Long-term investors – those with a time horizon of five years or more – with fresh money to put to work should always ask themselves the same question: What is undeniably cheap right now?
When you buy high-quality assets that are bargains you don’t just have more upside potential. You have a greater margin of safety as well.
The problem is this: While there are always individual securities that are underpriced, in a roaring bull market for stocks (like the one we’ve been in for 5 1/2 years) or bonds (which we’ve been in for more than 30 years) it’s often tough to find entire markets that are inexpensive.[ad#Google Adsense 336×280-IA]The S&P 500, for instance, currently sells for 16.5 times 2014 earnings.
That’s neither overvalued nor undervalued based on historical measures.
You could say the U.S. market is fairly valued. Warren Buffett seems to agree.
He recently said U.S. stocks “trade in a zone of reasonableness.”
U.S. Treasury bonds, however, are a sucker’s bet in my view.
Who in his right mind would lend out his money for 10 years at a paltry 2.4%? Interest-rate analyst Jim Grant rightly calls this “a return-free risk.”
By contrast, you could buy stodgy, old AT&T (NYSE: T) today. The share price could lose 2.5% every year for the next 10 years. And even if its current dividend of 5.2% were never increased, you’d still have a better total return over the next decade than with the 10-year Treasury.
History shows that the key to earning higher long-term returns is looking at assets that are ugly and out of favor. Here are two good examples.
What to Buy Now
Three and a half years ago, silver traded at more than $45 an ounce. Today it is less than $19, a 60% drop from its high. But silver mining stocks have dropped even more. You can buy iShares MSCI Global Silver Miners (NYSE: SLVP), an exchange-traded fund, and capture the performance of virtually all the world’s leading silver producers.
Major holdings include Silver Wheaton, Fresnillo, Tahoe Resources, Pan American, Hecla, Coeur Mining and Fortuna Silver.
When is silver going to pick up again? Your guess is as good as mine. But when you buy an asset in a bear market, you need only be patient.
I’d buy the silver producers over silver itself for two reasons. First, it gives you a leveraged play on the price of the metal. A 10% increase in the price of silver should drive up these miners 20% or more, since their costs are largely fixed and a jump in bullion prices will fatten their bottom lines immediately.
The other reason? Instead of paying storage costs, you get a yield. True, it’s only 1.2%. But what is your money collecting in a money market account? The dividend here is approximately half the yield of a 10-year Treasury. And you sure have a lot more upside.
Here’s another contrarian play…
Last month Argentina defaulted on its debt for the second time in 13 years. Argentine stocks and bonds sold off on the news.
The Argentine government has no credibility, and I wouldn’t touch its debt with a barge pole. But plenty of Argentine companies are in good shape.
So a long-term investor with a contrarian bent might reasonably plunk for a few shares of Global X MSCI Argentina ETF (NYSE: ARGT). Nearly 40% of the fund’s assets are invested in three fine companies: steel-pipe manufacturer Tenaris (NYSE: TS), oil and gas giant YPF (NYSE: YPF) and MercadoLibre (Nasdaq: MELI), the eBay of Latin America.
Is there risk in these two contrarian plays? Of course, there’s risk with every investment. (Even T-bonds leave you vulnerable to inflation.)
But here’s a secret. If you want to own the asset class that’s likely to go up the most, you might start by evaluating the ones that are liked the least.
Source: Investment U