A brutal sideways market has plagued Japan for more than 30 years. Now, we’re seeing the same conditions setting up in the U.S…
After a decade of low rates, lucky speculators raking in quick gains, a booming real estate market, and record-high stock valuations… the pendulum is now reversing.
The Federal Reserve has been raising interest rates for months. Speculators have sustained huge losses, home prices are falling, and U.S. stocks are down roughly 20% since their all-time high in January.
So what now?
Today, we’ll look at what to do if the U.S. is mired in a sideways market. You see, one strategy dramatically outperformed in Japan – and we can prepare to use it now…
When things first soured in Japan, the Bank of Japan tried to stimulate economic growth by cutting interest rates again, bailing out banks, and eventually even buying stocks. But it didn’t work.
Instead, it stoked the country’s famous “Lost Decade” of subpar economic growth from about 1991 to 2001. And despite having spent more than $430 billion on equity exchange-traded funds since 2010, the Nikkei 225 Index is still trading roughly 30% below its 1989 peak.
If the U.S. central bank attempts similar tactics now, as some investors expect it to, we could mirror Japan’s results. That would be devastating for the average American. But not for us…
See, even if the U.S. enters a major “go nowhere” market that lasts decades... we can still make money.
It’ll be harder, sure. We’ll need to be disciplined and strategic. But we can still realize significant, long-term gains simply by sticking with the Extreme Value blueprint. That’s because, unlike many investment publications, it was built for such a market…
The No. 1 reason Extreme Value exists is to help you find great businesses trading at discounts to their intrinsic values.
As it turns out, that simple strategy is perfect for what may lie ahead…
In 2013, the Hong Kong University of Science and Technology Center for Investing published a white paper titled, “Performance of Value Investing Strategies in Japan’s Stock Market.”
The paper examined the performance of value strategies in the Japanese stock market from 1975 to 2011. It reported separate results for the then-two-decade bear market from 1990 to 2011.
In a nutshell, value investing crushed the overall market during the latter period. The next table shows the growth in value of $1 invested based on four simple value metrics.
The dividend-yield strategy means buying stocks with the highest dividend yield. The other three strategies mean buying stocks with the lowest prices relative to book value, earnings, and cash flows…
These numbers don’t guarantee the returns each strategy will generate in the future. The overall point is that: Value investing thrives in a brutal sideways-market environment… even one that lasts decades.
Our approach in Extreme Value is based on our price-implied expectations (“PIE”) model, which gauges current stock prices relative to estimates of future growth potential.
It’s not a simplistic value approach based on the metrics used in the 1990 to 2011 study. But I can easily see us returning to those metrics if the bear plays out like I believe it will… taking the big U.S. stock indexes down 50%, 60%, or more before it hits bottom. That would be in line with past mega-bubbles.
If we do see a sideways market, we’ll likely use both the PIE model and the traditional value metrics to pick stocks. When things are rough and stocks are cheap, value investors have more ideas than they know what to do with.
These days – after years of slim pickings from the value bin – that would be an incredible gift.
Finally, please keep in mind that I’m not predicting that the market will go sideways. But I am saying it’s much more likely than anybody believes today. That difference between expectation and potential reality will blindside a lot of investors over the next several years.
It’s time to make sure you’re not one of them.
Good investing,
Dan Ferris
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Source: Daily Wealth