By MoneyMorning.com.au
“Buffett’s chosen low-cost S&P 500 fund gained 2.08 per cent in 2011 to beat the five portfolios of hedge funds Protégé chose, which were down 1.86 per cent. Through four years, the hedge funds are down 5.89 per cent. Buffett’s index fund is down 6.27 per cent.” – Associated Press
“German Chancellor Angela Merkel told MPs from her conservative party Wednesday that she believed the eurozone’s sovereign debt crisis was ‘not over’ and the current relative calm was merely a ‘phase’.” – AFP
“ANZ chief Mike Smith has tried to play down concerns about the health of the Australian housing market among overseas investors… He pointed out that all mortgage lending in Australia was full recourse, while loan-to-valuation ratios averaged less than 50 per cent.” – The Age
Where do we start?
Warren Buffet the world’s most famous investor is in a battle with hedge funds over who can lose the most money.
The German Chancellor warns you haven’t heard the last of the Eurozone debt problems.
And ANZ chief, Mike Smith, who claimed in 2008 that Aussie banks hadn’t received $1 of taxpayer money (obviously the first homebuyers cash doesn’t count!) now says the Australian housing market is… erm… safe as houses.
The upshot is: do you remember 2011? OK. Well, expect more of the same in 2012.
We’d like to tell you the market was heading back for gradual and consistent gains.
But it isn’t.
The housing market and the stock market are more similar than most investors think. For years both sides battled, claiming one was better than the other.
When stocks out-did housing, stock investors said they were geniuses.
When housing out-did stock, housing investors said they were geniuses.
But as we pointed out to an old pal over lunch on Monday, the truth is much different. And failure to understand this truth could see investors staring at zero growth and even losses in their wealth for another 10 years…
Why Buffett Hates Gold
People who bought homes in 1970 for $1,000 and still own the home today valued at $1 million, aren’t geniuses. They bought a house… and lived in it. That’s not hard!
We’re sorry if we’ve burst your bubble, but it’s true.
The fact is, in the case of 1970s homebuyers, they’ve made a lot of money due to the luck of being born in the 1940s and 1950s. At around the time they came of age, the world was set to embark on a once-in-a-millennium credit bubble.
The same goes for investors who bought shares in 1970 and still own them today. Warren Buffett – the world’s greatest investor – wouldn’t be half the investor if it wasn’t for a quirk of fate.
Until the start of the credit boom, Buffett was an average-to-good businessman. When the boom kicked off in the 1970s, he was simply in the right place at the right time.
Perhaps that’s why Buffet hates gold. He made a fortune, thanks to central banks rejecting sound money and instead embracing inflationary credit.
Buffett knows he wouldn’t have a fraction of his USD$44 billion wealth without the credit boom.
This is why it’s important you don’t listen to the “geniuses” who claim the path to prosperity is to leverage up on a five-, 10- or 15-house property portfolio.
And it’s why you shouldn’t listen to the likes of Buffett. Or the Buffett clones who tell you it’s always a good time to buy stocks.
Cash Flow Over Debt
The market over the next 40 years is likely to be a lot different from the market over the past 40 years. You’re more likely to see a repeat of the volatile 1960s and early 1970s, than you are a repeat of the booming 1980s.
That’s true for property and shares.
So, how do you play it?
The best approach is to pick stocks with strong cash flows, low debt and a good history of paying out dividends.
It won’t make you rich overnight. But then again, it’s not supposed to. If this were a get-rich-quick scheme, we wouldn’t tell you to put 20% or so of your wealth into these types of stock.
The idea is to build your wealth by getting the companies you invest in to pay you for owning them. As opposed to property investors who have to pay for the privilege thanks to interest costs and low yields.
But that’s only good for part of your portfolio. You still need to chase capital gains to boost your returns. That’s where small-cap stocks enter the fray.
Change Your Investing Style Before It’s Too Late
Remember, the days of buying and holding on to growth stocks for the long term are over. Because if you hold on too long, odds are, you’ll give back most of the gains.
So you have to be active. Buy stocks before most of the market gets wind of them. And sell when the herd of investors pushes the price higher.
Of course, that’s easier said than done. You won’t win with every punt. But that’s why we suggest you only set aside a fraction of your portfolio for speculative growth plays.
If you can get the right mix, you’ll find yourself doing better than leveraged hedge fund managers… the likes of Buffett who pretend to hate risk but who have built their entire fortune on a credit boom…
And the geniuses who think the secret to wealth involves buying a house and doing little else.
All three types of investors will soon figure out just how much things have changed. And they aren’t going to like it.
Cheers.
Kris.
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