Buying a Horse of a Similar Shade: Europe

I put the latest issue of Peak Income together from, of all places, Mamacona, Peru, a seaside town on the outskirts of Lima, where earlier this month I attended the annual Concurso Nacional, or national horse show.

For aficionados of the Peruvian Paso, the country’s signature breed, the show marks the single most important week of the year, outranking even Christmas and New Year’s Day. If you argue to the contrary with a Peruvian cowboy, you’re likely to get horsewhipped.

I’m the first to admit I’m not a true “aficionado.” To have afición is more than simply being a “fan,” as the Spanish-to-English translation suggests. The word additionally implies deep knowledge, expertise, and instinct.

Though I make the effort, I have none of the above. At all.

Despite growing up in Texas, I can barely distinguish a horse from a mule. But my wife’s family – who have bred Peruvian Pasos competitively for three generations – have afición in spades, and I brought my wife and kids to Peru to root for my father-in-law and brother-in-law in the competition.

My beat is income investing, not show horses. But you’d be surprised how the two can overlap.

A good, prize-winning horse isn’t that different from a stock.

Sure, you can try your luck “flipping” a horse, buying it low and selling it high to another aficionado. Or, you can turnrn it into an income vehicle and hold on to it for a while, collecting “dividends” along the way via stud fees.

As a case in point, my wife’s grandfather died young, in his 50s. But the stud fees generated from his champion of champions stallion supported his widow in retirement for years.

That horse would likely still be paying her retirement bills but for the fact that horses, unlike dividend-paying blue chips, don’t live forever.

Playing with the numbers a little, a $250,000 prize-winning stallion could generate something in the ballpark of $10,000 to $20,000 in annual stud fees depending on how aggressively you wanted to breed him. That works out to a “yield” of 4% to 8%.

I’m not suggesting you run out and buy a show horse to fund your retirement needs. That would be utterly absurd. And I can’t imagine it would end well for you.

Apart from the initial cash outlay to buy the horse, you’d need infrastructure (like a stable to put him in) and a small army of personnel to care for and feed him.

If the cash expenses didn’t bleed you dry, the headache of dealing with the logistics would likely drive you mad.

I prefer income investments that sit quietly in my brokerage account and don’t require food, water, and veterinary expenses.

These are the kind that I recommend in my income-based newsletter, Peak Income.

Last month I made the case for diversifying globally. And – to subscribers earlier this month – I extended the argument, recommending a fund featuring healthy allocations to the major European exchanges and broad sector diversification. I expect it to generate double-digit returnrns during our holding period.

While I still see upside in U.S. stocks, momentum has clearly shifted overseas. Just take a look at the year-to-date returnrns of our major trading partners in Europe and of emerging markets collectively.

French, emerging-market and German stocks are all up over 17%. Even the U.K. – which faces two years of bitter Brexit negotiations and a very uncertain future – is modestly outperforming this year.

There are a couple reasons why American stocks are lagging. The first is the effect of currency moves. The U.S. dollar has been weak this year, and assets denominated in foreign currencies have better returnrns when translated into dollars.

But there’s an even bigger reason, one that I detail in this month’s issue, where we’re buying Europe on the cheap.

If you’ll allow me a baseball analogy, the bull market in American stocks is probably somewhere around the seventh-inning stretch, whereas we’re barely past the ceremonial first pitch in most of the rest of the world.

Don’t get me wrong, there’s a lot to be concernrned about in Europe long term: demographic problems, the refugee crisis, the persistent threat of terrorism, and, maybe worst of all, the euro currency itself. It might be the worst idea in a long history of bad ideas to come out of the Continent.

But today, with Europe’s cheaper valuations and its stronger momentum, it makes all the sense in the world to buy European stocks with a relatively short time horizon… and to get paid handsomely while doing it.

Don’t believe me? My overseas recommendation from last month is already up about 4%, and that’s with a low-risk approach, as we seek to do in Peak Income. So you can rely on steady streams of income, whether you’re in retirement, close to it, or just thinking about it.

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Charles Sizemore

Portfolio Manager, Boom & Bust Investor

Charles Sizemore

Charles specializes in finding value opportunities and income plays outside of the mainstream stock market.