Overnight, the Nasdaq closed higher for the tenth day in a row, hitting yet another all time high in the process.
Apple. Alphabet (aka Google). Microsoft. Amazon. Facebook.
The share prices of these 5 tech giants have jumped significantly higher so far this year, the best being Facebook's 43% gain, the worst being Microsoft's 'mere' 19% advance.
What is it with US markets hitting all-time record highs, yet the boring old S&P/ASX 200 Index languishes around the 5,700 mark?
Not only is the S&P/ASX 200 index miles off its all time high of almost 6750 reached in October 2007, but it's as flat as a tack so far in 2017, up less than 1%.
Here's why…
Our index is dominated by two large mining stocks and four large banks.
Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are capital intensive, highly cyclical mining stocks. Sure they've had a good run over the past 12 months, but it's going to be a slow old slog from here. Mining booms only come along once every couple of decades.
The big four banks are growing earnings and dividends at a snail's pace. And they've got plenty of headwinds ahead too, in the form of an already highly indebted consumer and property price gains that are finally slowing.
Add in slow growers Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd(ASX: WES) and Woolworths Limited (ASX: WOW) and you can see how I think it's going to be a slow old grind for the S&P/ASX 200 Index.
I wouldn't be surprised if the S&P/ASX 200 Index finished the year around these same levels. About as dull as dishwater.
BUT…
That doesn't mean there aren't winners to be found — you'll just have to do a little more digging.
The a2 Milk Company Ltd (ASX: A2M) share price is up almost 80% so far in 2017, making it the best performer in the S&P/ASX 200 Index this year.
The Flight Centre Travel Group Ltd (ASX: FLX) share price — a company our own Scott Phillips recently named as one of his top 5 dividend stocks — is up 37% so far in 2017. Happiness is a dividend stock turned into a growth stock, even more so when it pays a fully franked dividend.
(You can find out how you can access all Scott's research — including the names of all five of his top dividend stocks to buy now — by clicking here. And as an added bonus, next week, be on the list to ALSO get Scott's brand new top ASX buy recommendation the instant it is released.)
One reason the Nasdaq is hitting all-time highs is that the big 5 tech giants listed above are growing at a fast clip. In Facebook's case, in its most recent quarter it grew revenue by almost 50% and profits by over 70%.
Another reason is that those big 5 all have strong and sustainable competitive advantages. Many have tried to launch a search engine to beat Google. They've all failed to such an extent that no-one is even trying any more.
Of course, it could be irrational exuberance that's driving the Nasdaq higher and higher. These stocks weren't cheap to start with, and are certainly trading on premium valuations today.
That said, compared to their growth rates, and taking into account their strong competitive positions, some of the valuations aren't entirely out of whack.
Facebook at 33 times forward estimates? Looks reasonable to me.
Google's parent Alphabet at 28 times forward estimates? Probably a fair valuation.
Apple at around 16 times forward estimates? On a price to earnings (P/E) basis, it's not a lot more expensive than Commonwealth Bank of Australia's (ASX: CBA) valuation at 15 times earnings. I know which one I'd rather own (and yes, I do own Apple. And Facebook. And Amazon. And Alphabet. And I don't own CBA.)
The vast majority of Australian investors don't invest in US stocks. Maybe they think it's all too difficult (it's not). Maybe they are worried about currency movements (don't — you are not a currency trader).
Our Love Affair With Dividends
Most likely the home bias is because of our undying love for dividends, and our desire to pay less taxes or get a tax refund, courtesy of franking credits.
Sure, I love a dividend too. I've got a good chunk of my family's money following some of the picks Andrew Page — our resident dividend expert — makes for his popular Motley Fool Dividend Investor stock picking service. You can find out how to get instant access to all Andrew's buy recommendations by clicking here.
But I also like growth stocks. Nasdaq or ASX… it doesn't matter to me.
It's no coincidence the share price of the aforementioned a2 Milk is up so big in 2017. This year it has already twice upgraded its earnings outlook. In February this year, a2Milk announced a tripling of its profits. a2 Milk shares trade on a forward earnings estimate of 33 times earnings. Looks very fair to me. I'm a happy owner.
Lest you think my portfolio is on fire this year, like any diversified portfolio, I have my share of losers too. Vita Group Limited (ASX: VTG) has been a shocker, down almost 60% so far in 2017. That's stock market investing for you.
The 3 Keys To Creating Great Wealth In The Stock Market
The key is to let your winners run. Even better, add more to your winners along the way.
Which is precisely where many investors get it wrong. They add to their losers, thinking they are cheap. Or trying to get their average cost base down. Talk about digging yourself into an even bigger whole.
Another key is to let time work for you. Great returns are made through nothing more than the miracle of compounding returns. A share price growing at 40% per annum will almost double in 2 years. A portfolio growing at 15% per annum will double in 5 years. It's a miracle you better believe.
The third key is to stay the course. Don't be scared out of the market at the first sign of volatility. Markets are incredibly benign right now. It won't always be the case. Keep a strong cash buffer. And a strong ticker.
There's good money to be made in the stock market.
