After being mostly indifferent on gold in 2013, we’ll look to pick up more exposure to it this year.
Statements such as this one from Michael Shaoul, chief executive officer at Marketfield Asset Management, give us confidence that gold is a good place to put money as an ‘insurance policy’. Mr Shaoul told Bloomberg News:
‘The developed economies are growing, and equities remain very interesting, so there is really no reason to be in gold.‘
Mr Shaoul is wrong. There are plenty of reasons to be in gold. One of them is the continued and gradual destruction of paper money. So as a long-term gold buyer we’re happy when the mainstream starts talking down the importance of gold.
The mainstream sells. The price falls. We buy more.
But make no mistake, you shouldn’t buy gold if you’re looking for a way to make money…lots of money…in 2014. If that’s your number one goal this year then you’ll have to look elsewhere…
If we had to only invest in one asset class this year it would be stocks.
Of course, we don’t have to invest in just one asset class. We have a choice. Our choice is to spread things around into a few asset classes. We mainly choose cash, gold and stocks.
Of the three, we’re betting on stocks giving investors the best returns this year.
Not everyone will agree with us. Last year was a pretty good year for stocks. The S&P/ASX 200 Index gained 14.6%. Many folks will argue that after a double-digit year this year the returns will be more subdued.
Baloney.
If you think a 14.6% return is pretty good, if you think things couldn’t get any better, and if you decide to avoid stocks this year, you’ll look back on 2014 as a year of missed opportunities.
Why are we so sure of a great year for stocks?
This report from the Australian sums things up well:
‘Stockmarket investors may suffer more subdued returns in the next 12 months amid growing concerns that company valuations have overshot earnings growth, after the flood of cash into equities and a storming run by the banks helped deliver the best returns since 2009.‘
That report could be right. Share price growth may suffer if earnings growth suffers. If so, it could mean that stock prices and stock indices fall over the next 12 months.
That certainly wouldn’t do much for our prediction of the S&P/ASX 200 index hitting 7,000 points in 2015. And it wouldn’t do much for our view that small-cap stocks will lead the way.
But what if the market has already priced in the slower earnings growth? What if that’s why the Australian market performed poorly last year compared to the US and European indices?
As an investor it’s a question you’ve got to ask before you think about abandoning the stock market this year.
Time and again investors forget one of the key rules of investing: that stock prices are all about future earnings.
And while you can count this year’s earnings as ‘future earnings’, to a large degree the market looked at that last year. This year the market will have one eye on this year’s earnings and one eye on next year’s earnings.
This is the type of situation that can puzzle novice investors. A company will report a lower profit or even a loss, and yet the share price can take off.
The novice investor will ask, ‘How is that possible?’ That’s because they don’t notice the company’s forward looking statements about the following year.
The novice investor doesn’t understand that the investment pros had already factored in the bad earnings news for the current year – that’s why the share price had already fallen, or risen less compared to other companies’ shares.
The pro investor looks ahead. The pro investor looks past what’s about to happen and instead looks at what will happen after that. That’s why we’re not worried about Australian company earnings being lower this year.
As always, we’re looking to the future.
To our mind it takes us back to the way most folks have looked at the market over the past six years. But to be honest, it’s not just novice investors who have made this mistake.
Most investors have focused either on the past or on the immediate news-making events – such as what the US Federal Reserve or European Central Bank is up to, or rising Chinese interest rates.
We call that stuff ‘noise’. It’s good for headlines. And it’s good for the folks who tend to focus on macro-economic analysis. But focusing on that stuff isn’t always the best use of an investor’s time.
Chances are if you’d focused on the macro stuff for most of the past six years you’ve sat on your hands in cash while the US stock market gained 170% and even the lagging Australian market gained 70%.
You would have worried too much about money printing, the potential for rising interest rates, and the latest worries about inflation or deflation. None of that would have helped you earn a buck in the stock market – unless you figured, as we did, that low interest rates and money printing are here to stay for the foreseeable future. (Perhaps forever?)
So sure, things may look bad for the Australian economy this year. It could even enter a recession. That could mean Australian companies record lower revenue and profits for the year. But don’t assume that means stock prices are about to hit the skids.
If 2014 turns out to be the bottom of the cycle for the Australian economy as some expect, it could also turn out to be the best time to buy stocks rather than sell them.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: 574 Years in the Making