Long Term Investing, Big Ideas, Inflection Points and Predicting the Winning Investment Strategy for the Next 30 Years

Overview

Turning points in the game are easy to see after the fact. It's when the game is actually being played that they matter.

And so it is with anything in life, including investing for our future needs and comforts.

Recognizing that "big mo" may be beginning to shift (look at the recent housing bubble and think about what it would have meant if people had seen that bubble developing early in the late 1900s or even early 2000s) is needed for long term investing, so let's take a look at our crystal ball and predict what's ahead for individual investors in the next few decades.

Big time difference making investment inflection points are few and far between, especially long term game changing ones.

And sometimes what appears as a big change is merely a head fake. But then again, sometimes the initial signals reflect long term secular change is ahead. I believe such a game changing opportunity for individual investors is at hand now, but of course, I can't know for sure.

With respect to any future predictions that any of us may make, we can't know for sure how it will all work out until much later down the road. Only after the final gun has sounded and game has ended will we know who won and lost.

Nevertheless, it's impossible for a base runner to steal second base without first taking his foot off first base. Risk is everywhere and all the time, so here we go with the future as I see it for individual investors.

A Long Term Trend Has Begun

My view is that we are at a relatively rare inflection point with respect to long term individual investing opportunities and that stocks will be the asset of choice during the next several decades. My view is also that they will outperform other asset classes by a historically wide margin over that period. They'll win big, in other words.

In 1980, inflation and interest rates were both in the double digits and gold sold for $800 per ounce. Inflation and interest rates then began a long descent which still hasn't ended. But my considered judgment is that the party will end sometime soon and interest rates will head back up, albeit moderately. We've bottomed and soon will be headed the other way, and that can mean good things for those who are ready to catch the train on its way out of the station. The next 30 year investing thesis has arrived.

Rates declined dramatically during the past 30 years, and they will increase from here, albeit moderately, during the next 30 years. At least that's my call. But what does that mean for long term investors?

First, let's briefly review what happened to stocks during the great bond bull market of the past three decades. They still outperformed bonds, gold, real estate and all other forms of investment in a several decades long period of declining interest rates.

But the news for stocks, at least in real inflation adjusted terms, will be even better for stock performance during the next 30 years.

Yes, I'm predicting that they will do even better relative to other investment vehicles over the next several decades. But let's review the past before focusing on the future opportunities. OK?

Reviewing The Past 30 years

To repeat, gold sold for $800 per ounce in 1980. So did the Dow Jones Industrial Average.

Today gold sells for close to $1,700 and the Dow trades at $13,500. But gold obviously returned no cash over the past three decades while stocks paid dividends which offset inflation of close to 2.5% annually.

Hence, the $13,500 for the Dow is in reality an inflation adjusted number. On the other hand, gold essentially remained flat at roughly $800 in real terms. {NOTE; 30 years at 2.5% will roughly double the nominal price using the rule of 72.} Stocks won hands down.

So the inflation adjusted Dow at $13,500 is the comparable number to the 1980 gold price of $800. Almost 17 times a much. But I still believe that the best news for long term stock investors lies ahead.

The Next 30 years

And stocks are poised to win even bigger during the next 30 years.

Once More, Awaiting a 'Great Rotation' makes the case for stocks becoming the place to be instead of bonds:

"As 2013 gets under way, one of the biggest questions in financial markets is again bubbling: Will this finally be the year that investors dump bonds and return to stocks?

For years, market watchers have called for what has become known as the "great rotation" out of bonds and into stocks. And for years they have been wrong.

Now, some signs are indicating that maybe, possibly, the tide is beginning to reverse. 

Stocks started 2013 with a bang. For the week ended Wednesday, U.S. investors plowed $18 billion into stock mutual funds and exchange-traded funds, the largest one-week total since June 2008, before the worst of the financial crisis hit. . . .

That followed a growing exodus from U.S. Treasury funds. Since late June, investors have pulled $6 billion from the group, including $1.1 billion in the week ending Wednesday.

The moves run counter to a trend that began in 2008, with investors since then pulling money out of stocks and putting $1.1 trillion into taxable government, international and corporate bonds.

Fueling expectations that a longer-term shift out of bonds and into stocks may finally take place is a growing nervousness that bond yields are dangerously low. As 2012 drew to a close, U.S. Treasury yields weren't far from record lows thanks to the Federal Reserve's unprecedented effort to pump money into the financial system through bond purchases. That sent prices up, and yields down.

But, due to a quirk of bond math, losses are exaggerated when yields are low. That risk has been brought into sharp relief since the start of 2013. In just three trading days, long-term Treasurys lost 3.07% in value, more than wiping out the 3% coupon payment they will deliver in 2013, according to Barclays. . . . many observers are saying it is only a matter of time before investors seek out stocks. They note that shares of dividend-paying companies are often providing higher yields than the company's bonds. With high-quality bonds offering yields below that of the rate of inflation, many investors worry that they aren't being compensated enough for the risks of holding them.

"I think the 'great rotation' has already started in terms of flows and returns," says Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.

Mr. Hartnett is watching for three indicators to determine whether the shift will continue: a falling unemployment rate, a continued drop in returns from fixed-income investments, and a growing belief among investors that the Federal Reserve may end its bond-buying program. These factors could all make Treasurys seem much less attractive. . . .

Other Wall Street firms have also taken note. In a report titled "The Search for Yield—Equity Opportunities," released early this month, Goldman Sachs analysts made the case for buying dividend stocks instead of bonds.

Corporate America, Goldman argues, is flush with cash and pays a dividend yield of 2.2%, compared with a 1.6% yield for the average triple-A rated company bond.

Goldman noted that investors in Treasury and investment-grade corporate bonds stand to lose a lot of money should interest rates ratchet higher. With rates at such low levels, it wouldn't take much of a move to cause losses, analysts say.

Analysts on average expect 10-year Treasury yields to rise to 2.15%. That would indicate a 2.5% drop in price. If yields moved up to 2.5%, which some say is possible, the price of the bond would fall by 5.5%. Many investors in Treasurys and investment-grade corporate bonds say they are closely eyeing 2.25% as a threshold that may trigger selling. . . .

And most analysts say that even if investors do continue to lighten up on Treasurys, and possibly investment-grade bonds, 2013 probably won't see a flood of money leaving those funds."

{NOTE; For more on this, please see Analysis: Big Flows Into U.S. Stocks May Be Sign of Things to Come. And if that's not enough, see also Great Rotation May Turn Slowly.}

Summing Up

For long term investors, the message is clear.

Get with solid blue chip, dividend paying stocks in order to outpace inflation and generate substantial real rates of return over time. Avoid bonds.

The way I see things developing with stocks, it's a heads we win, tails we win long term investing situation.

All we have to do is get in the game and then stay in the game when the proverbial fit hits the investing shan from time to time, which it inevitably has done and will continue to do.

And when things do get tough, let's resolve to remember this simple fact.

Stocks outperformed bonds and gold the past 30 years when interest and inflation rates were declining, and they will beat them by even more when interest rates are increasing in a climate of moderate inflation the next 30 years.

In other words, both during periods of disinflation (lower inflation and lower interest rates) and moderately escalating inflation (gradually increasing inflation and higher interest rates), stocks are relatively friendly to long term stock investors. But no form of inflation is friendly to owners of bonds.

Thus, barring out of control inflation, which I firmly don't believe is in the cards, the next thirty years will be a good time to be an owner of high quality stocks.

But even if I'm wrong and the inflationistas are right and inflation does begin to get out of hand down the road, there will be plenty of time for us to see that one coming and adjust course.

So in 2013, let's get with the program, even if we're acting a bit prematurely (which I don't think we are), and that means owning stocks over bonds for the long haul.

Thanks. Bob.