Tuesday, September 20, 2011
Ten years ago, investors had a tough choice.
Stocks were expensive. The S&P 500 was at 1,200. It was trading at 19 times earnings. At that valuation, it would take 19 years for an investor to make his money back off earnings alone.
Bonds were expensive, too. The 10-year U.S. Treasury note yielded just 5%. It would take 20 years of interest payments to earn your original investment back.
So what do you do? Do you buy a stock at a rich price and hope it'll grow more than 5% per year over time... or do you lock in a historic low interest rate of just 5% and hope inflation will stay low for the next 10 years? Do you buy stocks and look to double your money in 19 years... or do you buy Treasury notes and double your money in 20 years?
Back then, hardly anyone thought stocks would mark time for 10 years. Hardly anyone thought interest rates could drop even lower. So, like I said, investors had a tough choice.
Today, however, the choice is easy.
Put everything aside for a moment and clear your mind. Forget about the turmoil in Washington D.C. and the destruction of the eurozone. Get your mind off the coming recession, the end of America, the potential for QE3, and the obliteration of the Western standard of living.
Think only about this...
Yesterday, the 10-year U.S. Treasury note offered a yield of 2%. You can buy this note and make $20 for every $1,000 invested. Over the next 10 years, you'll make a grand total of $200. It will take 50 years of interest payments to earn your original investment back.
Meanwhile, the S&P 500 closed yesterday right around 1,200 – almost exactly where it was 10 years ago. But today, the index trades at 13 times earnings. So while stock prices have gone nowhere for 10 years, corporate earnings have increased. Now, you can make your money back in 13 years.
So what will it be, dear investor? Do you buy Treasury notes and wait 50 years to double your money? Or would you rather do it in 13?
The choice is easy... You must own stocks.
Of course, buying stocks is tough to do right now. After all, there's turmoil in Washington. Europe is falling apart. The economy is tail-spinning into a recession. America, as we know it, is dissolving. And the financial world is plunging head-first into a galactic black hole.
But here's the thing... No matter how dark the outlook, no matter how bleak the future appears, no matter how large our worries grow, the world has a habit of not coming to an end.
Companies will continue to make products, and consumers will continue to buy them. Maybe growth rates will slow and earnings will come down a bit. But good companies will find a way to thrive no matter what.
There are risks, of course. There always are. But if you can buy good companies with solid dividends, trading at cheap earnings multiples, the odds of success are on your side.
You must buy stocks. In a world of 2% Treasury notes and 1% bank accounts, there really is no alternative for your money.
That doesn't mean it's time to throw caution to the wind and toss your entire life savings into the stock market immediately... There's going to be some turbulence in the market over the next few weeks. I still expect the S&P 500 to come back down and retest its 1,100 August low.
But as it happens... as the talking heads on the financial networks preach gloom and doom... and as other investors stick their heads in the sand, you'll have a chance to pick up some of America's biggest and best-run companies at bargain basement prices.
For instance, I love the idea of buying Intel (INTC) below $20, Microsoft (MSFT) below $25, and Cisco (CSCO) below $16. These are solid, World Dominating businesses. And they are at the top of my "buy" list.
Start putting your own buy list together now. You'll likely have a chance to act on it sooner rather than later.
Best regards and good trading,