If you’re relying on index funds or stock and bond mutual funds to fund your retirement, you have a big problem.
The stock market is driven by earnings growth, the valuation level, and interest rates.
If rates are dropping, earnings are improving, and the price-to-earnings (PE) ratio is going higher, that is all fantastic for the stock market.
You need to have at least two of the three variables improving, or it’s tough for stock to power higher for very long.
On the opposite side of that, if rates are rising, have fallen to the floor, or are weak, then the multiple is going to contract and prices will fall.
Right now, the PE ratio of the S&P 500 is 21. The yield on the 20-year Treasury bond is a whopping 2.02%, and the 10-year yield is just 1.53%.
Earnings for the second quarter declined year-over-year, and analysts are lowering their expectations for the rest of the year.
None of the three components of stock market valuation is favorable right now.
When you add up the numbers, it tells me that for the next decade, investors will be lucky to get 5% returns from the major stock indexes.
But today I’ll show you a strategy that will beat that return 10:1…
Focus Your Portfolio
Given that most mutual fund managers underperform that bogey, relying on mutual funds and index funds is probably not going to be a winning strategy.
What we need to do is find a strategy that can give us several multiples of what the stock can gain and use that to grow our nest egg to the size we need to live the life we want.
The status quo is not going to be enough.
The best way to do this is to steal a phrase from Charlie Munger and take a simple idea very seriously.
My research shows that if we limit our portfolio to just those companies with rock-solid balance sheets and strong fundamentals that pay high dividends, we can outperform the market by a factor of three, annually.
How do we achieve this?
We’re going to take advantage of the fact that we can do things that big institutions and funds cannot do.
We’re going to start by looking for stocks that have a dividend yield of over 5%.
Then we’re going to limit the universe to only those companies that score high using the financial distress indicator, so we know there is no chance of a financial disaster ruining the performance of our portfolio.
Then we’ll buy the 10 that score the highest of several fundamental indicators that measure a company’s soundness and profitability.
Institutions can’t own just 10 stocks. You’d be fired for even suggesting such a thing.
In spite of the fact that most stocks don’t even do as well as Treasury Bills, they insist on owning hundreds of stocks in the name of diversification.
Diversification if fine if you’re trying to preserve wealth.
If you’re trying to build your cash pile, it hurts the probability of achieving your goals.
Watch That Basket
Andrew Carnegie first advised investors that the secret to success in the markets was, “Put all your eggs in one basket, and then watch that basket.”
This strategy can be your wealth-building basket.
The key to it is that we must watch the basket carefully.
Every month, we will check the portfolio and make sure all the companies meet all the requirements.
If one falls short, it’s immediately sold and replaced with one that does.
We want to own high quality, high yield stocks at every step of our journey.
One company that made the list – BGS Staffing Inc. (NYSE American:BGSF) – is a business I’ve followed for a long time.
My involvement with REITs and real estate investing helped me uncover this gem of a company.
They provide staffing services, and in addition to light industrial companies, they serve multifamily housing companies that own apartment complexes across the country.
They just announced that they’re moving into California – the market with the most apartments of any state in the country.
The Altman Z-score Financial Safety measure is more than three times our required number, so there’s no chance of this company having financial problems in the foreseeable future.
At the current price, the dividend yield is 6.75%, which is more than three times the 10-year Treasury Yield, and more than four times the 30-year bonds yield.
Over the last 20 years, which included two horrible bear markets, this simple approach has beaten the market by 3:1 annually.
Thanks to the magic of compounding, it’s more like 10:1.
Every $10,000 invested using this simple approach is now worth $323,100 while the index investor would have just $33,702 in their account.
Not only that, but our simple strategy also fell less during bad market periods and was less volatile with a beta of only 0.84.
A focused portfolio of high yield, high quality stocks is one of the best ways to make sure that when the stock market’s expectations are reduced, you don’t have to follow along with it.
To the Max,
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