The Investment U E-Letter
Tuesday, August 3, 2004 Outperform Your Friends by 'Investing Ugly'
By Dr. Steve Sjuggerud
President, Investment U You don't want to hear it, but the smartest play right now is in SAFE assets… Most folks believe the saying: "The more you risk, the more you can make…" Not so fast… There are ways to beat the markets by actually risking less… For example, Robert Haugen, in the book The New Finance, proves that buying less risky "value" stocks (defined as stocks with the lowest price-to-book ratios) actually beats buying risky "growth" stocks over the long run. Amazing! The common wisdom is that you have to invest in risky things like tech stocks and other growth companies to really generate big returns. Haugen proves it's the opposite… buying "boring businesses" at cheap values is where you make your money over the long run. Investing ugly should beat investing sexy today and for the rest of the year. It's counterintuitive, but I think it's also the case right now. Here's what I mean… Many Investors Are Increasing Risk - For Lower Returns You don't have to take a lot of risk to make a good return. Haugen proves the common belief is exactly the opposite of the truth! Right now is another time where we can actually beat the overall markets by risking less… But that's hard for a lot of investors to hear. Investors are disgusted by the returns they're making on their cash… generally less than 1% at the bank. So they are stretching outside of their comfort zones. And they're putting themselves in danger… like buying junk bonds, just because they're paying 8% interest… not fully understanding that they're risking a serious blow to their principal if something goes wrong. As recently as 2002, investors collected 14%-plus in interest on junk bonds… Now, that was a risk worth taking! But today, you make less than 4% above Treasury bonds in junk bonds, with the threat of disaster always looming. Bond defaults could increase, and interest rates on these bonds could rise. You could actually lose money in these… Just one example of how risky assets are expensive right now… Boring Bonds… And Other Forgotten Loves Meanwhile, boring government bonds are paying about 4.5% interest. And nobody wants 'em. Nobody anywhere… The pros hate government bonds. According to a recent Merrill Lynch survey, only 6% of fund managers think global bond markets are undervalued. And the contrarian in me loves this. When everyone hates an asset, it's generally a good time to start acquiring it. Individual investors - who have never particularly liked bonds in the first place - now have a smaller percentage of their assets in bonds than at any time in the last 17 years, with the exception of 2000 (data from the American Association of Individual Investors). Take a look at this chart, and you'll see what I'm talking about (you can click on it to see a larger version in your web browser): 
Notice that bonds SOARED in value the last time individual investors had this small a percentage of their money in bonds (2000)… Bond yields started the year 2000 at 6.5% and finished the year at 5% - a great year for bond investors - and it was a year when individuals didn't own bonds. Just like now. Quite often, the best time to buy an asset is when nobody wants it. And nobody wants bonds right now… so I'm buying! A Rare Moment in Investing: Low Risk for Higher Returns Everyone is attracted to risk right now - to his detriment. Risky assets are expensive. And really boring assets, like Treasury bonds that nobody wants, may actually be cheap. So my message today is, you may actually outperform your friends and neighbors for the rest of this year… by holding a safer portfolio than they do! It is a rare moment, where less risk will likely equal more return… That's the way I see it. Good investing, Steve Investment U Archives | 
