Sunday, January 12, 2014

2014 Outlook: Investment Opportunities In The Year Ahead

2014 Outlook: The Greatest Illusion The World Has Ever Seen
2014 Outlook: The Danger & Opportunity The Illusion Creates
2014 Outlook: U.S. Stock Market
2014 Outlook: U.S. Residential Real Estate
2014 Outlook: U.S. Municipal Bond Market
2014 Outlook: Rogue Wave 1: Japan Is A Powder Keg Searching For A Match
2014 Outlook: Rogue Wave 2: Europe Calmly Sits In The Eye Of The Storm
2014 Outlook: Rogue Wave 3: The Global Housing Bubble Is Back
2014 Outlook: Investment Opportunities In The Year Ahead

As we enter 2014, the focus for almost every investor is centered around the search for "yield." In a low interest rate environment, at the latter stages of a cyclical advance in asset prices, investors feel more comfortable moving out on the risk spectrum in order to achieve what they consider the proper return for their portfolio. If junk bonds are in the mid 5% level and they feel they need that return on their money, then they will purchase junk bonds. 

Your thought process should be the exact opposite. When investors are willing to stretch this far for yield, by purchasing stocks at nose bleed prices and high risk bonds at incredibly low yields, your goal should be to find assets that will be protected when these yielding assets reverse course.

The most hated asset on the planet right now by far is cash. It should be your largest position. By cash, I mean safe cash. I would locate funds that carry exclusively short term U.S. treasury bonds (duration of 6 months or less). The monthly yield will be close to 0%. That's okay. You want to have dry powder available to purchase assets as they go on sale, and you can consider this your large storage facility of dry powder waiting to be deployed.

The next thing you want to do is make a list of assets that you believe are in long term secular bull markets based on how the future will unfold over the next five years or beyond (not how it will unfold over the next six months). When those assets go on sale, you can then begin to make purchases and build your portfolio.

My personal list looks something like this:

Gold
Silver
Mining Shares
Agriculture 
Energy Companies
Water Companies
Rare Earth Companies
Emerging Market Stocks
Canadian Dollar (& Bonds)
Australian Dollar ( & Bonds)
Brazilian Real (& Bonds)
New Zealand Dollar (& Bonds)
South African Rand (& Bonds)
Swedish Krona (& Bonds)

I am currently making purchases from my list more actively than at any point since early 2010. Why? Many of the assets on my list have been sold off heavily, and they are hated by the market. This is the scenario that triggers buying under my guidelines, low price combined with low sentiment. The two items on my list I am most actively buying today are silver and agriculture. Many of the currencies on my list are very close to buying levels (I was buying the Brazilian real over the summer), even though I would like their bond markets to sell off further so I can purchase the sovereign bonds simultaneously. Chinese shares are almost back within a buying range. Same with a few specific Russian companies.

Please understand that I am not trying to provide you a list to say "do this" (I am NOT currently buying MOST of the assets on the list above). I am only trying to show you the thought process behind how I invest. Most of my investment time is spent sitting and watching and raising cash. It is like a fisherman sitting out on the open water all day - a very boring process. When the market provides an opportunity through both a price and sentiment decline, I begin accumulating until either the price or sentiment reverses course.

Looking at price and sentiment, precious metals experienced a massive price decline over the past year and they have been completely given up on as an investment class. Sentiment levels have plunged to record lows over the past few months. I have not been as active as I am today in the silver market since 2006. Back then it felt the same as it does today, no one is paying attention. I never imagined there would be another opportunity like what we are experiencing today in the precious metal's secular bull market. Prices will (hopefully) fall lower in the short term. I will accumulate more.

I am buying wheat, corn, sugar and other specific baskets of agriculture. The prices are in the toilet. Sentiment is worse. Prices will (hopefully) fall lower in the short term. I will accumulate more.

If oil prices were to plunge over the next few months, I would begin accumulating stocks in that sector. By plunge, I mean fall back under $75 a barrel (currently at $92). If the Canadian dollar were to fall sharply, I would begin making an investment. By sharply, I mean fall below 80 vs. the U.S. dollar (currently at 91). 

If every asset on my list were to move higher in price and become loved (this occurred from early 2010 to about mid 2011), then I would step aside and raise cash. I hate to buy an asset when people are talking about it on CNBC or Bloomberg. 

What I suggest you do first is take as much time as possible to invest in your understanding of the global economy and financial system. Then close your eyes and imagine how you expect the world to look five years into the future. With that vision in place, begin to decide which countries may have capital moving toward them at that future date. Then decide which assets classes within that country may perform best (stocks, bonds, real estate) and begin to compile a list of attractive assets within that sector. This is how you work backwards to determine the best way to structure a portfolio.

You want to do the opposite for markets if you feel there is a potential danger. As I discussed throughout this entire Outlook, I believe there is danger lurking in many areas of the world today. If you can move safely out of the way when that danger arrives, you will be far ahead of almost everyone around you. In addition, by investing time in your personal education it will give you the conviction to make purchases when a selling panic begins.

I appreciate you reading this Outlook and I look forward to an exciting year ahead. For further discussion on how I am personally preparing for the world I see in the future, see:


I am not a financial advisor. You should speak with one before making any investment decisions. 

5 comments:

  1. how are you buying ag? etfs? can you give me some names?

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    1. For the individual Ags I buy using ETFs. For example, I buy corn using CORN.

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  2. Nice list. I also think the best opportunities are gold, energy, water and agriculture.
    Especially agriculture. After 20 years from now on the mankind will use 2 times more food and we don't have much land to grow food. The land isn't infinite and I must say that in my country the land price is going through the roof. During 10 years period the land price increased 10 times and the big buyers are foreign companies. I think we have a bubble too. Our farmers can't buy more land, because it is too expensive.
    btw i live in EU.

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    Replies
    1. Yes, if you think about the population growth around the world there are many people that will need to be fed. I think some people go too far and say that "there will be no food at any price." That's silly. Prices will move higher and the market will adjust with supply. In the meantime, prices are at rock bottom levels, sentiment is putrid and the long term fundamentals are phenomenal.

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  3. Insightful articles you have written that offers clarity in a different light. What is your take on the Singapore Dollar and the asset classes of that country?

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