Why Most of the Investment Advice You’ve Heard is Wrong

Why Most of the Investment Advice You’ve Heard is Wrong

by Alexander Green, Investment U Chief Investment Strategist
Friday, January 20, 2012: Issue #1691

A conversation with a friend last week sounded numbingly familiar.

“I just can’t seem to win for losing in the stock market,” he confessed. “Five years ago, my broker had me fully invested in stocks and I took a drubbing. Then when things were bottoming out a couple years later, he talked me into making my portfolio more conservative. As a result, I didn’t get much of a pop on the rebound. Now he’s trying to get me to reshuffle again. But I’m too scared to do anything.”

Since he was a friend, I felt obliged to tell him the truth: He’s getting lousy investment advice. Not because his broker failed to outguess the market… but because he’s guessing at all. As if that wasn’t bad enough, there’s a good chance that the advice he’s getting is tainted by self-interest.

Here’s what I mean…

It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.

Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?

The same is true of market timing. It’s easy to look in the rearview mirror and see when you should have been in the market and when you should have been out. But when you look ahead, it is always a blank slate. No guru or trading system can change that.

Even if you could somehow divine what the stock market was going to do next – which you can’t – you still wouldn’t know which stocks would outperform and which ones would lag.

The only way to determine that is to look at business fundamentals. Companies that are doing all the right things – increasing sales, compounding earnings at high rates, growing market share, improving operating margins, paying down debt, buying back shares – will post superb returns, regardless of what the economy or stock market are doing. And those that are doing the opposite – experiencing flat or negative sales, lackluster earnings growth, small margins, high interest costs and diluting existing shareholders with new stock issues – will be laggards.

In short, stock market success is about analyzing businesses not investing in some self-styled expert’s macroeconomic forecast. Yet that’s exactly what the mass media and much of the investment advisory industry encourages people to do every day.

The media does it to attract viewers – and thus advertisers. The advisory industry does it sometimes out of ignorance but often just to justify its fees. This is especially true when you have a transaction-based relationship with an advisor where the more you trade the better he or she is compensated. Trust me. That doesn’t generate satisfactory long-term returns.

Every time you hear a pundit talk about “the new normal,” the rally just ahead or the prolonged economic slump we’re likely to endure, understand that you’re listening to opinions that are no more helpful than a weather forecast for three weeks from Sunday.

Both pieces of advice are worthless. But one is a lot more expensive – and harmful – than the other.

Good Investing,

Alexander Green

The Best Buy Signal of 2012

The Best Buy Signal of 2012

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677

Investors are scared right now and it’s not hard to see why.

Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.

We have all heard these negatives repeated daily and cycled endlessly in the national media.

However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)

Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.

This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.

If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…

Contrarian Investing Works

It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.

A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.

In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)

Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.

I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”

I’m trying to contain my glee. Who says no one rings a bell in the stock market?

The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:

1. Is logic or emotion governing my decision making about my portfolio?

2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?

We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.

Good Investing,

Alexander Green

Why This Market Truism Just Isn’t True

Why This Market Truism Just Isn’t True

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 5, 2011: Issue #1657

In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers…

I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.

Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.

Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.

My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.

“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …

For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.

If you don’t already own stocks, it’s tough to catch the train after it has left the station.

Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily, often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.

That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)

As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)

The Oxford Club has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.

True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.

You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.

Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.

The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.

If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.

Good investing,

Alexander Green

The Best Trade You Can Make in November

The Best Trade You Can Make in November

by Alexander Green, Investment U Chief Investment Strategist
Thursday, November 24, 2011: Issue #1650

In December 1996, I sold some shares of Best Buy (NYSE: BBY) to offset gains elsewhere in my portfolio.

I still consider it the most boneheaded investment move I ever made. A year later, the stock was up more than five-fold. A few years further on, it was up more than thirty-fold.

The worst part is that I didn’t dislike the business prospects for Best Buy at the time. Quite the contrary, in fact. I sold it only because I had substantial capital gains and was cleaning out my portfolio to offset them.

I don’t always do that any more. And you shouldn’t necessarily, either. Despite what your tax advisor may tell you, you should never sell an investment for tax reasons alone. Nor do you have to.

Here’s why…

The IRS allows you to offset realized gains with realized losses each calendar year. If you do, however, you must wait at least 30 days before buying the same shares back. (Otherwise you run afoul of the wash-sale rule.)

Offsetting gains at the end of the year is often a sensible move. Most stocks aren’t appreciably higher 30 days later. And if you still like them, you can buy them back then.

There is a risk, however, and it’s called the January effect. The first month of the year is traditionally a strong one for the market. A lot of pension and IRA money gets invested early each year. Plus, there’s often a rebound from the tax-loss selling that goes on each December.

If a stock you own soars in January, there’s a natural reluctance to buy it back. The temptation is to wait until it comes back down. But what if it doesn’t? You’ve taken a limited loss but sold an investment with unlimited upside potential.

There’s a way around this problem, however. And you can take advantage of it – but only if you’re willing to move this week.

In late November each year, I look at my entire portfolio for any companies that are trading below my entry price but NOT near my trailing stops. If I still like a stock, I often make the decision to double down on it for 30 days.

Why? Because I can sell the original shares at the end of December for a tax loss. And if the stock rallies in January, it’s not a problem. After all, thanks to my purchase in November, I own the same number of shares as I bought originally.

What if you don’t have the cash to double down on your position? Use margin. Again, I’m recommending this only for a 30-day period. Your margin interest charge will be minimal.

The risk, of course, is that your shares will be worth less in late December and you will have a paper loss on the second purchase.

However, just the opposite may happen. Remember, the January effect is often preceded by the Santa Claus rally, the tendency of the stock market to do well in the second half of December. As a result, you could end up with a smaller loss in your original shares and a paper gain on your second purchase.

(The Santa Claus rally is never certain, of course, and another reason why you should only add to those companies whose earnings prospects remain strong.)

Bear in mind, when selling for tax purposes, the IRS requires that you buy those identical shares AT LEAST 30 days before you sell the others. So if you want to use this strategy for 2011, you must act this week.

If we have the traditional mid-December to early February rally, you’ll thank me. And then perhaps again on April 15.

Good investing,

Alexander Green

The One Place to Invest for Growth, Income… and Safety

The One Place to Invest for Growth, Income… and Safety

by Alexander Green, Investment U Chief Investment Strategist
Monday, November 14, 2011: Issue #1642

Eight weeks ago, I wrote an Investment U column pounding the table for dividend stocks. Since then, they’ve ratcheted higher, but I still see plenty of upside ahead.

Someone who shares my enthusiasm for high-yield stocks right now is my friend and former colleague Rick Pfeifer, Senior Portfolio Manager at Fund Advisors of America, a  Florida-based money management firm.

On a recent trip to the sunshine state, I stopped into his office to hear why he, too, feels this is one of the best places to put your money to work today.

Q: Rick, there’s an awful lot of fear and anxiety about the economy and the stock market right now. Investors are confused and uncertain about what to do with their money. What is your take on things?

A: In a market as volatile as this, you have to spread your bets. But my take is this: If you’re looking for growth, buy dividend-paying stocks.

If you’re looking for income, buy dividend-paying stocks. If you’re looking for safety, buy dividend-paying stocks.

Q: Why?

A: The first question every investor has to ask himself is, “How should I divide my money among stocks, bonds and cash?”

The average money market fund currently pays two one-hundredths of one percent. At that rate, you will double your money in just 3,600 years.

Q: Not terribly attractive.

A: Definitely not.

And Treasury yields won’t make you jump up and click your heels, either. The 10-year guy is yielding two percent, which translates – at best – to a zero-percent yield after inflation.

Q: Tough to meet your investment goals that way.

A: Right.

In my view, dividend stocks are a good place to be right now for several reasons. Let’s talk about safety first. When the Dow traded at these levels 11 ½ years ago, it sold for 47 times earnings. Today it trades at less than 14 times earnings. Stocks are cheap right now on the basis of sales and earnings.

But even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and sometimes fight the broad trend and rise in value. The reason is obvious. These tend to be mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.

Q: U.S. companies are sitting on a record amount of cash now, too, right?

A: Correct.

U.S. companies currently hold more than $2 trillion in cash, a record. Thanks to this economy and the current Administration (don’t get me started), companies aren’t hiring and they’re not boosting spending. So a lot of this cash is rightfully going back to shareholders.

The Dow currently yields more than bonds. And dividend growth among U.S. companies has averaged 10 percent per year over the last two years, more than double the long-term dividend growth rate.

Q: Okay. Dividend stocks are less risky than non-dividend payers and currently pay more than cash or bonds. But how do you think this group will perform in the years ahead?

A: We can only use long-term historical performance as a guide, but the numbers are pretty darn encouraging. Over the last 50 years, for instance, the highest 20 percent yielding stocks in the S&P 500 returned 14.2 percent annually.

That’s good enough to double your money every five years – or quadruple it in 10. And if you were even more selective, say investing only in the 10 highest yielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7 percent.

Q: We should add the standard caveat here about past performance and point out that there are risks with dividend stocks, too, right?

A: Indeed. You have to be selective. An investor would be foolish to plunk for a stock just because the dividend is large. The market is full of “dividend traps,” troubled companies that pay hefty dividends to keep investors from bailing out.

Q: How does an investor avoid those?

A: Mainly, by doing his or her homework. You need to look at prospective sales and earnings growth. You have to examine the balance sheet and make sure that the company isn’t too highly leveraged.

You have to note cash balances. And, perhaps most importantly, you need to analyze whether the payout ratio is sustainable.

Q: So can you give us a few examples of high-yielders that have you been buying in your managed accounts lately?

A: I’ve been nibbling at Windstream Corp. (Nasdaq: WIN), a well-run communications and networking company with an 8.3-percent current yield. I like oil and gas producer Enerplus (NYSE: ERF), with its high operating margins and 7.7-percent dividend.

And – this one is a bit different – I’ve been picking up a 10.3-percent yield with the Gabelli Global Gold Trust (AMEX: GGN). There are plenty of other attractive high-yield situations out there, too. They should be owned, of course, as part of a more broadly diversified portfolio.

Q: I agree, Rick. Thanks for your time. Let’s chat about this sector again in a few weeks.

Good investing,

Alexander Green

How to Beat “the Mania of Pessimism”

How to Beat “the Mania of Pessimism”

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, September 12, 2011: Issue #1598

Two weeks ago, I opined that the biggest obstacle a stock market investor faces today is “headline risk.”

That is, relentless media negativity.

The idea seems to be gaining traction. On last week’s “This Week” on ABC, Pulitzer Prize-winning columnist George Will said, “The very least the media should do right now is not detract from the nation’s understanding or add to the synthetic hysteria.”

In the September 17 USA Today, James Paulson, Chief Investment Strategist at Wells Capital Management, said, “We are in the middle of a mania of pessimism. The nation is suffering from “Armageddon hypochondria.”

Again and again, the media reminds us about the weak dollar, high unemployment, the soft housing market, problems in the Euro Zone, political dysfunction in Washington, trouble in the banking sector, and the down-and-out consumer. After a few hours of this, you’d expect to walk outside and see bread lines and angry mobs.

That’s not what you see, however. What you see instead are ordinary people going about their everyday business – and getting bombed periodically with media sensationalism calculated to attract viewers and sell advertising.

It works, too. In fact, it works so well that few people see all the positives that exist today.

“Positives?” a friend asked me the other day, genuinely perplexed.  “What positives?”

Exactly. We’ve gotten to the point where people have had so much downbeat news dripped on them for so long that they can’t even imagine there is a positive side to recent events or that any logical case can be made for owning stocks to meet their financial goals.

So let me take a stab at it now.

For starters, realize that it is not possible for anyone to accurately and consistently predict economic growth or stock market performance. But here’s an insight you can take to the bank: Share prices follow earnings. (Earnings, of course, are the net profits of a business.)

In the third quarter of last year, the companies that make up the S&P 500 reported all-time record earnings. In the fourth quarter, those record earnings were exceeded, as they were again in the first quarter of this year… and yet again in the recently reported second quarter.

If you didn’t hear that we’re in a period of all-time record corporate profits, you really ought to think twice about who’s delivering your newsworthy information. Or at least who’s providing your investment guidance.

As investment legend Peter Lynch once noted, “People have all this data and yet they look at all the wrong things… It’s about earnings. They need to follow the earnings.”

Of course, just because corporate earnings have hit an all-time record four quarters in a row, it doesn’t mean they will continue. And, conversely, it doesn’t mean that they won’t.

If you can’t imagine why stocks would rally from here, just imagine what will happen if the much ballyhooed double-dip doesn’t appear.

• There are plenty of good reasons to be bullish on stocks right now. But if you’re developing your investment perspective from gloom-and-doom media reports, you may not recognize the positive factors. So I’ll tick off four big ones for you now:

• Interest rates are at historic lows and inflation is negligible. That isn’t likely to change any time soon.

• Energy and food prices are moving lower and Ben Bernanke has pledged to hold short-term rates at zero for two more years.

• Valuations are cheap.  When the S&P 500 traded at these levels eleven years ago, it sold for 44 times earnings. But because profits have hit new records lately, the S&P 500 today sells for just 13 times trailing earnings, well below the long-term average of 16.4.

• Investors are anxious and afraid. This may seem like a negative but it’s not. Investor sentiment is an excellent contrarian indicator, especially when accompanied by low valuations. Think back to the market low of March 2008, when the consensus was that the world was coming to an end and the Dow briefly traded below 6,500. From that point the market put on an impressive rally, essentially doubling in two and a half years. As investment pioneer John Templeton rightly said, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” Do you know anyone who’s feeling euphoric right now? Not me.

• Mutual fund investors have yanked money out of stocks over the past six weeks. It may seem counter-intuitive but that’s yet another positive. A 25-year study published last year in the Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills. In other words, it pays to buck the consensus.

Don’t get me wrong. More bad news from the Euro Zone and political wrangling here at home will still push stocks around from day to day. That’s not important. What is important is whether you’re confident – as The Oxford Club is – that the companies you own are set to report dramatically higher profits in the weeks ahead.

You may be reluctant to invest in stocks. I understand. It takes nerve and resolve to go against the trend and invest in times like these. But you should.

FDR was wrong about some things. But he got one big thing right. The only thing you have to fear… is fear itself.

Good investing,

Alexander Green

Will You Fall Prey to “Headline Risk”?

Will You Fall Prey to “Headline Risk”?

by Alexander Green, Investment U Chief Wealth Strategist
Friday, September 2, 2011: Issue #1592

In the last couple of months, millions of investors have done a 180. It happens all the time. And – just as in the past – they will surely come to regret it.

The story is as old as equities themselves. When the market is an uptrend, investors focus on opportunity and considerations of risk go out the window. When the market is in the tank, they focus on risk and forget about opportunity.

This is the very opposite of what you should be doing.

During my 16-year career as an investment advisor and portfolio manager, I used to show new clients a 200-year chart of the stock market and ask them to identify the best buying opportunities.

Invariably, they pointed to the periods when the market had cratered.

I asked if they would be willing to step up and take advantage of such opportunities in the future. Most nodded vigorously and assured me that they would.

Few actually did.

Why? Because you can never imagine the news backdrop that will accompany a major stock market decline.

When the market recovered – as it always does – these same investors kick themselves for not scooping up bargains when stocks were cheap. Yet when the market declined again, they would generally react the very same way.

Nothing could be simpler than to say, “buy low, sell high.” But pulling the trigger when times are tough isn’t easy.

How to Avoid Headline Risk

It’s easy to fall prey to “Headline Risk.” Here’s what I mean…

On August 9, national newspaper and television headlines shouted that the Dow had plunged 634 points the previous day. That was not an insubstantial drop. It amounted to a 5.5 percent decline in the index.

Yet few sources reminded investors that the Dow was still up 66 percent (excluding dividends) from the market lows 2 ½ years ago. Or that the drop wasn’t even in the top 50 for largest daily percentage losses.

Similarly, the media made a big deal about the market sell-off the week of August 1 to 5 representing an evaporation of more than $4 trillion in world equity values. That’s a big number. (Unless you’re a Congressman, apparently.) Yet the total value of all stocks worldwide is approximately $55 trillion. And, for the overwhelming majority of investors, these were temporary paper losses.

Where was the context? There wasn’t any. The media needs sensationalism to grab viewers’ attention. Newspapers, magazines and television shows aren’t interested in helping you reach your financial goals. They’re interested in helping their marketing departments sell advertising. Sensationalism does just that.

Understand this and you can inoculate yourself against “Headline Risk.” Scary headlines create strong emotions. But strong emotions are usually the prelude to bad investment decisions.

Flee common stocks – the greatest wealth creator of all time – and where will you go? Into 10-year Treasuries yielding 2 percent? Into money market accounts paying next to nothing? Into gold which has already risen six-fold in the past 10 years? Into residential real estate which is mired in a sea of foreclosures?

High quality stocks are still your best bet to meet your long-term financial goals. National headlines are screaming just the opposite, of course, just as they have during every major buying opportunity of the past 75 years.

The truth is your greatest risk is not market fluctuations. It’s that your money fails to keep up with inflation – or that your investment portfolio kicks the bucket before you do.

Consider that before extravagant headlines prompt you to do something foolish.

Good investing,

Alexander Green

The Best Buy Signal in 53 Years

The Best Buy Signal in 53 Years

by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, August 25, 2011: Issue #1586

Just weeks before the stock market made a dramatic bottom in early 2009, I wrote an Investment U column entitled “One of The Best Buy Signals in 51 Years.”

It was one of our most widely read columns that year – and syndicated many other places, as well.

I have no idea how many readers acted on my analysis at the time. After all, the financial crisis was in full swing and investor sentiment – to quote Jed Clampett – “was lower than a hog’s jaw on market day.”

But those who bought stocks on this signal made gobs of money in the months that followed. After all, the market essentially doubled between the lows of 2009 to the highs earlier this year.

Now – for only the second time in 53 years – this uncanny signal is flashing again. Here’s what it is and why you should take advantage of one of the best and most accurate signals in stock market history…

Market Yields: Stock vs. U.S. Treasuries

In the first half of the twentieth century, investors found that if you bought stocks only when the market’s yield exceeded the yield on 10-year Treasuries, you would have been in for every single major rally.

The returns were huge – and the system made perfect sense. Stocks are riskier than bonds, market participants reasoned, so they should yield more to compensate for greater volatility and the likelihood of occasional losses.

The system worked like a charm until 1958. Then it stopped cold. Why? Because for the next 50 years, stocks never yielded more than Treasuries.

Public companies began using their cash flow to fund operations and acquisitions rather than paying out dividends to shareholders. With stock yields sharply lower, most analysts reasoned that the indicator was dead, that the yield on stocks would never again top bonds.

And, indeed, it took a full blown financial crisis but two and a half years ago to finally happen again. With the luxury of hindsight, we can see that was yet another superb buying opportunity. And today it’s happening yet again thanks to both the tremendous rally in government bonds and the socking that stocks have undergone. For only the second time since 1958, stocks are yielding more than bonds.

Granted, it’s a squeaker. As I write, the 10-year Treasury is yielding 2.07 percent. The S&P 500 yields 2.16 percent. Of course the S&P 500 Index was only created in 1957. It was the Dow that investors used in the first half of the last century. And the yield on the Dow is more than 50 percent higher at 3.24 percent.

History Says… Stocks Are a Terrific Long-Term Buy

If history is any guide, that means stocks are a terrific long-term “Buy” right now and Treasuries – which have become a complete bubble and a table-pounding “Sell” in my estimation – are due for a long period of underperformance.

True, GDP growth is likely to be anemic in the months ahead. But – shocking and surprising most investors – stocks (and especially dividend-paying stocks) should do exceptionally well.

There are no guarantees in the world of stock market investing, of course. But as Patrick Henry famously said, “I know no way of judging the future but by the past.”

Good investing,

Alexander Green

Editor’s Note: So how can you capitalize on the best buy signal in the last 53 years? As Alex said, it’s important to focus on dividend-paying stocks… And the best way to read Alex’s favorite picks and his regular market commentary is to join The Oxford Club…

Is It Different This Time?

Is It Different This Time?

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, August 22, 2011: Issue #1583

Investment legend John Templeton famously said that the biggest mistake an investor can make is to say “this time it’s different.”

In some ways, this statement may seem a little strange.  On the surface, every market correction is different. For example, when the stock market imploded on October 19, 1987, falling over 22 percent in a single session, that was unexpected. After all, no government failed that morning. No currency collapsed. No President was shot. To this day, pundits still argue about why the stock market crashed.

Or how about the bear market of 1990? No one foresaw Saddam Hussein rolling into Kuwait that August, taking over the country and its oil fields. Investors worldwide speculated that the Middle East would go up in flames. (And, indeed, many Kuwaiti oil fields did.) That was certainly different.

Then there was the collapse of hedge fund giant Long-Term Capital in 1998. Fed Chairman Alan Greenspan feared that unwinding the fund’s highly leveraged positions would turn the bond market upside down. He worked behind the scenes to get major Wall Street firms to help bail out the fund. That was something new.

Or how about the March 2000 to October 2002 bear market that started with the collapse of technology and Internet stocks? It was the end of an era, the deflating of a bubble. We hadn’t seen anything like that in modern history.

Or how about 9/11? Who woke up that day suspecting that a group of zealots would fly planes full of people into buildings? Not me.

The mania for residential real estate six years ago was something curious, too. And so was the collapse of sub-prime mortgages. That led to an unprecedented financial crisis and a harrowing drop in the Dow. You don’t see something like that every day.

So was Templeton out of his mind when he declared it foolish to say “this time it’s different?” Of course not. Templeton well understood that the particular events that cause a market decline will always vary. What shouldn’t vary is the way you respond to it as an investor.

If you bought into the market crash of 1987, you did very well over the next few years.  After the bear market of 1990, stocks went on a remarkable 10-year run. If you bought into the secular bear market of 2000 to 2002, you also made out handily over the next five years. And, of course, the market almost doubled from the lows of the financial crisis in 2009.

Here we are today and the stock market has swooned again, this time due to sovereign debt problems here and in Europe. Nothing like this has happened in recent history.

So the question you face now is whether to take advantage of the sell-off and buy great companies at bargain prices or… to insist “this time’s it’s different.”

The choice is yours.

Good investing,

Alexander Green

How Traders and Investors Should Play This Market

How Traders and Investors Should Play This Market

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, August 8, 2011: Issue #1573

You often read in the financial press that stock market investors should do this or short-term traders should do that. But which one are you and what should you be doing now?

Here are my quick and dirty definitions, followed by a few thoughts about how each ought to approach today’s wild and wooly financial markets.

• An investor is someone set on achieving long-term financial goals: a comfortable retirement, the kids’ college education, or perhaps the down payment for a new house. Success here is measured in years, so this week’s market action is largely irrelevant except as it offers unusual opportunities. The important things to consider here are quality, diversification, asset allocation and keeping annual expenses and taxes to a minimum.

• A trader is someone who is trying to beat the market in the short term either to goose returns or reach short-term financial goals. This approach is inherently more risky, as the market action over the last few weeks has made crystal clear. The key here is to own great companies that are likely to post positive surprises in the short term (for example, great sales, high earnings, new product announcements, or an unexpected takeover bid). A trailing stop is essential to protect profits and limit any losses.

For the long-term stock investor, the current sell-off is almost certainly a gift from Fortune. I know, no one you know sees it that way, but look back through history. You’ll find that virtually every widespread market sell-off was a buying opportunity.

Yes, the market can go lower in the short term. (That’s always the case, incidentally.) But over the last 40 years, the S&P 500 has seen 25 corrections of 10 percent during a bull market. In only nine of them did the losses grow to 20 percent or more. Despite all the naysayers, a further sell-off is hardly assured.

One of the Few Reliable Rules of Investing

Still, you should only nibble at great stocks right now, not throw money at them in wild abandon. (Although I’ll bet that’s not your instinct right now, anyway.) One of the few reliable rules of investing is that perceived risk and actual risk are inversely related: The more dangerous the market feels, the more likely it is to produce generous returns in the years ahead.

So long-term investors gradually shift some money out of assets like bonds that have appreciated sharply and move them into stocks which have depreciated sharply. The fact that this feels like the wrong thing to do is, paradoxically, just the confirmation you need. (You need only recall the market meltdown two and a half years ago to see what I mean.)

Short-term traders need to take a slightly different approach, however. If you’ve been using our recommended trailing stops, you almost certainly have been building cash the last few weeks as you protected profits and preserved capital.

Don’t be in any rush to put this cash back to work. To take advantage of a crisis, you don’t have to be the first one to the fire. Pick your spots and trade judiciously. (One good strategy is to buy the same stocks that corporate insiders are currently loading up on.)

Don’t Risk Missing a Significant Rebound

Despite the stormy weather, you should cast a few lines right now. It may be tempting to simply wait until things “settle down” but then you run the risk of missing a significant rebound.

In short, tune out all the end-of-the-world hysteria and think rationally.

• As a long-term investor, shift money in cash and bonds into stocks.

• As a short-term trader – and you may well be both – scoop up great companies selling at unusual discounts – there are plenty of them out there – and adjust your stops to protect your gains.

You’ll thank me when things get back to normal. As they always do eventually.

Good investing,

Alexander Green