My investing motto is J.P. Morgan’s: “I never gamble.”
It didn’t mean he never bet on the stock markets. Rather, he only bet when the odds were overwhelmingly in his favor.
But how can individual investors ferret out where exactly to find the odds stacked in their favor? In an environment where market trends point to the bull market’s solid facade beginning to crack, more and more individual names are pulling back in their own private “corrections.”
If you’re smart, you shouldn’t fear these pullbacks, as they open up great opportunities for retirement-minded investors looking to snap up a few bargains. But not all falling stocks will recover. Some market darlings like Facebook (FB), Twitter (TWTR) and Tesla (TSLA) are grossly overvalued, and priced to disappoint.
Let’s think big today, and consider the biggest market trends that I believe will drive returns for the next five years.
You Can’t Count on the S&P 500
Let’s start with what I’ll call a “nega-trend”—namely, that you cannot rely on a plain-vanilla S&P 500 index fund to provide you with the growth and income you will need in retirement.
This chart of price-to-sales and the S&P 500’s total return comes from John Hussman, the president and founder of Hussman Econometrics Advisors. I think he has been overly cautious in the market trend analysis he publishes weekly, but he’s a good teacher.
Why are index funds like the SPDR S&P 500 (SPY) poised to disappoint? They are driven by companies that are trading at high price-to-sales ratios. Even though the S&P 500 index is trading at 1.6x, Facebook is 17.5x. With Twitter, at 23 times sales, it’s likely going to disappoint. Go ahead and post on Facebook, and keep in touch with your loved ones on Twitter. But I wouldn’t invest in the stocks. Even if the companies do satisfy their customers, the stocks will likely correct, dragging down index returns.
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The investing strategy I recommend to my Profitable Investing subscribers is to find “riches in niches.” I try to narrow down and find the places that will provide value and safety without going to an index fund.
Let’s get on to where I see the greatest opportunities in the next five years.
