Long-term returns depend on initial P/E...

In our article, 3 legs, we exposed one of the main problems related to retirement calculations: returns on stocks depend on initial P/E. Right now, the P/E is high, so to get 7% a year could be a dream. How can we estimate the stock yield?

Crestmont Research has done an amazing job with its stock matrix (link here). How do we use it? We choose a period with similar P/E on the left, and, following the same row, check out the nominal annual returns after 20, 30 years without dividends. For instance, from 68 till 98, the yield is around 8% a year. We can appreciate that when the P/E ratio is high, the following years it is difficult to obtain high returns (red and pink colors). However, after a certain number of years, in most of the cases, we get 5% at least (6% probable). So, in our retirement calculators, we could choose 5% plus dividends (lower line of the chart) if we are going to be retired for a long time. Around 8% could make sense. It took 60 years to get that kind of return after 1929 (3% in 40 years), though.


We are usually right...

..., but you shouldn't trust us. The keyword is "usually", and one thing is being right and another is making money, as most of you know. Let's review:

EURUSD 1.06 now (link)
EURGBP 0.9 end of October (link1link2)
Bitcoin/EUR 800 now (link)
CADUSD rebound OK, still waiting (link)

Some of you may think that our opinions are a little bit vague, and it is true. First, because we don't think it is possible to be more accurate, and, second, to make sure everyone understands that nothing is sure and there is always risk involved. For instance, we like gold, however the lasts days its behavior has been awful.


Gold/oil ratio

Here we see (thanks macrotrends.net) how many barrels of oil we can buy with 1 ounce of gold. Historically, around 35 it bounces back.

This ratio should be followed closely because it is a good indicator of economic climate (see article here).


EURUSD still in the range

With Trump or no Trump the USD is perfectly in the range [1.05, 1.145]. It seems there is not going to be a major range break for a while.
The range started in 2015 and now it seems the USD has decided to go stronger (perhaps towards 1.06). Usually when the range is clear it becomes narrower or flatter with time. We will see. 


Have you thought of retiring in the Philippines?

If you are not very wealthy, but still want to enjoy a high-quality life, one option is coming to the Philippines.

First of all, we need to understand that this group of islands is huge, therefore it is possible to find our favorite spot here. We all know Manila is a dangerous city, but there are many places where safety is not an issue. The most popular expat locations are Cebu, Clark, Subic, Baguio and Iloilo.

Second, the Philippines is a very affordable country, however you want to be close to a nice hospital with decent standards. That is the other side of the coin: cheap but not Western quality. Still there are options. You just need to look for then.

And third, tax wise, if you are an alien resident, you won't be taxed on the money you make abroad, so basically if you don't work or have a business in the Philippines, you don't have to worry about paying taxes here.


Early retirement. Withdrawal. A game

1. We start with C (initial capital) and we want to retire. We want to calculate "w" or how much we can withdraw a month and have a safe future.
2. We are going to hedge the longevity risk by creating a perpetuum mobile, meaning, we are going to keep the principal intact taking inflation into account.
3. Our portfolio will consist of 5% cash, and the rest: 8/13 dividend shares and 5/13 gold.
4. w is going to come exclusively from the dividends. Why? Because we are going to suppose that the inflation will be hedged by the increase in the value of shares and gold.

w=1/12xDIVIDENDx95/100x(8/13xC)x0.7, being DIVIDEND the dividend yield. 0.7 comes from taking 30% taxes into account. The final equation can be rewritten as follows:
w=34103xDIVIDENDxM, being M the number of initial millions.

Practical point of view:
If we happen to have 2.2 million dollars for retirement and we buy shares of solid companies with an average dividend of 3.5%, we can spend 2625 USD a month and feel safe.
From another angle, we think we can live with 4000 USD a month and will receive a pension of 2500 USD a month, how much do we need to retire? w=4000-2500=1500 M=w/(34103x0.035)=1.26 millions.

Some of you might think:
1. Why gold? To hedge the risk of the stock market.
2. Isn't it too much money for such a tiny yield? Inflation is a very powerful enemy, and to overcome it we cannot overspend.


Art as a store of value

Art is not a very liquid investment. True. To consider art as an alternative currency might be exaggerated.

However, if we can get liquidity from other assets, certain specific pieces of art can be both enjoyable and the perfect store of value in the long term.

While it is easy to buy gold (all Philharmonics are the same), you need independent help to buy gold. A good advisor not connected to an art gallery can be the best idea, also in order to get the best prices.



What is happening with 2 of the apparently best currencies: Norwegian krone and Canadian dollar?

Let us compare them with the euro and the US dollar respectively.

After a minimum point of 7.3 in 2012, the krone started sinking until EURNOK=9.7 at the beginning of this year, but after that it strengthened and now it is trading around 8.9. So far, the historical range is approximately [7-10].

Somehow, something similar has happened with the Canadian dollar. Why? Because NOK and CAD are correlated with the price of commodities, particularly oil. In 2011 CAD reached 0.94 and again the USD peaked at the beginning of 2016 (1.46). Since then the CAD has been going up and now it trades at 1.33.

If you want to bet on oil and perhaps better fiat currencies, NOK and CAD could be an option.


Ray Dalio at the FED, October 4th

The full speech can be found here, however, we have extracted its main ideas:

Abnormally slow growth
Future investment returns very low
Monetary policies less and less effective
End of long-term debt cycle
QE close to the limit. Worst country Japan, then Europe, USA and China
There is a limit as to how negative bond yields can go
Gold more attractive than bonds with negative yields
Most similar period 1935-1945

This speech is a must-read paper for everyone interested in understanding the financial world we are living.


Healthcare REITs

"Looking for a safe haven?" was the title of a recent article on a newspaper. It recommended 7 healthcare REITs (Real Estate Investment Trust).

Check out the following list of REITs related to the healthcare system, but first, please, read How to choose a good REIT, it is a very brief post.

Ventas VTR (P/B=2.67)
HCP (P/B=1.97)
Care Capital Properties CCP (P/B=2.39)
Omega Healthcare Investors OHI (P/B=2.12)
Medical Properties Trust MPW (P/B=1.85)
Welltower HCN (P/B=2.39)
The Universal Health Realty Trust UHT (P/B=4.67).

I understand that we can pay a little more for the know how, management, etc..., but all of these REITs are clearly overpriced. There are better solutions in other countries. The US healthcare REIT train has already passed...


Nos han dado aire..., aprovechémoslo

Todos conocemos empresas e individuos que, de forma casi milagrosa, han podido salvar los muebles después del inicio de la gran crisis económica mundial. Están tocados y sus patrimonios en muchos casos en números rojos, sin embargo no quiebran porque mantienen un flujo de caja positivo, a diferencia de otros que se han quedado por el camino.

Los tipos de interés están en el entorno de cero y el petróleo barato, lo que es un gran alivio. Muchos respiran pensando que la situación va a quedar estática para siempre. Mucho nos tenemos que no va a ser así, pese a que la popular Carmen Reinhart (quién es, aquí) en recientes declaraciones parezca explicar que los tipos de interés se van a mantener bajos por años. Por el momento, la producción de petróleo se ha estancado/disminuido por lo que el precio por barril ha subido (uno de los activos que más ha subido porcentualmente este año):
Nos han dado algo de tiempo para intentar sanear los números, vendrá otra oleada en algún momento y habrá que estar preparado. Solo una última anotación: sanear puede implicar asumir la pérdida.


British pound

In July, we wrote a post about the future of the EURGBP or EUR/GBP (post here). So far, we've been absolutely right as we can see on the chart below:
We all have read that against the USD the situation is more dramatic for the pound, but nothing to worry about. As we explained in the case of Argentina, the British stock market is doing great because either British people prefer to own shares of a company to their currency or foreign investors find good deals in international British companies traded in the UK.


There is always room for individualism

Even in the worst circumstances exceptional individuals can separate themselves from the crowd and the establishment and show their abilities. Just as an example, when we think of architecture during the communist years in the Soviet Union, we immediately visualize brutal buildings. However, even during this period, certain architects were able to outstand their fellow architects and create master pieces like the Palace of Ceremonies in Tbilisi (by Victor Djorbenadze).

But even following the directives of the Commusnist Party, there is room to express one's thoughts. Check this wonderful building in Kaliningrad by Yulian L. Shvartsbreim:

Human beings are social, no doubt about it, however we are also individualistic and without the people that didn't follow the herd, our development would have been much slower.


Precio y valor percibido

Decir que no existe relación entre valor (tómese aquí como grado de disfrute) y precio es un poco exagerado. Sin embargo, una cierta e ineficiente relación no puede llevarnos a decidir nuestras opciones de ocio.

A mí me encanta viajar y esto cuesta. Curiosamente, los viajes más maravillosos ni de lejos han sido los más caros.

Un restaurante de 120 euros el cubierto puede ser una ganga o un robo. Recuerdo con absoluta deleitación las cenas en el Diverxo cuando aún no tenía estrellas Michelin. Era "caro" y era muy barato.

De igual forma que cuando invertimos intentamos hallar valor para un precio, en nuestra vida diaria hay que realizar un balance honesto sobre el binomio disfrute/pago. Si el hotel de 5 estrellas tiene un gran restaurante, quizás no haga falta alojarse en el hotel de precio desorbitado pero sí disfrutar de su comida.

En este ámbito, uno de los temas más controvertidos es el viaje en business class pagado por uno mismo. A veces el precio es el doble, el triple o 4 veces el precio de turista. Corresponde a cada uno pensar si no puede encontrar una mejor utilización para su dinero.


When the stocks go down...

A stock has gone down 30% (0.3), how much does it need to go up to get even? Of course it is going to be more than 30%. The formula is y=x/(1-x) where y is percentage up, and x percentage down. So, to answer the previous question, the stock needs to go up 0.3/0.7=0.43 or 43%.

We have graphed this equation (thanks fooplot.com):

As we can see, after big falls it is very difficult to recover: 70% down needs an upward movement of... more than 230%!!