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Where should we invest now, we should invest where the returns have lagged in the past 5 years, according to Bill Miller. He wrote: The US equity market has lagged those of the rest of the world by a wide margin for several years, and within our market the mega cap S&P names have lagged the small and mid caps, which are in the 7th year of relative outperformance, quite long in the tooth by historic standards. Part of the reason for the relative lack of interest in US stocks has been the relentless rise in short rates. Our central bank has been noticeably more hawkish than the rest of world, and money has flowed to where money was the easiest, outside the US. As we end our tightening cycle, and others remain engaged in theirs, our market should become relatively more attractive.

In a world where global liquidity may be diminishing, relatively illiquid assets are likely to begin to lose their allure. Liquidity will become more valuable. I think the most liquid market in the world, the US market, will become more attractive, and within that market, money will flow to the largest, most liquid names, which also happen to be the cheapest part of our market

The excitement and enthusiasm surrounding commodities, and the belief that they will continue to rise, is not surprising. People want to buy today what they should have bought 5 or 6 years ago; call it the 5 year psychological cycle.

Today people want commodities, emerging market, non US assets, and small and midcap stocks. Those were all cheap 5 years ago and had you bought them then you would be sitting on enormous gains. But 5 or 6 years ago, everyone wanted tech and internet and telecom stocks, and venture capital and US mega caps. The time to buy them was in 1994 or 1995, when they were cheap. But in 1994 or 1995, people wanted banks and small and mid caps, which should have been bought in 1990, and well, you get the picture.

In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years. That is long term for most people, and long enough to convince them that the malaise is permanent and to have migrated their money elsewhere, such as to whatever has done best in the past 5 or 6 years.

Given the choice of buying Commodities with a capital C, or buying capital C-Citigroup at current prices, I’ll take the latter. Check back in 5 years.

To read the complete letter

Thank you GuruFocus for the link.

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

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