How You Really Make Money Investing: Issue #384

The Investment U E-Letter
Friday, November 19, 2004

How to Beat the Markets by Risking LESS
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).

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.

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Today’s IU Cribsheet

• Robert Haugen’s book The New Finance: The Case Against Efficient Markets is a bit technical. But if you’re really into what works in investing in stocks, it might be worth a look.
• Also, here’s how you can join a select group of serious investors to learn how to multiply your money many times over. At Phoenix, AZ’s Pointe Hilton Squaw Peak Resort on February 21-22, 2005, Agora Financial will host Profits at the Peak Traders Conference. Eight top experts will reveal their techniques for beating the markets soundly, year in, year out. Presenters will include MST’s James Boric, Commodity Trend Alert’s Eric Roseman, Microcap Moonshot’s Brian Hunt, the 10 Minute Trader’s D.R. Barton, and The Oxford Club’s Louis Basenese and Karim Rahemtulla, to name a few. To reserve your spot now, please call Jayle Watje 888.799.0463 or 410.454.0413, or e-mail her at jwatje@agorafinancial.com or visit http://www.agora-inc.com/reports/300Sconf/F300EB21/

Good investing,

Steve

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