Investing Guide For The Next 20 Years
Investing in the stock market is tricky business. With the manner in which the markets and investing is covered by the media, it makes it quite confusing. Business media like the Wall Street Journal or CNBC on TV is all about covering what is happening now. It’s very hard to have and keep a long-term perspective with the way the media covers investing.
Moreover, it seems the alternative is to be completely ignorant to economic reality and events, ignore everything with regards to stocks and the economy, and let the experts handle your money and investments. True passive investing.
Are these the only two options? Day trading or passive, ignorant investing? I don’t think so.
I think there is a way to have a long-term investment plan but be more active in your strategy and implementation than simply allocating a set amount on a monthly basis. This article discusses this investment approach, and I call it my investing strategy or guide for the next 20 years.
I pick 20 years because I think there are some major trends that are in place that should impact the way you allocate your capital. These macro trends will have a long-term impact. 20 years isn’t the important part. These trends might only hold for 15 years, or it might be 30 years. The number itself isn’t important.
The goal here is to identify some macro trends, and allocate investment capital accordingly. We will outline these trends, and then the solutions or ways to implement an approach to take advantage of these trends. As time passes, it’s important to continue to monitor these trends, but not get spooked on day-to-day events which ultimately, are more of a distraction than anything else. Stay engaged, but objective and focusing on multi-year trends and developments.
The following outlines what I believe are undeniable trends. Not only are they undeniable but they are also very impactful and will have a major influence on the economy and thus, the way we invest. Let’s get into it.
Two Undeniable Macro Trends
1. Baby Boomers Shift From Spending Into Saving, From Living It Up To Buckling Down
The baby boomer generation is shifting into retirement mode. Unfortunately, this massive segment of the American population is too broke to retire. The boomers who desperately want to retire, are struggling to find ways to retire. With a housing downturn – where far too many boomers planned on using their home equity to fund a future retirement – has left many boomers scratching their heads as to what to do.
The job picture is bleak for aging workers with outdating skills. The stock market scares them and losses have been incurred in recent years.
The bottom line is that this massive segment of society wants to retire, but will have to accept a significantly lower standard of living in order to do so. At best.
Now, it’s worth noting, that most of these guys probably had an over-extended standard of living even pre-retirement. Their lavish spending helped fuel the economy. Going out to dinner, re-doing kitchens, and taking vacations helped boost the economy for years. This level of consumption won’t recover because of the reasons I’ve already outlined.
The American economy – dependent on consumption – will suffer and consumption will not return to prior levels. Yes, I know you see the Apple earnings on a quarterly basis and we think that the consumer is back. Remember, we want to focus on multi-year trends, not multi-month trends. The consumer won’t be back.
Too large of a segment of society is slowing spending. This will continue to slow down the consumption-fueled economy we have. This will impact growth and stocks.
2. Credit Expansion Has Peaked
Going hand-in-hand with consumption that we just talked about was the expansion of credit. Credit growth accounted for much of the economic growth we became accustomed to. We built an economic system that required additional expansion of credit because frankly, that is what an over-indebted economy requires. More debt is required to sustain a high level of debt. Welcome to America.
What happens to the largest economy in the world that is completely dependent on debt when the expansion of credit hiccups? You have chaos. You have talk of the collapse of the financial system. You have emergency Fed meetings. This is what happened in 2008. The expansion of credit stalled and like when a jet engine stalls, the jet began to fall out of the sky.
So, what kept the plane in the sky? The Fed stepped in and started printing currency to continue to keep the “credit expansion” going. But, can’t we just continue to do this and won’t we be fine? Or, the second question you hear is: can’t we just stabilize the economy then the economy will grow its way out of this? The answers are no and no, and I’ll explain why.
First, we can’t continue to do this indefinitely. Why? Because essentially the government/Fed is trying to overcome market forces. You can’t beat the market. You can delay the market events, but you can’t overcome it. The market will always win. You don’t know how it will look but the market will win. That is why the government can’t create prosperity. It might be that the Chinese stop buying American debt, or it might mean the collapse of the currency. Either market response will ultimately win out (these are examples). You can postpone the market forces, but you only do so temporarily. It’s a dangerous game to play.
Second, we can’t grow our way out of this. The current debt levels are astronomical, and any sane economist knows that the debt will never be repaid. It’s like this sick global debt game that everyone plays. All parties involved know the debt won’t be repaid (for a number of countries), but it’s just the game that is played. Additionally, the policies that are being put in place are extremely counterproductive. The productive class is penalized and forced to continue to fund the benefits of the rest of the population. As purchasing power decreases as a result of printing the currency, the middle/lower class continues to deteriorate. We’re not experiencing real growth. If we’re not growing, how would we grow our way out of this? Inflating asset prices doesn’t equate to growth.
To sum up this point, credit expansion has peaked. The Fed will attempt to continue to support the expansion of credit but will not be able to ultimately counteract the market forces which will continue to strengthen and attempt to restructure the debt. Think of it as a dam holding back waters that continue to climb. It can’t hold forever. The debt will be restructured one way or another (two options: default or inflation).
2b. Politicians Won’t Fix Anything
As I mentioned above, there is no political will to fix the economy. The economic cure is political suicide. We’re past the point of easy solutions. Every solution requires taking something from someone, namely in the form of a benefit or a job.
Please know that I’m referring to both parties here in present form.
Solutions – What To Do / How To Invest
1. Stocks – If consumption and credit expansion are slowing continuously over the coming years, this means that economic growth will be slow at best. Any growth will essentially be in the form of inflation (which we seem to think is the same anyways). As such, factoring in inflation, stocks as a whole should not do well. Remember, the Fed could print 100 trillion dollars and make the Dow hit 100,000 but that won’t be a real return on your money.
Should you avoid stocks altogether? No, because stocks do offer some inflation protection as companies can pass on increased costs to consumers. Buying the broad market, however, should not do well.
Which stocks? I like companies that produce a needed product, on an international basis. I don’t want to be in luxury items or highly discretionary products. Also, I want dividend stocks.
My favorite stock? Wal-Mart Stores, Inc. (WMT). Here’s why. Not only will this company hold up as more Americans buy more from Wal-Mart as their standard of living declines, but Wal-Mart has an incredible long-term, international growth strategy that hardly anyone is talking about. They are expanding and opening stores (all kinds of stores like restaurants and other retail businesses) in emerging markets like Mexico, Asia, and South Africa. Their growth internationally should accelerate. Best of all, nobody really talks about Wal-Mart and their stock hasn’t moved much in a decade (yes, this is a good thing) even while earnings have increased. Throw in an annually increasing dividend payout and you got a home run here. Biggest risk? Probably peak oil possibilities. Answer: Hedge your Wal-Mart stock with energy/oil positions.
2. Commodities - As just mentioned, oil prices could spike in the coming years, and you should definitely have exposure to possible rising energy costs. Don’t get caught up in the day-to-day or month-to-month price of crude oil. Own some dividend paying oil and energy companies on a long-term basis.
With the global response to the global recession being little more than printing currency, there is a race to the bottom in the global currencies. Everyone wants a crappy currency. Therefore, you need to own precious metals. Gold & silver. Own them both.
3. Cash - I also recommend keeping levels of cash. You will hedge your cash positions with inflation-hedged instruments like stocks, commodities and physical gold & silver. You need a heavy cash position to buy distressed assets when they become available. If anything, market volatility should be expected. Who knows what the stock market will do, but you should have cash available to buy on serious volatility like we saw in 2008.
4. Timing - The worst thing you can do is alter your strategy based on the day-to-day chatter of the markets. Today’s investing world is dominated by quarterly earnings announcements. Quarterly earnings are almost useless in my opinion and are manipulated half the time. The “street” celebrates when a bank draws down reserves to boost earnings and then they upgrade the stock. Ignore all of this crap. All of it.
Work on your strategy. Develop it over time and over a couple years of observing. Then, stick to it. Buy assets that support your strategy when there are good opportunities. Don’t get caught up in the excitement of a Apple earnings beat. You’re probably better off not watching CNBC and not checking the market every day. Instead, check stock prices occasionally and watch your dividend payments come in.
Reinvest your dividends to continue accumulating shares of the companies you want. Other than that, hoard cash and wait for serious buying opportunities. I’ll warn you, there might not be buying opportunities for years at a time. This means you’ll have some serious dry powder and you can be really aggressive when the time comes. In fact, you’ll need to be aggressive at this time.
What I’m Not Saying
1. I’m not saying you should avoid all stocks - I don’t think the wall street pushed method of passive investing, and buying stocks simply because they’ll go up as long as you wait long enough is the right course of action given the structural economic issues that are present. You need to be selective and buy only at opportune times. Yes, that means ignoring the current stock market rally. Again, this is a 10-20 year focus not a 1-2 year focus. Yes, I know people will criticize me for missing the current rally. No, I don’t care. Let’s talk in 10-20 years. This is my strategy. You can do with it what you want.
2. Lastly, I’m not saying that everything is doom and gloom. I think for the masses, their standard of livings will decline. They have to. There’s no way around it. Opportunities will not be as visible and it will require harder work and harder search to find them. I’m willing to find them both in the investing world and the business world.