I spent the past weekend at an investment conference that featured a bunch of speakers talking about various ways to make money in the financial markets.
The dirty little secret is that I don’t go to watch the presentations.
I go mostly to visit with friends who are speaking, as was the case this time.
I also take the opportunity to do a lot of people watching and small talk to see what people are currently doing with their money and what their concerns are at a given moment in time.
The presentations, for the most part, were pretty run-of-the-mill, vanilla, low-cost index funds and buy-and-hold strategies.
That might be okay for some, but if you want to be financially secure sometime this century, then you’re going to need a better plan.
Ordinary Strategies with Ordinary Returns
There were some presentations that were exceptions, including those put on by the people who I came to see that concentrated on good businesses at bargain valuations.
Interestingly, two of the hottest investment topics around the web right now are ESG (Environmental, Social and Governance) investing and of course, the ever-present next big thing – crypto assets.
There were presentations on both of these subjects, but they were so lightly attended that you could have fired a cannon in the auditorium without hitting anyone.
The internet may care about such things, but the 1000 or so people with money to invest and seeking advice couldn’t have cared less.
This was a higher-end conference, so there wasn’t as much of the gold bug and aggressive trading systems folks floating around.
There was one panelist on a four-person panel that talked about REITs. He was the only one who even mentioned them all weekend.
Almost all of the discussion centered around indexes and ordinary dividend-paying stocks.
The problem with that is that blue-chip dividend-paying stocks make up a significant part of the index, and both are overvalued right now.
We aren’t in a bubble yet, but there is now a way to make the argument that U.S. stock, as represented by the S&P 500, is cheap.
Searching for Yield in an Overvalued Market
That’s the real takeaway for the conference. U.S. stocks are overvalued to the point that buying here pretty much locks in low returns for the next seven-to-ten years based on historical performance.
We just had one of the best decades for stock performance in history, and the best decades are almost always followed by some of the worst decades.
Depending on whose model you use, large-cap U.S. stock will offer slightly negative returns by the most pessimistic assumptions and about 5% a year from the most optimistic scenarios.
I’ve been doing this for a very long time, and I can tell you that whatever is popular right now and is universally considered the wise investment choice is about to stop working.
For the last decade, buying low-cost index funds and hanging on forever has been the best advice.
That may well be true if you’re under 40 and have the 30 years or so for a full cycle to play out and get you somewhere near the much-hyped 10% long-term average annual return of 10% minus taxes and inflation.
However, if you are over 50 and playing catch up for retirement, a traditional 60-40 stock and bond index mix is going to average right around 3%.
Even going all-in on equities isn’t going to double your money over the next ten years. At 4% doubling your money will take 18 years.
Keep in mind that the 4% is not going to be linear, and you will see volatility and significant drawdowns that generate vomit-inducing fear and doubt into the picture.
It will be a rough ride to low returns.
Even if you’re younger and have time for indexing to work out, why would you want to do that?
Different Paths to Higher Returns
There are ways to double the index return over time, which will build your wealth much faster than putting up with a good decade, followed by a bad one, and then maybe followed by a mediocre one…
But to achieve that, you have to do what no one at the conference was talking about this weekend.
You need to use private equity replications strategies that buy good companies at bargain prices.
You want to find companies that are generating cash flow and using that to buy back stock, pay dividends, and pay down debt.
That’s how private equity consistently generates above-average returns.
We can do the same without worrying about the high barriers to entry and high fees imposed by the best private equity funds.
The Wildly Profitable World of Community Banks
We need to take advantage of the persistent consolidation trend that is going on and will go on for a very long time in community banks.
The rising cost of regulatory compliance and technology makes it very difficult for small banks to survive profitably, so they need to sell.
Larger banks cannot grow earnings at a fast-enough pace to satisfy shareholders in a slow-growth economy, so they need to buy smaller banks to grow assets and generate earnings growth.
It’s a match made in heaven and one that can make us an enormous amount of money over the next 10 years.
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Income Growth Opportunities
Take a look at the Forbes 400 and count how many of the world’s millionaires and billionaires got where they via real estate investing.
Wall Street thinks you should have a few percentage points of your portfolio in real estate.
I think you should own as many equity REITs that own property and produce cash flow, as you can find at bargain prices.
We need to own heavily discounted closed-end funds that give us access to income-producing infrastructure projects, private credit, emerging markets, arbitrage strategies, and even venture capital.
These are the types of assets that private equity firms are using to make their investors richer, and we can do the same, but pay a bargain price thanks to the psychological soup of the markets that create closed-end fund discounts.
In short, we need to do the things that Wall Street does not and that none of the speakers at investment conferences are talking about.
They were a few discussions about these topics this weekend, but that was at the dinner table and bar amongst my friends and myself, not on the stage where the information-starved public was seeking advice needs them to be.
To get different results, you have to do different things.
My research shows that strategies that replicate what private equity investors do with their money can allow us to earn much higher than index returns that get us where we want to be much faster than traditional stock and bond portfolios.
To the Max,