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<ul class="summary-list"><li>Investors are living in a "Barbie"-style fantasy world where everything's great, Cole Smead says.</li><li>They're ignoring the risks of inflation, more interest-rate hikes, and larger bond yields, he says.</li></ul>Stockholders are living in a "Barbie"-style dreamworld if they think stubborn inflation and high interest rates won't crush their future returns, Cole Smead says.Investors can earn a risk-free 5.5% return from 3-month Treasury bills today, Smead Capital Management's CEO and portfolio manager noted in a memo titled "<a href="https://smeadcap.com/missives/stock-investors-in-barbieland/" target="_blank" rel="noopener">Stock Investors in Barbieland</a>" on Tuesday. Stocks should have declined to reflect their relatively less attractive returns versus bonds, and the greater risks they pose to investors, he said."When you see short-term rates move over 500 bps, something should markedly change in how investors value assets," he said. Despite the "tectonic rise" in yields, the S&amp;P 500 remains highly valued on both a price-to-earnings and price-to-book basis, he continued.Indeed, the S&amp;P 500 has jumped 16% and the Nasdaq Composite has surged 32% this year. Many investors have piled in because they're excited about artificial intelligence, and hopeful the Federal Reserve can crush inflation without raising interest rates too high and causing a recession.Inflation spiked as high as 9.1% last summer, spurring the Fed to hike interest rates from nearly zero to north of 5%. The central bank's efforts have helped to slow the pace of price growth hto about 3% in recent months, not far off its 2% target.However, inflation acts like "gravity" on stocks, and if it accelerates to 4% or 5%, the Fed could hike rates more than expected, Cole said.The market's disregard for those risks indicates that "stock investors are just another Ken in Barbieland," Smead said. "After all it's a fantasy land.""The higher nominal rates that inflation may cause are not being considered by stock investors in valuing individual businesses or the stock market at large," he added.The upshot is the fund manager expects the twin pressures of lingering inflation and larger risk-free returns to weigh on stocks."These valuations won't go up like a six-inch heel," he said. "Flats may be more fitting for thinking about stock returns going forward."Smead's father and the fund's chief investor, Bill Smead, issued an <a href="https://markets.businessinsider.com/news/stocks/smead-ai-big-tech-stock-market-outlook-dot-com-bubble-2023-8">even more pessimistic outlook</a> in August. He warned the AI frenzy had surpassed the internet hype of the late 1990s and early 2000s, and declared it was bound to end badly."This financial euphoria episode has gone to a sustained high that makes the dot-com bubble look like small change," he wrote. "Manias die in vicious ways."

Investors are in a 'Barbie'-style fantasy as they brush off market risks, Smead Capital Management CEO warns

<ul><li>Technology stocks could be a "disaster waiting to happen," the bosses of <keyword id="161434" type="COMPANY" weightage="60" keywordseo="Smead-Capital-Management">Smead Capital Management</keyword> said in their third-quarter newsletter this week.</li><li><keyword id="18635" type="CITY" weightage="60" keywordseo="Amazon">Amazon</keyword>, Facebook, Apple, and Google wield monopoly power over their addicted users, and the pandemic has only increased people's reliance on their products and services, <keyword id="335279" type="PERSON" weightage="60" keywordseo="Bill-Smead">Bill Smead</keyword> and his team said.</li><li><keyword id="6358815" type="UNKNOWN" weightage="60" keywordseo="tech">Tech</keyword> investors could face brutal losses if regulators dismantle the companies and tax them more effectively, they said.</li><li>Smead and his team are betting on companies that provide necessities such as Target and American Express.</li><li><a href="https://www.businessinsider.com/international?r=US&amp;IR=TIR=T">Visit Business Insider's homepage for more stories</a>.</li></ul><keyword id="950785" type="PERSON" weightage="60" keywordseo="growth-stocks">Growth stocks</keyword> may be a "disaster waiting to happen," the heads of Smead Capital Management warned in their <a href="https://smeadcap.com/wp-content/uploads/2020/05/Smead-Newsletter.pdf">third-quarter newsletter</a> this week.Amazon, Facebook, Apple, and Google have monopoly power over their addicted users, Bill Smead and his co-portfolio managers, Tony Scherrer and <keyword id="10118853" type="UNKNOWN" weightage="60" keywordseo="cole-smead">Cole Smead</keyword>, told their shareholders. Offering services such as YouTube and Instagram for free means rivals can't compete with them on price, they continued.Read more: <a href="https://www.businessinsider.com/stock-picks-to-buy-jim-osman-investing-expert-3-winners-2020-10">200-plus money managers pay thousands to see which stocks are on Jim Osman's buy list. He details 2 he sees doubling and says one has at least 50% left to soar.</a>The coronavirus pandemic has only strengthened their position by putting their userbase in a "state of near-complete dependence," they added. Millions of people, scared or unable to leave their homes, are relying more on their devices and apps to stay connected, productive, and entertained.However, shareholders in the US technology titans could suffer heavy losses when regulators drop the hammer, the trio said.They pointed to Amazon's profits from its cloud-computing division, which enable it to cut prices in its core e-commerce business and kill competitors. Its sky-high valuation could be "obliterated" if the two segments are separated and the company is lumped with a massive tax bill, they said.Smead and his team managed $1.6 billion in assets as of September 30. Their flagship portfolio has returned an average of 10% over the past 12 years, but was down 9.5% for the year at the end of the third quarter.The trio are betting on companies that provide tangible necessities such as pharmaceuticals, oil and gas, houses, and storage. Their biggest holdings include Target, homebuilders Lennar and NVR, biopharmaceuticals giant Amgen, and American Express.Read more: <a href="https://www.businessinsider.com/long-term-stock-picks-recommendations-investing-strategy-parnassus-lori-keith-2020-10">Lori Keith's mutual fund has grown 98,000% in 12 years by focusing on unflashy companies. She told us about 7 such stocks that thrived in the recession — and will likely do even better in the recovery.</a>"Value has beaten growth by over 3% per year for 94 years and is the most depressed it has been in 57 years," they said in the letter. "We look forward to the next five years as we believe the remedies will play out."Cole Smead echoed his team's comments in a <a href="https://www.cnbc.com/2020/10/15/smead-nightmare-us-stock-valuations-driven-by-young-dumb-investors.html">CNBC interview this week</a>, arguing the market has ballooned to unfounded, unsustainable levels. US stocks have become a "total nightmare" driven by "young and dumb investors," he said.

Amazon, Facebook, and other tech stocks may be a 'disaster waiting to happen,' investor Bill Smead says

<ul class="summary-list"><li>Major banks like Goldman Sachs walloped Wall Street expectations thanks to dealmaking fees.</li><li>Investment banking has made a comeback, and bigger bonuses are in the cards, too.</li></ul>Christmas came early for investment bankers.The biggest banks on Wall Street reported a huge boost in dealmaking fees this quarter after a two-year slump. Investment bank revenue surged 30% on average at <a target="_blank" href="https://www.businessinsider.com/goldman-sachs-3q-results-dealmaking-trading-resurgence-david-solomon-2024-10">Goldman Sachs</a>, JPMorgan, Bank of America, Citigroup, and Morgan Stanley, according to Wells Fargo analyst Mike Mayo."We continue to believe we are in the early stages of a multiyear capital markets recovery," Morgan Stanley CFO Sharon Yeshaya said during an earnings call. Morgan Stanley's investment bank revenue surged 56% year over year to $1.46 billion, beating Wall Street expectations.Several tailwinds are at play, including tempering inflation and pent-up demand. Debt underwriting has surged as companies rushed to take advantage of <a target="_blank" href="https://www.businessinsider.com/fed-cuts-interest-rates-how-much-september-fomc-powell-inflation-2024-9">interest rate cuts</a>, S&amp;P Global's Nathan Stovall told BI. After years of recession fears, there is more optimism the Federal Reserve can deliver a <a target="_blank" href="https://www.businessinsider.com/inflation-recession-outlook-prediction-labor-market-job-additions-interest-rates-2024-10">soft landing</a>, he said."You're seeing corporates get more comfortable with the world they're operating in, and they're willing to take more risks, and this leads to more M&amp;A activity, more equity raising, things like that," said Stovall, director of financial institutions research.An incoming flurry of dealmaking could reflect a broader economic recovery, as lower borrowing costs make it easier for companies to fund acquisitions. This past quarter saw several <a target="_blank" href="https://www.businessinsider.com/megamergers-deals-m-a-wall-street-comeback-2024-9">megamergers</a>, such as candy giant Mars buying the maker of Pringles for <a target="_blank" href="https://www.businessinsider.com/mars-buying-pringles-cheez-it-maker-kellanova-36-billion-deal-2024-8">nearly $36 billion</a>. Citi advised Mars and provided $29 billion in debt financing with JPMorgan. Paramount <a target="_blank" href="https://www.businessinsider.com/paramount-global-agrees-to-merge-with-skydance-shari-redstone-2024-7">agreed to merge</a> with David Ellison's Skydance Media. Bank of America is one of Skydance's advisors on the $8 billion deal.Wall Street CEOs, however, are cautious about their enormous wins. <a target="_blank" href="https://www.businessinsider.com/jpmorgan-earnings-q3-jamie-dimon-economy-geopolitics-banking-wall-street-2024-10">JPMorgan's Jamie Dimon </a>warned on an earnings call that the favorable interest rate conditions "may not prevail or be the ongoing conditions late next year" and of geopolitical turmoil that is "treacherous and getting worse." Goldman Sachs CEO David Solomon noted that while the bank had a healthy backlog, M&amp;A and equity activity is still well below 10-year averages.Risks to this comeback loom large, Mayo wrote in a research note."There's little question to us that activity and revenues reflect a degree of bull market banking," he wrote. "This could end based on potential results and reactions to the upcoming November elections, a stock market decline, and/or unexpected changes in rates (esp. higher)."Portfolio manager Cole Smead described the results as a "head fake." Smead is watching the US's ballooning deficit, concerned it could <a target="_blank" href="https://www.businessinsider.com/fixed-income-investing-tips-national-debt-yield-curve-steepening-treasury-2024-9">push up bond yields</a> and the cost of borrowing, which would discourage dealmaking."This can go on for maybe a quarter or two more, but it is likely going to fall apart long before it ever gets back to anywhere near the numbers of 2021," said the CEO of Smead Capital Management, which owns shares of Bank of America and JPMorgan. "Ultimately, this equity market, with many risks out there, is complacent and doesn't care. The problem is when the chickens come home to roost, this activity will go back to low levels again."<h2 id="d7f46fb6-2aae-4454-a462-5b0acb5aa3e8">The potential 'X-factor'</h2>While the risks are real, this quarter's upswing isn't necessarily a blip. For the five banks, Mayo estimated that capital markets revenue will grow 8% in 2025 to $31.7 billion and another 7% to $34 billion in 2026.There's also what Mayo calls "the X-factor": the $1 trillion-plus of dry powder held by private equity firms.Jon Gray, president and chief operating officer of private equity giant Blackstone, said that anecdotally, the number of confidentiality agreements more than doubled in September compared with a year ago."Now, that doesn't necessarily mean it's going to turn into that volume of deals. But it clearly shows you there is more enthusiasm," Gray said during the firm's earnings call Thursday. "And we know in the private equity world, there's a lot of companies that need to be sold, similar story in real estate."Finance professor David Stowell told BI that while the upcoming US election and overseas conflict pose economic risks, the sponsors can't sit on the sidelines indefinitely."They know that they always have to risk-adjust their investments," said Stowell, an investment banker for two decades before joining the Kellogg School of Management at Northwestern University. "They pretty much have to spend the money, or their kind of business goes away."Stovall acknowledged that one quarter doesn't make a trend but said that economic data, such as job creation numbers, points to a <a target="_blank" href="https://www.businessinsider.com/us-economy-outlook-data-points-to-soft-landing-no-recession-2024-9">soft landing</a>. This bodes well for dealmaking for the rest of the year and 2025."I'm cautiously optimistic," he said. "It is wise to not jump up and down and say things are going to go straight up from here, but I do think it's more encouraging than it's been for a while."For now, some Wall Streeters can already count on larger bonuses, according to compensation consultant Alan Johnson. With debt and equity capital markets thriving, underwriters will get the biggest gains. For debt and equity underwriters, he estimated bonus increases of 25% to 35% and 20% to 30%, respectively. M&amp;A bankers will have to wait longer for a significant boost and should expect maybe a 5% or 10% uptick this season."Traditionally, the sexiest area would be M&amp;A — the pipeline looks really good, but most of the closing fees would be for 2025," said the founder of Johnson Associates. "The headlines around M&amp;A are really going to be next year's story."

Investment banking has made a multibillion-dollar rebound, but it's too early to pop the Champagne 

<ul class="summary-list"><li>Stocks could drop 30% over the next few years, according to Smead Capital portfolio manager Cole Smead.</li><li>That's because the Fed risks cutting rates too early, causing inflation to spike and investors to flee the market.</li></ul>The Fed could end up making another big policy mistake this year — one that could end up sparking a double-digit plunge in the stock market.That's according to Cole Smead, the CEO and portfolio manager of Smead Capital Management. While other Wall Street strategists have raised their hopes for a soft-landing and immaculate disinflation, Smead thinks the Fed is on the cusp of making the same error it did in the 70s, when the central bank saw cooling inflation and prematurely began to slash interest rates.That ended up being disastrous for the economy, plunging the US into a stagflationary spiral and, eventually, a recession. Stocks, meanwhile, were obliterated, with the Dow Jones Industrial Average seeing 45% of its value wiped out over the course of two years.Today's Fed looks poised to make that very same mistake — so much so that the current investing environment resembles 1972, Smead said. That was right before the stock market saw one of its <a href="https://www.businessinsider.com/worst-stock-market-crashes-2011-8">worst crashes in history</a>.The most likely outcome? Inflation will roar back up and stocks drop 30% from their current levels over the next few years, Smead warned."It's the worst-case scenario. I would also argue, I think it's the most likely scenario," he told Business Insider.<h2>Fed rate cuts galore</h2>That spells big trouble for the rest of Wall Street, where most strategists are expecting some, if not small upside for the S&amp;P 500. Investors have been waiting for the Fed to lower interest rates in the economy and are ambitiously pricing in rate cuts. Six by the end of 2024, to be exact, according to the CME FedWatch tool.That market-wide forecast could be tempered a bit after Fed Chair Jerome Powell was more hawkish than expected during remarks on Wednesday, after the Federal Open Market Committee <a href="https://www.businessinsider.com/did-federal-reserve-cut-interest-rates-continue-pause-inflation-recession-2024-1" target="_blank" rel="noopener">held rates unchanged</a>. He expressed caution around the central bank's willingness to rush ahead with a rate cut at a time when inflation is "still too high" and the path forward is "uncertain." <a href="https://markets.businessinsider.com/news/stocks/stock-market-news-fed-rate-cut-caution-outlook-inflation-economy-2024-1" target="_blank" rel="noopener">Stocks tanked</a> as a result.But if the Fed does forge ahead with cuts as early as March, there's a very real possibility it will do so at a time when inflation still hasn't been fully tamed, Smead said, given that multiple price pressures still linger in the economy. The US debt, which is inherently inflationary, keeps climbing higher, with the total federal debt balance notching $34 trillion this year. Meanwhile, the <a href="https://www.businessinsider.com/baby-boomer-retirement-surge-spark-forever-labor-shortage-jobs-workers-2023-5">labor market is still suffering from a shortage of workers</a>, which has helped push wages higher and risks stoking inflation."Structurally, nothing has changed other than the supply chain has obviously got tighter and oil prices have come down," Smead said, referring to supply disruptions from the pandemic, which temporarily stoked inflation and oil prices. "The other structural problems have not changed." That suggests the Fed runs a serious risk of cutting interest rates too early. And if inflation ends up coming back to life, that could spark a disaster in markets, causing investors to get spooked and rush to take their cash out of overpriced stocks.Most at risk are the "<a href="https://markets.businessinsider.com/news/stocks/tech-stocks-tesla-nvidia-apple-microsoft-amazon-the-magnificent-seven-2023-6">Magnificent 7</a>" stocks, Smead said, which have dominated most of the market's gains last year.Taking the 1970s parallel further, he points out that the "Nifty Fifty" — a group of large companies that dominated in the market during the first half of that decade — ended up crashing in 1973 and 1974, with stocks like Disney and Coca-Cola wiping out more than 50% peak-to-trough.Smead sees a 50-50 chance that stocks will follow that same playbook, with the overall market losing around 30% of its value over the next two years as inflation spikes. In another scenario, he sees a 25% chance that stocks will do poorly without a spike in inflation.That leaves just a 1-in-4 chance stocks will continue to do well in the next few years, Smead warned. In that scenario, inflation will remain low, though the US economy will be in a full-fledged recession."That part of the rhyme I think looks very miserable," Smead said of the parallels to the 70s. "Our next trouble [could be] waking up in a world where inflation picks up and stock returns are nose diving," he added. "That's a probable path."Fears of a coming <a href="https://markets.businessinsider.com/news/stocks/stock-market-crash-fed-rate-cuts-economy-investors-1987-finance-2024-1">stock-market correction</a> have grown in recent weeks as investors eye an uncertain economic backdrop and the looming risk of recession. As of December, more than 60% of investors see more than a 10% chance of a 1987-style stock market crash happening in the next six months, according to Yale's US Crash Confidence Index.Investors are particularly concerned for the Magnificent Seven, as tech giants like Tesla look overvalued. In a previous research note, Smead Capital warned investors of the risk of a <a href="https://markets.businessinsider.com/news/stocks/stock-market-crash-outlook-2024-tech-bubble-ai-artificial-intelligence-2023-12">stock market failure</a>, an event that could wipe out the <a href="https://markets.businessinsider.com/news/stocks/stock-market-outlook-failure-2024-sp500-tech-bubble-ai-investing-2023-12?_gl=1*hpmgmq*_ga*MjMxMzA1Mzg2LjE2NTY0NDQxNTU.*_ga_E21CV80ZCZ*MTcwMjMwMzA0Ni42NDAuMS4xNzAyMzA2Nzk4LjYwLjAuMA..">most expensive stocks on the market as much as 70%</a>.

The Fed risks making a big policy mistake this year that could spark a 30% drop in the stock market, portfolio manager says

<ul class="summary-list"><li>Unlike the 2010s, expect higher interest rates, persistent inflation, and tight job markets in the 2020s.</li><li>Experts say diversification, mid-cap stocks, and bonds offer opportunities in these conditions.</li></ul>Few strategists expect the next decade to look anything like the pre-pandemic economy.The recovery from the financial crisis was defined by near-zero interest rates, minimal inflation, excess labor, and efficient global trade.By contrast, the economy of the 2020s will likely be defined by higher rates, persistent inflation, and a tight jobs market, said Peter Bates, the global select equity strategy portfolio manager at T. Rowe Price.Business Insider spoke with nine professional investors, strategists, and financial planners to hear how the next decade will differ from the last 10 years — and how people can make the most of it, both through investing and by better managing their personal finances.<h2>A new market regime requires a strategy switch</h2>In all likelihood, the next decade will look nothing like the 2010s, said Damanick Dantes, a global markets portfolio strategist at Global X. Investors will have to contend with tight financial conditions for years instead of low interest rates and <a target="_blank" href="https://www.investopedia.com/terms/q/quantitative-easing.asp">quantitative easing</a> (QE)."We're definitely entering a new regime," Dantes said. He added: "You're not going to get the same returns that you got out of a Covid situation or what you got when rates were artificially suppressed for a very long time, QE-driven era. Now we're entering a tighter era where rates were structurally higher than normal. So a higher base rate means that your expected returns would be lower than what you've been accustomed to."But even in a tougher backdrop, Dantes sees opportunities for investors. International equities have stable dividends and enticing valuations that could help them outperform in the next few years, the strategist said. He's also bullish on infrastructure stocks as the US invests heavily in that area and as companies move their supply chains back home to reduce political risk.This economic environment reminds fund manager Matt McLennan of the late 1960s and early '70s. Back then, low interest rates gave way to rampant inflation that was only extinguished by drastic, valuation-crushing rate hikes. International stocks topped their US counterparts back then, McLennan said, adding that defensive, safe-haven assets like gold also excelled."If there is a regime shift, then what has worked could be quite different from what does work," McLennan said.<h2>Quality companies at a reasonable price will outperform</h2>McLennan is positioning for a new backdrop through the First Eagle Global Fund (<a target="_blank" href="https://markets.businessinsider.com/funds/first-eagle-global-fund-class-a-us32008f5070">SGENX</a>), which he runs with co-manager Kimball Brooker. The fund has <a target="_blank" href="https://affiliate.insider.com?h=8d2677f4a9aa7a9a694b109abb922b9c7c64ee3e920be9cb423f3afa776bb314&amp;postID=655e422c1b08829c5b328d8d&amp;postSlug=how-to-invest-make-money-work-next-decade-2020s-2023-11&amp;site=bi&amp;u=https%3A%2F%2Fwww.morningstar.com%2Ffunds%2Fxnas%2Fsgenx%2Fperformance">outperformed 89% of its peers</a> in the last 15 years, according to Morningstar, rising an average of 9.3% per year in that span.The two stick to their <a target="_blank" href="https://www.businessinsider.com/how-to-invest-stock-market-strategy-recession-best-fund-manager-2022-11">investing strategy</a>, which centers around finding leading companies with sizable profit margins, strong management teams, and tangible competitive advantages."Our focus is to find businesses that are stable and cash-flow generative that become available at a reasonable price," McLennan told Business Insider at First Eagle Investments' 2024 outlook conference. "And we're willing to commit capital to that business for the next decade or next couple of years, depending on the situation."While McLennan doesn't make market calls, he's keeping a close eye on long-term shifts in the market backdrop. The 32-year market veteran, formerly of Goldman Sachs Asset Management, expects interest rates to <a target="_blank" href="https://markets.businessinsider.com/news/stocks/stock-market-news-today-trade-federal-reserve-fomc-rate-hike-2023-9">stay higher for longer</a> instead of returning to pre-pandemic levels. That means the growth stocks that dominated for years may come back to earth in the mid-2020s."If we're in a window where the cost of capital is normalizing higher, then I just would say that it makes sense, to me, to pay attention to valuation in your investing," McLennan said. "The biggest victims of an increase in the cost of capital are the longest-duration growth stories."<h2>Don't dismiss mid caps in the mid-2020s</h2>Nicola Stafford, who runs the Fidelity Mid-Cap Stock Fund (<a target="_blank" href="https://markets.businessinsider.com/funds/fidelity-mid-stock-fund-us3161284043">FMCSX</a>), is also preparing her portfolio for stickier inflation and persistently high interest rates."That era seems to be over," Stafford said of the low-interest-rate backdrop. "It's a complete shift from my 20 years of investing."Stafford focuses on mid-cap companies since they have more room for growth than large caps and are often more resilient than small caps due to their proven management teams."They're a little more off the radar," Stafford said of mid caps. "I think it's just kind of an interesting hunting ground for growth, for compounding over time and for really developing an edge versus the market, which is the basis of active management."Instead of chasing the next quarter, Stafford said she spends most of her time thinking about the long-term earnings power of a company."By long-term, I mean three to five years out," Stafford said. "The market's not thinking about what's happening in three years — they're thinking about what's happening in three months."There's plenty of hype about innovation in the healthcare and technology sectors, Stafford said, but she thinks it's justified. Although she didn't cite individual names she's bullish on, the second-largest holding in her fund is managed care firm Molina Healthcare (<a target="_blank" href="https://markets.businessinsider.com/stocks/moh-stock">MOH</a>).Bates, the T. Rowe Price portfolio manager, also likes healthcare companies due to their solid long-term demand prospects. He also recommends that investors diversify away from growth stocks that thrived under low rates and instead broaden out to value-oriented names.Examples of popular exchange-traded funds (ETFs) tied to value and healthcare stocks include the Vanguard Value ETF (<a target="_blank" href="https://markets.businessinsider.com/etfs/vanguard-value-index-fund-etf-shares-us9229087443">VTV</a>), the iShares Russell 1000 Value ETF (<a target="_blank" href="https://markets.businessinsider.com/etfs/ishares-russell-1000-value-etf-us4642875987">IWD</a>), the Health Care Select Sector SPDR Fund (<a target="_blank" href="https://markets.businessinsider.com/etfs/health-care-select-sector-spdr-fund-us81369y2090">XLV</a>), and the iShares Global Healthcare ETF (<a target="_blank" href="https://markets.businessinsider.com/etfs/ishares-global-healthcare-etf-us4642873255">IXJ</a>).<h2>Pricey US stocks make diversification a top priority</h2>Various valuation measures show that US stocks are richly valued. The Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio is 30.7, which is <a target="_blank" href="https://www.multpl.com/shiller-pe">around levels seen during the height of the dot-com bubble</a>.Over the long-term, high valuations typically lead to poor returns. Valuations explain 80% of a stock's returns over a decade, according to Bank of America.Cole Smead, who co-manages the Smead Value Fund (<a target="_blank" href="https://markets.businessinsider.com/funds/smead-value-fund-investor-class-us83178c8819">SMVLX</a>) that's <a target="_blank" href="https://affiliate.insider.com?h=f3d8d9acb3650494a8a05384eb83d68d8095d6aaddf214a8457abddb36fdffb7&amp;postID=655e422c1b08829c5b328d8d&amp;postSlug=how-to-invest-make-money-work-next-decade-2020s-2023-11&amp;site=bi&amp;u=https%3A%2F%2Fwww.morningstar.com%2Ffunds%2Fxnas%2Fsmvlx%2Fperformance">beaten 98% of similar funds</a> over the last 10 years, says there's a high chance the S&amp;P 500 delivers negative returns over the next decade.There are two valuation metrics he points to: the percentage of household assets that are held in equities being near all-time highs, and the equity risk premium, or ERP, which is the expected excess return of the S&amp;P 500 over risk-free Treasuries. Right now, the ERP is barely positive, while the long-term average is about 3%, according to Comerica Wealth Management.Phillip Colmar, a global strategist at MRB Partners, also believes returns for the S&amp;P 500 over the long-term will be lackluster given higher valuations. Over the next 10 years, his firm sees US stocks having a compound annual growth rate of around 1%, while non-US stocks will grow at around 4% per year.All that said, US stocks have vastly outperformed the rest of the world over the last several years, and US stocks have tended to trade at higher valuations.Smead sees energy in stocks in Canada also outperforming in the coming decade, as well as European banks.Colmar likes European financials stocks, too. He thinks the euro — and by extension European banks — will benefit from weakness in the Canadian housing market and the Canadian dollar."When the house prices go down, households end up having to repair their balance sheets, like they did in the United States, then you end up with very weak growth, you end up with a backlash on the financial system, and so financial stocks become your short opportunity," Colmar said. He said having exposure to European financials stocks is one way to benefit from that downside without taking on the risk of shorting Canadian financials stocks.Colmar also recommends euro-area stocks as a whole (ex-UK), given that valuations there are low relative to the US. The iShares MSCI Eurozone ETF (<a target="_blank" href="https://markets.businessinsider.com/etfs/ishares-msci-eurozone-etf-us4642866085">EZU</a>) and the iShares MSCI Europe Financials ETF (<a target="_blank" href="https://markets.businessinsider.com/etfs/ishares-msci-europe-financials-etf-us4642891802">EUFN</a>) are two ways to gain exposure to the above trades.All that said, US stocks have vastly outperformed the rest of the world over the last several years, and US stocks have tended to trade at higher valuations.<h2>Look under the surface in the US</h2>While some believe the broad US stock indexes will underperform, there are still opportunities within the market.Bob Doll, the chief investment officer at Crossmark Global Investments and the former chief US equity strategist at BlackRock, thinks that growth-oriented areas of the market are where investors will find the best returns."Typically, the ones who produce more earnings growth over a 10-year period outperform, and I don't know why that wouldn't be the case again — which takes me to technology, the higher growth end of healthcare and consumer discretionary," Doll said.Meanwhile, Smead believes capital will flow into two industries he thinks are widely seen as outdated and unloved: banking and energy. Both have underperformed over the last decade. Since November 2013, the Energy Select Sector SPDR Fund (<a target="_blank" href="https://markets.businessinsider.com/etfs/energy-select-sector-spdr-fund-us81369y5069">XLE</a>) is down 4%, while the SPDR S&amp;P Bank ETF (<a target="_blank" href="https://markets.businessinsider.com/etfs/spdr-sp-bank-etf-us78464a7972">KBE</a>) is up just 25% over that time."Those are those old fuddy-duddy industries, you know, the ones that should be replaced by fintech and renewable energy," Smead said. "I think we're finding out really quickly that renewable energy is finding a crucifixion in stock markets, and I don't think fintech has changed the banking world in the slightest."<h2>Bonds offer opportunities</h2>Outside of stocks, Dantes of Global X said fixed income is intriguing after a massive multi-year selloff in Treasuries that followed a decade-long bull market. Yields are the highest they've been since before the financial crisis, and Dantes is confident that <a target="_blank" href="https://www.businessinsider.com/how-to-buy-high-yield-bond-funds-2023-11">bond returns</a> will beat cash."You definitely want to be actively involved in the market, knowing that you're not entering an early-cycle environment that's after a recession when you get the really juicy returns," Dantes said of fixed income. "You're still in a late-cycle environment."Dantes said other ways to earn income include the <a target="_blank" href="https://www.investopedia.com/terms/c/coveredcall.asp">covered call</a> options trading strategy or master limited partnerships (MLPs), which are companies with tax advantages that are often either tied to commodities or real estate.<h2>As rates remain high, stay invested and prioritize paying down debt</h2>Regardless of what happens in markets and the economy in the next decade, investors should follow time-tested strategies like dollar-cost averaging and taking advantage of 401(k) matching at work, said Michael Sheldon, the chief investment officer at RDM Financial Group.Dollar-cost averaging means investing smaller chunks of money periodically instead of attempting to time the market. Those who dollar-cost average in a 401(k) plan enjoy tax benefits and also often receive additional contributions from their employer through a matching program."Markets are going to have their ups and downs over time, but we also know, importantly, that equity markets over the decades have proven to be the best way for investors to create wealth in financial markets," said Sheldon, who's also a Certified Financial Planner (CFP).Investing early and often is especially vital since Sheldon said there's a serious chance that the US won't be able to fully fund programs like Social Security in the next decade."Given the uncertainty of where Social Security is, that just means that younger adults — unfortunately — need to save as much as they can for future retirement," Sheldon said.However, investing and saving shouldn't preclude people from paying down debt, Sheldon said — especially in an era of higher-for-longer interest rates. Borrowing costs on everything from credit cards to cars to houses will likely be elevated in the next decade, so Sheldon advises reducing debt as soon as possible, starting with whatever has the highest interest rate.<h2>Invest with taxes in mind</h2>Chris Chen, the founder of Insight Financial Strategists and a CFP, believes investors with a long-term horizon should consider direct indexing. This means instead of buying an index fund like the SPDR S&amp;P 500 ETF Trust (<a target="_blank" href="https://markets.businessinsider.com/etfs/spdr-sp-500-etf-trust-us78462f1030">SPY</a>), one buys the stocks that make it up individually.The main advantage of doing this is to reduce the tax burden of gains the portfolio makes, Chen said. One can lock in positive returns of individual stocks without paying taxes on the gains by selling other individual stocks that happen to be down at the time. Investors can then immediately buy back the stocks they sold at a gain, and can do the same for the down stocks after a 30-day waiting period. This process can then be repeated as desired.Another long-term tax strategy Chen recommended is investing in more growth-oriented assets through a Roth IRA, which is taxed upfront. Meanwhile, one can invest in more stable assets like bonds through a traditional IRA, where gains are taxed upon withdrawal.This is because growth-oriented assets will tend to deliver higher returns over the long-term than bonds will, making it more advantageous to let them grow tax-free in a Roth IRA and avoid future taxes on substantial returns. Bonds will tend to produce less impressive returns, so it's better to have them taxed on the back end.This makes most sense if you're able to fill both accounts on a yearly basis. The maximum yearly contribution in 2024 for both traditional and Roth IRAs is $7,000. For people over the age of 50, it's $8,000.

How to make your money work for you over the next decade 

<ul class="summary-list"><li>Warren Buffett's Berkshire Hathaway won approval to raise its Occidental Petroleum stake to 50%.</li><li>Berkshire is unlikely to pursue an immediate takeover, for several reasons.</li></ul>Warren Buffett's <a href="https://markets.businessinsider.com/stocks/brk-b-stock">Berkshire Hathaway</a> has the green light to purchase up to 50% of <a href="https://markets.businessinsider.com/stocks/brk-b-stock">Occidental Petroleum</a>, but it probably won't try to buy the energy company outright for a while.The billionaire investor's conglomerate has <a href="https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-20-percent-stake-occidental-petroleum-energy-2022-8">built a 20% stake</a> in the oil-and-gas explorer and producer since February, and also holds warrants it can exercise to increase its ownership to nearly 27%. On Friday, the Federal Energy Regulatory Commission (FERC) <a href="https://elibrary.ferc.gov/eLibrary/search">approved Berkshire's request</a> for clearance to raise its stake to 50%.Berkshire has happily plowed about $10 billion into Occidental stock this year, and handed the company $10 billion in exchange for preferred stock and warrants in 2019. But there are several reasons a full takeover seems unlikely in the near future.For one, Buffett hasn't told Occidental's bosses that he intends to take a controlling stake, <a href="https://www.wsj.com/articles/warren-buffett-not-expected-to-bid-for-control-of-occidental-following-stake-boost-11661099924?mod=Markets_screener_news">The Wall Street Journal reported Sunday</a>, citing people close to the matter. The investor famously eschews hostile takeovers in favor of friendly ones, so it's unlikely he would move to acquire the fossil-fuel specialist before speaking to its bosses.Plus, Buffett has a warm relationship with Occidental CEO Vicki Hollub, and the pair speak regularly, the WSJ said — which makes a surprise offer even more improbable.Berkshire has filed with the Securities and Exchange Commission as a passive shareholder in Occidental. It would presumably have to refile if it enters into serious talks about buying the company.Moreover, Occidental's stock has soared to around $70 on the news of Berkshire winning regulatory approval. Buffett, a proud bargain hunter, might balk at paying the premium to that price likely needed to win support for an acquisition from Occidental's directors and shareholders — especially as he's largely bought the stock below $60 this year.Still, Occidental's bosses think Buffett might consider making an offer if oil prices fall and the company's stock gets cheaper, according to the WSJ. Occidental's board would likely take a fair offer to its shareholders for a vote, one source told the newspaper.Buffett and his team may have asked for regulatory permission to increase their ownership to 50% — not because they want to take control of Occidental, but because they want the freedom to buy more shares without breaching the standard limit of 25%."I think he could be happy at 30% or 40% ownership over the next six months," Cole Smead, the president of Smead Capital Management and an investor in both Berkshire and Occidental, told Insider."I don't expect him to buy it out after this filing, because you wouldn't tip your hand and then take it over."Buffett may be eager to continue capitalizing on the rampant speculation on Occidental shares this year. The more shares he buys now at attractive prices, the less he has to pay if he decides to buy out the rest of Occidental's shareholders."This filing teaches everyone that he loves taking advantage of the suckers at the table right now," Smead said.Read more: <a href="https://www.businessinsider.com/value-investing-updates-growth-tech-stocks-warren-buffett-adam-seessel-2022-6">Value investors have missed out on massive gains by dismissing the likes of Amazon and Alphabet as overpriced. Fund manager and writer Adam Seessel explains how to fairly value tech champions, and avoid losing out again.</a>

Warren Buffett gets the green light to buy 50% of Occidental Petroleum - but he's unlikely to pursue a full takeover for now

<a href="https://newsletter.businessinsider.com/join/4np/10-things-opening-bell&amp;hash=8122c716833601fc1471f79af063b104?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestedium=ingest" target="_blank" rel="noopener">Welcome to 10 Things Before the Opening Bell. Sign up here to get this email in your inbox every morning.</a><a href="http://newsletter.businessinsider.com/join/4np/insider-investing?nr_email_referer=1&amp;utm_sou%5Bu%5B" target="_blank" rel="noopener">Sign up for Insider Investing</a> for your weekly <keyword id="31671" type="CITY" weightage="100" keywordseo="markets">markets</keyword> analysis.Here's what you need to know before US markets open.1. US futures slipped after the Dow Jones reacted to economic data with a record high. See <a href="https://markets.businessinsider.com/news/stocks/stock-markets-today-us-futures-dow-jones-sp500-record-nasdaq-oil-prices-2021-4-1030275936">what markets are up to</a>. 2. Top executives at Credit Suisse are leaving following the Archegos blow-up. The <a href="https://markets.businessinsider.com/news/stocks/credit-suisse-posts-loss-after-archegos-blow-up-exec-departure-2021-4-1030275805">Swiss bank disclosed a $4.6 billion hit</a> on Tuesday. 3. Michael Burry deleted his Twitter profile after warning of market bubbles. The 'Big Short' investor has <a href="https://markets.businessinsider.com/currencies/news/big-short-michael-burry-deletes-twitter-profile-warning-market-bubbles-2021-4-1030275994">tweeted warnings about specific stocks, crypto assets, SPACs, inflation and more</a> this year. 4. The crypto market has doubled in value to $2 trillion. A <a href="https://markets.businessinsider.com/currencies/news/crypto-market-cap-bitcoin-doubles-to-2-trillion-rally-surges-2021-4-1030274638">massive cryptocurrency rally has led to this growth in just three months</a>. 5. GameStop's latest regulatory filing explains stock volatility. <a href="https://markets.businessinsider.com/news/stocks/gamestop-highlights-short-squeezes-online-chatter-driving-stock-volatility-2021-4-1030274652">Short squeezes and online chatter are specifically named</a> as reasons for the stock's behaviour. 6. Oil prices drop sharply as Covid-19 cases rise. <a href="https://markets.businessinsider.com/news/stocks/oil-prices-today-wti-brent-barrel-demand-worries-opec-covid-2021-4-1030274667">Concerns about demand recovery might not be swayed</a> by increasing vaccinations. 7. Earnings expected. A light day today, but <a href="https://markets.businessinsider.com/earnings-calendar">Paychex Inc is one to look out for</a>. 8. On the data docket. The <a href="https://markets.businessinsider.com/economic-calendar">Royal Bank of Australia announced</a> its interest rate decision. 9.RBC has unveiled its global ideas stock list featuring its analysts' top picks for 2021. The firm says to <a href="https://www.businessinsider.com/stock-picks-to-buy-30-top-global-ideas-q2-rbc-2021-4?r=opening-bell" target="_blank" rel="noopener">buy these 30 stocks poised to dominate amid an economic reopening rising inflation expectations</a>.10. A portfolio manager at a $2.3 billion firm says 10-year yields going to 7% is 'not outlandish' amid a wave of inflation. Cole Smead also breaks down <a href="https://www.businessinsider.com/stock-market-crash-sp500-negative-returns-ahead-treasury-yields-smead-2021-4?r=opening-bell" target="_blank" rel="noopener">why the S&amp;P 500 is staring down a decade of negative returns</a>.

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