Demise of Classic Investing

Demise of Classic Investing - stocks

If investment reports were written like beer commercials, perhaps we’d all be better off.

That’s my theory, anyway. What’s the last piece of really useful financial advice you can recall hearing? Listen to a clever beer commercial just once, however, and you can’t get it out of your head. So, for instance…

“Head for the mountains” equals: Buy gold.

“Tastes great, less filling” equals: Avoid high-priced tech stocks.

Or, if you want to know how to make big investing profits in the future, just remember something really important about the past and present day: “It doesn’t get any better than this.”

In my mind, that former Old Milwaukee slogan was the ultimate point of a recent McKinsey Global Institute study.

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The report itself is pretty dry (it was titled “Diminishing Returns: Why Investors May Need to Lower Their Sights”), but McKinsey — as mainstream as the investing establishment can be — meant it as a wake-up call to institutional pension-fund managers.

ETF Index Idiocy

The past three decades (1985 to 2014), according to McKinsey analysts, “have been a golden age for companies, and for large North American and Western European companies in particular.”

For stock investors, the message has been to buy the S&P 500 — and hang on at all costs. The reward? Watching one’s wealth double every nine years, with real total returns of nearly 8%. And, as the report points out, that’s three full percentage points above the 100-year long-term average.

That’s not news to us, of course. We know the reasons already: cheap borrowing rates and a Federal Reserve that is more than happy to keep spiking the punch bowl whenever the party seems to be winding down.

On a more ominous note, the McKinsey analysts say “that era is now ending,” with “total returns from both stocks and bonds in the United States and Western Europe likely to be substantially lower over the next 20 years.”

Again, we’ve been warning about that for some time. But if the folks at McKinsey are willing to acknowledge it, then that’s a broad hint that Wall Street’s plain vanilla advice, not to mention the whole cult of passive ETF index-based investing, won’t work nearly as well in the future as it did in the past.

So, where does that leave you?

It means we all need to be a lot more selective — special situations, small companies and under-the-radar ideas — when it comes to the stocks we buy as a path to wealth.

Fortunately, we at The Sovereign Society recently recruited former hedge-fund pro Paul Mampilly to join us; we’re building a new service around him called Profits Unlimited to go after just such opportunities.

To explain the power of those opportunities, I’ll use the investing environment of the 1970s as an historical example.

As that decade started, “conglomerates” were all the rage on Wall Street. Investors couldn’t buy enough of the “Nifty Fifty” large-cap stocks that dominated the headlines and the economy. But high valuations, rising inflation and rising interest rates put an end to the mania. The post-World War II “golden era” of investing was over.

But for the really smart investors, a new “golden era” was just beginning.

For instance, in 1972, three of today’s biggest, most successful companies went public as tiny pip-squeaks. All three, I might add, fell sharply in the severe recession and bear market of 1974-1975. And yet…

  • Intel rose more than eightfold by 1980.
  • Wal-Mart more than doubled.
  • Southwest Airlines rose more than 2,000%.

By 1977-1978, the Dow Jones Industrial Average was in yet another grinding bear market. Few on Wall Street had even heard of the term “overnight package delivery.” But that didn’t stop FedEx — known then as Federal Express — from going public and watching its stock triple in value in 18 months’ time.

The problem, then as now, is identifying the right opportunities at the right time. That’s where Paul and his new service come in. You’ve already seen the power of his approach with his observations about gold and silver stocks. (Read “Stop Panic Selling Gold Mining Stocks,” which Paul wrote just as gold stocks bottomed in late February.)

Kind regards,
Demise of Classic Investing - stocks
JL Yastine
Editorial Director