OK. I’ll admit it. I used the cheesy headline to get lots (dozens and dozens) of hits. Everyone’s constantly hunting, scouring the information universe to see what gurus and pundits think about the forthcoming year. In 2009, I wrote a “prediction” piece that was a little more longer horizon. How’d I do? I didn’t pick any individual stocks, per se. More macro stuff than anything. You can go back and read it if you like.
I think we did OK. We skipped writing a prediction for 2011 and judging from this year’s action, it’s just as well. It would have been a complete exercise in futility.
I will make a forecast for 2012, though. I predict, at best, the markets will be unpredictable. They always are. Could anyone predict the enormous, maybe bigger than ours, monetary crisis in Europe? I’m sure there are a lot of naysayers who may be proven somewhat right who doubted the viability of the Euro all along. But on this magnitude? Probably not. It’s always that way. I’m currently reading Reinhart and Rogoff’s “This Time Is Different” on the Kindle (thank to my wise and thoughtful sister for the gift card!). If you’re serious about investing and economics, I mean TRULY serious about really learning about it, red this book. It’s tough. It’s like going to school. But that’s what it takes.
Anyway, so, agreeing that markets are as unpredictable as Charlie Sheen and a stolen prescription pad, what do you do? I’m sticking with the strategy, yet to be named, I’ve been using for the past few years. As far as stocks are concerned, own big, cheap, well run, well known names that pay you something. What do I mean by cheap? A good place to start is the forward P/E ratio. The S&P 500 currently has a P/E of around 12 or 13. So, good stocks with a P/E less than that of the index are probably a smart move. Stocks like International Paper (IP) trading at 9.6 times 2012 earnings yielding 3.5%, Eli Lilly (LLY) at 9.5 times 2012 earnings with a 4.7% yield, and Intel (INTC) at 10.32 times 2012 earnings and yielding 3.4% are probably good ideas. I know. I’ve talked about these names before. I still like them. They’re great companies. Their multiples are reasonable to just down right cheap. And they pay you more than a ten year treasury for your risk.
Incidentally, had you owned those three names this year, your return just from capital appreciation would have been a little better than 15%. Throw in dividends and you’d be flirting with 20%. Not bad considering the S&P 500 has returned…oh…almost nothing this year? Did I mention I’ve written about these names in the recent past?
As far as bonds go, caution is probably the operative word. I’d stay away from government stuff. Hell, I haven’t bought a government bond for a client since 1997. Yeah, I’ve missed some run up. But I’ve always been taught that bonds are for income. They should pay you something. I’ve always gravitated toward corporate bonds. I guess it’s the equity background. I still hold the same belief. Again, use the same philosophy for corporates that you would for stocks. Big, cheap, liquid, well known names. Don’t pay too much (par or less…NEVER pay a premium for a bond) and get some yield. Don’t be afraid to dabble in the upper end (“B” rated or better) of the junk bond world. Don’t go out too far on the curve (10 years…tops!) and trade ‘em if you can. Yes…trade bonds. If you buy it at 96 and it goes to 110 and paid you 6% in the process, that’s a 20.5% total return. At the end of the day, the bond is really only worth 100. Let someone else pay 110.
Also, some financial company bonds are floating around out there that look attractive from a price standpoint. Worth a look, but be choosy and expect the worst while you hold it. Also, plan on trading those as well.
2011 was weird. 2012? Who knows? But judging from the past few years, at least some weirdness is guaranteed.