I'll gladly pay you Tuesday for a hamburger today.
My investment philosophy has dramatically shifted over the past couple of years. I now focus on buying stock in and bonds of companies that have tremendous yields. No more of this "I'll gladly pay you Tuesday for a hamburger today" waiting for someone to pay me more for something than I originally paid for it, thanks.
Capital gains are nice and if I do a good job at buying things on the cheap, they will eventually come...BUT I strongly believe that at best, the earnings of most companies will be flat to down over the next year or two and the multiples that investors are willing to pay for these companies are likely to remain at a depressed level for some time, both because of economic weakness and a loss of confidence caused by scandals like Madoff, Satyam, and myriad of other events.
I realize that the dividends of many companies will come under pressure as the economy struggles, so I have been focusing on rock solid blue chip companies with low payout ratios, companies with outstanding moats like pipelines and power companies, and things that have a higher claim on assets and earnings than common stock does has like preferred stock and bonds. Just yesterday, I picked up shares of inflation protected preferred stock in a company that the government has been and will continue to shovel money into which yield over 9% and a corporate bond of a solid company that has five years left on it with an annual yield to maturity of over 10%.
I'm on the fence about where the economy is headed right now. As it usually is, I think that the truth lies somewhere in the middle, between the "this is the end of life as we know it" and "we should see a recovery in the second half of '09" crowds. We will probably experience the worst recession since the Great Depression and it will likely last until at least some time in early 2010. Even when things stop deteriorating, I don't expect them to bounce back quickly.
However, I have said it before and I'll say it again, this is not going to be anything like the Great Depression. There are too many differences between what happened then and what is happening today. The government will spend, spend, spend and the Fed / Treasury will print money until it the printing presses break to prevent a depression from happening. This may not be the ideal solution, some would argue that we would be better off taking our medicine now rather than suffering the consequences of this unprecedented government intervention, which will likely be higher taxes and slower growth for many, many years and possibly higher interest rates and a precipitous drop in the value of the U.S. dollar.
There are some amazing deals out there right now in terms of yields in this sort of environment. Yields like this just weren't available over the past decade because there was so much leverage being used and so little risk aversion out there that even things like the junkiest of junk bonds weren't yielding that much more than treasuries. Fear is back and it's good for those who are seeking high yielding investments.
I am now able to buy investments that will pay me to hold onto them even if the economy takes years to recover and never resumes the leverage-fueled growth that we have experienced over the past two decades. Even if interest rates begin to rise, I'll gladly take 8%, 9%, 10% returns on my money given what is going on right now. I have picking up assets with tremendous yields and I have been spreading my bets around so if any one company implodes I will not experience much pain.
That's all I have for now.