"The Big List"

01/06/2006 12:00 am EST

Focus:

Steve Sjuggerud

Founding Editor, DailyWealth

While the consistently clear and unhedged advisor from Steven Sjuggerud is always of tremendous value, his recent review, entitled "The Big List" is a must-read for those with a view towards long-term trends. Here, he explains how to invest in sync with "generational" investment cycles.

"For an entire generationthe 17 years from 1930-1947 stocks lost money. Yet stocks rose by more than 500% in the next generation, from 1947 to 1965 (18 years). This boom ended with the ‘tronics’ mania, the 1960s version of the dot-com stock craze. For the next generation from 1965 to 1981 (16 years), the Dow gained less than a point. Almost like clockwork, that 70s generation of investors who saw the Dow go nowhere learned to avoid stocks and then missed out on the greatest stock boom in history. Stocks soared from the end of 1981 to the end of 1999 (18 years).

"When you look at it over history, a rough pattern starts to emerge. It's a pattern where every 17 years or so, the investing generation switches. One investment rises by triple digits, the other loses money. Again, it's not clockwork, but it is interesting. The simple idea here is that we're into a new investment generation now. If the last investment generation ended around 1999, and if the pattern holds, then we could see stocks do poorly for about 17 years or until 2016. I'll admit the evidence from a statistical standpoint is a bit flimsy, as we're only going back five generations here. But the generational idea makes sense, and the numbers do fall into place.

"Since the end of 1999, we're on track once again. Stocks (as measured by the S&P 500 index) are down about 13%. Meanwhile, commodities prices (as measured by the CRB Index) are up 29%. Some commodities like oil and gold are up significantly more. My point is not to get you to invest in commodities now based on that table. The point today is that, sometimes, it's good to be in stocks, and sometimes it's not. How do you know when to be invested in stocks, and when to avoid 'em? You can use this 17-year rule. It's basically driving at this idea: If the last generation of investors loved stocks, and made triple-digit returns on them, then don't buy 'em. It's too late. You missed it. Do something else.

If the last generation of investors lost money in stocks for an entire generation, and now hate them, then it's probably time to buy. The last generation of investors loved stocks. The table above tells us it's time to do something else. And just exactly what should you buy? What's The Big List? The Big List has been our cheat sheet for the last few years. The idea behind The Big List is pretty simple. We're buying up what worked during the last generational switch. The last stock market peak was the late 1960s. A few years after that, gold, coins, commodities, and other assets (including Chinese ceramics) started to soar. So we took The Big List as our blueprint. Here we are, a few years after a stock market peak once again, and the exact same things are working. It's uncanny. Take a look:

THE BIG LIST: What Worked the Last Time Around
Performance of various assets, June 1970-1980

Oil

1,866%

Gold

1,458%

U.S. coins

1,053%

Silver

739%

Stamps

619%

Chinese ceramics

607%

Diamonds

315%

U.S. farmland

271%

Old masters' paintings

242%

Housing

164%

US CPI (inflation)

110%

Treasury bills

110%

Foreign exchange

102%

Bonds

89%

Stocks

81%

Source: Tomorrow's Gold, by Marc Faber

"It really is crazy. The exact same things that did well in the 1970s have done well again today, practically in the same order. I believe there's plenty more to come. They say history doesn't repeat itself, but it rhymes, and the last time around, these things soared because of fears of inflation. Commodities rose because the dollar was falling. This time around, it may be supply driven. This time, commodities and the rest of this stuff will rise as people look for an alternative to stocks, and see prices rising.

"I believe we're only at about the year 1972 on this list. From 1972 to 1981, stocks were horrible performers. And the things above did well for another eight years after 1972. To me, the way you make money investing is extremely simple. You buy something of extraordinary value at a time when nobody else wants it. And you sell it at a time when people are willing to pay any price to get it. Gold coins offer one of the best investment opportunities in the world right now. You could make many times your money in the next ten years. It happened the last time around. And I suspect it'll happen again.

"Gold recently jumped to $540 an ounce last week, and then quickly gave back the gains. Be prepared, for this type of thing is going to happen. Most people think gold went straight up from $35 an ounce in 1971 to $800 in 1980. That wasn't the case at all. Gold absolutely soared until mid-1973. And then it quickly lost a quarter of its value, shaking out nearly everyone. Gold had gone up hundreds of percent by then, so everyone thought the move was done. But it wasn't. Gold soon hit new highs in 1974. Then it got obliterated again...falling from about $200 an ounce at the beginning of 1975 to about $100 an ounce by mid-1976. Those that weren't shaken out before were shaken out this time.

"Gold started coming back, and the third time was the charm. Everyone had seen gold jump twice now. They finally believed in it by the third time. The general public started clamoring to get in. That's when gold rose above $800 by January 1980, and the coin index rose 1,195%. The point is, it won't be a straight shot up. Each successive move higher will bring in more believers, until everyone believes. The list above is our cheat sheet for the next ten years. It'll be a rough ride, but we'll try not to get bucked off, and give it time to develop. Then in ten years, when everybody loves basically everything on The Big List, we sell. We get out of our Big List holdings, and we buy stocks.

"Summing up, since the last generation loved stocks, this next generation has to learn to hate them. It'll probably take ten years. At that point, we'll buy stocks with all we've got. Our friends and neighbors will think we're crazy for doing so. We'll be embarrassed to tell them what we're up to. And it's exactly where we want to be. Of course, it may not be exactly ten years. But that's a reasonable ballpark guess. Based on the size of the boom that we just went through in stocks, and how it captivated everyone, it'll probably take the full ten years to shake everyone out of believing in stocks, and into believing in The Big List."

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