FYI | May 08 2018
By Peter Switzer, Switzer Super Report
This is the safest contrarian risky play on stocks you can invest in!
What I’m looking at right now might be the riskiest safe play or the safest risky play of all time. One of the greatest mistakes a long-term investor can make is to care too much about their short-run returns. But I reckon at least 80% of the people reading this right now fall foul of this crazy tendency.
Before revealing my investment idea, let me take you back to some of my best, safe but risky calls to see if I have any track record to believe in.
Back to the future
In late 2008, after the US Government started to bail out its banks and car-makers and the Fed’s Ben Bernanke was talking about his ‘helicopter’ solution of sprinkling money on to the economy to beat the threat of a Great Depression, I started talking up stocks. I pointed out that after a crash the Aussie market rebounded by anything between 30-80%, but I had to wait until March 2009 before it all started.
As we faced crisis after crisis – from the US losing its triple-A debt rating, to Europe needing sub-zero interest rates, to Grexit to Brexit, to the intermittent concerns about Chinese debt, banks and ‘ghost towns’ – I’ve recommended buying quality companies or exchange traded funds (ETFs) for the best stock market indexes around the world as a “buy the dip” strategy.
Julia Lee of Bell Direct and myself got the low down on Telstra pretty well right on my TV show around September 2010, and my best recent call was BHP in the low fifteens in late 2015. That has proved to be the gift that keeps on giving!
Now, I want to use the same analysis I used with the big miner for my current investment idea.
I said then that if you bought BHP, at say $15, and took a three-year view and it made $20 in that time, you would make 33% or 11% per annum. That’s not a bad bet on a pretty good company.
Outlook for financials
On Friday in the Switzer Report webinar, we were asked about some financial stocks in light of the Royal Commission. I did some homework looking at what analysts are saying about financials right now on FNArena.
And when I looked I was surprised how positive analysts remain. Here, have a look:
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Let’s assume the analysts’ guesses are right, and we add in a very conservative 5% yield, ignoring franking credits with Bill Shorten looming, then the average gain of buying all of these stocks in equal proportion would be close to 24%.
And if this took three years to materialize, you’d still pocket about 8% per annum with franking credits on top, if Bill isn’t PM or he’s forced to water down his attack on retirees with tax refunds.
Sure, the Royal Commission could uncover some more surprising dirt, but I think the banks have copped the worst of it. Governments will have to introduce changes but the businesses themselves are already doing a lot. Most banks are rethinking their wealth strategies and if they spin them off, there will be pay-offs there for shareholders.
Also, AMP has appointed a new chairman in David Murray, who’s bound to help sort out the company and the share price is bound to reflect that.
Like BHP, which was in a hole from mid-2015 until it started climbing out in 2016, many of these financial businesses will eventually benefit from no more Royal Commission headlines, a stronger economy, a lower dollar and a new business model.
Keep your head
Old heads of the market often argue that when the market trashes quality companies, great buying opportunities are created. Sure, the banks’ business models are threatened by regulation, digital disruption and the new age rivals, and while I can see our big four banks being smaller, they’ll still be big.
I guess it will take three years to prove me right or wrong on this financial play but I reckon within two I’ll know if I’ve been on the money.
No matter what happens, we know the financials’ share prices have been beaten up and we know changes are afoot. We also know how market views on businesses such as banks change so quickly.
Do you remember when European banks were basket cases? When the great Deutsche Bank was seen as part of the walking dead? And the likes of Citibank needed to be rescued by the US Government?!
Short-term views can stop you investing in sensible long-term opportunities and at least with these ‘risky’ businesses they will pay you a decent dividend along the way.
If you have doubts, think of those people who took my advice to buy CBA at $27 during the GFC. Once I went optimistic in the media on the outlook for stocks in late 2008, radio and TV interviewers would ask: what should they buy? I played it safe then (as I do now) and recommended the big four banks, which at the time were in the top 10 safest banks in the world!
With our financials, I reckon a safe, long-term investor can bank on these stocks, especially after the Royal Commission.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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