When I got into the investment business in the early 1990s, I felt a bit cheated…
I couldn’t find any classic GREAT values to buy in the investment markets.
I felt like young David Dreman did during the stock market boom of the 1960s:
When I was a student reading the old newspapers of the 1930s, 1940s, and 1950s, I was amazed by the value so abundant in the stock markets of those days. I felt a little cheated because I thought the great days of investment coups all lay in the past.
– David Dreman, Contrarian Investment Strategy
Dreman’s opportunity finally came. And it made him a hero to contrarian investors. It just took 20 years…
[ad#Google Adsense 336×280-IA]When Dreman wrote his book in 1979, interest rates were in the double digits. So was inflation. Adjusted for inflation, the S&P 500 stock index had fallen 50% in the preceding 15 years. Nobody wanted anything to do with stocks.
Dreman stood alone. He saw the value. And he said stocks were a bargain:
“Overreactions to the current economic problems seem to me to present the investor with some of the great stock market opportunities in decades.”
He said the stock market “appears cheap by nearly every historical standard. Since the 1930s, with the exception of the bottom of the 1974 market, stocks have never been as totally washed out as they are today.”
Dreman was bold. He said “buy.”
And he was right. His book, Contrarian Investment Strategy, kicked off the greatest bull market in the history of stocks, lasting for two decades. The S&P 500 stock index soared. It was near 100 in 1979. Twenty years later, it was over 1,400.
It turned out, Dreman was not cheated. He just had to wait 20 years from when he entered the business for his day to come.
When I started working in this industry 20 years ago, I felt like Dreman did in the 1960s. I thought I’d never see values like Dreman saw in 1979.
And just like Dreman, it took 20 years of my career for such values to arrive.
But now, value is finally here in stocks.
When Dreman’s book came out in 1979, stocks in the S&P 500 spent most of the year selling for around nine times earnings. Today, many of the top companies in the S&P 500 are trading at similar valuations.
Take a look at the top holdings of two of my favorite speculations… a double-long fund in tech stocks (ROM) and one in health care (RXL)…
While these values are dirt-cheap, I believe stocks are a much better value than what Dreman saw in 1979. Here’s why…
Back in 1979, stocks had serious competition from many other assets…
You could earn 13%-14% on money in the bank (in CDs). High-quality corporate bonds were paying double-digit interest, as well. Why bother with stocks when you could earn double-digit returns in boring investments… right?
Today is an entirely different story… It’s near-impossible to find a safe financial asset that pays you more than 1% interest. Bank CDs are paying 0.25% interest. No matter what you buy, you’re losing purchasing power due to inflation. It’s awful.
Among financial assets, stocks today have no competition. So what do we do?
Right now? Nothing…
While everything I wrote about Dreman and 1979 is true, the REAL bottom in stocks (when you adjust for inflation) didn’t actually arrive until 1982. Stocks were super-cheap for a couple more years before they took off.
While stocks are incredibly cheap now, they could get much cheaper. Heck, the entire global financial system is in doubt as I write… Seriously bad times in financial assets – reminiscent of the Lehman collapse in 2008 – could be around the corner.
Stocks could go sideways for a couple years… staying cheap… before the big uptrend finally kicks in. That’s what happened from 1979 to 1982.
We are fortunate enough to be able to be patient… to let the dust settle a bit. Stocks are cheap enough now that we can afford to miss the first couple percent off the bottom.
So for now, hold tight. Stocks are cheap. But there is no uptrend. Our Dreman day is coming, but it’s not here yet…
Good investing,
— Steve Sjuggerud
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Source: Daily Wealth