For Richard Bernstein, choosing specific stocks is not what is most important for successful investing. In his more than 25 years as a Wall Street strategist with Merrill Lynch and other firms, he has spent most of his time looking at the big picture, figuring out what size companies were going to do best, which countries would shine and what industries would outperform each year. This approach to investing wound up making huge profits for his institutional and individual investors and helped keep them out of trouble when the market plunged.
We asked him how this approach can work now for our readers…
START WITH THE BIG PICTURE
Different areas of the stock market tend to excel at different times, depending on powerful trends in the US and global economies. For instance, over the past decade if you held shares of a variety of large-cap growth stocks—those issued by big companies with promising growth potential—you struggled no matter how talented a stock picker you were, while investors who were positioned in commodity investments, such as gold, earned double-digit annual returns.
The secret is determining what the emerging economic environment is like and identifying overlooked and underestimated areas of the stock market that are best-suited for that new environment. That’s where 90% of my mutual fund’s returns are likely to come from.
Letting the big picture tell me where to invest helped me sidestep the bursting bubble of tech stocks in 2000 and the collapse of housing and financial stocks in 2008.
The problem with stock pickers who ignore economic trends is that they wind up chasing yesterday’s story, investing in companies that have done well in the recent past, often just as the old trend that benefited them is on the wane.
Right now, there are five “Big Picture” trends that I think can lead us to the best areas of the stock market…
START WITH THE BIG PICTURE
Different areas of the stock market tend to excel at different times, depending on powerful trends in the US and global economies. For instance, over the past decade if you held shares of a variety of large-cap growth stocks—those issued by big companies with promising growth potential—you struggled no matter how talented a stock picker you were, while investors who were positioned in commodity investments, such as gold, earned double-digit annual returns.
The secret is determining what the emerging economic environment is like and identifying overlooked and underestimated areas of the stock market that are best-suited for that new environment. That’s where 90% of my mutual fund’s returns are likely to come from.
Letting the big picture tell me where to invest helped me sidestep the bursting bubble of tech stocks in 2000 and the collapse of housing and financial stocks in 2008.
The problem with stock pickers who ignore economic trends is that they wind up chasing yesterday’s story, investing in companies that have done well in the recent past, often just as the old trend that benefited them is on the wane.
Right now, there are five “Big Picture” trends that I think can lead us to the best areas of the stock market…
1 – US STOCKS WILL SHINE
The market crash of 2008 has cast a long shadow, rattling many Americans so much that they still have little confidence in US companies, even though the stock market has posted two winning years in a row. With US unemployment still at nearly 10%, investors feel inclined to wait for signs of a stronger economic recovery before jumping in.
But by the time the US has regained its full economic strength and the unemployment rate is back to its historical average of 5% to 6%, the lion’s share of the stock market rebound will have already passed.
Even though the economic recovery is a weak one, it is no weaker than the recovery of 1991 or 2001. Many investors don’t realize this and remain enamored of BRIC (Brazil, Russia, India and China) countries, even though the emerging-markets stock trend has run its course, leaving little room for further gains over the next several years.
BRIC inflation rates are rising rapidly, and their stocks have become very expensive over the past dozen years. In a sign that the BRIC stocks are fading, the Standard & Poor’s 500 stock index far outperformed BRIC stocks last year and early this year, on average.
2 – BET BIG ON SMALL-CAP
Small-cap stocks likely will do better than large-company stocks. I am most confident of this trend. Small-caps tend to perform best for several years coming out of a deep recession.
Improvements in economic activity lead to higher rates of growth in sales and earnings for smaller firms, relative to large companies. Last year, small-cap stocks returned 27%, on average, compared with 15% for the S&P 500.
From a global perspective, US small-cap stocks have twice the average 2011 projected earnings growth of Chinese stocks and, by my calculations, are selling for about 50% less than Chinese stocks based on stock-price-to-sales ratios.
In addition, I expect mergers and acquisitions to heat up this year because so many large companies are flush with cash and looking to buy up small, growing firms. As deals are announced, investors tend to bid up shares of other small companies in the same sector.
3 – GOLD LOSES ITS LUSTER
Last year, gold had its 10th consecutive year of gains, driven by investor nervousness over the $14 trillion US national debt and fears of a depreciating dollar and hyperinflation. But the dollar actually bottomed out in 2008, and inflation expectations remain well under control.
4 – ENERGY IS POWERFUL
As we enter the middle of the US economic recovery, the historical trend is for energy stocks to take leadership positions. That’s happening now as increased global demand for oil, natural gas and coal—along with a pickup in industrial production—will likely drive up the price of energy stocks this year.
5 – EUROPE RECOVERS
Heavy pessimism still hangs over European markets, which currently are the cheapest in the world. But the new trend here is that European corporations are doing better, even if the government balance sheets of many countries that use the euro still are a mess.
