“Half the battle is buying things at the right price, and right now stocks are priced right…”
“It’s the cheapest in the past 25 years…”
It was strange to hear these words at the Value Investing Congress in New York City. And hearing it from two of the smartest value investors I know was shocking.
[ad#Google Adsense 336×280-IA]Value investors like to focus on individual stocks. They usually don’t care about the “big picture.” But Joel Greenblatt and Leon Cooperman – two of the greats – were saying stocks as an asset class are nearly as cheap as they’ve ever been.
I agree. And it’s got big implications for your portfolio. Let me show you what I’m talking about…
Stocks relative to other asset classes – specifically bonds – are as cheap as they’ve been in 50 years. As an investor, you have to look at this chart and take pause…
For most of my investing career (which began on the left side of the chart), the U.S. 10-year Treasury paid a lot more in interest than stocks paid in dividends.
For example, in the 1980s, stocks paid 6%. The 10-year Treasury was paying 14%. Smart investors owned some of each to balance out their portfolios. Owning stocks gave you the potential for long-term gains and some income… Bonds gave you tons of income with little hope for capital gains if held to maturity.
Today, things have changed.
The 10-year Treasury is paying less than 2%. But inflation is around 3%. Holding bonds is risky. The yield on them might not even cover the loss from inflation.
Stocks, on the other hand, are offering an unusual opportunity. The S&P 500 dividend yield – at 2.3% – is now higher than the 10-year Treasury yield. This is a big change from the past decades.
The last time this happened regularly was before 1958. But at the time, regulations were lacking. Reporting requirements were weaker. And investors couldn’t get the same amount of information that they can today. Stocks had to pay something more to make up for the extreme risk.
More recently, the 10-year Treasury yield dipped below the S&P yield in 2008-2009. That was one of the best times to buy stocks in a generation.
For years, intelligent investors have held stocks and risk-free safe government bonds. One hedged the other in good and bad times. The combined returns were a mix of income and capital gains.
But with stocks so cheap compared to bonds, it makes sense to reconsider this. As you allocate your investments, you might join me in adding a few more stocks…
In my Retirement Millionaire service, we’re buying the same sorts of stocks value greats Greenblatt and Cooperman talked up at the conference: technology and health care companies with strong cash flows and solid balance sheets.
These businesses will perform in good times and bad. And with stocks so cheap right now, it’s a great time to buy.
Here’s to your health wealth and a great retirement,
— Doc Eifrig
Source: Daily Wealth