Wednesday, April 24, 2013

DIY Stock Investing ... Redefining Risk ... Cash and Bonds are Out ... Blue Chip Dividend Paying Stocks are In

Bonds and cash are safe, and stocks are too risky. That's what we've all been taught. But it's wrong.

And it will be even more wrong in the future. Blue chip stocks with dividends are safer investments than cash, bonds and even government debt, assuming we're interested in enhancing our purchasing power over time and protecting the value of our hard earned savings from inflation. 

Dow 16,000! is Barron's cover story this week and predicts that the stock market will rise to 16,000 in another year or so. {NOTE: My own long term point of view is that the market should reach 20,000 by 2020 and 30,000 by 2030 or so. It will also continue to pay inflation offsetting cash dividends all along the way.}

But admittedly I'm no 'pro,' so let's look closer at what the investment 'pros' have to say:

"The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years. What's more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year . . .


The bull market is hardly in its infancy, our respondents acknowledge, but neither is it "game over."

"The amount of money that's playing defensive is astronomical," says Robert Lutts, president of Cabot Money Management in Salem, Mass. "Main Street isn't yet in Wall Street. It is still scared to death. In the past couple of years, the professional money started to flow in. This is just the beginning of new flows that will push indexes even higher.". . .

WHAT WOULD SEND STOCKS SHARPLY higher in coming months? The managers cite rising corporate earnings, first and foremost, followed by any sign in Washington of progress toward a bipartisan budget deal. . . .

Fortunately, perhaps, only 16% of managers say their investment decisions are heavily influenced by U.S. fiscal policy. . . . Small wonder the Big Money folks finger political dysfunction as one of the biggest challenges facing the market, along with Europe's problems, potential earnings disappointments, and a possible deceleration in economic growth.

Even so, the managers aren't just bullish on U.S. stocks, but on equities generally. Some call it the TINA trade, for "there is no alternative" to stocks in a slow-growth, ultralow-interest-rate world.

Eighty-six percent of poll respondents are bullish on stocks for the next 12 months, and a whopping 94% like what they see for the next five years. Real estate has similar approval ratings. . . .


The managers are split in their near-term assessment of commodities, but bullish longer-term. . . . As for bonds and cash, they have few fans at the moment. Nearly all of the managers expect fixed-income assets to be a bad bet in the next five years. . . .

ALTHOUGH MOST BIG MONEY MANAGERS are stockpickers, the macroeconomic outlook helps shape their investment decisions. It looks decent, but hardly great, to them. Seventy-two percent of poll respondents expect the U.S. economy to keep plodding along in the next year at an annual rate of 2% to 3%, while 44% predict that the growth rate of gross domestic product will average the same 2.5% in the next 10 years that it has for the past 25. That said, 37% see the economy growing at a slower pace in the future.

Inflation worries the U.S. money managers as much as it worries the folks at the Fed, and 60% of our respondents think it will be a bigger threat in the next 12 months than it is now. Excluding food and energy, the consumer price index rose by an annualized 1.9% in March, below expectations. But the Big Money crowd sees CPI jumping 2.51% next year. . . .

The managers show little enthusiasm for Europe, which has been grappling with sovereign-debt losses and economic crises. Sixty-five percent of respondents proclaim themselves bearish on European stocks for the next 12 months, and 75% believe it will take five to 10 years for the euro zone to resolve its problems. . . .

THE BIG MONEY MANAGERS see subdued growth for corporate profits of 5% to 6%, both this year and next. They expect the market's price/earnings ratio to hold steady at 15.7. The managers plan to reduce their cash and fixed-income positions in coming months, and to invest more in stocks and alternative assets.

One thing is for sure: This has been a tough year for active money managers. Only 59% of our pros are beating the S&P 500 in their client accounts, and even fewer are doing so with their own money.

Here's a final prediction for 2013: The market will continue to surprise."

Summing Up

It's easy to pick the long term direction of stock prices. It's up.

But things don't look bad for the short term either based on valuations, the economic outlook and the historically low level of interest rates today. It's time to redefine risk and throw out the old rules of investing 'safely' in bonds, CDs and similar fixed income instruments. And it's time to replace them with blue chip dividend paying stocks in order to hedge against and offset future inflation.

With respect to the near term, the decided majority of professional money managers, aka the investing experts, are forecasting that the Dow will reach 16,000 in another year or so.

My own admittedly amateurish and long term optimistic view is that the Dow is likely to reach and surpass ~20,000 by 2020 and then climb to as high as or higher than ~30,000 by 2030. And on top of the higher stock prices, the shares will pay increasingly higher cash dividends all along the way. Lots of reasons to like the market's prospects going forward.

That said, how many gut wrenching and volatile ups-and-downs there will be along the way, and when they'll occur, I have no clue. Nor does anybody else, no matter what the experts may say.

But what we can say with confidence is that share prices over time will reflect the actual performance of companies and how much they grow their sales and earnings. And we can also say that increasing earnings will depend on companies achieving higher sales while simultaneously controlling their unit costs. They do this by being competitively successful in the marketplace, and that simply means satisfying the wishes and demands of their customers.

And there's one very big ADDITIONAL reason to be optimistic about economic performance of U.S. companies during the next several years and beyond -- energy independence. In this regard, the U.S. is perhaps the best positioned of all the nations to be the leader in energy exploration, development, refining and distribution opportunities.

North America's opportunity in the next several years to achieve lasting energy independence is real, and all that needs to be done is to turn the private sector loose to make it happen. Becoming energy independent will set us apart from Europe and China, as examples, and doing so will mean that our U.S. economy as well as our export base will become second to none.

Achieving energy independence will position our manufacturing companies well to compete effectively on overall costs with anybody in the world, including the Chinese. And it will make our nation secure and provide our government with needed revenues from a rapidly growing tax base as well.

Finally, We the People have another global competitive advantage, and although it's not often discussed, it's by far the biggest asset and competitive differentiator that we have. It's our rich U.S. history and tradition of encouraging entrepreneurialism, innovation and risk taking by free people operating in free markets.

Simply put, an unwavering belief in the benefits of capitalism has long been the American way, and this has afforded our citizens with the highest standard of living the world has ever known. And it's no time to stop now. In fact, it's time to step on the gas.

As for stock market investing, individual DIY investors will be well advised to invest in U.S. companies for the long haul.

That's always been the case, and it is even more so now.

That's my take.

Thanks. Bob.


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