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Last Updated on: 13th February 2015, 03:16 pm
The key to succeeding as an investor is to find hidden value on the market that others have overlooked. Most investors follow the exact same information and strategies. It’s no wonder that they all end up making the exact same mistakes to lose money as well.
Tim Price, the Director of PFP Wealth Management, has built his career on finding good investments through contrarian logic. In a recent interview, he discussed 3 surprising market trends that most investors are unaware of. This advice could help you build a lucrative portfolio in today’s uncertain times.
Secret 1 – The gold market is still under-bought
Gold has been one of the best investments over the past decade. Over the past 10 years, gold averaged an annual return of 10% and held up much better compared to stocks and bonds, which struggled during the financial crisis. While the stock market has recovered, it’s hard to say how long this recovery is going to last. After all, Europe is a mess while the American economy is fragile. It wouldn’t take much for everything to crash again. This would be terrible for most investments but would create another boom for gold.
With this in mind, you’d think that gold would be a popular investment choice and closing in on stocks. The truth is, not only is gold under-bought compared to the stock market. It’s under-bought even compared to some individual stocks!
Price researched the market cap of the entire gold market compared to different stocks. He found that there’s less in the entire gold market than there is in some large companies. Take a look at this chart:
The entire gold market has about $150 billion of investment. In comparison, Facebook’s market cap is over $200 billion, Microsoft is around $400 billion while Apple is stunningly over $600 billion. Basically, you could buy the entire gold market for less than the money invested in these individual stocks. Price sees this as an exceptional buying opportunity.
First, gold is due for a rebound so the fact that it’s under-bought creates a ton of value. Also, these major stocks are in for some tough times even if the economy doesn’t collapse. Most of these companies rely on exports for part of their business. The strong American dollar is going to squeeze their profits. Price said that investors should consider buying gold while possibly shorting these large companies like JNJ and Microsoft.
Secret 2 – Exceptional investors exist and they’re generally value investors
One of the claims constantly parroted by investors is the efficient market hypothesis. This theory claims that the stock market is unpredictable and it’s impossible for investors to find extra value on their own. An investor might get lucky for a year or two and beat the market, but over the long run it should be impossible for investors to earn a consistent return above the market. As a result, the best investment strategy is to just buy the entire market, like with an S&P 500 index fund.
Price went over the historical returns of professional investors to see if this was true. He found that while exceptional investors were rare, they definitely exist. As you can see below, there are top investors who have been beating the S&P 500 for years, even decades. Buffett’s been consistently beating the market for over 50 years!
What Price also noticed about these top investors is that many are value investors. This is a style of investing that looks for stocks that are undervalued based on their current earnings and/or assets. These investors are less concerned about the long-term exciting, but unrealized growth prospects of stocks and are more interested in finding current value that other investors have overlooked. Considering how under-bought gold is, you could argue that gold is currently a value investment and could be a way to earn these above average returns.
Secret 3 – Trend following can work, especially during down markets
One other idea that Price researched was whether he could find funds that had an average return of at least 20% for 20 years or more. He was able to find 11. Besides Berkshire Hathaway, which was launched in 1965, the others were all relatively new funds launched in the 80s.
What was interesting about these funds is that 6 of the 11 were trend following funds. These are funds that base their investment strategy on historical patterns in a stock’s price. The efficient market hypothesis says this is another strategy that shouldn’t work consistently yet this data shows it can. Price believes that these funds did well because trend following funds are really the only funds that make money during market downturns. That’s because they can adjust to market losses in the short-term. Most other funds just buy and hold stocks so they’re stuck taking losses when the market goes down. Investors may want to put some money in a trend following fund to help hedge their portfolio against a market downturn in the future.
Despite all the research available, there is still plenty investors don’t know about the stock market. If you take advantage of secret strategies like these ones, the market’s ignorance can be your gain.