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Nothing Performs Better in Times Like These

By Dr. Steve Sjuggerud
Wednesday, March 17, 2010

Darn it. I should have known better...
A fantastic idea sat right under my nose, and I missed it. I will try not to let it happen again.
Let me show you what this investment is... how it was so obvious... and how to NOT miss it next time.
The investment is, historically, the best-performing asset in our current economic situation (at least by one measure).
Before I get to the specifics, let me back up and explain something about investing...
When it comes to investing, I know everything will work out just fine as long as I follow my rules.
I don't worry about my returns year to year (though I do have a few accounts up more than 100% in the last year). I know the returns will come if I just stick to the rules.
I don't beat up on myself at all for taking losses, either. Losses these days don't faze me a bit... Giving up small battles is simply a part of winning the war. Never let a small loss turn into a big loss. It's part of the rules.
So I don't get worked up over winners or losers... What do I get worked up over? NOT sticking to my rules. Argh! The worst is when your brain overrides your rules. If you do that, the rules aren't even rules anymore.
In this case, it was a missed opportunity...
I didn't follow my rules and invest heavily in an asset class I knew would perform best in the current situation. Why didn't I? Darn it, I have no idea!
The missed opportunity... the asset I SHOULD have bought... was real estate investment trusts (REITs).
Yes, real estate stocks. By my rules, a year ago, REITs were exactly what I look for...
REITS were 1) hated, 2) cheap, and 3) in an uptrend.
If I had simply, mechanically, pulled the trigger a year ago, I would have made another 100% gain in a year, by simply investing in a fund that tracks the REIT market (like the iShares Dow Jones REIT Index Fund, IYR).
My friend Meb Faber reminded me of my missed opportunity when he published a table showing what asset classes perform best when the spread between short-term and long-term interest rates is wide.
In short, you make a fortune in real estate stocks when the spread is wide. Right now, the spread between short-term interest rates (near zero percent) and long-term interest rates (approaching 4%) is at near-record levels.
Meb did a historical test, going back to 1973, of how various asset classes perform when the spread is at different levels. When the spread is above three percentage points, REITS are the top-performing asset class by a long shot – earning an astounding 24% a year.
Even when you step down a level (when the spread is between two and three percentage points), REITS are STILL the best-performing asset class, making you 15% a year.
These numbers are exceptional. So is now a time to buy REITs? I don't think so. They don't fit my rules anymore...
The uptrend is strongly in place. And investors still expect bad things from commercial real estate. But they're far from cheap.
The index of REITS is up over 100% in the last year. The real estate those companies hold, those buildings, didn't double in value... The shares went from underpriced a year ago to overpriced today. Now, REITs have a dividend yield of only 4% and are selling at near two times book value...
That's not a deal worth chasing.
Don't worry about your returns. And don't worry about taking losses. If you follow the rules (which we've laid out over the years in DailyWealth), you will be just fine.
Don't celebrate your winners or kick yourself for having losers. Instead, beat up yourself over not following your rules... like not cutting your losses or missing opportunities that fit your rules (like REITs a year ago).
It works for me... and it will for you, too. I'm certain of it.
Good investing,

Further Reading:

Steve might have missed the huge rally in REITs, but back in April he did get DailyWealth readers into one of his favorite interest-rate speculations: Hong Kong stocks. As Steve explained, when the U.S. slashes interest rates, Hong Kong goes nuts. "It can't help it. It soars." Get the story here: Hong Kong Is About to Skyrocket.

One of the simplest investing rules to follow is the trailing stop. If you stick to it, you'll keep your losses small and your winners big. Steve laid out the fundamentals in a classic DailyWealth essay here: Don't Lose Money: The Most Important Law of Lasting Wealth.

Market Notes


The latest development in the "financials trade" we discussed early this month: XLF is moving in favor of the bulls.
Several weeks ago, our colleague Jeff Clark argued the financials were likely headed lower in the next few months. We also noted that John Paulson, a guy some consider to be the world's best, richest speculator, is betting heavily on the financial sector rising this year.
There's an easy way to tell who's right on this one... watch the big financial fund, XLF. This fund is loaded with the biggest names in American finance. As we noted earlier, XLF has traded in a tight range between $14 and $15.50 per share since August. A fresh "breakout" in either direction would tell us who is right... at least for a few months.
As you can see from today's chart, XLF is not just "knocking on the door" of $15.50, it's pounding on it. Shares have enjoyed a big rally, climbing within a whisker of their October 2009 high. A break above $16 puts this asset back into an official bull trend... and lets us know the great "handouts and bailouts" program is keeping asset prices afloat.

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