Invest When It Can't Get Any Worse

Between 2003 - 2005, not many people believe that property investment can reap wonderful returns. But that was the start of a 7-year rally that took the URA Property Price Index Over 1996's high. Rental yield was 5% on average then and 3.3% now. People are still chasing after shiny new condominiums, landed properties etc. 

In 2003, stocks were at record low valuations. Dividend yields in S&P500 were above 10 year government bond yields. But few believed that a sustainable rally is possible. Stock markets rallied to a new high in 2007. By then, gullible investors were chasing after Chinese equities, just before the biggest crash of the century. This year, everybody is still bearish on equities, preferring to chase after ever-pitiful yields from bonds and perpetuals. But stocks turned out to be the better performer, up 14 - 15% for S&P500 vs 8 - 10% for high yield bonds and 4 - 6% for investment grade bonds.

My point is, you cannot thread the well-trodden path to make super returns in investments. You must think differently. Here are the steps:

1. If everybody hates it, check valuations. Are they cheap? 

2. If valuations are near the worst on record, then buy!

This is a simple rule. You cannot invest in the obvious. Rather, you have to invest in the despised, something the common person shun. Usually, investing in such assets comes with worries. There will be lots of "what-ifs". "What if the Eurozone fails". "What if China faces a hard landing?" "What if there are security issues in XX country?" It is precisely such worries that offer opportunities. If there aren't any worries, then the price will be much higher. "BUY ANYTHING CHEAP ENOUGH AND YOU'LL MAKE MONEY!" "IT'S NOT THE ABSENCE OF BAD NEWS THAT CAUSE INVESTMENTS TO RISE. IT'S THINGS GETTING LESS BAD."