An investor's shopping list for the next 10 years

People who lived through the Great Depression never lost their mistrust of shares, while those who lived through the '80s bull market don't believe in anything else, says True Wealth's Dr Steve Sjuggerud. But smart contrarian investors can learn to take advantage of this investment 'generation gap' - and buy the things their fellow investors have mistakenly learned to avoid. He has more than a few suggestions...

My grandparents lived through America's Great Depression. The impact stayed with them forever.

My grandparents were a great influence on me. As they got older, my grandmother managed to go to work five days a week and care for my grandfather full time until she died in her 80s. She never complained - to the point that we didn't realise how much she was doing until she was gone. My wife and I named our only daughter after them.

If my grandparents were still alive today, they'd be shaking their heads at how people handle their money now. They "lived lean" - somehow, they never spent money, but they never needed anything either. My grandparents didn't believe in having any debt.

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Investing in stocks: making a fortune vs. losing everything

And after living through the terrible decade of the 1930s when share prices got obliterated on both sides of the Atlantic, they never believed in buying stocks for the rest of their lives. The only things they bought were US Treasury bonds, the simplest investment on the planet. They certainly missed out on a lot of gains though.

My wife's parents, on the other hand, invested heavily in stocks throughout the 1990s when stocks soared. As a result, they'll probably always believe that stocks can make you a fortune.

Neither belief is right. There are times when stocks can make you a fortune, and other times when you can get obliterated. The key is knowing when they might string a decade of gains together, and when they might do nothing for a decade. If we can get close to knowing that secret, then we're set for life.

So I'll share with you what I think is a little known - but huge - secret. It'll help you be in the game when it's time to be in. And it'll tell you when to play it safe when it comes to stocks. The best part is, it requires you to make only one major portfolio adjustment.

And you won't make that trade for another 10 years!

Investing in stocks: learning from the past

My grandparents must have thought they were making a sensible decision by avoiding stocks. After all, if you'd lived through the Depression, and through an entire generation (seventeen years from 1930-1947) where stocks lost money, would you ever consider buying shares again? Probably not. Yet, as we now know, US stocks went on to rise by more than 500% in the next generation, from 1947 to 1965 (eighteen years).

So it wasn't very surprising that those people who invested in shares during the 1950s and made that 500% return started to believe the opposite of my grandparents - they now believed that stocks always go up. This boom ended with the ''tronics' mania - the 1960s version of the dot-com stock craze.

And what happened next? For the next generation, from 1965 to 1981 (sixteen years), the Dow Jones Industrials stock index gained less than a point!

Now I won't deny that the stock market was swinging about pretty violently during those years. We had the Vietnam War, the devaluation of the dollar in 1971, Watergate and the Nixon resignation - and, most of all, the 1974 financial crisis, which caused two years of terrifying mayhem for investors. But overall, the DJ Industrial Average at the end of that 16-year period was in exactly the same spot as it had been at the start.

Things were even worse in Britain. The FTSE All-Share Index practically halved in real inflation-adjusted terms during those same years. On paper, it didn't look so bad. The UK stock market grew by 222% between 1964 and 1981. But as anyone who was there at the time can tell you, the price of goods quadrupled during those years! You'd have lost half your savings if you'd been in British stocks at that time.

So people who invested heavily throughout the 1970s decided - like my grandparents before them - that you could never make money in shares. Instead, you needed real assets, like real estate and gold.

It's funny how it all goes in stages.

Almost like clockwork, that 70s generation of investors who saw the stock market go nowhere learned to avoid shares - then missed out on the greatest stock market boom in history. Stocks soared from the end of 1981 to the end of 1999 (eighteen years).

When you look at it over history, a rough pattern starts to emerge.

Investing in stocks: the investment pattern

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 there to see. And the simple idea you need to understand today is that we're now into a new investment generation.

If the last investment generation ended around 1999, at the end of the last 18-year upswing in share prices, and if the pattern holds, then we could see stocks do poorly for about seventeen years...or until 2016.

Since the end of 1999, we're on track once again. Stocks, as measured by the S&P500 index on Wall Street or by London's FTSE100 - are down between 9% and 13%. Meanwhile, commodities prices are up 29%. Some commodities like oil and gold are up significantly more.

And the point I want to make is quite simply that sometimes it's good to be in stocks and shares, and sometimes it's not.

How do you know when to be invested in the stock market, and when to avoid it? You can use this 17-year rule. If the last generation of investors loved shares, and made triple-digit returns on them, then don't buy them. It's too late. You missed it. Do something else.

But if the last generation of investors lost money in stocks for an entire generation, and consequently they now hate them, then it's probably time to buy. But the last generation of investors loved stocks. So just what exactly should you buy?

Investing in stocks: the Big List

Well, have I got a Big List of things to buy for you:

Asset, Performance 1970-80 (in US$)

Oil, 1,866%

Gold, 1,458%

US coins, 1,053%

Silver, 739%

Stamps, 619%

Chinese ceramics, 607%

Diamonds, 315%

US farmland, 271%

Old masters' paintings, 242%

US housing, 164%

Treasury bills, 110%

Foreign exchange, 102%

US bonds, 89%

US stocks, 81%

US consumer price index, 110%

(Source: Tomorrow's Gold, by Marc Faber)

The idea behind The Big List is pretty simple. We're buying up what worked during the last generational switch.

The last really major US stock market peak was the 1960s, when American shares comfortably doubled during a five-year period. And a few years after that, something remarkable happened. Gold, coins, commodities, and other assets all started to soar. It was as if they'd taken up the running after the stock market had run out of steam.

So we took The Big List as our blueprint. And here we are, a few years after a stock market peak once again, and the exact same things are working.

It's uncanny. I believe there's plenty more to come.

They say history doesn't repeat itself, but it rhymes. The last time around, these things soared because of fears of inflation. Commodities rose because the dollar was falling. But this time around, it may be supply driven.

As Jim Rogers, the legendary commodities investor and writer, says: 'Do you know anyone who's opened a lead mine in the last 20 years?' How about a sugar plantation? How about a coin shop?

Of course, this 10-year commodity jump won't be a straight shot up. Each successive move higher will bring in more believers, until everyone believes. And the Big List 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 shares.

By Steve Sjuggerud for The Daily Reckoning

Dr Steve Sjuggerud has worked in the investment world as a stockbroker, the vice president of a $50 million global mutual fund, an international hedge fund manager, and the director of several research departments. An expert global investor, he is frequently quoted in places like and Barron's. Steve runs the True Wealth investment advisory service, where a version of the essay you just read first appeared, alongside Steve's pick for the world's No.1 commodity stock to own over the next 10 years.