Two Costly Threats the ‘Uber Bears’ Might Have Right at Last
July 25, 2016
By requesting this report, you’ve already taken an important first step to securing your long-term financial future. Your next step is just as easy. But you must be available bright and early on Thursday, July 28, 2016 for a time-sensitive announcement …
Table of Contents
According to respected members of the investment community, two mathematical certainties “prove” that we will struggle to reach our wealth goals over the next decade – and should lower our expectations.
As you probably know, I have no beef with a good “struggle.” I didn’t get from where I came from to where I am today by running from a fight. I have a feeling you have a similar mindset.
But there’s no way I’m going to lower my expectations.
I won’t lower my expectations for you, either. Especially if that means abandoning my sworn mission to harness the power of the global financial markets – not just to reach our goals, but to get truly wealthy in the process.
Which brings us to the first of two legitimate threats I’m hearing from the more evidence-based and frankly more sensible of the “peddlers of doom…”
From a strict valuation perspective, history suggests we’d be wise to brace for lower-than-normal stock market returns for some time going forward.
There are problems with this approach. Beginning with how difficult it is to pinpoint exactly how over- or under-valued today’s market actually IS – especially, given that that no two “experts” can seem to agree on an acceptable valuation metric.
I won’t wade too deep into the weeds here.
If valuation is your thing, you know the advantages and disadvantages of relying on forward and trailing Price to Earnings (P/E) ratios… the effects of changing profit margins on valuation estimates… and perhaps even the bubbling controversy over “cyclically adjusted” or CAPE-based valuation metrics.
If so, you probably have a preference for one metric or another. Or if you’re like me, you’re probably a little dubious about fancy metrics and prefer to keep things simple. But no matter how you look at it, here’s the thing…
Regardless of how we measure it – even if we focus on the price we’re paying for each dollar of this year’s top-line revenue – it’s difficult to argue that U.S. markets are “inexpensive” on a historical basis.
Nor should we pretend that today’s valuations have zero impact on the total return we can expect going forward. As a rule, the higher today’s valuations, the lower the returns we should rightly expect going forward.
This echoes my concerns for bond investors in this market. Historically, when interest rates are as low as they are now, the total return investors can earn by buying bonds at today’s prices are invariably disappointing.
Again, there’s no guarantee that bond yields can’t stay at record lows – or go even lower. But history says otherwise. The argument that this same logic applies to stock investors at today’s prices is at least worth considering.
Frankly, it’s a real concern.
But it’s one we can work around. I’ll show you how we plan to do it just ahead. But first, let’s dispense with the second, related hurdle we face as investors trying to build wealth in this unique market environment.
If we assume for a moment that there’s some truth to the threat we just discussed – and that we do look back 10 or 15 years from now and find that U.S. stocks have barely moved – we will almost surely have endured a second calamity.
To understand why this is so, we have to look again at market history. After all, it’s common knowledge that, dividends included, U.S stocks have returned roughly 10% per year. But it’s also true that stocks have not always done so well.
From experience, we know there have been five-, 10-, and even 20-year periods where stocks have returned less than half that – sometimes much less. Indeed, since January 2001, stocks have returned more on the order of 5% per year.
But here’s something else you probably remember about those past 15 years. Stocks didn’t actually return 5% per year, year after year. This is not unique. In fact, it’s true of every extended period of market underperformance in history.
Which is why one of the most prolific market “bears” not only predicts ZERO returns over the next decade – based on what he argues are RECORD high current valuations. He confidently predicts something even more disturbing…
Namely, that we should prepare for at least one major market crash of 50% or more – maybe more than one.
Now, I don’t know about all that. But I can get onboard with this much. If he and his gloomy pals are right…
If we do look back on 10-plus years of near ZERO total market returns, we will almost certainly have suffered at least one MAJOR stock market crash during the period.
Here’s how I “know” this to be true…
Again, throughout history, multiyear periods of subpar annual returns – whether it’s ZERO, or 2%, or 5% as in the past 15 years – have NEVER been characterized by year after year of 0% or 2% or 5% gains. Not once.
Meaning that – if you agree that market returns going forward will be disappointing (as they have been since 2001) – you have to acknowledge that we will endure at least one punishing sell off (again, just look to the past 15 years for proof).
Again, nothing that we’ve discussed today is inevitable. Some of these same valuation wonks now predicting market crashes and zero returns for the next 10 years, also argued that the market couldn’t rally from the 2009 lows.
But their math is sound. If nothing else, we can agree that it would be naïve to trust our family’s futures to the broader U.S. equity markets compounding at 10% per year over the next 10 to 15 years, even with dividends reinvested.
That’s a winning formula for an early-stage bull market strategy – and one whose time has likely passed, at least for now. Okay, so are you ready for some good news? How about this…
None of this has to be your worry!
As a member of Smart Investing, you know we don’t invest blindly in “U.S. equity markets.” We focus exclusively on companies that are positioned to out-perform the broader market – and succeed in all market environments.
This is a valuable advantage in good markets, as we experienced throughout the 1990s… from 2002 through 2007… and from March 2009 through today. But in bad markets – where stock returns are disappointing – it’s a true lifesaver.
Being a “strong hand” owner of superior companies when they’re hitting on all cylinders can make the difference between reaching our long-term goals (and getting really, truly wealthy) and lowering our expectations.
Yet, in some cases even that might not be enough. To succeed in a low return, crash-prone market, we will have to be nimble – and most of all, vigilant. This might mean raising cash… sidestepping the carnage… and having the guts to buy the dips.
It won’t always be easy I assure you. But if you’re interested – and if you can get back to me as soon as possible – I believe I have a solution that will make the coming decade more pleasant and more lucrative than you probably think is possible.
In my last note, I mentioned that I might have a workaround for the problems we’ve discussed over the past few days. I also admitted that I might have to be “exclusive” with what I’m about to propose, though it runs counter to my nature.
I was also a bit cryptic regarding what was brewing. Well, we’ve been working feverishly since we last spoke, and I’m excited to tell you that things are coming together.
I think you’ll be as pleased as I am when you hear the details.
I’m also at liberty to tell you that I’ll be getting back to you with the FULL DETAILS early Thursday morning, July 28, 2016. At which point I will spell out my plans for you over the next 365 days, if you can accept a few simple terms.
Including how we will sidestep both legitimate threats we discussed today. Plus a third, perhaps even more insidious threat that’s already costing hardworking individual investors literally billions of dollars – and will only get worse.
This third and final danger, even more so than the threats we discussed today, is frankly simple math. It’s very real and quite deadly. But we can easily avoid it.
I’ll follow up with one final message in a few days, highlighting the third and most insidious threat U.S. investors will struggle to overcome – but how can easily do so.