23 Mar “Skate to where the puck is going, not where it has been.” – Wayne Gretzky
Former Canadian professional hockey player Wayne Gretzky could just as well have been talking about investing instead of hockey. To be successful in investing, you need to focus on the future, not the past. Just because the market or a particular industry has been going up doesn’t mean it will keep going up. In most cases what happens is expectations begin to disconnect from reality and the result is disappointment. In my thirty plus years in the investment business, I have witnessed four such examples; the 1987 market crash, the 1999 technology bubble, the 2007 commodity bubble and the 2014 ‘domestic shale’ revolution. In all of these examples, both professional and amateur investors were focused on what was going on at the time, not what might happen in the future. The reason I bring this up is because I believe a lot of investors today are making those same mistakes.
To help you understand what I’m talking about, click on this article written by Jim Paulsen of ‘Wells Capital Management’. As you view Jim’s charts, you can clearly see that the valuations of stocks listed on the New York Stock Exchange are currently near the top of their sixty-year trading range. They have gone from ridiculously cheap in 2009 to fairly expensive in 2015. In the process investors have made lots of money. If you are expecting similar results going forward then you either expect stocks to get a lot more profitable or a heck of a lot more expensive. With today’s near-record profit margins that is not going to be easy. Similarly, what typically drives bond prices is declining interest rates. If you think the returns on bond funds are going to look anything like the past you must believe the economy is going to get a lot worse or for whatever reason rates are going to all-time record lows. I’m not saying prices can’t go higher just that you might need to temper your expectations.
In order to achieve above average results you need to look to where the puck is going, not where it has been.
So where am I looking:
- High-quality multinational stocks getting penalized by declining foreign currencies.
- Stocks with exposure to depressed commodities that are available at significant discounts to normal valuations.
- Emerging market stocks with dominate market positions that are being overlooked by investors focusing only on the United States and Europe.
- Gold and silver mining stocks trading at near record low valuations when compared to multiple benchmarks.
It is easy to follow the crowd when investing, but sometimes you need to leave the herd in order to find greener pastures. I think we are approaching one of those times.
If you have a friend or relative you think might benefit from my investment experience please give me a call. I would enjoy the chance to visit.