People are running away from shares, but as The Motley Fool shows, there are great growth opportunities, especially in the overlooked small cap sector.
Are you a fighter, or a quitter?
When the chips are down, do you pack up your bags and go home, or do you double-down your efforts, try even harder, and never give up?
It has been a tough time for wearied, bloodied sharemarket investors.
The S&P/ASX 200 index is back trading at the same levels of early 2005. Over the past 10 years, it is up only 20 per cent in total (dividends excluded).
Worse, from its October 2007 peak, the market is down close to 40 per cent, including last year's fall of 14.5 per cent.
Run away…
When looked at through the rear-view mirror, the picture looks bleak. Add into that the seemingly unsolvable European debt crisis, and you'd be excused for running away from shares, and fast.
And that's exactly what many investors have been doing. Having been fully invested during the go-go years of the mid 2000's, and having a whale of a time, now the going has become tough, they've taken their bat and ball and gone home, or gone to gold.
Speaking of gold, in recent months it too has been exposed as an emperor with no clothes.
The doomsters kept telling us Gold was the safe haven for when the world economies and world sharemarkets inevitably imploded.
Reality has been very different. During the November sell-off, virtually all asset classes fell (with the exception of the U.S. dollar and U.S. treasuries) including gold.
When markets panic, as they are prone to from time to time, there really is no place to hide.
Gold…nothing going for it
We're not particularly fond of gold. As an asset, it pays no dividend and is virtually impossible to value. Not only that, as we saw above, in times of panic, it too is no safe haven.
Back in early September, when gold was riding high, we put our heads on the block by making a bold prediction…
"…stock returns over the next 10-15 years will be above average, and gold returns will be below average."
We're off to a decent start since then, with the market flat but gold down over 14 per cent. Only 116 months to go to see if we're right.
Putting our money on the line
Today we're going to make another bold prediction…that yields on U.S. Treasuries will rise over the next 3 years, meaning the underlying asset will fall in value.
Putting my money where my mouth is, by selling calls, I've set up a short position on the iShares 20+ Year Treasury Bond Fund ETF (AMEX: TLT).
The ETF has an average duration of 28 years with a weighted average yield to maturity just under 3 per cent. I'm betting, as the U.S. economy slowly recovers, the yield will slowly but surely edge higher. The yield was 4 per cent only in July.
So…if gold is not going to do it for us, and treasuries/bonds aren't, and property definitely isn't, what is?
No surprises here when you hear us say the sharemarket. After all, we're in the business of recommending individual stocks to investors via our relatively new Motley Fool Share Advisor service.
But just think about this…
- As reported in The Sydney Morning Herald, "for the sixth year in a row the Australian sharemarket chronically underperformed many of its global equity market peers, despite being at the centre of a mining boom and being part of an economy that managed to notch up its 20th consecutive year of growth."
- People are pulling their money out of shares.
- Domestic interest rates have already fallen, and are projected to fall even further, the 10-year bond yielding 3.75 per cent.
People continue to ignore the sharemarket, despite it looking very cheap.
- As measured by the price to earnings ratio, the ASX is trading on an average earnings yield of around 8 per cent.
- The ASX is trading on an average dividend yield of around 5 per cent.
Cheap stocks and nasty stocks
We'll be the first to admit looks can deceive.
Retailers like Myer Holdings (ASX: MYR), Harvey Norman (ASX: HVN) and David Jones Limited (ASX: DJS) look incredibly cheap and trade on very attractive dividend yields, yet we're not rushing down to the local shopping mall to buy their goods, let alone buy their shares.
In his latest weekly update to Share Advisor subscribers, the Motley Fool's very own Investment Analyst Dean Morel warned of the perils of investing in poor businesses.
"We want to completely avoid bad businesses. These companies often appear cheap, but…these companies can get cheaper and cheaper…
OneSteel Limited (ASX: OST) is the poster child for bad business. It appeared cheap in September when we recommended running away fast. OneSteel is down 40% since then, proving once again that cheap shares can get even cheaper."
Growth, value and yield, all wrapped up together in just one stock
When looking for great investment opportunities, Dean prefers to sniff around in the overlooked smaller company sector. There, not only can he find value, he can find growth and compelling dividend yields.
Only yesterday he upgraded a Share Advisor recommendation from buy to a strong buy. This small technology company guided for 30 – 50 per cent higher profit this half, yet it trades on a P/E of 10 and a dividend yield of well above 8 per cent.
Re-discover that winning feeling
Try getting those returns from bonds, or gold, or property, or even commodities. Today, The Australian reports Deutsche Bank's commodity team cut its price forecasts by an average of about 12 per cent, with the expectation that most commodities will dip further in the first quarter of this year.
People never buy sharemarkets when they're cheap. It's madness of course, but they always buy markets when they're expensive. The sharemarket is the only market where the things that you buy seem more appealing when they're more expensive.
It's time to fight back, to become a winner again. As Tom Stevenson, Investment Director at Fidelity Worldwide Investments recently said…
"I think that actually we'll look back on this period as being one of the great long term buying opportunities for the stock market."
We tend to agree.
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