Bull's Eye Investing

By: John Mauldin | Sat, Apr 17, 2004
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This week, I am going to depart from the regular format, as my book, "Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market" is in the trucks on the way to a bookstore near you, as well as Amazon.com and Barnes and Noble.com. I have arranged for a nice 30% discount on the book for you courtesy of Barnes and Noble.com, a different and excellent source for bulk orders and I launch a special letter just for readers of my book.

Today, we are going to look at some of the content in the book. Yes, a lot of the book has been in these pages over the last year. But my guess is that at least half of the book is new material, and the 50 plus graphs and charts really add to the usefulness. The chapters on actual investment strategies have not graced this weekly letter and I hope are of great value. Being able to make a thoughtful and logical case, step-by-step, for the future direction of the economy, rather than piecemeal in this weekly letter will give you a much better understanding of the problems and opportunities confronting us.

As I look through the 435 some-odd pages of the book, I find that it is very relevant to today's markets and economy. Too often by the time a book is published, it is out of date. I must admit that has been a concern. I feel I have dodged that bullet. The book speaks to the very issues confronting investors today, and much of the research and material I use will be of use years from now. As long-time readers know, I believe in backing up your beliefs with solid research. There are 14 pages of footnotes and bibliography. You can disagree with my thinking (and many do!), but you better do your homework.

The early reviews (my publisher sent out lots of manuscripts for publicity and comments) have been more than kind. While I am proud of the book and feel that it can stand on its own, it is always nice to read kind words from your peers (and superiors!) and readers. (I post a few comments below.)

This book will surprise many of my long time readers. After making what I feel is an extremely strong case that we are in the first innings of a secular bear market, I spend three very full chapters telling you how and why to buy stocks. Ironically, in a secular bear market, the little guy has a big advantage over the larger institutions and funds. I show you the sorting screens and give you access to the research which will guide you to successful investing in stocks. If you own stocks or mutual funds, these three chapters will give you a new and unique view of the stock market. Oh, to have had this when I was just starting out in the investment world. This is a book many of you will want to get for your young adult (and even older!) kids to read.

The Bull's Eye Club

I want to do something special for those of you who read the book. If you will respond to this letter and let me know you have ordered or bought the book, I am going to create a special "Bull's Eye" email list, and update various topics in the book every quarter or so, as well as do some letters where I answer reader's questions. There are certain subjects in the book that if I wrote about them in the regular letter, it would require lengthy explanations to set up the three page update. It makes much more sense to simply send those updates to people who have already read the chapters.

And now, let me give you the basic thrust of the book.

Which Way to Go?

"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cheshire Cat.
"I don't much care where--" said Alice.
"Then it doesn't matter which way you go," said the Cat.
"--so long as I get somewhere," Alice added as an explanation.
"Oh, you're sure to do that," said the Cat, "if you only walk long enough."
--Lewis Carroll, Alice's Adventures in Wonderland

Every hunter knows that you don't shoot where the duck is, but where the duck is going to be. You've got to "lead the duck." If you aim where the duck is at the moment you shoot, you will miss your target (unless the duck is flying very slowly or is very close!).

Bull's Eye Investing simply attempts to apply that same principle to investing.

In this book, I hope to give you an idea of the broad trends that will be evident for the remainder of the decade and help you target your investments to take advantage of these trends. Successful investing for the period 2004 through 2010 will require you to do things differently than you did in the 1980s and 1990s. We started the last bull market with high interest rates, very high inflation, and low stock market valuations. All the elements were in place to launch the greatest bull market in history.

Now we're in the opposite environment. The stock market has high valuations, interest rates have nowhere to go but up, the dollar is dropping, and the twin deficits of trade imbalance and government debt stare us in the face.

Which way is the stock market going? Which way are bonds going? Gold? Real estate? Where should I invest?

Wall Street and the mutual fund industry say, "The market is going up; you should buy stocks and now is the time to buy. You can't time the markets, so you should buy and hold for the long term. Don't worry about the short-term drops. And my best advice is to buy my fund."

The folks on Wall Street are in the business of selling stocks because that is how they make their real money. Whether the shares are sold directly or are packaged in mutual funds or as initial public offerings (IPOs) or in wrap accounts or in variable annuities or in derivatives, these folks primarily want to sell you some type of equity (stock), preferably today. Unfortunately, the vast majority of investors believe these pitches and don't know there are better investment alternatives.

Their advice--buy what they sell--has been the same every year for a century. And it has been wrong about half the time. There are long periods of time when stock markets go up or sideways and long periods of time when markets go down or sideways.

These cycles are called secular bull and bear markets. ("Secular" as used in this sense is from the Latin word saeculum, which means a long period of time.) Each cycle has different types of good investment opportunities. We are currently in just the first few innings of a secular bear market. The problem for Wall Street is that the products brokers primarily sell do not do well in secular bear markets. So they have to tell you that things will get better so you should buy now. Or they advise you to "have patience, and please give us more of your money."

In secular bull markets investors should focus on investments that offer relative returns. By that I mean we should look for stocks and funds that will perform better than the market averages. The benchmark by which you measure your investment strategy is the broad stock market. If you "beat the market," you are doing well. Even though there will be losing years, staying invested in quality stocks will be a long-term winner.

In secular bear markets, that strategy is a prescription for disaster. If the market goes down 20 percent and you go down only 15 percent, Wall Street proclaims your performance to be "winning." But you are still down 15 percent.

In markets like those we face today, the essence of Bull's Eye Investing is to focus on absolute returns. Your benchmark is a money market fund. Success is measured in terms of how much you make above Treasury bills. In secular bear markets, success is all about controlling risk and carefully and methodically compounding your assets.

Some will say, as they say each year, that the bear market is over: that this book is writing about ancient history. But history teaches us that is not the case. Secular bear markets can have drops much bigger than we have already seen, and last for up to 17 years. The shortest has been eight years. They have never been over when valuations have been as high as they are today.

Investors who continue to listen to the siren song of Wall Street will be frustrated at best, in my opinion, as the research I present clearly shows we have a long way to go in this bear market cycle. For those who plan to depend on their stock market investments for retirement within a decade, the results could be particularly devastating.

Bull's Eye Investing is not, however, some gloom and doom book. Despite what Wall Street wants you to believe, there is no connection between how the economy will do and how the stock market will perform. As we will see, the economy should be fine, with just the usual corrections sandwiched between periods of growth. The world as we know it is not coming to an end. It is merely changing, as it always has. There are numerous possibilities for investment growth in a secular bear market. They just don't happen to be in the standard Wall Street fare.

What I hope to do is give you a road map to the future by looking at how and why markets have behaved in the past. We will debunk many of the myths and "scientific studies" used by Wall Street to entice investors into putting their money into buy-and-hold, relative return investments. The Wall Street insiders, not surprisingly, use theories, statistics, and so-called facts that are blatantly biased and in many cases just plain wrong. When the market goes down, they just shrug their shoulders like Chicago Cubs (or my own Texas Rangers) fans and say, "Wait till next year. And buy some more, please."

Basically, in the first half of the book I am going to teach you how to fish, and in the second half I am going to tell you where the fish are. I would politely suggest that you not skip the first half of the book--do not turn to the last part simply looking for the quick investment fix. If you don't understand what is happening in the economy and world markets, you will not have confidence in your investment strategy and you'll end up chasing the latest hot investment, which is usually a prescription for pain in any type of market.

Here's how the book is organized:

First, we look at what history teaches us about the potential for stock market returns over the rest of this decade. We examine six major (and very different) ways to look at the stock market. As a quick preview, the evidence is heavily weighted to suggest that at the end of this cycle the stock market will not be too far from where it is today. The historical and mathematical analysis of bubbles also suggests that we could see the stock market drop much further before beginning the next bull market. We examine several of Wall Street's favorite sales tools, the famous Ibbotson study,Jeremy Siegel's Stocks for the Long Run, and Modern Portfolio Theory (MPT), and see why you should exercise extreme caution when they are used in a sales presentation.

We then look at why the economy can do just fine and stock markets still can fall: It all has to do with the expectation for earnings and the value investors put on those future earnings.

Most analysts track a simple bear market from peak to trough (top to bottom). Bear markets (or 20 percent plus corrections) can happen in secular bull periods (think 1987 or 1998), just as bull markets (20 percent plus up reversals) can happen in secular bear markets (think 2000, 2001, 2002, 2003). Analysts also view a secular bear market as the lengthy period over which the market makes a top, enters into a decisive down phase, and then once again returns to the old high.

I suggest that we view a secular bear market a little differently, as the period in which the price-earnings (P/E) ratio goes from very high to quite low. It is in these periods of low valuation that we can once again begin to confidently put our money back into stocks, as the rubber band is getting ready to snap back. Of course, Wall Street folks will trot out all sorts of studies that show that stocks are always undervalued and you should buy today. They did so in 2000, 2001, and 2002, and 2003. They are doing so as this book is written and published. They cheer each move up as proof they are right, and each down move as a buying opportunity. They are wrong, and we will examine why they're wrong.

That means earnings are important, and thus for a few chapters we focus on earnings. We see why Wall Street analysts are so consistently wrong (by about 50 percent per year too much), what the prospects for real earnings growth are, and how to put it all into perspective.

Next, we look at risk. As I've said, investing in secular bear markets is all about controlling risk. I believe this chapter is one of the most important in the book, but it may also be the most fun.

We discuss the most common mistakes investors make and how to avoid them. Statistics show that investors do not do as well as the funds or stocks they invest in, and we look at the causes. We examine why today's hot fund is likely to be tomorrow's loser, and what types of funds you should be looking for in this market.

We look at the future, including the demographics of the baby boomer generation, and how it will impact our investment potential. We analyze the direction of interest rates, deflation, and inflation. Then we examine the world economy and the dollar and see if we can find a potential winning theme (we do!).

The consequences of these economic problems will require some painful adjustments from those who do not make the effort to protect themselves. I show you where and how to turn problems into opportunities by seeking absolute returns in turbulent markets.

After the first section, the book focuses on specific types of investments. After telling you why we are in a secular bear market for stocks, Chapters 16 through 18 explain precisely how to invest in stocks today. Ironically, in a secular bear market, the little guy has a big advantage over the larger institutions and funds. There are great opportunities in the stock market if you know where to look. During the last secular bear market, companies like Microsoft and Intel were launched. I show you a simple way to find the hidden gems sought after by the savviest investors.

Then we look at the world of fixed income investments. The rules are changing, and what worked in the 1980s and 1990s will in all likelihood be a losing proposition for the remainder of this decade.

We then analyze what are, in my opinion, some of the better potential sources of absolute returns: certain types of hedge fund styles. We look at how Wall Street has rigged the market against small investors getting the best deals. The richest investors and largest institutions with the best-paid advisors choose these high-fee, unregulated private investments because they deliver better risk-adjusted performance than one-way buy-and-hold mutual funds. We show you how to find and gain access to these private funds, and how to use some of their strategies in your own portfolios.

Finally, we take a more thorough look at the future, and why you should be optimistic. In 1974, only a few people saw the changes and opportunities that computers, telecommunications, and the Internet would bring. The world was bemoaning the losses of basic American industry as jobs were being lost to world competition.

Today, we find ourselves once again faced with serious competition for American jobs. Our core seems to be slipping away, as the market doesn't respond. The world sees us in a much different light than just a few years ago. Few notice the new revolutions that are happening in small firms and research departments that will form the basis for the next wave of American prosperity because we haven't even begun to imagine the ways in which the next waves of change will affect us.

Will there be winners and losers in this process? Of course. Anytime there are periods of upheaval and great change, there are always those who benefit from the change and those who suffer. I will try to show you how you can position yourself to be a winner.

There is a centuries-long, if not millennia-long, pattern to these cycles. Good markets are followed by bad markets, which are again followed by good markets. They are as predictable as winter and summer. These cycles have been happening since the Medes were trading with the Persians. While no one can predict the exact day winter weather will arrive, it is a pretty good bet that winter will come. You can prepare for winter just as you plan for summer. As investors, you can be successful if you understand the economic and investment seasons we are in and plan your investments accordingly.

So, let's get you started on your way to successful Bull's Eye Investing. You can order the book by going to BarnesandNoble.com (www.bn.com/bullseye). They have it at a 30% discount. I am told it will ship as soon as it gets there, even though the website says April 29.

A quick note to brokers and investment advisors: most of you are going to hate this book. But some of you "get it." You understand why you are in the business - the prosperity of your clients, and you don't buy the Wall Street pitch. You are going to love the book and want your clients to read it. For those who order 25 or more books, we have a source where you can get a 42% discount. Just drop us a note and we will get you the form.

Some Quick Comments About the Book

"This book has more wisdom per page than any reader has the right to ask for. John Mauldin knows the score and tells the reader how to join him in keeping count."
--Peter L. Bernstein, author of the bestseller Against the Gods

"John Mauldin's widely heralded new book, Bull's Eye Investing, is a breath of fresh air and a treasure trove of market insights and information. When you think you've read 'em all, my suggestion is that you turn to this book. Simply put, Bull's Eye Investing provides information and perspective that you will not find anywhere else."
--Richard Russell, publisher of Dow Theory Letters

"Bull's Eye Investing is a lucidly written, lambently cautionary, edifying, and diverting must-read guide to the ways and means of hitting the gyrating target of a 'Muddle Through Economy.' Mauldin is the Ben Graham of the new millennium, but unlike Graham, he combines investment savvy with a sense of humor and a gift of style."
--George Gilder, author of Wealth and Poverty and the editor of the Gilder Technology Report

"Mauldin dances and weaves through a mountain of fascinating research, taking us on a well-argued tour of the past and giving us a spellbinding preview of the future. He then lays out in clearly documented detail where the investment opportunities and pitfalls of the next decade will be. In a world where the right investment information is the key to success, Bull's Eye Investing is one book that should be close to every investor's desk."
--Bill Bonner, author of the New York Times #1 business bestseller, Financial Reckoning Day

"This book is lucid, cogent, and useful. Overall, it provides an excellent guide to better investing habits and an effective antidote to standard Wall Street bromides."
--Robert R. Prechter Jr., author of Conquer the Crash

"Finally, an easy-to-read but very comprehensive study on investments in a world where, sadly, common sense is no longer so common."
--Marc Faber, editor of the Gloom, Boom & Doom Report

"Bull's Eye Investing is a scintillating tour of the art and science of long-range forecasting. With his eye fixed as it should be on the great sweep of history, John throws a much-needed splash of realism onto the wishful thinking of recent years."
--Neil Howe, Partner, LifeCourse Associates coauthor of Generations and The Fourth Turning

Field of Dreams

I feel somewhat like Kevin Costner in Field of Dreams (one of my favorite movies). I have built the "field," but will they come? Before this letter or any media or reviews go out, the book is number 28,006 at BarnesandNoble.com and number 1,115 on Amazon. We will see what happens. I do appreciate all the help many readers have been with arranging media interviews. If you have a website and would like to have a graphic of the book to link to Amazon or my book site (coming next week) let me know.

My publisher (John Wiley) has shown a lot of faith with a 30,000 initial printing, which for an investment book by a little known author is quite the first run. Pre-publication orders have been very good, especially from Barnes and Noble, who by all indications are going to give it a little extra promotion.

I will be in La Jolla most of next week, meeting with clients and managers. I will be in Las Vegas speaking at The Money Show from May 11-13. This is a massive event. They expect over 10,000 attendees, and you can register for free at http://www.moneyshow.com/main/main.asp?site=lvms04i&cid=default&sCode=002868.

Tonight my wife is off with her friends, so it is just me and the boys, which is always fun. I am starting to get settled into my new office. They have been letting high school teams play in the Ballpark in Arlington (Home of the Texas Rangers) today, so it has been fun to stop and watch every so often. Actually, considering the terrible state of Ranger pitching, I am not sure that it was high school kids. They looked as good as I saw last Wednesday night.

Next week we will get back to economic events. I will probably write about the possibility of the Fed raising rates before the election. Jim Bianco said today he thinks they will raise rates at the June meeting. Jim, my friend, I will take that bet. In fact, I will raise and say not even in August. Next week we look at my reasoning. And it does make a difference as to how you position yourself.

Life is good and just getting better. Have a great week.

Your hoping they come analyst,


John Mauldin

Author: John Mauldin

John Mauldin

John Mauldin

Note: John Mauldin is president of Millennium Wave Advisors, LLC, (MWA) a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273. MWA is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Funds recommended by Mauldin may pay a portion of their fees to Altegris Investments who will share 1/3 of those fees with MWS and thus to Mauldin. For more information please see "How does it work" at www.accreditedinvestor.ws. This website and any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest with any CTA, fund or program mentioned. Before seeking any advisors services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Please read the information under the tab "Hedge Funds: Risks" for further risks associated with hedge funds.

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John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above.


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