 Bull's Eye Investing
John Mauldin
April 17, 2004
The Bull's
Eye Club
Alice in Wonderland Markets
Which Way to Go?
The Focus on Absolute Returns
Field of Dreams
This week, I am going to depart
from the regular format, as my book, "Bull's Eye Investing:
Targeting Real Returns in a Smoke and Mirrors Market" is
in the trucks on the way to a bookstore near you, as well as
Amazon.com and Barnes and Noble.com. I have arranged for a nice
30% discount on the book for you, courtesy of Barnes and Noble.com,
a different and excellent source for bulk orders and I launch
a special letter just for readers of my book.
Today, we are going to look
at some of the content in the book. Yes, a lot of the book has
been in these pages over the last year. But my guess is that
at least half of the book is new material, and the 50 plus graphs
and charts really add to the usefulness. The chapters on actual
investment strategies have not graced this weekly letter and
I hope are of great value. Being able to make a thoughtful and
logical case, step-by-step, for the future direction of the economy,
rather than piecemeal in this weekly letter will give you a much
better understanding of the problems and opportunities confronting
us.
As I look through the 435 some-odd
pages of the book, I find that it is very relevant to today's
markets and economy. Too often by the time a book is published,
it is out of date. I must admit that has been a concern. I feel
I have dodged that bullet. The book speaks to the very issues
confronting investors today, and much of the research and material
I use will be of use years from now. As long-time readers know,
I believe in backing up your beliefs with solid research. There
are 14 pages of footnotes and bibliography. You can disagree
with my thinking (and many do!), but you better do your homework.
The early reviews (my publisher
sent out lots of manuscripts for publicity and comments) have
been more than kind. While I am proud of the book and feel that
it can stand on its own, it is always nice to read kind words
from your peers (and superiors!) and readers. (I post a few comments
below.)
This book will surprise many
of my long time readers. After making what I feel is an extremely
strong case that we are in the first innings of a secular bear
market, I spend three very full chapters telling you how and
why to buy stocks. Ironically, in a secular bear market, the
little guy has a big advantage over the larger institutions and
funds. I show you the sorting screens and give you access to
the research which will guide you to successful investing in
stocks. If you own stocks or mutual funds, these three chapters
will give you a new and unique view of the stock market. Oh,
to have had this when I was just starting out in the investment
world. This is a book many of you will want to get for your young
adult (and even older!) kids to read.
The
Bull's Eye Club
I want to do something special
for those of you who read the book. If you will respond to this
letter and let me
know you have ordered or bought the book, I am going to create
a special "Bull's Eye" email list, and update various
topics in the book every quarter or so, as well as do some letters
where I answer reader's questions. There are certain subjects
in the book that if I wrote about them in the regular letter,
it would require lengthy explanations to set up the three page
update. It makes much more sense to simply send those updates
to people who have already read the chapters.
And now, let me give you the
basic thrust of the book.
Which
Way to Go?
"Would you tell me,
please, which way I ought to go from here?"
"That depends a good deal on where you want to get to,"
said the Cheshire Cat.
"I don't much care where--" said Alice.
"Then it doesn't matter which way you go," said the
Cat.
"--so long as I get somewhere," Alice added as an explanation.
"Oh, you're sure to do that," said the Cat, "if
you only walk long enough."
--Lewis Carroll, Alice's Adventures in Wonderland
Every hunter knows that you
don't shoot where the duck is, but where the duck is going to
be. You've got to "lead the duck." If you aim where
the duck is at the moment you shoot, you will miss your target
(unless the duck is flying very slowly or is very close!).
Bull's Eye Investing simply attempts to apply that same
principle to investing.
In this book, I hope to give
you an idea of the broad trends that will be evident for the
remainder of the decade and help you target your investments
to take advantage of these trends. Successful investing for the
period 2004 through 2010 will require you to do things differently
than you did in the 1980s and 1990s. We started the last bull
market with high interest rates, very high inflation, and low
stock market valuations. All the elements were in place to launch
the greatest bull market in history.
Now we're in the opposite environment.
The stock market has high valuations, interest rates have nowhere
to go but up, the dollar is dropping, and the twin deficits of
trade imbalance and government debt stare us in the face.
Which way is the stock market
going? Which way are bonds going? Gold? Real estate? Where should
I invest?
Wall Street and the mutual
fund industry say, "The market is going up; you should buy
stocks and now is the time to buy. You can't time the markets,
so you should buy and hold for the long term. Don't worry about
the short-term drops. And my best advice is to buy my fund."
The folks on Wall Street are
in the business of selling stocks because that is how they make
their real money. Whether the shares are sold directly or are
packaged in mutual funds or as initial public offerings (IPOs)
or in wrap accounts or in variable annuities or in derivatives,
these folks primarily want to sell you some type of equity (stock),
preferably today. Unfortunately, the vast majority of investors
believe these pitches and don't know there are better investment
alternatives.
Their advice--buy what they
sell--has been the same every year for a century. And it has
been wrong about half the time. There are long periods of time
when stock markets go up or sideways and long periods of time
when markets go down or sideways.
These cycles are called secular
bull and bear markets. ("Secular" as used in this sense
is from the Latin word saeculum, which means a long period
of time.) Each cycle has different types of good investment opportunities.
We are currently in just the first few innings of a secular bear
market. The problem for Wall Street is that the products brokers
primarily sell do not do well in secular bear markets. So they
have to tell you that things will get better so you should buy
now. Or they advise you to "have patience, and please give
us more of your money."
In secular bull markets investors
should focus on investments that offer relative returns.
By that I mean we should look for stocks and funds that will
perform better than the market averages. The benchmark by which
you measure your investment strategy is the broad stock market.
If you "beat the market," you are doing well. Even
though there will be losing years, staying invested in quality
stocks will be a long-term winner.
In secular bear markets, that
strategy is a prescription for disaster. If the market goes down
20 percent and you go down only 15 percent, Wall Street proclaims
your performance to be "winning." But you are still
down 15 percent.
In markets like those we face
today, the essence of Bull's Eye Investing is to focus on absolute
returns. Your benchmark is a money market fund. Success is
measured in terms of how much you make above Treasury bills.
In secular bear markets, success is all about controlling risk
and carefully and methodically compounding your assets.
Some will say, as they say
each year, that the bear market is over: that this book is writing
about ancient history. But history teaches us that is not the
case. Secular bear markets can have drops much bigger than we
have already seen, and last for up to 17 years. The shortest
has been eight years. They have never been over when valuations
have been as high as they are today.
Investors who continue to listen
to the siren song of Wall Street will be frustrated at best,
in my opinion, as the research I present clearly shows we have
a long way to go in this bear market cycle. For those who plan
to depend on their stock market investments for retirement within
a decade, the results could be particularly devastating.
Bull's Eye Investing is not, however, some gloom and doom
book. Despite what Wall Street wants you to believe, there is
no connection between how the economy will do and how the stock
market will perform. As we will see, the economy should be fine,
with just the usual corrections sandwiched between periods of
growth. The world as we know it is not coming to an end. It is
merely changing, as it always has. There are numerous possibilities
for investment growth in a secular bear market. They just don't
happen to be in the standard Wall Street fare.
What I hope to do is give you
a road map to the future by looking at how and why markets have
behaved in the past. We will debunk many of the myths and "scientific
studies" used by Wall Street to entice investors into putting
their money into buy-and-hold, relative return investments. The
Wall Street insiders, not surprisingly, use theories, statistics,
and so-called facts that are blatantly biased and in many cases
just plain wrong. When the market goes down, they just shrug
their shoulders like Chicago Cubs (or my own Texas Rangers) fans
and say, "Wait till next year. And buy some more, please."
Basically, in the first half
of the book I am going to teach you how to fish, and in the second
half I am going to tell you where the fish are. I would politely
suggest that you not skip the first half of the book--do not
turn to the last part simply looking for the quick investment
fix. If you don't understand what is happening in the economy
and world markets, you will not have confidence in your investment
strategy and you'll end up chasing the latest hot investment,
which is usually a prescription for pain in any type of market.
Here's how the book is organized:
First, we look at what history
teaches us about the potential for stock market returns over
the rest of this decade. We examine six major (and very different)
ways to look at the stock market. As a quick preview, the evidence
is heavily weighted to suggest that at the end of this cycle
the stock market will not be too far from where it is today.
The historical and mathematical analysis of bubbles also suggests
that we could see the stock market drop much further before beginning
the next bull market. We examine several of Wall Street's favorite
sales tools, the famous Ibbotson study,Jeremy Siegel's Stocks
for the Long Run, and Modern Portfolio Theory (MPT), and
see why you should exercise extreme caution when they are used
in a sales presentation.
We then look at why the economy
can do just fine and stock markets still can fall: It all has
to do with the expectation for earnings and the value investors
put on those future earnings.
Most analysts track a simple
bear market from peak to trough (top to bottom). Bear markets
(or 20 percent plus corrections) can happen in secular bull periods
(think 1987 or 1998), just as bull markets (20 percent plus up
reversals) can happen in secular bear markets (think 2000, 2001,
2002, 2003). Analysts also view a secular bear market as the
lengthy period over which the market makes a top, enters into
a decisive down phase, and then once again returns to the old
high.
I suggest that we view a secular
bear market a little differently, as the period in which the
price-earnings (P/E) ratio goes from very high to quite low.
It is in these periods of low valuation that we can once again
begin to confidently put our money back into stocks, as the rubber
band is getting ready to snap back. Of course, Wall Street folks
will trot out all sorts of studies that show that stocks are
always undervalued and you should buy today. They did so in 2000,
2001, and 2002, and 2003. They are doing so as this book is written
and published. They cheer each move up as proof they are right,
and each down move as a buying opportunity. They are wrong, and
we will examine why they're wrong.
That means earnings are important,
and thus for a few chapters we focus on earnings. We see why
Wall Street analysts are so consistently wrong (by about 50 percent
per year too much), what the prospects for real earnings growth
are, and how to put it all into perspective.
Next, we look at risk. As I've
said, investing in secular bear markets is all about controlling
risk. I believe this chapter is one of the most important in
the book, but it may also be the most fun.
We discuss the most common
mistakes investors make and how to avoid them. Statistics show
that investors do not do as well as the funds or stocks they
invest in, and we look at the causes. We examine why today's
hot fund is likely to be tomorrow's loser, and what types of
funds you should be looking for in this market.
We look at the future, including
the demographics of the baby boomer generation, and how it will
impact our investment potential. We analyze the direction of
interest rates, deflation, and inflation. Then we examine the
world economy and the dollar and see if we can find a potential
winning theme (we do!).
The consequences of these economic
problems will require some painful adjustments from those who
do not make the effort to protect themselves. I show you where
and how to turn problems into opportunities by seeking absolute
returns in turbulent markets.
After the first section, the
book focuses on specific types of investments. After telling
you why we are in a secular bear market for stocks, Chapters
16 through 18 explain precisely how to invest in stocks today.
Ironically, in a secular bear market, the little guy has a big
advantage over the larger institutions and funds. There are great
opportunities in the stock market if you know where to look.
During the last secular bear market, companies like Microsoft
and Intel were launched. I show you a simple way to find the
hidden gems sought after by the savviest investors.
Then we look at the world of
fixed income investments. The rules are changing, and what worked
in the 1980s and 1990s will in all likelihood be a losing proposition
for the remainder of this decade.
We then analyze what are, in
my opinion, some of the better potential sources of absolute
returns: certain types of hedge fund styles. We look at how Wall
Street has rigged the market against small investors getting
the best deals. The richest investors and largest institutions
with the best-paid advisors choose these high-fee, unregulated
private investments because they deliver better risk-adjusted
performance than one-way buy-and-hold mutual funds. We show you
how to find and gain access to these private funds, and how to
use some of their strategies in your own portfolios.
Finally, we take a more thorough
look at the future, and why you should be optimistic. In 1974,
only a few people saw the changes and opportunities that computers,
telecommunications, and the Internet would bring. The world was
bemoaning the losses of basic American industry as jobs were
being lost to world competition.
Today, we find ourselves once
again faced with serious competition for American jobs. Our core
seems to be slipping away, as the market doesn't respond. The
world sees us in a much different light than just a few years
ago. Few notice the new revolutions that are happening in small
firms and research departments that will form the basis for the
next wave of American prosperity because we haven't even begun
to imagine the ways in which the next waves of change will affect
us.
Will there be winners and losers
in this process? Of course. Anytime there are periods of upheaval
and great change, there are always those who benefit from the
change and those who suffer. I will try to show you how you can
position yourself to be a winner.
There is a centuries-long,
if not millennia-long, pattern to these cycles. Good markets
are followed by bad markets, which are again followed by good
markets. They are as predictable as winter and summer. These
cycles have been happening since the Medes were trading with
the Persians. While no one can predict the exact day winter weather
will arrive, it is a pretty good bet that winter will come. You
can prepare for winter just as you plan for summer. As investors,
you can be successful if you understand the economic and investment
seasons we are in and plan your investments accordingly.
So, let's get you started on
your way to successful Bull's Eye Investing. You can order the
book by going to BarnesandNoble.com (www.bn.com/bullseye). They have it at a 30%
discount. I am told it will ship as soon as it gets there, even
though the website says April 29.
A quick note to brokers and
investment advisors: most of you are going to hate this book.
But some of you "get it." You understand why you are
in the business - the prosperity of your clients, and you don't
buy the Wall Street pitch. You are going to love the book and
want your clients to read it. For those who order 25 or more
books, we have a source where you can get a 42% discount. Just
drop us a note and we will get you the form.
Some
Quick Comments About the Book
"This book has more wisdom
per page than any reader has the right to ask for. John Mauldin
knows the score and tells the reader how to join him in keeping
count."
--Peter L. Bernstein, author of the bestseller Against
the Gods
"John Mauldin's widely
heralded new book, Bull's Eye Investing, is a breath of
fresh air and a treasure trove of market insights and information.
When you think you've read 'em all, my suggestion is that you
turn to this book. Simply put, Bull's Eye Investing provides
information and perspective that you will not find anywhere else."
--Richard Russell, publisher of Dow Theory Letters
"Bull's Eye Investing
is a lucidly written, lambently cautionary, edifying, and diverting
must-read guide to the ways and means of hitting the gyrating
target of a 'Muddle Through Economy.' Mauldin is the Ben Graham
of the new millennium, but unlike Graham, he combines investment
savvy with a sense of humor and a gift of style."
--George Gilder, author of Wealth and Poverty and the
editor of the Gilder Technology Report
"Mauldin dances and weaves
through a mountain of fascinating research, taking us on a well-argued
tour of the past and giving us a spellbinding preview of the
future. He then lays out in clearly documented detail where the
investment opportunities and pitfalls of the next decade will
be. In a world where the right investment information is the
key to success, Bull's Eye Investing is one book that
should be close to every investor's desk."
--Bill Bonner, author of the New York Times #1 business
bestseller, Financial Reckoning Day
"This book is lucid, cogent,
and useful. Overall, it provides an excellent guide to better
investing habits and an effective antidote to standard Wall Street
bromides."
--Robert R. Prechter Jr., author of Conquer the Crash
"Finally, an easy-to-read
but very comprehensive study on investments in a world where,
sadly, common sense is no longer so common."
--Marc Faber, editor of the Gloom, Boom & Doom Report
"Bull's Eye Investing
is a scintillating tour of the art and science of long-range
forecasting. With his eye fixed as it should be on the great
sweep of history, John throws a much-needed splash of realism
onto the wishful thinking of recent years."
--Neil Howe, Partner, LifeCourse Associates coauthor of
Generations and The Fourth Turning
Field
of Dreams
I feel somewhat like Kevin Costner
in Field of Dreams (one of my favorite movies). I have built
the "field," but will they come? Before this letter
or any media or reviews go out, the book is number 28,006 at
BarnesandNoble.com and number 1,115 on Amazon. We will see what
happens. I do appreciate all the help many readers have been
with arranging media interviews. If you have a website and would
like to have a graphic of the book to link to Amazon or my book
site (coming next week) let me know.
My publisher (John Wiley) has
shown a lot of faith with a 30,000 initial printing, which for
an investment book by a little-known author is quite
the first run. Pre-publication orders have been very good, especially
from Barnes and Noble, who by all indications are going to give
it a little extra promotion.
I will be in La Jolla most
of next week, meeting with clients and managers. I will be in
Las Vegas speaking at The Money Show from May 11-13. This is
a massive event. They expect over 10,000 attendees, and you can
register
for free.
Tonight my wife is off with
her friends, so it is just me and the boys, which is always fun.
I am starting to get settled into my new office. They have been
letting high school teams play in the Ballpark in Arlington (Home
of the Texas Rangers) today, so it has been fun to stop and watch
every so often. Actually, considering the terrible state of Ranger
pitching, I am not sure that it was high school kids. They looked
as good as I saw last Wednesday night.
Next week we will get back
to economic events. I will probably write about the possibility
of the Fed raising rates before the election. Jim Bianco said
today he thinks they will raise rates at the June meeting. Jim,
my friend, I will take that bet. In fact, I will raise and say
not even in August. Next week we look at my reasoning. And it
does make a difference as to how you position yourself.
Life is good and just getting
better. Have a great week.
Your 'hoping they come' analyst,
John Mauldin
John@frontlinethoughts.com
Copyright ©2004 John Mauldin.
All Rights Reserved.
John Mauldin
is president of Millennium Wave Advisors, LLC, a registered investment
advisor. All material presented herein is believed to be reliable
but we cannot attest to its accuracy. Investment recommendations
may change and readers are urged to check with their investment
counselors before making any investment decisions. Opinions expressed
in these reports may change without prior notice. John Mauldin
and/or the staff at Thoughts from the Frontline may or may not
have investments in any funds cited above. Mauldin can be reached
at 800-829-7273.
This information
is not to be construed as an offer to sell or the solicitation
of an offer to buy any securities.
_______________
321gold Inc
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