The Next Ten Years

As we close out 2019, it’s time to look ahead to see what we can expect from the stock market over the next decade.

I want to be crystal clear here… there is no perfect, foolproof stock market indicator. No one knows with any degree of accuracy what the market will do over the following year.

If such an indicator did exist, it would become useless the minute it was discovered. Every trader in the world would start trying to front run it.

Any concept of the perfect indicator is fundamentally flawed because the stock market is not a machine. The market is nothing more than a collection of people buying and selling, and those people aren’t always rational. You can’t build a rational model to predict the behavior of irrational actors. You’d have better luck trying to predict the next popular hair style for teenagers or the next trendy Millennial buzzword or dating app.

But while there is no perfect indicator, there are a few that have a reasonably good track record of predicting stock returns over the next decade.

One of my favorites is the cyclically adjusted price-to-earnings ratio (CAPE) — also called the Shiller P/E ratio after Yale professor Robert Shiller.

An Indicator to Guide You

The CAPE takes an average of the past 10 years of company earnings and compares it to today’s prices. There’s nothing sacred about a 10-year average, and I’ve seen plenty of variants that use other timeframes. But 10 is a nice round number, and in any given 10-year period we’re likely to have seen a boom, a bust, and everything in between.

Using Shiller’s data, Barclay’s recently ran the numbers back to 1926 to see how the market performed over the following 10 years starting at various CAPE levels.

Not surprisingly, the more expensive the CAPE, the worse the returns were over the following 10 years. Any value investor would tell you the secret to market success is buying low and selling high.

The question is, of course, where are we today?

Where Are We Today?

The S&P 500 is trading at a CAPE of 29.4 at today’s prices, putting it in the most expensive bottom bracket.

If history is any guide — and, admittedly, we don’t have a lot of data points here as the market only got that expensive one other time in the late 1990s — we’re in for a rough decade.

The worst-case scenario has stocks falling 6.1% per year over the next decade, and the best case has stocks rising 5.8%. I think that’s a pretty reasonable range.

If we avoid a deep recession and the Fed somehow manages to pull a rabbit out of its hat and keep pumping money into the financial system without causing inflation, then it’s not unreasonable for us to hit the top end of the range.

But if the wheels come off — if investors lose faith in the Fed and the foundations crumble — the lower end of the range is also very realistic.

As the baseball-player-turned-philosopher-king Yogi Berra said, “It’s tough to make predictions, especially about the future.” Yet we’re going to do it anyway…

What’s to Come in 2020

I think the most likely outcome is something in the ballpark of 2-3% per year.

We’ll get some kind of recession and a maybe a mild bear market or two.

But Fed stimulus, low bond yields, and a dearth of opportunities anywhere else will keep the bottom from completely falling out.

Still, I don’t know about you… 2-3% per year isn’t going to work for me.

I need better returns than that.

Luckily, I don’t see that being a problem in Peak Income.

I target high-yielding investments with cash payouts of 5-10% and sometimes significantly more than that.

So, even if the stocks and funds I recommend see zero price appreciation (which would be very unlikely), the yield alone would make them attractive.

It Pays to Be Naughty

I read a headline this week that left me shaking my head in disapproval.

In a grandiose display of high-minded social responsibility, Japan’s Government Pension Investment Fund, the world’s largest pension plan, decided to ban the shares of the stocks it owns from being borrowed by short sellers. (In order bet against a stock by selling it short, a short seller must first borrow the shares from another investor.)

Apparently, the fund didn’t like the idea of shares it owned being used by hedge funds for supposedly nefarious ends. The horror!

Where do I even start in ripping apart that argument…

Money Is Lost

To start, the pension’s first priority is to the retirees whose money it manages. Allowing short sellers to borrow shares netted the fund around $300 million over the past three years. That’s money that will no longer be available to fund the retirement of elderly Japanese pensioners.

Arguably worse is the precedent it sets.

Short sellers may come across as dodgy characters at times, but their trading adds liquidity to the market. A healthy market needs both buyers and sellers. If other large pensions feel pressured to follow Japan’s lead and restrict shorting, market liquidity dries up and execution gets worse for all investors.

It’s another case of the road to hell being paved with good intentions.

But believe it or not, that’s actually not the worst case of do-gooding run amok I’ve come across this week.

Enough Is Enough…

Activist hedge fund TCI threw down the gauntlet and threatened boardroom proxy battles with any company that didn’t publish detailed reports on their carbon dioxide emissions.

In plain English, TCI threatened to fire the boards of directors of literally any company, anywhere in the world, that didn’t share their sense of urgency about global warming.

Now, I’m all for corporate responsibility. If you can quantify the damage that a company does to the environment, it only makes sense to make them pay. It’s not fair that a company can pad its profits while damaging the world we all have to live in.

It gets ridiculous when you look at some of the “polluters” TCI singled out.

At the top of the list was Moody’s.

Yes, Moody’s. The bond rating agency…

Moody’s isn’t an oil fracker or a coal plant. It’s a company that creates credit reports for bonds.

I’m struggling to comprehend how company full of white-collar analysts with spreadsheets is causing the polar icecaps to melt with excessive carbon dioxide emissions. It’s also my understanding that a money manager’s job was to make money, not engage in meaningless virtue signaling. But what do I know…

We all have our pet issues, and business shouldn’t be immoral. There’s a reason why some industries are illegal and others are strictly regulated. But high-mindedness can be taken to an extreme.

And when it is, it creates opportunities for those of us with a level head.

Profiting from the Politically Incorrect

In their 2007 white paper, The Price of Sin: The Effects of Social Norms on the Markets, Princeton Professor Harrison Hong and New York University professor Marcin Kacperczyk found that the taboos associated with investing in politically incorrect industries such as tobacco, alcohol, and gaming led these sectors to be priced as perpetual value stocks.

This perpetual discount means attractive pricing and dividend yields, which in turn meant market-beating returns for investors willing to be a little naughty.

In other words, by being socially responsible, you end up with lower returns. But by being a little less judgmental, you put yourself in a position to profit quite well.

Historically, socially-responsible investing tended to focus its disdain on tobacco.

Today, I’d argue that energy companies are viewed as the greater evil. And this has created fantastic opportunities for income investors like us.


I have a library. And you should have one, too.

I’m proud of the collection of books I’ve collected over the years. A good chunk of my library is dedicated to investing, economics, and other money-related topics. It is my job, after all.

But I also have an entire shelf of literature dedicated twentieth century Spain, and another dedicated to the rise and fall of the Ottoman Empire. I own just about every book Hemingway wrote. And I have a fantastic translation of Don Quixote. The particular edition I own is one that I’ve not found elsewhere since.

Why? You may ask…

Why not! The book is particularly interesting in its own right, and even more so since it’s something of a one-of-a-kind find. It was too good to pass up.

I have fiction, nonfiction, which includes biographies, how-to books, essays on various topics… And that’s just to skim the surface. When it comes to my books, I have it all. And I’ve actually read 95% of them. The remaining 5% I’ll get to soon enough.

In Good Company

I’m not the only voracious reader on the team.

Harry Dent has a formidable book collection spanning an impressive breadth of information.

Back when we were office mates, I remember watching Rodney Johnson get through three newspapers every morning before even touching his first cup of coffee… and then following that coffee with more reading.

I don’t know how many annual reports John Del Vecchio has read over the years. If I had to guess, I’d say that number is in the tens of thousands. It’s what makes him great at his job as a forensic accountant.

In short, we’re a bunch of nerds.

But we’re in good company.

Becoming the Best Version of Yourself

Warren Buffett is arguably the best investor of all time. I say “arguably” because he has his share of competition for the crown.

Much like professional basketball players, fans will always debate who the all-time great is.

Is Lebron James really as good as Michael Jordan in his day? It’s hard to say.

Likewise, it’s hard to say whether Buffett is greater that Jesse Livermore, Julian Robertson, or even a quant pioneer like Jim Simons.

But what is beyond debate is that all of these giants of finance reached the heights they did by continuously learning.

Todd Combs, one of Buffett’s lieutenants at Berkshire Hathaway, said that the best advice he ever got from his boss was to “read 500 pages per day.” Buffett apparently made that offhand comment while teaching a class at Columbia University, which Combs was attending at the time.

Combs took that lesson to heart and reportedly reads 500 to 1,000 pages every single day of his working life.

And Buffett practices what he preaches, too.

The Oracle of Omaha claims, even at his age today, to spend five or six hours every day reading.

What Should You Read?

The easy, one-word answer: everything. Read everything you can get your hands on.

Of course, that’s not possible. So, let’s be a bit more practical.

I suggest taking a cue from Rodney and start with a couple good financial newspapers. I prefer the Financial Times because it gives the best international coverage, but the Wall Street Journal and Investor’s Business Daily are both solid options as well.

It goes without saying that you’re not going to learn how to invest by reading a newspaper.

In fact, I know traders that make a living betting against mainstream media. But reading a good financial paper at least gets you that baseline of knowledge that you need in order for the additional research to make sense.

Read plenty of books, too. And not just the ones on investing. You can find tidbits of knowledge in history books or biographies, even novels. These books can spark an idea or help you to make a connection.

Every time I go to London, I make a pit stop by the bookstore of my old alma mater, the London School of Economics, and fill up a bag with books that I can’t find anywhere else. You don’t have to get that crazy, but make an effort to read books on a variety of different subjects. It’s training for your brain.

For a deeper education, read the quarterly or annual letters of large, influential investors like Buffett. He often goes into the nitty gritty details of why he bought or sold something. You’ll learn more about investing from reading 15 minutes of one of Buffett’s Berkshire Hathaway letters than you would from two years in an elite business school.

He’s something of a controversial figure, but I also get a lot of value out of reading Bill Ackman’s letters. For a fantastic understanding of the bond market, read everything that Jeff Gundlach has to say.

And, naturally, keep reading Sizemore Insights!

It’s my job to get you fresh content that you’re not likely to find anywhere else.

Don’t Strive to Be a Jack of All Trades

Hakeem Olajuwon was one of the greatest basketball players in history.

Two-time NBA Finals champion — and Finals MVP — with the Houston Rockets, two-time defensive player of the year, and the 1994 league MVP; he is rightly included among the all-time greats.

But whatever you do, don’t put a baseball in his hand.

Hakeem the Dream was invited to throw out the ceremonial first pitch in last night’s World Series game in Houston, and it wasn’t pretty. It landed in the dirt.

It was all in good fun, of course. He took it all in stride. The crowd still cheered for him. Hakeem is  a hometown hero.

But let’s just say the Houston Astros won’t be signing him as a relief pitcher any time soon.

There are parallels to investing here.

Just as Olajuwon was legend on the basketball court but a joke on the pitcher’s mound, investors that are good stock pickers might be terrible market timers. Or an options expert might be terrible at putting together a bond portfolio.

Two Real-World Examples

My friend J.C. Parets, editor of Breakout Profits, is one of the best technicians I’ve ever met.

In seconds, he can pick apart a stock chart and tell you what direction that stock is likely to go. But don’t ask him to read a balance sheet. J.C. identifies trends, but it’s not his job to dig into the details of analyzing an individual company. J.C. has no clear advantage there. So, he sticks to his charts.

Now, contrast that to my buddy and fellow Rich Investor contributor John Del Vecchio.

John is a forensic accountant. He can dissect a company’s financial statements with ruthless efficiency. Within minutes, he can tell you whether a company has been overstating its revenues and earnings. He knows where the bodies are buried in the accounting. But don’t ask him to give you precise timing. That’s not his bag. There’s no special advantage for him in this.

The Take Away from This Comparison

To start, don’t try to be a jack of all trades.

Experiment until you find an investment style that suits your skills and temperament, then stick with it so you can refine your techniques.

Keep in mind that there’s no need to pigeonhole yourself into one narrow style. But don’t constantly try to reinvent the wheel or switch from style to style based on what’s hot that moment. That’s a form of performance chasing, and it generally doesn’t end well.

Second, seek out mentors and experts in your chosen discipline.

You’re probably not going to get great results by copying another investor’s style verbatim, but you can certainly pick up a few tricks along the way.

While trying to find your niche, remember that not every discipline works well in every market.

I’m a value investor, and let me tell you, my job was a lot easier 10 years ago. The 2000s were a fantastic decade for value investors and a lousy decade for growth investors. But the 2010s have been the complete opposite… It’s been a cakewalk for growth investors and a hard market for value investors.

That’s ok though. There is a season for everything. And a good strategy will eventually come back into favor.

Speaking of, it looks like we may be in the early stages of a rotation from a growth market to a value market.

Where to Put Your Money in 2020

I’m not sure how I’d feel about inviting Jeremy Grantham to my Thanksgiving dinner.

On the one hand, I could see him being a font of fascinating cocktail chatter. After more than a half-century of navigating the markets, the man no doubt has stories to tell, and in a sophisticated English accent at that!

But on the other hand, at the first mention of U.S. stocks, I could see him being a real wet blanket. His forecast for the next seven years isn’t exactly rosy.

If case you’re not familiar with him, Grantham is the co-founder of Grantham, Mayo, & van Otterloo (GMO), a Boston-based money manager with about $60 billion under management. He’s one of the best in the business, and he successfully called the last two market bubbles in 2000 and 2008, even though he took a lot of flak for it both times.

Grantham’s firm regularly publishes a seven-year forecast for the returns of various asset classes. While it’s not gospel truth, it’s proven to be pretty accurate over the years.

But Why Seven-Year Forecasts?

Grantham’s learned that seven years is roughly how long it takes for profits and stock prices to revert to their long-term averages.

In any single year, guessing the direction of the market is a crapshoot. And over the long term, stocks have historically returned about 7% per year after inflation.

But seven years is that sweet spot where Grantham’s mean reversion models add value.

So, let’s see what Grantham & Co. see going forward:

There’s a lot of red on the chart.

Based on GMO’s mean reversion models, U.S. large-cap stocks are priced to lose 3.9% per year over the next seven years. U.S. small-caps are priced to lose 1%.

Essentially, Grantham is forecasting a major bear market in the coming years and what is likely to be a slow recovery.

Overseas, the story isn’t quite so bad… but it’s not exactly stellar.

Developed international stocks are projected to essentially go sideways over the next seven years.

Even bonds look nasty…

U.S. bonds are projected to lose 2.2% per year over the next seven years, and developed international bonds (i.e. Europe, Canada, Australia, and Japan) are projected to lose 3.9% per year in dollar terms.

If there’s one bright spot, it’s in emerging markets.

Emerging markets have been beaten and left for dead over the past decade. As a case in point, the iShares MSCI Emerging Markets ETF (NYSE: EEM) is still sitting at prices first reached in 2007.

In a 12-year period that has seen the S&P 500 rise nearly 120% even after taking the 2008 meltdown into account, emerging markets have gone nowhere.

Now, I agree with Grantham that emerging markets look like an attractive place to park some of your savings over the next seven years or so. I plan to seek out opportunities in that space.

But you can’t put your entire portfolio in emerging market stocks. That would be madness.

After all, emerging markets started 2018 attractively priced and yet still managed to drop 20% in the nearly two years that have passed.

So, Where Do You Put Your Money?

You can, however, take a more active approach to investing and expand beyond the S&P 500.

Buy-and-hold investing works over the long-term. I believe that. And history has proven it.

But the “long-term” can sometimes be a lot longer than you’re willing to wait…

The S&P 500 went nowhere between 1968 and 1982, leaving investors to tread water for 14 long years.

More recently, the S&P 500 went nowhere between 2000 and 2013, again making buy-and-hold a tough proposition.

None of this means that another 13- to 14-year drought starts today. But if you’re in or approaching retirement, you really shouldn’t take that risk.