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Will Value Investing Run Up Next?

I’m going to keep this short because I’m putting the finishing touches on my presentation for later this week at the Irrational Economic Summit in Austin.

Though I have no love for the University of Texas (the Longhorns humiliated my beloved TCU Horned Frogs in a 31-16 rout last month), I’m excited to be headed to Austin for the week. For good music, good food, and good times, you really can’t beat Austin.

If you’re attending the Summit, be prepared for authentic Texas blues, Texas barbecue and, most likely, a little Texas beer too. And be sure to look for me in the crowd.

I love chatting with my readers, and it’s a great opportunity to ask questions and spitball ideas. Just do me a favor and avoid any mention of college football. It’s just too painful to discuss this year.

The theme for the summit is disruption, and my presentation will be on “Securing a Stable Stream of Income Amidst the Chaos.”

I plan to cover three broad themes: My outlook for bonds, the coming rotation from growth stocks to value stocks and, naturally, my favorite sectors for the coming year.

I don’t want to spoil the presentation by telling you too much, but I’ll give you a sneak preview…

Sneak Preview

It’s no secret that value investing works. Countless studies (and real-world practitioners) have proven that a strategy of buying cheap stocks beats the market over time.

Dimensional Fund Advisors recently ran the numbers for the 90-year stretch of 1926 to 2016 and found that a disciplined large-cap value portfolio outperformed the S&P 500 by over 2% per year.

That 2% might not sound like much. But compounded over the length of the study, it made a huge difference. A dollar invested in the S&P 500 in 1926 would have grown to a little over $6,000 by 2016. That same dollar invested in the large-cap value portfolio would have grown to over $13,000.

That’s huge.

 

The problem with value investing is that it doesn’t outperform every year… or even every decade. There are long stretches where value gets its butt kicked.

Take a look at the chart below.

This divides the value of the Russell 1000 Value Index by the Russell 100 Growth Index.

When the line is rising, value stocks are outperforming growth stocks. When the line is falling, value stocks are underperforming growth stocks.

We’re Poised for a Comeback

Going back to the late 1970s, growth and value have each had three respective stretches of outperformance.

Value outperformed throughout the early to mid-1980s, though growth dominated in the late 1980s. Value enjoyed a nice comeback in the early 1990s… though when the dot-com boom really got underway in the mid-1990s, growth left value in the dust for several years.

Value enjoyed a massive run of outperformance from 2000 to 2007. These were some of the very best years in the careers of long-time value investors like Warren Buffett.

But for the past 10 years, growth has utterly crushed value.

I believe value is poised to make a major comeback. I won’t go into detail today, as I don’t want you skipping my presentation on Friday and hitting happy hour early.

But I believe the next five to 10 years could look a lot like the 2000 to 2008 period.

That’s bad news if you’re betting heavily on social media stocks. But it’s fantastic news if you’re a value or income investor like me.

 

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Cheapest Way to Own Real Estate Right Now

Most think of it as the “bull market in everything.” But the past decade has been anything but a bull market for my favorite sector.

In fact, prices today are sitting at 2006 levels… and this despite the most accommodative Federal Reserve policies in history over most of this period.

Prices started to sag in early 2007 and then rolled over and died over the next two years. The sector had several strong years of recovery, but prices today are no higher than they were in 2013 and are still a decent bit below their old 2006 peak.

If you’re a value investor like me, that’s the sort of thing that ought to get you excited. At a time when the major indexes are coming off of their best run since the go-go years of the 1990s, this is a sector that investors have mostly left for dead.

The story gets even more compelling when you consider the power of dividends.

When you include dividends paid, the returns look a lot better. My favorite asset class is up about 46% from its pre-crisis top and up 440% from its 2009 bottom.

So, lest there be any doubt, dividends matter. In this case, they make the difference between having losses over the past 12 years and having returns of nearly 50%.

I suppose it’s time to let the cat out of the bag.

My Favorite Sector Is…

My favorite sector is income-producing real estate.

Real estate stocks haven’t exactly been popular of late. The sector got its butt kicked during the 2008 meltdown, and investors have been reluctant to touch that hot stove again. This is particularly true given that the sector was popular with retirees who liked the stocks for their income potential.

It’s been a particularly rough ride since 2013. That year, Fed Chairman Ben Bernanke merely mentioned the possibility that he might scale back the Fed’s quantitative easing program, and that was enough to rattle the bond market and send high-yielding real estate shares sharply lower.

Two years later, Bernanke’s replacement, Janet Yellen, rattled the sector again when she hinted that rate hikes would be coming soon.

Real estate stocks had one last hurrah into mid-2016, but rising bond yield took the wind out of their sails. And the “volpocalypse” this past February slapped the sector around yet again.

Frankly, it’s been a miserable five years to be invested in real estate. But I believe conditions are finally right to see this sector outperform.

To start, real estate stocks are worth more dead than alive at current prices. Recent estimates by real estate consultancy Green Street Advisors shows real estate stocks selling at a 5% discount to the value of the actual property they own.

That should never happen.

Barring a financial panic that sees prices temporarily dip below fair value, real estate stocks should literally always trade at significant premiums to the value of the real estate they own.

Investors pay a premium for professional management and for the ease of buying and selling with a mouse click rather than with a room full of lawyers with contracts.

Yet for most of the past five years, real estate stocks have traded at a discount. That kind of pricing won’t last forever.

But the bigger short-term catalyst will be a moderation in the rise of bond yields we’ve seen recently.

Barring a major recession, I don’t necessarily see bond yields dropping all the way to new lows. But at the very least, I see yields leveling off around today’s levels and probably falling slightly.

Unlike bond coupon payments, which are fixed, rents from real estate tend to rise over time.

Rising rents translate into higher dividends for investors. So, even if we’re stuck with 10-year Treasuries yielding over 3%, owning real estate with yields of 5% to 8% and rising payouts makes all the sense in the world if you want to boost your income.

I think these bargains are so valuable right now, and can help contribute to your retirement so much, that I decided to put together my top five real estate investments in a new report, How to Pocket Thousands in Monthly Income From Real Estate.

I’ll be releasing it this week. Stay tuned to your inbox for details.

 

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Retirement Ain’t Cheap

Your monthly expenses fall once you retire. Or at least they’re supposed to.

But what if they don’t?

Standard financial planning assumes that your expenses in retirement will be 70% to 80% of your expenses during your final working years.

But a recent study by MoneyComb and Duke University suggests that the real number can be a lot higher. As in 130%.

That number might sound ridiculously high at first, but think about it. You might have massive expenses in retirement that you didn’t have in your working years, such as paying for your adult children’s weddings.

Plus, without work taking up eight to ten hours of your day, you have a lot more time to sit around the house and impulsively buy things on Amazon.

But before we get into any of that, consider where the old 70% to 80% rule of thumb came from.

In a simpler time, you might have bought a house at 30 and lived in it long enough to pay off a 30-year mortgage. So, you entered retirement without one of your biggest expenses – the house payment.

Today’s retiring Boomers are far more likely to have moved multiple times for jobs and possibly divorced once or twice. They’ve taken out new mortgages at each stop along the way, resetting the 30-year clock, and enter retirement with those debts left to pay.

That’s a very big difference from previous generations.

Otherwise, where else are big drops in spending going to come from? Your electric bill doesn’t magically drop once your paycheck stops. And you might spend a decent bit more on travel and leisure since you have the free time.

And let’s face it. Unlike their parents’ generation, which learned frugality during the Great Depression, the Boomers were never the most fiscally disciplined. Does that magically change in retirement?

I would take all retirement estimates with a large grain of salt.

As my friend Harry Dent has explained for years, retirement is not the spending breakpoint. Americans hit their peak spending years long before that, between 46 and 54 on average, depending on their income level.

Spending declines after that, but it does so gradually. And it doesn’t suddenly drop 20% to 30% at retirement (or soar by 30%).

As you do your retirement planning, I recommend you take an honest look at your finances.

Unless something is fundamentally changing, such as your mortgage getting paid off, your post-retirement expenses are going to look a lot like your pre-retirement expenses.

And you also might have large expenses you didn’t before, like your daughter’s wedding. Try to set that money aside and out of your regular investment or spending account. Consider that money already spent and not part of your retirement nest egg.

The Social Security Administration estimates that your Social Security benefits will only replace about 40% of your paycheck. That means the remaining 60% has to come from your investments.

That could be $50,000, $100,000, or even a lot higher depending on your lifestyle.

Let’s take a look at the numbers. The following table breaks down how much you’d have to invest in assorted income securities in order to generate $10,000.

I list traditional forms, along with my Peak Income service.

Instrument

Yield

Amount Needed
to Generate $10,000

Savings Account

0.09%

$11,111,111

5-Year CD

1.33%

$751,880

10-Year Treasury

3.07%

$325,733

Utility Stocks

3.28%

$304,878

Peak Income

6.77%

$147,710

At today’s current average savings account rate, you’d need a ridiculous $11 million to generate just $10,000.

If you needed an extra $50,000 to top off your Social Security income, you’d need a nest egg of $55 million.

If you have that kind of money, there’s really no point in you reading this. You clearly don’t need my services.

The further you get down the scale, the numbers get a lot more reasonable.

You’d need $751,800 in the average five-year CD in order to generate $10,000 in retirement income, but “only” $325,733 or $304,878 in 10-year Treasury notes or a utilities index fund. That’s still a lot of money. You’d need a million dollars in savings to generate just $30,000.

This is why I write Peak Income. My current model portfolio sports a dividend yield of 6.77%, more than double what you’d get in utilities stocks.

You’d need $147,710 invested for every $10,000 in income. That’s a lot more doable than $304,878… or $11 million.

Bond yields are rising, but they’re still far too low to meet the retirement needs of most investors. And this is where Peak Income comes in handy.

I look for income stocks that are a little off the beaten path. Some sport monster yields over 10%, while others sport more modest yields of around 4%.

But all pay substantially more than what you’re going to get in traditional income investments.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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How to Generate 40%-Plus Effective Returns

Let me stop you right here. I’m not going to share with you some “can’t lose” market timing or trading system.

Instead, I want to share with you what I reminded my Peak Income readers of last week about their 401k. If you take it seriously, it will have a far greater impact on your long-term investing returns than anything you learn in a trading seminar.

You might not know this, but I’m a regular W2 employee at Dent Research.   

My publisher is more like a partner than a boss, but I get paid every two weeks via a good, old-fashioned paycheck (technically a direct deposit, if you want to split hairs).

As an employee, I get the same basic 401k plan that you do, with the same very conventional menu of mutual funds. The mutual funds available limit my investment returns, but as I’ve consistently emphasized in my work, the investment returns are only part of your total effective returns.   

And in my book, they’re the least significant part.

Vastly more important to your long-term financial health are the tax breaks and employer matching.   

I talk about this exact topic in a video I recorded last week:

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Investing Tips From the Greatest Hitter Who Ever Lived

A few weeks ago, I wrote about the NFL lineman who was giving his teammates a lesson in compound interest.

Today I want to talk about another sport: baseball.

This wasn’t the best year for my hometown Texas Rangers, though I’m happy to see my fellow Texans, the Houston Astros, again advancing to the playoffs, which started this month.

That got me thinking about something I’ve written before, but want to share again — the investing lessons you can glean from arguably the best hitter in the history of baseball.

That’s Ted Williams. He was a trading expert and probably didn’t even know it.

The Boston Red Sox leftfielder finished his 19-year professional career with a lifetime batting average of .344 and an on-base percentage of an incredible .482, and this despite taking time off in the prime of his career to fight in World War II and the Korean War.

He also won the Triple Crown, meaning he led the league in batting average, home runs, and runs batted in… and he did it twice.

To put that in perspective, there’s only been 16 Triple Crown winners in the history of baseball, and two of those belong to Williams. And to cap it off, Williams was also the last Major League Baseball player to bat .400 in a season.

It’s safe to say that Ted Williams knew a thing or two about hitting a baseball.

And he was generous enough to share some of his secrets in his 1986 book, The Science of Hitting, which I strongly recommend for any baseball fan with an appreciation for history.

Interestingly, we can apply a lot of his same insights to investing.

To start, both baseball and investing are “sports” in which it pays to study.

Sure, Williams was probably born with better eyesight and better reflexes than you or me. But that’s not why he was the greatest hitter in history.

Williams was the best because he was willing the approach the game analytically, study his opponents and – perhaps most importantly – practice.

More than a half century before Billy Beane used statistical analysis to revive the struggling Oakland Athletics (as recounted in Michael Lewis’ book Moneyball), Williams might have been the first “quant” in professional sports.

Williams carved the strike zone into a matrix: seven baseball lengths wide and 11 tall. His “happy zone” – where he calculated he could hit .400 or better – was a tiny sliver of just three out of 77 cells. In the low outside corner of the strike zone – Williams’ weakest area – he calculated he’d be a .230 hitter at best.

The “happy zone” will vary from batter to batter, but Williams understood exactly where his was, and he wouldn’t swing if the pitch was outside of his zone.

Likewise, investors need to have the self-awareness to know when the market is favoring their specific trading style.

When it is, it makes sense to swing for the fences. And when it’s not, you don’t have to swing at all.

Williams was notoriously patient and disciplined at the plate, which is why his on-base percentage was so high.

He had control over his ego and his emotions and wouldn’t swing because the defense – or even the spectators – was taunting him. He finished his career behind only Babe Ruth in bases on balls (walks).

And in investing, it might be easier. You can watch pitches go by until you see one you like. As Warren Buffett famously said, there are no called strikes in investing.

While professional investors have enormous career pressure to look like they’re “doing something,” individual investors don’t have to worry about a boss firing them. They can afford to be patient and wait for a perfect trading setup.

Williams, an eventual Hall of Famer, was chastised in his day for talking too many walks by none other than the legendary Ty Cobb. Well, frankly, Williams could call “scoreboard” on Cobb.

Cobb finished his career with a slightly higher batting average (.366 versus .344) but his on-base percentage trailed Williams’ by a much wider margin (.482 versus .433).

But perhaps the best lesson from Williams is this:

If there is such a thing as a science in sport, hitting a baseball is it. As with any science, there are fundamentals, certain tenets of hitting every good batter or batting coach could tell you. But it is not an exact science.

While it pays to take a detached, scientific approach to investing, it is absolutely not an exact science. Given the role that human emotions play, it’s probably closer to a social science like psychology than to a hard science like chemistry or physics.

That’s why it’s always important to give yourself a little wiggle room when you invest, what Benjamin Graham called his margin of safety. Structure your trading so that being “mostly right” is good enough.

This piece first appeared on The Rich Investor.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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