Speaker 1 (00:02):
Okay. Hi everyone, Melvin. And welcome back to, it’s a better way to wealth. Now, one of the biggest headlines that I’ve seen over the past couple of weeks is the fact that last week, Jeremy Grantham and GMO asset management came out with their quarterly asset return projections for the next seven years. And it’s really grim folks. I mean, they look at all the economic factors in the market factors and they make a projection for what they think these asset classes are going to earn over the next seven years. It, it’s not pretty their average annual return for both large and small us stocks is a negative 8% a year. Now that’s not 8% over the next seven years. That’s 8% each and every year for the next seven years. So that’s not fantastic news international stocks, pretty much the same thing. You’re seeing losses, not quite as big as the U S but losses, nonetheless, except for the emerging markets value asset class.
Speaker 1 (01:10):
Now that’s all well and good buying cheap stocks in emerging markets sounds fun, and I’m not averse to it. I’ve done it before. I’ll probably do it again, but keep in mind right now, emerging markets value means investing in Egypt, Pakistan, Turkey, and Indonesia, not exactly global peace and prosperity places to be right now. So there’s, there’s a higher risk element that most people simply don’t want to take in their portfolio. Having said that this looks really bad for the next seven years for the market prices. And I’ve been talking about that a little bit, that, you know, we are an extended valuations in the, in the U S market we’re at just crazy prices that make it difficult to make money from here. So we’ve got to find things to do to work around the market. Now when Greg class projections came out, you know, all the chat rooms in the Reddits and everywhere, they were just ha ha, these guys don’t know anything.
Speaker 1 (02:12):
They’re always PERMA bears. They’re crazy. They don’t know what they’re talking about. Look, 10 years ago, they said emerging markets would outperform U S markets and look how wrong they were about that. And you know what they were wrong. Okay. However, emerging markets have given a decent return over the last decade. Yes. U S stocks would unquestionably have done better. However, what they’re not talking about. And because I actually read the reports, I’m familiar with Jeremy Grantham. He’s got a guy on his team there named James Monte. That’s one of the most brilliant investors that ever set foot on the planet. And he shares my affection for really ugly Hawaiian shirts. So that automatically means he’s a great guy. But anyway, back in 1999 and indeed through most of the late nineties Granta was saying, avoid us stocks at all costs. This is going to end very badly.
Speaker 1 (03:06):
Ha ha. He was exactly correct. It did not really switch back to Hey, it’s time to get back in us. Stocks are attractive until like mid year, 2003. Exactly correct people following his advice, missed the internet crash and they got back in justice. Things began to look a little rosy with potential for stocks going up again, guess what? He did it again in 2007, he said, guys, you cannot buy these stocks here. They’re too expensive. A couple of years later, as everything was falling apart, he said, if stocks are this cheap and you don’t buy them, you don’t just look like an idiot. You are an idiot. Okay. So Grantham has been right far more than he’s been wrong. Now last he’s been. Projections have been coming down for a couple of years now is just slower and lower and lower for what you can make investing in broader market assets classes.
Speaker 1 (04:07):
And we finally gotten to zero. Now last year coming into the year, projections were quite low at the very bottom in March of 2009, James Monterey was on with with one of the commentators. And he, they asked him what they think about the market too. And he said, you’ve got to be buying this market right now. Now by August, they were back to saying, yeah, returns don’t look so good from this level. Once it had recovered. But at that dead bottom, they got bullish. When it mattered. These guys have been right far more than they’ve been wrong. They don’t stay bullish long. They only like to buy at these massive extremes and you know what? You can actually get kind of rich that way. If you have the patience and discipline for it over time. So they also, and nobody talks about this in the chat rooms, oh, those guys are pregnant minors.
Speaker 1 (05:03):
They don’t do anything about the Grantham laid out in the report. Look, this is what you want to do to make money in this type of environment. And he talked about a long short strategy buying cheap and selling overpriced stock. He talked about investing in some alternatives. They love Japanese small caps. That’s a little tricky for us as individual investors to do, but we can explore that as well. And also there will be severe shocks and disruptions in the credit markets. And he thinks you ought to try to, to invest in that. Now let me give you my thoughts on all this and how I think that you ought to be investing right now. If you look back in 2001, Warren, Dave, and interview two women and Carol Linda’s worked for fortune magazine and she asked you, how do you tell if the market’s over undervalued?
Speaker 1 (05:48):
And he said, well, you know, comparing market cap to GDP, that’s about as good as yeah. An indicator of the relative value of the stock market as you’re ever going to get. And you know, Buffett’s amount of timing guy, and it’s certainly, this is not a timing measurement, but I’m going to tell you that when I look at, if the market cap to GDP ratio, it’s higher than it’s ever been, the market cap of all stocks is twice 200% of what the gross domestic product is. Now GDP is recovering from a big hit. We could factor that in no matter how you dice it, it’s the highest it’s ever been. Can we justify that with low interest rates? No, I do not pull if we can. This is a ridiculous, overvaluation not a precise timing indicator by any stretch of the imagination folks, but it does shout and scream.
Speaker 1 (06:40):
Be careful, probably not a good time to buy an S and P index fund. Yeah. When I look the Cape ratio, the sickly adjusted PE ratio, just the 10 year average PE ratio adjusted for inflation, highest it’s ever been that I can recall. It’s at about 38, that’s ridiculously high. So what do we do? How does, how does Tim Melvin, but a better way to wealth. We know what Grantham thinks. Here’s what I think. Bill cash folks. Now I know there’s no interest rate on cash unwell aware of that. Okay? But we’re not cash at this point. It’s not an asset. It’s a tool. We want to have a whole bunch of it. When this thing finally unravels. Richard rainwater once said that most people who was a famous investor worked with the bass brothers. It was part of the attempt to take over Disney years ago, a very smart guy who made an enormous amount of money.
Speaker 1 (07:30):
He wants said, most people buy stocks and then worry that the market’s going to crash. He says, I wait for the market to crash and then go buy stocks. What’s the secret of how he got very rich and we can make that work for us. So you start building your cash. There’s no need to rush into the market right now. When it is time, I will let my subscribers know, Hey, back in the pool, everybody let’s go. And here’s what you buy. Now. Here’s the other thing we’ve talked about this. We did a video on it not long ago. If you stick to community banks is specially recently converted thrifts. You should be pretty insulated from broad market movements. You know, I was look back and I look at the last decade, which was 2000 to 2010. If you owned an index fund, you made exactly nothing.
Speaker 1 (08:13):
You actually lost a little bit of money during that same period of time, the SNL thrift index almost tripled in value. So, you know, fantastic returns didn’t really care what the market’s doing. You’ve got these small little banks, you have lots of cash, great loan portfolios, you just Bulletproof balance sheets, nothing bad can happen to them for the most part. Yeah. So you can invest in those pretty aggressively and not have to worry too much about what the broader stock market is doing. I think that except for the great financial crisis, when real estate was the cause of the crisis reach have tended to do very well in big market sell loss, they held up well in 87, they were fantastic during the internet crash were positive returns most years. So you ended up with very nice returns if you have a real estate investment trust.
Speaker 1 (09:05):
So I think you’d be looking at alternatives like that. You can certainly engage in what I call SPAC arbitrage, where you buy special purpose acquisition companies, or SPACs at a discount to the value of the trust is respects that have not announced a deal. Now, if the market likes the deal and it pops up, you sell, if the market doesn’t like the deal, you redeem your shares as allowed by the perspectives and you’ll gain a small profit. So your worst case is a small profit. Again, you will not be affected by whatever craziness is going on in the stock market, or you can use the black Swan strategy that we talked about not too long ago. And just, you know, always when the VIX is really low, like it is now you can go out and buy a whole bunch of just low price puts 25, 30, 40 cent puts on the spy, the S and P 500 ETF.
Speaker 1 (10:00):
If we get a crash, the volatility explosion is going to drive those things up to, you know, five, 10, and even 20 times the low price that you’re paying for them, if it was market was to drop all the way to the strike price of the puts that you purchased, you would make a phenomenal amount of money. So yes, Mr. Grantham is probably right. I think that from right now, out over the next seven, take it out to 10 years. If you want looking at where earnings are, where GDP growth is going to be and where interest rates are, and what’s likely to happen with interest rates over the next decade, it’s going to be very difficult to make money in old traditional wall street index fund mutual fund thinking. Fortunately, I don’t think that way I have a better way to wealth, and I’m going to be sharing that with you each and every day.
Speaker 1 (10:52):
So yes, Grantham’s probably right. I’m not laughing at him. And I don’t think anybody else should be either because he’s got a fantastic track record of predicting long-term rates of return, not precise market timing, but just how things are going to play out over time based on valuation and economic environment. So smart people are talking usually make sense to take a few notes. So we’re going to be looking constantly for ways to make money where we don’t have to worry about what the stock market’s doing from day to day. And that my friends is our better way to wealth. I’m Tim. Melvin, thanks so much for watching. I’ll talk to you tomorrow.
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