Are There Any Cheap Investments Left?
The ever-higher stock market has made lots of folks rich and is worrying more than just a few. For anyone with money to invest in the stock market right now, there is a real risk of getting in just as the bottom falls out! We could be looking at a decade, like the one running up to the Financial Crisis in which the stock market will be relatively flat. As such, the task of the investor will be to find cheap investments with the potential for growth. But, are there any cheap investments left?
Finding Cheap Investments That Are Good Investments
When looking for cheap investments, investors need to constantly remind themselves that many cheap investments are really just value traps as they are cheap for good reasons. When are cheap investments the best investments? What you are really looking for are investments with good intrinsic stock value. The best stocks to invest in are those whose intrinsic value (based on forward-looking earnings) is substantially higher than their current stock price. This usually happens when the market reacts to temporary factors and discounts the stock. Here is a possible example of such a case.
Cheap Stocks Right Now
The Motley Fool writes about a couple of stocks that are absurdly cheap at this moment. The two stocks that they discuss are SciPlay, a smartphone game maker and Malibu Boats, a speedboat manufacturer. In the case of SciPlay, the market is looking at revenue growth instead of profits and discounting this profitable company. In the case of Malibu Boats, the market is concerned about two recent acquisitions at a time when recession fears are a real concern. However, these are both profitable companies with strong positions in their respective niches. So, if you are wondering are there any cheap investments left, take a look at either of these too. The Motley Fool article as more details.
Accurate Investment Valuations in an Aging Bull Market
The key to finding cheap and profitable investments in this market is being able to determine an accurate value of the stock going forward. So many stocks today are valued based on steady earnings growth. What happens if that growth cools off? Others are being propelled upwards by stock buybacks. What happens when the company does not have the cash to keep buying back their stock? Market Watch notes that while stock valuations have meant nothing for years, they are becoming important now.
While inaction has been the best course of action since the bull market in U.S. stocks began in early 2009, the risks have now piled up. According to my research, there’s a chance of near-zero returns for most stocks during the next 10 years and a very high likelihood of a 50% collapse at some point.
The risks of a prolonged trade war as well as other investment risks for 2020 and after are such that investors will do well to look at stock valuation and forward-looking earnings in both their current portfolio and any prospective stock purchases.
Investment Risks for 2020 and After
What investment risks should you be concerned about as we head towards 2020? The prospect of a permanent trade war should be high on everyone’s list. And, anyone who has ridden the bull market to higher and higher profits over the last decade may wish to take a little off the table as we noted in our article about when it might be time to stop investing. But, there are other investment risks for 2020 and after which will become increasingly worrisome if not addressed and dealt with. The first of these is the widespread inequality in wealth, income, and access to health care.
Investment Risk of the Current Distribution of Wealth
If you think that your wealth is safe from confiscation by the government, you are wrong. Going back a century there were families in Great Britain who owned estates the sizes of large U.S. counties. These were “taxed away” with each passing generation so that now the survivors of these once-great families live in one wing of the old estate while the National Trust runs the rest of the buildings and grounds as a museum. John Steinbeck once noted that even the poor in the U.S.A. view themselves as temporarily dispossessed millionaires. Thus, he did not think that the U.S. citizens would revolt or that the government would adopt confiscatory measures as in Great Britain. Now when Bernie Sanders and Elizabeth Warren talk about paying for health care and other things with increased taxes on the uber-wealthy, people are listening and supporting their campaigns. Add to this an increasingly-unpopular president soon to be impeached, and you have a potential recipe for investment disaster.
Investment Risk of the Current Distribution of Income
Trump and the Republicans crow about the lowest level of unemployment in more than half a century but fail to mention that so many of the new jobs are with low wages and none of the benefits that came with jobs a couple of generations ago. People who rent in places like San Francisco are living in the last apartment they will ever live in within that city as they are only protected by rent control from being priced out of the housing market. All of those folks with low wages who are living paycheck to paycheck can vote. And, one of these times around they are going to elect enough representatives, senators, and a president whom they believe will rectify things. When that happens, the safety of your investment portfolio could be at risk.
Investment Risk of the Current Unequal Distribution of Access to Health Care
This is another area where many people are hurting. The health care benefits that were so common in another era are gone for most people. And, at the same time, the cost of care has risen dramatically. In this case, we might expect higher taxes on the wealthy as part of the package to provide more access to health care. But, we might also see confiscatory regulations in regard to the pharmaceutical industry and health care providers.
How Do You Deal with Investment Risks for 2020 and After?
Part of your investment planning should be to decide which investment sectors will not be targeted by overly-zealous attempts to rectify perceived social injustice. Because there is not enough money in the investment portfolios of the super-rich to pay for the things that Warren and Sanders want to do, we can expect them to have to borrow. This will drive up long term interest rates but likely lead to inflation such as in the 1970s. Could this be a good time to be looking at gold as an investment again? Real estate might be a better choice.
Investments That Have Nothing to Do with China
Just the other day the stock market rallied on news that the USA and China were close to an interim trade deal. And then the market slides back on news that there would be delays and problems. Thus, any of your investments that have anything to do with China are being held hostage. In the short term, political gamesmanship is the major factor but over the long term, there are very deep and permanent issues that each nation is fighting for in this matter. A year ago we posed the question, what happens to your investments if the trade war becomes permanent? In that article, we looked in some detail at the issues of global power, military dominance, and economic hegemony that China and the USA are fighting over under the guise of a trade war. The point is that the trade war will be with us for the rest of our lifetimes and longer. Thus, picking investments that have nothing to do with the trade war is a good idea, at least for part of your investment portfolio.
Investments That Have Nothing to Do with China
CNBC was thinking along the same lines when they suggest that you should own stocks that have nothing to do with China. Three suggestions that they offer include Sherwin-Williams, Waste Connections, and Zoetis.
These picks make up an odd trio of companies in waste management, home construction, and animal health, but the strategy connecting them is: “You can own all sorts of names that are not related to the China deal that are still growing earnings 10 percent.”
The common factor with these investment options is that they all do business within the USA, are not dependent on materials or products imported from China or sales in foreign markets.
And, these stocks have other attractive features. For example, Sherwin-Williams barely noticed when the financial crisis occurred and the market crashed. And, its stock price has gone up from the $50 range to the $550 range since that time! Waste Connections is another stock that barely flinched during the 2008 market crash and has gone up from being a $13 stock in those days to a $90 stock today. Zoetis has only been listed for six years but has gone up from $33 a share to $120 a share during that time. And, it does not jump up and down with every innuendo in the trade war.
Investments That Will Detach Themselves from China
In our article about investing during a protracted trade war we noted that that the ABC (anywhere but China) movement is taking hold. As this advances, we will see more and more companies that are not dependent on China for their supply chains including raw materials and for their markets. This will add to your list of investments that have nothing to do with China but do have access to international markets.
When Is the Time to Stop Investing?
No Profit Until You Take a Profit
You may be already wondering what this question is doing on a website that provides help with investing and investments. But, there is a point at which transitioning your investments away from opportunity and risk to reduced opportunity but safer investments makes sense. We wrote recently about the silent warning from Warren Buffett in that he is finding few attractive investments these days and as a result is stockpiling cash. In a more-immediate timeframe, Jim Cramer, the former hedge fund manager-turned TV investment personality, always notes that you do not have a profit when investing in stocks until you take a profit! The Motley Fool recently published an article on the same theme.
When Is the Time to Stop Investing?
The article by The Motley Fool is entitled, Once You’ve Won the Game, Quit Playing.
Despite the stock market’s history of wealth creation over the long run, on a day-by-day basis it can be quite volatile. Heck, there are occasionally even decade-long periods when the market winds up below where it was when it started. If you still have time before you need to get at your money, you can deal with that volatility. In fact, with time on your side, a drastically down market can be a great time to go value hunting for cheap stocks.
While that risk is real, currently, we’re still benefiting from the longest bull market in history. If you’ve been invested through it, you might be looking at your portfolio today and realize that you’re ahead of where you need to be at this stage in your life in order to meet your ultimate retirement goals. If so, congratulations, you’ve won the game. For at least part of your money, it’s time to quit playing.
You do not need to take all of your money out of the market and you should not be just holding cash. But, as we have written, there are ways to invest without losing any money. Taking advantage of long term treasuries, AAA corporate bonds, and a ladder of CDs insured by Federal Deposit Insurance at your bank(s) can be a good idea. Just as you will balance your stock portfolio, you can balance the maturity dates on bonds and treasuries so that money is always coming available as you need it.
What Do You Lose if You Stop Investing?
If you stop investing in strong companies with the prospects for continued growth, you will lose money by pulling out. But, if Trump’s trade war with China worsens and throws the world into a recession, it could take ten or twenty years of steady growth to come back to where we are today. If you have not invested in stocks with strong intrinsic value, they may never recover from a financial downturn and market crash.
What Do You Gain if You Stop Investing?
If you have already won, as noted by The Fool, you will gain a good night’s sleep every night as you worry and fret less about your investments. As we noted at the beginning, we are not talking about getting out of every investment and holding cash. Rather, we are talking about taking some money off the table and following Cramer’s advice about not having a profit until you take a profit. There are still conservative dividend stocks that are excellent growth prospects at any time and likely to continue to keep paying dividends for decades to come.
How to Evaluate Investments in Biotechnology
Biotech can be an investment sector where you can become rich and it can be where you lose everything. Knowing how to evaluate investments in biotechnology can make all the difference. The rationale for investing in biotech is that a company will invent a new medicine or product that will change the world and generate huge sales in the process. The common reasons for avoiding biotech investments are that the vast majority of prospective products never make it to the market and that evaluating the prospects of a biotech investment can be very difficult to the point of bordering on guesswork.
However, there are a series of steps to take that will greatly improve you odds of success. Here are the basics.
- What is biotech and what is not?
- What is your risk tolerance?
- What are the general risks of biotech and your investment in particular?
- What should you be looking for in a biotech investment?
- Check out the top biotech stocks as well as biotech ETFs.
- Proceed with caution.
- Keep close track of each individual investment.
Here are the specifics of our thoughts about how to evaluate investments in biotechnology.
What Constitutes a Biotechnology Investment?
Biotechnology means that the processes involve living (biological) organisms. A good example is the use of genetically altered e coli bacteria to produce human insulin. Although we usually think of biotech as being equal to the development of medications, the category includes things like genetically modified foods. Genetically engineered plants that are more resistant to diseases or chemicals fall into this category as well. The processes involved need to include the use of biological organisms.
And, the use of biotechnology needs to be a major part of the company you are investing in. While many large pharmaceutical companies work in biotechnology, the fractions of their work and profits are small. As such they are considered biotech investments.
Note: Because many investors mistakenly consider any small pharmaceutical startup company to be “biotech” the name may stick even as the company grows and does little or no work in the biotech arena.
When screening for biotech stocks, simply check the industry designation to make sure that a stock is biotech. For example, “Med-Biomed/Genetics” is a biotech stock designation. This means that the company works in biotech as its primary focus and source of profits.
What Is Your Investment Risk Tolerance?
If you are interested in investing in stocks without losing any money, the vast majority of biotech investments are not for you. Any investments in biotech that you make will be in established companies whose stock prices already reflect their success. Two ways to reduce your risks are these. Invest in ETFs that track a basket of biotech investments or invest in your own carefully selected group of biotech stocks and track them very closely.
Not paying attention in the biotech investment world is equivalent to throwing you money away.
Risks That Are Unique to Biotechnology Investments
Every biotech product starts with an idea. The company needs to efficiently and cost-effectively translate that idea into a product they can sell. In the medical product sector of biotech drugs need to work for the purpose intended, not cause any harm, pass strict clinical trials and have a large market to sell to. At any step along the way, a biotech drug may fail to pass a regulatory step. And, these drugs have limited exclusivity and patent protection so when these expire, other companies move in to make the same drug without having incurred the developmental costs.
Biotech meds typically come to an investor’s attention when a drug enters FDA clinical trials. This starts with “pre-clinical” testing which is done “in vitro” in the lab and with test tubes. It progresses to “in vivo” testing with animals.
Only after a drug has satisfied the first steps does it progress to “clinical” testing which is use in humans. The vast majority of biotech drugs never get this far.
In order for a drug to be OK’d for use in the USA, it needs to work and it needs to cause no harm. This is tested in three steps which also determine the appropriate dosage in people and the incidence and types of side effects. The success rates for drugs that get this far are as follows:
- Phase 1: 37% pass
- Phase 2: 30% pass
- Phase 3: 60% pass
- FDA approval: 85%
The stock prices of these companies may be particularly labile when results of phase 1, phase 2 and phase 3 testing are due.
There are many drugs that are perfect cures or treatments for rate diseases or diseases that are prevalent in poor countries where no one can pay for the drug. They get developed but they are never profitable and are commonly referred to as “orphan drugs.”
And, in the USA, Europe, Japan, and other nations, government run health care programs and insurance companies need to pay for the drug at a price that makes the whole process economically feasible. And, it all needs to work out before their period of exclusivity (12 years in the USA) and patent protection (20 years in the USA) run out.
What to Look for in a Biotechnology Investment
The safest biotech investments are companies that have products that are approved and making money and a “pipeline” of drugs and other products at all stages of development and regulatory approval. The company ideally has a good track record of picking ideas and bringing them to fruition in a reasonable period of time.
Ideally the company is making billions of dollars and its intrinsic stock value is such that it is an obvious buy. And, don’t be surprised to learn that such biotech investments do not exist. But, the best investments have a good product lineup, a promising pipeline, a strong financial position, and a fair price.
Predicting biotech success is chancy. Because many startup biotech stocks have one of two products in their pipeline and no guarantee of success, they are largely “story” stocks. The more you know about the details, the more secure your investment will be.
Although you may have no clue as to whether a drug in development will work out, there are folks who have more insight. When you see that a major pharmaceutical company has partnered with a small biotech startup, you know that someone with the right technical expertise is impressed.
In the end, the more you know about a sub-sector of biotech, the more successful you will be. This means that you focus on an area of development that you understand to a reasonable degree and then apply fundamental analysis to the degree that is possible.
Best Investments in Solar Energy
There are several reasons why solar energy is going to be an increasingly important part of the total energy picture for the foreseeable future. Climate and pollution issues are driving energy production away from fossil fuels and toward clean, renewable energy. Across the world, the middle class is growing and with it the demand for more energy. Meanwhile the technologies involved in industrial scale manufacturing of solar products are becoming faster, more efficient, and cheaper. The best investments in solar energy will be in those companies that best use these factors to generate profits. To apply the intrinsic stock value approach to these stocks, you will need to learn a bit about solar energy, the producers, the resellers, and the market. Here is some information to get you started.
The Many Different Kinds of Investments in Solar Energy
When investing in stocks in the solar market, you need to apply the same reasoning that you do for any of your investments. Are you investing for the long term? Are you more comfortable with large cap dividend stocks that do work in the solar energy area but have a broad base of products and services to guarantee those dividends for years to come? Or, do you like to find startups with the prospect of extraordinary growth? Whichever approach you take, you will need a company that stays ahead of the curve in this rapidly advancing investment arena.
Lots of companies are working in solar energy. Some are large companies for whom solar is a small percentage of the business and others are small companies totally devoted to solar. Large companies like Tesla, NextEra Energy, or AES Corp. are billion dollar companies with small-for-them solar exposure but still have more invested in and income from solar than smaller pure-play solar companies like Sunrun or Enphase Energy.
Here is a “baker’s dozen” list of companies trading on U.S. stock exchanges and working in the solar sector. They are listed by the size of their solar footprint.
- Tesla, $25 billion, solar panel installation
- NextEra Energy, $17.8 billion, utility
- The AES Corp., $10.6 billion, utility
- JinkoSolar Holding, $3.98 billion, solar panel manufacturing
- Brookfield Renewable Partners, $2.5 billion, solar panel manufacturing
- First Solar, $2.5 billion, solar panel manufacturing
- SunPower, $1.67 billion, solar panel manufacturing
- SolarEdge, $1.1 billion, solar panel and accessory manufacturing
- TerraForm Power, $940 million, utility-scale power production
- Sunrun, $844 million, installation of solar panels
- Enphase Energy, $404.5 million, manufactures solar components and accessories
- Vivint Solar, $301 million, solar panel installations
As you can see, there both large and small companies in this sector and companies that just manufacture panels, those that just install them, and utilities for whom solar is an increasingly large part of their operations.
Investments in Solar Panel Manufacturing
The two important things to know understand in this niche are solar panel efficiency and solar panel cost per watt of power produced. The technology is advancing and panels seem to get more efficient every year. However, end-users want the most power production for their dollar. Thus, cost per watt is commonly the driving factor in profitability. While the folks making the most efficient panels may get bragging rights, those that most-effectively produce panels that deliver the most electricity for the dollar will likely be the ones to survive and prosper. Solid fundamental analysis is important here and it needs to be repeated every time technology advances. Largest players in this niche are JinkoSolar Holding, First Solar, SunPower, and SolarEdge.
Investments in Solar Panel Installation
To a degree this is a less chancy investment niche. These folks are not hurt by investment is manufacturing technology that become obsolete in a year. But, they need to constantly find customers, compete on price and service, and stay current with the technology. The biggest player in this niche is Tesla followed by Sunrun and Vivint Solar.
Investing in Solar Energy through Utilities
This sort of solar investment is one step further removed from the risks of advancing technology. Utilities tend to be secure investments and those that are the best run are the most successful. Utilities that make the best use of solar will be increasingly prosperous as the decades roll by. NextEra Energy and AES Corp. are the largest in this niche. The part of this sector that includes companies that just use solar for power generation bears watching. The one to watch in this case is TerraForm Power.
Best Investments in Solar Energy
The best investments in solar energy over the years will be those companies that use this advancing technology most effectively to generate long term, reliable profits. You will want to decide if you are going to “bet” on a pure manufacturing play, someone installs the panels, or the folks who generate power. Then you need to apply the same diligence that you use for every investment. What sort of debt does the company carry? How much cash does it routinely generate? Are its sales steady or always up and down? And, have they demonstrated the ability to stay ahead of the curve by adapting new technologies, efficiencies in their operations, and dominance of any particular part of the market? Are they, like the Coca Colas of the world, a household name?
Investment Risks of Holding Cash
An article on CNBC caught our attention. Nearly 1 in 5 Americans are stashing cash at home in fear of a recession according to the folks at CNBC. Perhaps they are trying to emulate Warren Buffett whose silent warning for investors is that his company is holding more than $100 billion in cash assets because he cannot find investments that he believes will be profitable over the long term at current prices. Or maybe they are thinking about the 1933 bank holiday when President Roosevelt suspended all banking transactions within 36 hours of taking office. At that time banks closed their doors in 37 states. To a degree, these concerns may be valid. But, there are investment risks of holding cash. CNBC makes the point that when you are stashing cash, you are missing out on investment opportunities and the compounding of interest with bank deposits and bonds when reinvested. Here are our thoughts about the investment risks of holding cash.
Investment Risks of Holding Cash Include Loss of Interest Payments
When we pointed out that the Oracle of Omaha is sitting on a pile of cash, we do not mean that he is stuffing bills into a really huge mattress. From bank deposits, CDs, and money market accounts to short term bonds, there are many ways to hold cash, make a little money (even at today’s low interest rates) and have ready access to your money. When we wrote about how to invest without losing any money, we talked about how Federal Deposit Insurance now protects bank deposits. And, with bank CDs or Treasuries, you can set up “ladders” where money is always turning over and available for short-term needs. The rate of inflation is low today but it still eats away at the purchasing power of you hidden home cash. When investing in stocks, holding cash until you find the right investment is not a bad idea. And, when you will need your money for things like buying a house or sending a child to college, don’t stay in a risky market. But, over the long term, you are missing out on interest payments when you stash cash.
Investment Risks of Holding Cash Include Missing Out on the Next Market Rally
The reason that many investors are staying in the ever-older bull market is fear of missing out on the next big surge in prices. The rationales are that Trump will fix the trade war, earnings will continue to soar, and high employment will continue. Add a possible cut in interest rates to the picture and you can see why many folks are hesitant to get out of an ever-higher market.
The problem with this line of reasoning is just why long term successful investors like Buffett are holding so much money out of the stock market when they (Buffett especially) have described the US stock market as the best place for your long term investments.
The counter-argument is that folks like Buffett pick companies that will in all likelihood make strong and steady profits into the far distant future. With this idea in mind, they are willing to wait out a market downturn in the belief that that stock prices will recover and continue to climb. This approach was borne out when investors stayed with strong companies through the Financial Collapse and Great Recession.
The Investment Benefits of Holding Cash
When the markets melt down, cash is king. Time and time again, stocks and real estate have taken hits and folks with cash in hand have moved in and used the concept of intrinsic stock value to pick investments that are very cheap only to see their investments grow and prosper over the years.
We see no problem with holding cash so long as you have a plan for how to use it. But, don’t find yourself with hidden cash at home that loses its value slowly but surely as inflation eats away at it.
Investments for the Coming Recession
Have you thought about investments for the coming recession? What? Isn’t the market going to surge forward when Trump makes a deal in the trade war with the Chinese? Hasn’t the market defied every critic for years and years? The answers are “possible” and “yes.” However, every bull market ends. And, the ones that last the longest and run the highest often have the worse fall. As the economy cycles, we will see a downturn sooner or later. The bond market is betting on soon and on a downturn that will last a long time with its inverted yield curve. And, we have written a lot about how the trade war with China is more about global economic power, military strength, and the desire of the Chinese Communist Party to retain power forever. Any short term deal is likely to be largely for the sake of politics and more likely to benefit the political interests of the Chinese leaders and Trump than the populations and investors of either nation. All of that having been said, a wise investor will give some thought to investments for the coming recession.
Investments for the Coming Recession
We start off with an article from The Motley Fool about stocks to buy during a market downturn. They suggest Berkshire Hathaway and CME Group. CME gets their nod because trading volume in futures and options always goes up during a bear market. This is not a bad idea for the short term. They pick Berkshire Hathaway because of Warren Buffett’s ability to find bargains in bear markets and then watch those investments recover and grow over the decades.
One of the many great things about Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is that it tends to create tremendous value for its shareholders during periods of market distress. The mega-conglomerate is led by Warren Buffett, one of the most successful investors of all time.
Buffett excels at identifying mispriced assets, such as businesses that have temporarily fallen out of favor with investors. During bull markets, these opportunities are few and far between, but during bear markets, these profit opportunities are abundant. This is when Buffett is at his best.
We recently wrote about Buffett’s growing cash hoard as a silent warning for investors about the scarcity of good investment opportunities in today’s markets. But the truth of the matter is that Berkshire Hathaway will not stay out of stocks forever. Their favorite time to buy is when prices are depressed due to panic selling while long term growth prospects are good.
What Are Your Investments for the Coming Recession?
You do not have to be Warren Buffet to use intrinsic stock value as a guide to investing as he does. And, you do not have to buy stock in his company to follow the same approach. When choosing your investments for the coming recession, you can follow his approach which includes the following:
- Only invest in companies whose businesses you understand
- Don’t be disappointed if you end up throwing out 95% of the stocks you investigate
- Identify stocks that will have good cash flow going forward
- Identify a price at which buying those stocks will be profitable for the long term
- Pay attention as the market panics and many good stocks see their prices slashed
- Accumulate a pile of cash and be ready to buy when the time is right
And, if you think that wise investing during the coming recession will make Berkshire Hathaway more valuable, you might consider including them in your list of possible purchases. CME Group sounds like a good idea for the short term if you buy the argument that The Motley Fool makes. Utilities are usually a good bet when the economy weakens, but you need to get in before the market falls and not afterward.
We wrote recently about Disney as buy and hold investment. They have a business that is likely to grow over the years and will be rather recession-proof. The problem, in that case, is that the Disney stock price might not fall far enough to make it a wise purchase in your list of investments for the coming recession.
The best approach is to start with businesses that you understand and develop a short list of ones that have great long term prospects and whose stock prices will probably take a hit during a recession. Then start putting cash aside and wait for the inevitable.
Investing Metrics You Should Pay Attention To
Shortsightedness is never a virtue in investing. Time and time again over the years too many investors jump into bull markets too late, stay too long, and lose their shirts. Along with the assessment of intrinsic stock value, what are the investing metrics you should pay attention to when investing in stocks today? Here are a few thoughts on the subject. Our treatment of this is in no way complete but rather intended to point investors in the right direction during a time of market uncertainty.
What Are Investing Metrics and Why Should You Care?
As noted by Investopedia, investing metrics are quantitative measures used to assess current performance and predict future performance. The key to using metrics is choosing the right ones to watch and then learning how to read them. For example, the P/E ratio is generally considered one of the best ways for value investors to assess the value of one stock compared to others. Unfortunately, stock prices can be manipulated on a short term basis with stock buybacks. And, financial statements can be manipulated to make earnings appear greater than they really are. This does not mean that you should throw out the P/E ratio as a useful metric. Rather, it means that you should use more than one metric to assess your investments.
Investing Metrics You Should Pay Attention To
We write again and again on this site about using intrinsic value as a guide. This approach seeks to determine the forward-looking income stream of a company. Smart long term investors only invest in companies that have products and services they understand and a clear way that their business plan will make money for years to come. Success depends on the company, its products and services, and management. And, it depends on the economy. No matter how great a widget a company makes, it won’t make any profits if no one has the money to buy those widgets.
The Global Macro Monitor blog has some interesting comments in this regard in their post, How Far Can the Stock Market Run?
Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate. That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages.
Micro measures, such as Price-to-Earnings are way too distorted by buybacks and can be easily manipulated by CFOs, who play around with variables such as depreciation or loss reserves.
Our two favorite are 1) market cap-to-GDP, which, according to Warren Buffet is, “the best single measure of where valuations stand at any given moment.” Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash, 2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well. The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.
This is the first chart he refers to.
The commonly used micro investing metrics are these.
- Price to Earnings Ratio
- Price to Book Ratio
- Debt to Equity
- PEG Ratio
- Free Cash Flow
The commonly used macro investing metrics are these.
- GDP
- Market Cap to GDP Ratio
- Average Number of Work Hours Needed to Buy the S&P 500
- Bonds yields (e.g. inverted yield curve)
Using Investment Metrics
Micro metrics are useful in evaluating individual stocks. Macro metrics are useful when deciding when it is time to pull your investments out of the stock market and hold cash. Depending on the status of your macro investing metrics, you will choose to stay with your current investments or consider how to invest without losing any money by sticking with investments that will not crash when the market does.
Will There Be a Trade War Peace Dividend?
The president stated recently that there is a partial deal in the works to advance talks in the trade war between the USA and China. Part of our speculation as this story has played out is about what investments will do well when the trade war is resolved. In that regard, Apple rose to an all-time high on the news. Will there be a trade war peace dividend? If so, this is the time to jump in with both feet. Or, is this just more posturing with a permanent trade war the more likely course?
Will There Be a Trade War Peace Dividend?
Bloomberg notes that a potential trade thaw sent stocks up.
Signs of progress in U.S.-China trade talks sent stocks to the biggest gain in a week and had Wall Street handicappers making odds on a bigger rally to come.
The S&P 500 Index climbed to within 1.8% of a record after President Donald Trump said the two sides agreed to the outlines of a deal that could be signed as early as next month. The equity benchmark rose 1.1% Friday, closing off its session highs since several of the thorniest trade problems remain unresolved. Equities also got a boost from signs of progress in Brexit negotiations.
At JPMorgan Chase & Co., strategists led by John Normand estimated there is 10% upside or more in the stock market under a “blue sky” scenario where agreements are reached in both cases, based on the way past geopolitical crises played out.
Is There Likely to Be a Trade Thaw?
We have been writing about this issue ever since Trump started the trade wars with China and everyone else. And, we have noted that the issues go a lot deeper than the balance of trade. The USA does not want to lose global technological and economic leadership and China wants to displace the USA at the top. A core issue is the intent of the Chinese Communist Party to stay in control and direct the economy instead of letting a true market-driven economy develop. The demands of Chinese companies for technology transfers as the price of access to their markets are a key issue.
To the extent that a partial trade deal addresses these key issues, it is possible that a trade thaw will happen. Trump needs some sort of deal going into the 2020 election. And, the deal will need to benefit his supporters! The Chinese are watching their economy slow down and trade suffer. They need help before they replicate the collapse of the Japanese economic miracle of the 1980s.
How Will a Trade Thaw Help Your Investments?
Investors do not like uncertainty. When Iran hijacks tankers in the Persian Gulf, Great Britain does not manage a clean break with the EU; and China is in a trade war with its biggest customer, nobody is happy. The prospect of a trade war truce sends stocks like Apple upward. Apple sells millions of iPhones to the Chinese. Boeing should prosper as well as this growing market is not shut off to them.
Looking into the future, more important aspects of a trade war deal emerge. If more foreign investment in China is allowed, forced technology transfers go away, and China buys more from the USA, all of these will drive investments and send stock prices up. However, we will need to see the details of any deal before it will be clear what investment opportunities will arise.