In terms of investing strategy, there are lots of things to avoid (warnings to follow) and two clear winners: U.S. stocks and U.S. real estate. In stocks, I've given you plenty of ideas to consider, including 20 consecutive double-digit winners. On the heels of a 79% return for 2012's Top 10 list, my 10 picks for 2013 are up 36% so far vs. an S&P return of 19%. Go here if you'd like to review the record.
My mindset in terms of asset allocation is similar to the mindset of a poker player. I don't waste time trying to precisely forecast interest rates or GDP growth or any other impossible-to-predict metric. I'm trying to figure out where I can get the best odds, where probability of reward is heavily skewed in my favor coincident with low risk.
What's particularly interesting about this investing cycle is how divergent the opportunities are among asset classes. In the 1980s and 1990s, just about everything worked. Today, it's feast or famine. If you're invested in the right area, you're doing well; if you're poorly positioned, it's a struggle.
Here are the asset classes to avoid:
Bonds: Don't put any new capital in bonds. If you own a bond mutual fund, sell it immediately. If you own long-duration bonds, it's possible you can hold until maturity depending on how the rest of your assets are allocated. But the picture here is bleak. After a 31-year bull market, it's reasonable to expect a tough cycle for bonds that will last several years.
Commodities: I don't see the allure of investing in commodities, especially an inert metal like gold and silver. Absent a cash flow stream, it's merely a speculation (think roulette wheel). If I wanted to place a bet on a commodity, it wouldn't occur until the price suffered a wash out and investors gave up hope.
Foreign markets: This is a soft call, since there are areas (especially Europe) that offer compelling opportunities in stocks. The point of emphasis: America is the place to be for equity investments. We've gotten our mojo back.
Cash: You shouldn't have much invested in cash, and it's not just because rates are crazy-low. The opportunity cost is too severe; there are wonderful, safe companies worth buying that are much better than cash. If you want an idea or two, each one of my Top 10 picks for 2013 still has plenty of upside.
For growth-oriented investors, I'll point out two. Amazon (AMZN) dominates online retail as well as the infrastructure-as-a-service (IAAS) component of the cloud. The company will generate $2.5 billion in revenue this year in IAAS, where it has 80% market share and is growing more than 50% per year. If you think the potential for online retail and IAAS is 10 times today's numbers, you're aiming too low.
MGM (MGM) is another giveaway at the current quote. As I said in a recent column, I expect this stock to get to the $20s and soon (it should already be there). For conservative investors, my Top 10 picks General Electric (GE) and Berkshire Hathaway (BRK.B) are excellent long-term buys.
The long runway for growth that I anticipate for both equities and real estate is partially a function of cycles. Stocks suffered a profound nine-year bear market (which ended in 2009); it was almost as bad as the Great Depression. To say the long-term uptrend has resumed and will last to 2020 and beyond isn't a courageous call. The accumulation and compounding of profit makes an uptrend in stocks an inevitability.
Real estate, too, is easy call to make. This asset class moves in elongated cycles with very little oscillation. Real estate went straight down for six consecutive years. Now, with the housing supply/demand imbalance so far out of whack (we'll need 10 years of 1.6 million starts just to satisfy demand), it's reasonable to anticipate a runway for growth that takes us into the next decade.