zohair4u
19-08-2002, Mon 7:29 AM
NEW TECH BEATS OLD TECH
Listen, when the Fed puts on the brakes on the economy with
contracting monetary policy and higher interest rates, the economic
cycle always turns for the worse and our economy comes to a grinding
halt.
And since the business cycle radically affects corporate profits and
thus the amount of capital available for investment, all industries
dependent on corporate capital expenditures suffer most in a
contracting economy. Infotech industries are especially hurt, as I
mentioned earlier.
But I do believe industries that comprise the Techonomy food chain
benefit more from the new Techonomy. The losers in this transition
are old-tech companies in basic manufacturing, commodity production
and low-tech services. Old tech in the sense that:
a.. Their products change slowly--cars, refrigerators, even air
travel.
b.. They have little pricing power or ability to pass on higher
labor costs because of global competition.
c.. Their only opportunity to grow earnings significantly is
through merger and acquisition consolidation followed by
substituting capital for labor by investing in new
productivity-enhancing technology.
Almost the complete opposite is true of services and products of the
Techonomy:
a.. New tech replaces old tech, and newer tech replaces new tech,
as technology becomes obsolete every 12 to 36 months--generating more
unit sales.
b.. New tech does not worry about cost pass-through because these
companies learned long ago how to generate higher and higher levels
of profit via increased unit sales expansion, while dropping the
price of their products every year as a result of increased
productivity.
c.. New tech volume grows because its products increase customers'
productivity--which in turn adds to volume growth.
Herein lies a formula for significant compound wealth building and
the core logic behind my optimism about our future. What the new
Techonomy means is the ascension of cost-decreasing/high
value-added/productivity-building industries and the contraction of
cost-increasing/lower value-added industries as a percentage of our
GDP.
It is the best scenario you could imagine for investing in stocks
with monster investment returns in the future.
"Change is the law of life. And those who look only to the
past or present are certain to miss the future."
---President John F. Kennedy, June, 1963
The point of our emerging Techonomy thesis is to set the investment
context for the next two decades ahead. The good news is that severe
or "monsterish" levels of change are mandatory for creating an
environment conducive to monster wealth creation … and we have
monster rates of change coming in spades. "Monster" growth
stocks--the kind that grow 500% to 1,000%--don't come from times of
linear or slow predictable growth.
For example, in the rapidly changing '90s, 259 stocks rose 1,000% or
more--a lifetime of growth for most investors earned by one stock in
10 years. But the Top 20 monster stocks grew on average more than
27,000%!
The rewards of a few monster stocks can be life-altering. With as
little as $5,000 and moves at their peaks of 91,000% by Dell,
68,000% by Cisco, 66,000% by AOL, and 21,000% by QUALCOMM, you would
have become a millionaire five to 10 times over in less than a
decade!
Even if you disregarded the advice of my first book and held on to
these stocks AFTER they broke their 50- or 200-day moving average
prices to fall 50%-80% lower, you made a fortune 10 times over
owning any of these monster stocks.
We will undoubtedly return to more historically "normal" rates of
stock market returns and valuations in the post-bubble investment
world. But the great news is our increasing exponential rate of
progress means we should expect more disruptive innovations will hit
the marketplace in the next 10 years than in the past 10.
Don't forget that the monster stocks of the early 21st century will
undoubtedly come from many non-infotech industries, too, like
alternative energy, water management, natural gas exploration and
production technology to name a few. ChangeWave Investing is about
riding waves of change no matter where they come from--tech investing
is only one part of our universe of stocks.
THE RISK OF STAYING ON THE SIDELINES
Growth investing--and particularly AGGRESSIVE-GROWTH investing--IS NOT
a strategy for a majority of your investment portfolio. Those
investors with 100% of their money in expensively valued tech stocks
in 2000-2001 learned this brutal lesson the hard way.
But the most important reason to dedicate a part of your investment
capital to monster growth stocks is the risk of NOT participating in
this revolutionary age. With so many explosive markets and stocks,
the mathematics are too compelling to dismiss.
When you aggressively invest A PORTION of your investment capital in
the world's fastest growing companies, the most money you can lose
is 100%. Yet, many companies profiting from the emerging Techonomy
revolution generate investment returns of 1,500% to 3,000%,
sometimes in as little as a few years. This means you could
literally invest $1,000 in 10 companies, have nine stocks go to $0,
and still make 10% on your money, catching only one 1,000% winner.
So think about this-- the most you can lose is 100%, and there's a
good possibility that you can catch a gigantic wave-riding stock and
earn a return of 1,000%-plus. Is that a bet you'd want to take with
at least some of your investment capital? Can you really afford not
to be in this once-every-hundred-years game?
In the 21st Century EVERYONE Can be a Millionaire--the question is
how long will it take you?
Building a million-dollar investment portfolio is a simple game.
Thanks to the power of compounding (i.e., your money grows
exponentially not linearly because it earns a return on your
original money PLUS its return so its growth rate accelerates each
year) a 20-year-old need only to invest $1,014 a year with a 11%
annual return to have saved $1 million by the time he is 65
A person at 40 needs to save $8,740 per year at the same rate. And
if you don't need a reason to start early, using the same numbers,
the 20-year-old has invested only $45,609 during the 45-year time
stretch while the 40-year-old invests $218,506
Now here is where aggressive-growth investing comes in. For every
0.5% you add to your overall portfolio growth each year for the 10%
to 20% of your portfolio invested in high growth stocks, you cut off
about one year from your $1,000,000 portfolio. Add 5% additional
growth to your portfolio and you wind up working 10 years LESS.
Think of successful aggressive investing (what Charles Schwab calls
"explore" investing) as your secret strategy for working fewer years
and playing more. Or do you want to work forever?
24 HOURS A YEAR IS ALL IT TAKES
Adding 3% additional return to a portfolio seems to be
inconsequential. But think of it this way. Let's say you put up
$10,000 in a mutual fund that earned 12% on your money for 30 years.
You put another $10,000 to work and invest two hours a month
searching for six to 10 ChangeWave growth stocks that average 15%
growth.
You'd earn $320,000 more on your money for your 720 hours of
work--not a bad return on your investment of time.
Is it too late to play the game? This question is a bit like asking
a young Henry Ford in 1917, "Is it too late to invest in the
automobile business?"
We have just entered the first years of a 20- to 30-year revolution
that makes the New Economy revolution look like a jailbreak from a
one-cell jail.
And in addition to the fantastic economic environment of the
emerging Techonomy, and once we're past the bloodbath of the Nasdaq
Techwreck 2001, you and I begin another cycle of
multi-trillion-dollar growth.
Don't Bet Against 70 Million Baby Boomers' Retirement Money, Either
Betting against the boomers' trillions of retirement dollars, and
the 40 trillion to 126 trillion dollars they start to inherit over
the next 30 to 40 years, is a true loser's game. Why? Because a
majority of that money is going into stocks … primarily because it
has nowhere else to go. This is where the cash will come from to
fuel the extended bull market we project.
Is the market risky? On a year-to-year basis of course. But what
pessimists continually fail to realize is that for the 70 million
U.S. Baby Boomers (and an even larger number in Euro land and Asia)
furiously saving their hard-earned money for retirement, it's even
riskier staying OUT of the equity markets.
And make no mistake--it's the boomers from the U.S., Asia and Europe
investing in his or her future who is really driving the demand side
of the stock market. To have a chance of reaching the amount of
dough required to keep the BMW detailed and the frequent-flyer
mileage up to snuff, boomers are doing what any sane person would do
faced with the same situation. They are putting their money into the
ONLY thing that gives them a fighting chance for the future they
envision and feel entitled to: growth stocks.
If you need 60% of your pre-retirement salary to live comfortably in
retirement, boomers know they are behind on their saving. And 4% to
5% interest from bonds ain't gonna cut it.
DON'T LET THE OLD TIMERS CONFUSE THE CONTEXT
Old-timer pessimists talk about how the '60s and '70s bear markets
portend the dismal future for the market miss four enormous economic
points about the 21st century investment environment. (Forget about
the emerging Techonomy argument with these grumpy old men (and
women)--most traditional thinkers I meet can't seem to fathom the
Techonomy concept, so I stick with the simplest evidence--it makes
the point just fine.)
First, it was incredible that anyone invested in stocks at all
during that time. Remember the marginal tax rate in the '60s? Try
74% combined marginal federal and state at the highest income
rates--including 50% capital gains taxes!
Why would anyone take the risk of stock investing--especially when
you could get a 100% guaranteed return on your investment dollar
buying tax shelters like avocado farms and oil wells.
The competition for investors' dollars grew even fiercer in the '70s
and early '80s when tax shelters emerged with $10 tax write-off for
a $1 investment (thus saving up to $5 in taxes). Why DID anyone
invest in stocks?
Today, stocks are THE only retirement game in town. It's also the
only government-approved tax shelter left to the individual
investor. Bonds--5% dividends taxed at 40% rates with 2% to 3%
inflation fail miserably. Real estate tax deductions can't be used
against ordinary income and no one has the time to be a landlord.
Realistically, only the 8% to 10% historic returns of stocks gets
the boomer anywhere close to the promised land and the boomer
investor knows it.
Second, in the '60s and '70s, much of corporate America guaranteed a
healthy monthly lifelong pension (try 50% to 75% of your highest
last five-year income average!) to anyone who did their 20 years of
hard labor. Jeez--who needed to build a big nest egg OUTSIDE of
retirement plans? Today less than 5% of the boomers are covered by a
traditional pension. It's up to boomers themselves to fund their
retirements. All of which places even more retirement money into
stocks.
Third, the great shift of the world's profits has made the U.S. the
dominant profit maker of the world. In the old days--say 1992 for
instance--according to J.P. Morgan & Co., American companies
accounted for 25% of the world's profits in the six major global
economies. Today, that number is more that 40%--while our share of
GDP is roughly the same.
Fourth, the U.S. share of corporate profits is nearly DOUBLE its
share of GDP--including the profit recession of 2001. Upon economic
re-expansion in 2002 this percentage is expected to rise to 50% by
2005. Stock valuations DO follow profit growth--and the profit growth
in the world is in the country that owns 9-out-10 of the key
intellectual properties behind the world's growth.
Fifth, U.S. Baby Boomers are going to inherit between $40 TRILLION
and $126 TRILLION of wealth over the next 40 years in the U.S.
ALONE! Boston College researchers now show "it can now safely be
said that the forthcoming transfer of wealth will be many times
larger than any generation by a factor of 10 over the previous
generational wealth transfer."
Where is that money going to go? Where it is treated best and grows
the safest--in well-diversified stock portfolios.
Don't fall for the pessimistic claptrap of the stopped-clock (as in
"even a broken clock gives the right time twice a day") bear market
prophets whining incessantly on the boob tube about the "Big
Crash-Dow 500" future ahead for stocks. You'll be poorer in mind and
wallet if you do.
Listen, we've just had a once every other decade bear market--and a
tech stock bubble burst as well. We started the ‘90s with $4
trillion in household wealth and ended with nearly $15 trillion--and
that's after giving almost $5 trillion back!
CONCLUSION: THE BEARISH SCENARIO--THAT DOG WON'T HUNT
To get a firm grip on the opportunity ahead, I paraphrase investment
strategist Ed Kershner of UBS PaineWebber. Ask yourself these
questions. In light of all you know about the emerging new Techonomy
and the world in general, do you really think:
1) Structural inflation (increasing-cost industries and
deficit-spending government) is coming back?
2) Information technology and the Internet are going to be LESS a
part of our economic future than today or more?
3) People are demanding BIGGER government or less?
4) There is a reasonable chance of another world war?
5) That old economy industrial growth will reverse and grow faster
than techonomic GDP?
6) Boomers will need LESS for their retirement nest egg?
In this context, it is easy to see and grasp the big picture of
long-term prosperity and opportunity ahead. Don't let the
stopped-clock bears scare you away from your coming fortune.
We only have three certainties in life: death, taxes and increasing
rates of change. ChangeWave Investing is all about you learning how
to profit and thrive from a radically changing world. So now, let's
get you in the game.
A SPECIAL MESSAGE ABOUT STOCK MARKET INVESTING RISK
Optimism aside, you have to understand a basic component of
investing in stocks. You get the 50% to 100% higher returns from
stocks over the world's safest investment (treasury bonds) IF you
can endure volatility. Enduring volatility is the price equities
investors pay to earn higher rates of return than bond investors.
Thus, the ability to endure volatility is the key element of
successful equity investing.
A great hedge fund manager once told me that when it comes to
day-to-day prices the stock market is 90% psychology and 10%
fundamentals. Volatility or high/low price swings in day-to-day
prices comes from extreme nature of swings in the levels of
certainty or uncertainty about the future.
If you are going to be a stock investor, and particularly hold
aggressive-growth equities, you are 100% GUARANTEED to have at least
one or two 10%-plus Nasdaq price corrections lasting on average 49
days each year and every four years you will have a 20%-plus bear
market lasting between five to 13 months. Guaranteed.
You have to look at the schizophrenic nature of the stock market
this way. Without these inevitable bouts of psychological despair,
you'd never get a chance to make above-average profits.
You can't get it both ways--you don't get higher-than-market rates of
return in stocks without getting opportunities to buy them at
lower-than-realistic prices.Volatility is the tool we use to get
HIGHER returns. Period.
Now--we go through periods where people are VERY certain about the
near future--and this makes them bid up stocks because they see
earnings MUCH higher in the future with stable economic (i.e.,
currency and inflation) risk. In highly certain economic times,
stocks go up in value because optimism creates more people who want
to own stocks than sell them. This is called a bull market.
The years 1995-1999 represented an almost PERFECT WORLD of
certainty. Certainty that the Fed would bail out our economy with
rate cuts. Certainty that energy prices were headed south. Certainty
that inflation was doubly in check with a vigilant Fed and the new
inflation-eating productivity being introduced into our economy with
the $200 billion explosion of spending on productivity enhancing
infotech.
Only the impact of Y2K was uncertain: but it brought the certainty
of monetary base expansion (the fuel of the Nasdaq bubble) by the
Fed's dumping of over $500 billion in additional cash into our
economic system. Cash, which was not, hoarded under the mattress but
invested in exploding-growth Internet and tech stocks.
We go through periods where people are very uncertain about the near
future--like much of 2000-2001. From the day Microsoft warned about
earnings in December 2000, we entered a PERFECT STORM of
uncertainty.
The Nasdaq Crash of 2000-2001 was, in effect, a crash of "good"
economic certainty replaced with a mostly "bad certainty." For a
terrifying and grueling 15-month period of history, we had no
certainty of growth. No certainty of energy costs. No certainty of
bullish monetary system management. Even no certainty of a president
for 35 brutal days.
And the bad certainty? The certainty of Fed interest rate hikes. The
certainty of Middle Eastern distress. The certainty of Alan
Greenspan pulling over $500 billion in monetary reserves OUT of the
economy to undue his overdone monetary expansion from both Y2K scare
and the $200 billion he pumped into the system to bail out the Long
Term Capital Management fiasco.
All this uncertainty makes many people sell stocks and buy the
certainty of bonds because they see earnings much LOWER in the
future with unstable currency and inflation risks. When there is
more inventory of stock for sale than bids to buy them, stocks go
down in value. When everyone wants the certainty of bonds they
increase in value.
The only sure thing about periods of "bad certainty" flooding and
"good certainty" drought is they eventually reverse themselves in a
free-market based capitalistic economy.
When a majority of uncertainty dissipates, guess what--stocks go up
in value again at rates many orders of magnitude greater than rates
of investment return than zero-risk bonds. Think of certainty and
uncertainty as riders on a stock market teeter-totter. As
uncertainty goes down, stock values shoot skyward.
As I'll talk about a little later, the greatest risk for investors
is to disregard the role of the business cycle in this drama. But
the second-biggest risk is not being invested in stocks when the
market turns--because up to 50% of stock market gains come in
gigantic bursts of upward price moves as the world slowly comes to
the conclusion that the contraction phase of the business cycle is
about to be replaced with a new re-expansion phase of economic
growth.
Moral of the story: There is only ONE WAY to make long-term money in
the stock market--riding the higher highs and higher lows of the
price swings of the stocks of superior growth companies. All the
while, using the business cycle to help you change horses (i.e..
stocks) to improve your positioning on newer, faster-growing waves
of change that will lead the next upward market.
Why do the stocks with the highest AND most certain rates of
earnings growth go much higher than the average stock when times of
uncertainty become clear? Simple--what kind of company do you want to
own if you are certain about safe economic risk over the next 12
months--a company that grows 6% a year or one you are convinced will
grow at 50% average for the next three to five years?
If the value of a company IS the net present value of its earnings
power over the foreseeable future--not the recent past--YOU WANT TO
OWN THE COMPANY GROWING ITS EARNINGS 10 TIMES FASTER than the
average stock!!
The only way you screw this up is to:
A) Sell your best growth stocks and stay out of the market
B) Take that money and put into long-term CDs
C) Miss the inevitable over-sized recovery of the fastest and most
predictable earnings growth stocks when the fog of investor
uncertainty eventually lifts.
D) Go back into the stock market only after you can't stand the
pain of watching the same stocks you sold six months ago NOW 50% to
100% higher than what you originally paid for them.
Here is the trick: If you believe in the ultimate power of global
capitalism and the ultimate deflationary growth of our emerging
Techonomy, then you HAVE to believe in the growth and inflation
resistance of the economy LONG-TERM. If you do, this means you stay
invested in equities for the long term (but actively and dynamically
manage your portfolio according to short-term risk and reward
elements of the market you will soon learn).
If you don't deeply believe in the power of the emerging Techonomy
in your heart--CLOSE THE BOOK, sell your stocks and buy 30-year
treasury bonds adjusted for inflation.
It is that simple.
See you next week,
Tobin Smith
Editor, ChangeWave Investing
P.S. What stocks are up between 33% and 46% since January 2002? Many
stocks on our aggressive growth buy list at ChangeWave Investing.
Our subscribers are up big time in these leading stocks of the 2002
bull market, and it's not too late for you to get in on the fun. As
a valued seminar participant, I invite you to join the ChangeWave
Investing advisory service at a 50% discount to the regular price if
you act before Friday.
Just click here for details on our special offer.
http://changewave.com/order/?ccode=770832&acode=4CHC111
P.P.S. Coming next week: Learn the five kinds of ChangeQuakes, the
strategies for discovering them and how to ride the most profitable
ones. Plus, find out how YOU can identify a bona fide killer value
proposition, and how to become 100% richer by this time next year
investing in what we call the "arms merchants of the 21st century."
Listen, when the Fed puts on the brakes on the economy with
contracting monetary policy and higher interest rates, the economic
cycle always turns for the worse and our economy comes to a grinding
halt.
And since the business cycle radically affects corporate profits and
thus the amount of capital available for investment, all industries
dependent on corporate capital expenditures suffer most in a
contracting economy. Infotech industries are especially hurt, as I
mentioned earlier.
But I do believe industries that comprise the Techonomy food chain
benefit more from the new Techonomy. The losers in this transition
are old-tech companies in basic manufacturing, commodity production
and low-tech services. Old tech in the sense that:
a.. Their products change slowly--cars, refrigerators, even air
travel.
b.. They have little pricing power or ability to pass on higher
labor costs because of global competition.
c.. Their only opportunity to grow earnings significantly is
through merger and acquisition consolidation followed by
substituting capital for labor by investing in new
productivity-enhancing technology.
Almost the complete opposite is true of services and products of the
Techonomy:
a.. New tech replaces old tech, and newer tech replaces new tech,
as technology becomes obsolete every 12 to 36 months--generating more
unit sales.
b.. New tech does not worry about cost pass-through because these
companies learned long ago how to generate higher and higher levels
of profit via increased unit sales expansion, while dropping the
price of their products every year as a result of increased
productivity.
c.. New tech volume grows because its products increase customers'
productivity--which in turn adds to volume growth.
Herein lies a formula for significant compound wealth building and
the core logic behind my optimism about our future. What the new
Techonomy means is the ascension of cost-decreasing/high
value-added/productivity-building industries and the contraction of
cost-increasing/lower value-added industries as a percentage of our
GDP.
It is the best scenario you could imagine for investing in stocks
with monster investment returns in the future.
"Change is the law of life. And those who look only to the
past or present are certain to miss the future."
---President John F. Kennedy, June, 1963
The point of our emerging Techonomy thesis is to set the investment
context for the next two decades ahead. The good news is that severe
or "monsterish" levels of change are mandatory for creating an
environment conducive to monster wealth creation … and we have
monster rates of change coming in spades. "Monster" growth
stocks--the kind that grow 500% to 1,000%--don't come from times of
linear or slow predictable growth.
For example, in the rapidly changing '90s, 259 stocks rose 1,000% or
more--a lifetime of growth for most investors earned by one stock in
10 years. But the Top 20 monster stocks grew on average more than
27,000%!
The rewards of a few monster stocks can be life-altering. With as
little as $5,000 and moves at their peaks of 91,000% by Dell,
68,000% by Cisco, 66,000% by AOL, and 21,000% by QUALCOMM, you would
have become a millionaire five to 10 times over in less than a
decade!
Even if you disregarded the advice of my first book and held on to
these stocks AFTER they broke their 50- or 200-day moving average
prices to fall 50%-80% lower, you made a fortune 10 times over
owning any of these monster stocks.
We will undoubtedly return to more historically "normal" rates of
stock market returns and valuations in the post-bubble investment
world. But the great news is our increasing exponential rate of
progress means we should expect more disruptive innovations will hit
the marketplace in the next 10 years than in the past 10.
Don't forget that the monster stocks of the early 21st century will
undoubtedly come from many non-infotech industries, too, like
alternative energy, water management, natural gas exploration and
production technology to name a few. ChangeWave Investing is about
riding waves of change no matter where they come from--tech investing
is only one part of our universe of stocks.
THE RISK OF STAYING ON THE SIDELINES
Growth investing--and particularly AGGRESSIVE-GROWTH investing--IS NOT
a strategy for a majority of your investment portfolio. Those
investors with 100% of their money in expensively valued tech stocks
in 2000-2001 learned this brutal lesson the hard way.
But the most important reason to dedicate a part of your investment
capital to monster growth stocks is the risk of NOT participating in
this revolutionary age. With so many explosive markets and stocks,
the mathematics are too compelling to dismiss.
When you aggressively invest A PORTION of your investment capital in
the world's fastest growing companies, the most money you can lose
is 100%. Yet, many companies profiting from the emerging Techonomy
revolution generate investment returns of 1,500% to 3,000%,
sometimes in as little as a few years. This means you could
literally invest $1,000 in 10 companies, have nine stocks go to $0,
and still make 10% on your money, catching only one 1,000% winner.
So think about this-- the most you can lose is 100%, and there's a
good possibility that you can catch a gigantic wave-riding stock and
earn a return of 1,000%-plus. Is that a bet you'd want to take with
at least some of your investment capital? Can you really afford not
to be in this once-every-hundred-years game?
In the 21st Century EVERYONE Can be a Millionaire--the question is
how long will it take you?
Building a million-dollar investment portfolio is a simple game.
Thanks to the power of compounding (i.e., your money grows
exponentially not linearly because it earns a return on your
original money PLUS its return so its growth rate accelerates each
year) a 20-year-old need only to invest $1,014 a year with a 11%
annual return to have saved $1 million by the time he is 65
A person at 40 needs to save $8,740 per year at the same rate. And
if you don't need a reason to start early, using the same numbers,
the 20-year-old has invested only $45,609 during the 45-year time
stretch while the 40-year-old invests $218,506
Now here is where aggressive-growth investing comes in. For every
0.5% you add to your overall portfolio growth each year for the 10%
to 20% of your portfolio invested in high growth stocks, you cut off
about one year from your $1,000,000 portfolio. Add 5% additional
growth to your portfolio and you wind up working 10 years LESS.
Think of successful aggressive investing (what Charles Schwab calls
"explore" investing) as your secret strategy for working fewer years
and playing more. Or do you want to work forever?
24 HOURS A YEAR IS ALL IT TAKES
Adding 3% additional return to a portfolio seems to be
inconsequential. But think of it this way. Let's say you put up
$10,000 in a mutual fund that earned 12% on your money for 30 years.
You put another $10,000 to work and invest two hours a month
searching for six to 10 ChangeWave growth stocks that average 15%
growth.
You'd earn $320,000 more on your money for your 720 hours of
work--not a bad return on your investment of time.
Is it too late to play the game? This question is a bit like asking
a young Henry Ford in 1917, "Is it too late to invest in the
automobile business?"
We have just entered the first years of a 20- to 30-year revolution
that makes the New Economy revolution look like a jailbreak from a
one-cell jail.
And in addition to the fantastic economic environment of the
emerging Techonomy, and once we're past the bloodbath of the Nasdaq
Techwreck 2001, you and I begin another cycle of
multi-trillion-dollar growth.
Don't Bet Against 70 Million Baby Boomers' Retirement Money, Either
Betting against the boomers' trillions of retirement dollars, and
the 40 trillion to 126 trillion dollars they start to inherit over
the next 30 to 40 years, is a true loser's game. Why? Because a
majority of that money is going into stocks … primarily because it
has nowhere else to go. This is where the cash will come from to
fuel the extended bull market we project.
Is the market risky? On a year-to-year basis of course. But what
pessimists continually fail to realize is that for the 70 million
U.S. Baby Boomers (and an even larger number in Euro land and Asia)
furiously saving their hard-earned money for retirement, it's even
riskier staying OUT of the equity markets.
And make no mistake--it's the boomers from the U.S., Asia and Europe
investing in his or her future who is really driving the demand side
of the stock market. To have a chance of reaching the amount of
dough required to keep the BMW detailed and the frequent-flyer
mileage up to snuff, boomers are doing what any sane person would do
faced with the same situation. They are putting their money into the
ONLY thing that gives them a fighting chance for the future they
envision and feel entitled to: growth stocks.
If you need 60% of your pre-retirement salary to live comfortably in
retirement, boomers know they are behind on their saving. And 4% to
5% interest from bonds ain't gonna cut it.
DON'T LET THE OLD TIMERS CONFUSE THE CONTEXT
Old-timer pessimists talk about how the '60s and '70s bear markets
portend the dismal future for the market miss four enormous economic
points about the 21st century investment environment. (Forget about
the emerging Techonomy argument with these grumpy old men (and
women)--most traditional thinkers I meet can't seem to fathom the
Techonomy concept, so I stick with the simplest evidence--it makes
the point just fine.)
First, it was incredible that anyone invested in stocks at all
during that time. Remember the marginal tax rate in the '60s? Try
74% combined marginal federal and state at the highest income
rates--including 50% capital gains taxes!
Why would anyone take the risk of stock investing--especially when
you could get a 100% guaranteed return on your investment dollar
buying tax shelters like avocado farms and oil wells.
The competition for investors' dollars grew even fiercer in the '70s
and early '80s when tax shelters emerged with $10 tax write-off for
a $1 investment (thus saving up to $5 in taxes). Why DID anyone
invest in stocks?
Today, stocks are THE only retirement game in town. It's also the
only government-approved tax shelter left to the individual
investor. Bonds--5% dividends taxed at 40% rates with 2% to 3%
inflation fail miserably. Real estate tax deductions can't be used
against ordinary income and no one has the time to be a landlord.
Realistically, only the 8% to 10% historic returns of stocks gets
the boomer anywhere close to the promised land and the boomer
investor knows it.
Second, in the '60s and '70s, much of corporate America guaranteed a
healthy monthly lifelong pension (try 50% to 75% of your highest
last five-year income average!) to anyone who did their 20 years of
hard labor. Jeez--who needed to build a big nest egg OUTSIDE of
retirement plans? Today less than 5% of the boomers are covered by a
traditional pension. It's up to boomers themselves to fund their
retirements. All of which places even more retirement money into
stocks.
Third, the great shift of the world's profits has made the U.S. the
dominant profit maker of the world. In the old days--say 1992 for
instance--according to J.P. Morgan & Co., American companies
accounted for 25% of the world's profits in the six major global
economies. Today, that number is more that 40%--while our share of
GDP is roughly the same.
Fourth, the U.S. share of corporate profits is nearly DOUBLE its
share of GDP--including the profit recession of 2001. Upon economic
re-expansion in 2002 this percentage is expected to rise to 50% by
2005. Stock valuations DO follow profit growth--and the profit growth
in the world is in the country that owns 9-out-10 of the key
intellectual properties behind the world's growth.
Fifth, U.S. Baby Boomers are going to inherit between $40 TRILLION
and $126 TRILLION of wealth over the next 40 years in the U.S.
ALONE! Boston College researchers now show "it can now safely be
said that the forthcoming transfer of wealth will be many times
larger than any generation by a factor of 10 over the previous
generational wealth transfer."
Where is that money going to go? Where it is treated best and grows
the safest--in well-diversified stock portfolios.
Don't fall for the pessimistic claptrap of the stopped-clock (as in
"even a broken clock gives the right time twice a day") bear market
prophets whining incessantly on the boob tube about the "Big
Crash-Dow 500" future ahead for stocks. You'll be poorer in mind and
wallet if you do.
Listen, we've just had a once every other decade bear market--and a
tech stock bubble burst as well. We started the ‘90s with $4
trillion in household wealth and ended with nearly $15 trillion--and
that's after giving almost $5 trillion back!
CONCLUSION: THE BEARISH SCENARIO--THAT DOG WON'T HUNT
To get a firm grip on the opportunity ahead, I paraphrase investment
strategist Ed Kershner of UBS PaineWebber. Ask yourself these
questions. In light of all you know about the emerging new Techonomy
and the world in general, do you really think:
1) Structural inflation (increasing-cost industries and
deficit-spending government) is coming back?
2) Information technology and the Internet are going to be LESS a
part of our economic future than today or more?
3) People are demanding BIGGER government or less?
4) There is a reasonable chance of another world war?
5) That old economy industrial growth will reverse and grow faster
than techonomic GDP?
6) Boomers will need LESS for their retirement nest egg?
In this context, it is easy to see and grasp the big picture of
long-term prosperity and opportunity ahead. Don't let the
stopped-clock bears scare you away from your coming fortune.
We only have three certainties in life: death, taxes and increasing
rates of change. ChangeWave Investing is all about you learning how
to profit and thrive from a radically changing world. So now, let's
get you in the game.
A SPECIAL MESSAGE ABOUT STOCK MARKET INVESTING RISK
Optimism aside, you have to understand a basic component of
investing in stocks. You get the 50% to 100% higher returns from
stocks over the world's safest investment (treasury bonds) IF you
can endure volatility. Enduring volatility is the price equities
investors pay to earn higher rates of return than bond investors.
Thus, the ability to endure volatility is the key element of
successful equity investing.
A great hedge fund manager once told me that when it comes to
day-to-day prices the stock market is 90% psychology and 10%
fundamentals. Volatility or high/low price swings in day-to-day
prices comes from extreme nature of swings in the levels of
certainty or uncertainty about the future.
If you are going to be a stock investor, and particularly hold
aggressive-growth equities, you are 100% GUARANTEED to have at least
one or two 10%-plus Nasdaq price corrections lasting on average 49
days each year and every four years you will have a 20%-plus bear
market lasting between five to 13 months. Guaranteed.
You have to look at the schizophrenic nature of the stock market
this way. Without these inevitable bouts of psychological despair,
you'd never get a chance to make above-average profits.
You can't get it both ways--you don't get higher-than-market rates of
return in stocks without getting opportunities to buy them at
lower-than-realistic prices.Volatility is the tool we use to get
HIGHER returns. Period.
Now--we go through periods where people are VERY certain about the
near future--and this makes them bid up stocks because they see
earnings MUCH higher in the future with stable economic (i.e.,
currency and inflation) risk. In highly certain economic times,
stocks go up in value because optimism creates more people who want
to own stocks than sell them. This is called a bull market.
The years 1995-1999 represented an almost PERFECT WORLD of
certainty. Certainty that the Fed would bail out our economy with
rate cuts. Certainty that energy prices were headed south. Certainty
that inflation was doubly in check with a vigilant Fed and the new
inflation-eating productivity being introduced into our economy with
the $200 billion explosion of spending on productivity enhancing
infotech.
Only the impact of Y2K was uncertain: but it brought the certainty
of monetary base expansion (the fuel of the Nasdaq bubble) by the
Fed's dumping of over $500 billion in additional cash into our
economic system. Cash, which was not, hoarded under the mattress but
invested in exploding-growth Internet and tech stocks.
We go through periods where people are very uncertain about the near
future--like much of 2000-2001. From the day Microsoft warned about
earnings in December 2000, we entered a PERFECT STORM of
uncertainty.
The Nasdaq Crash of 2000-2001 was, in effect, a crash of "good"
economic certainty replaced with a mostly "bad certainty." For a
terrifying and grueling 15-month period of history, we had no
certainty of growth. No certainty of energy costs. No certainty of
bullish monetary system management. Even no certainty of a president
for 35 brutal days.
And the bad certainty? The certainty of Fed interest rate hikes. The
certainty of Middle Eastern distress. The certainty of Alan
Greenspan pulling over $500 billion in monetary reserves OUT of the
economy to undue his overdone monetary expansion from both Y2K scare
and the $200 billion he pumped into the system to bail out the Long
Term Capital Management fiasco.
All this uncertainty makes many people sell stocks and buy the
certainty of bonds because they see earnings much LOWER in the
future with unstable currency and inflation risks. When there is
more inventory of stock for sale than bids to buy them, stocks go
down in value. When everyone wants the certainty of bonds they
increase in value.
The only sure thing about periods of "bad certainty" flooding and
"good certainty" drought is they eventually reverse themselves in a
free-market based capitalistic economy.
When a majority of uncertainty dissipates, guess what--stocks go up
in value again at rates many orders of magnitude greater than rates
of investment return than zero-risk bonds. Think of certainty and
uncertainty as riders on a stock market teeter-totter. As
uncertainty goes down, stock values shoot skyward.
As I'll talk about a little later, the greatest risk for investors
is to disregard the role of the business cycle in this drama. But
the second-biggest risk is not being invested in stocks when the
market turns--because up to 50% of stock market gains come in
gigantic bursts of upward price moves as the world slowly comes to
the conclusion that the contraction phase of the business cycle is
about to be replaced with a new re-expansion phase of economic
growth.
Moral of the story: There is only ONE WAY to make long-term money in
the stock market--riding the higher highs and higher lows of the
price swings of the stocks of superior growth companies. All the
while, using the business cycle to help you change horses (i.e..
stocks) to improve your positioning on newer, faster-growing waves
of change that will lead the next upward market.
Why do the stocks with the highest AND most certain rates of
earnings growth go much higher than the average stock when times of
uncertainty become clear? Simple--what kind of company do you want to
own if you are certain about safe economic risk over the next 12
months--a company that grows 6% a year or one you are convinced will
grow at 50% average for the next three to five years?
If the value of a company IS the net present value of its earnings
power over the foreseeable future--not the recent past--YOU WANT TO
OWN THE COMPANY GROWING ITS EARNINGS 10 TIMES FASTER than the
average stock!!
The only way you screw this up is to:
A) Sell your best growth stocks and stay out of the market
B) Take that money and put into long-term CDs
C) Miss the inevitable over-sized recovery of the fastest and most
predictable earnings growth stocks when the fog of investor
uncertainty eventually lifts.
D) Go back into the stock market only after you can't stand the
pain of watching the same stocks you sold six months ago NOW 50% to
100% higher than what you originally paid for them.
Here is the trick: If you believe in the ultimate power of global
capitalism and the ultimate deflationary growth of our emerging
Techonomy, then you HAVE to believe in the growth and inflation
resistance of the economy LONG-TERM. If you do, this means you stay
invested in equities for the long term (but actively and dynamically
manage your portfolio according to short-term risk and reward
elements of the market you will soon learn).
If you don't deeply believe in the power of the emerging Techonomy
in your heart--CLOSE THE BOOK, sell your stocks and buy 30-year
treasury bonds adjusted for inflation.
It is that simple.
See you next week,
Tobin Smith
Editor, ChangeWave Investing
P.S. What stocks are up between 33% and 46% since January 2002? Many
stocks on our aggressive growth buy list at ChangeWave Investing.
Our subscribers are up big time in these leading stocks of the 2002
bull market, and it's not too late for you to get in on the fun. As
a valued seminar participant, I invite you to join the ChangeWave
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Just click here for details on our special offer.
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P.P.S. Coming next week: Learn the five kinds of ChangeQuakes, the
strategies for discovering them and how to ride the most profitable
ones. Plus, find out how YOU can identify a bona fide killer value
proposition, and how to become 100% richer by this time next year
investing in what we call the "arms merchants of the 21st century."