January 2006: True Wealth - THE TRUE WEALTH 10-YEAR FORECAST

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 realize 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 (they didn't even have a mortgage).

And after living through the terrible decade of the 1930s when stocks got obliterated, they never believed in buying stocks for the rest of their lives. They only bought Treasury bonds, the simplest investment on the planet. They sure 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 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. If we can get close to that, then we're set for life.

My goal today is to help direct you. 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.

In this issue, I'll explain all of this. And then I'll share with you what I believe is the best investment you can make to profit from what I describe over the next 10 years. I strongly believe you will make a few times your money on this investment. So let's get started...

My grandparents must have thought they were making a sensible decision by avoiding stocks.

If you'd lived through the Depression, and through an entire generation (17 years from 1930-1947) where stocks lost money, would you ever consider buying stocks again? Probably not. Yet stocks rose by more than 500% in the next generation, from 1947 to 1965 (18 years).

Folks who invested in stocks 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.

For the next generation from 1965 to 1981 (16 years), the Dow Jones Industrials stock index gained less than a point:

Folks who invested heavily throughout the 1970s decided – like my grandparents did before – that you could never make money in stocks. You needed real assets, like real estate and gold.

Almost like clockwork, that '70s generation of investors who saw the Dow go nowhere learned to avoid stocks – then missed out on the greatest stock boom in history. Stocks soared from the end of 1981 to the end of 1999 (18 years).

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.

I can show this "switching" to you in a simple table. I've put together stock prices versus commodity prices. Take a look... triple-digit gains in one generation, losses in the next.

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.

The point of this newsletter today 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? Oh man, have we got a Big List of things to buy for you...

Tom Dyson and I have been talking Chinese ceramics lately around the DailyWealth office, wondering when they're going to take off in value. (Don't worry, I'm not going to tell you to buy 'em.)

Why Chinese ceramics? One reason is, newly-minted Chinese millionaires will probably come looking to buy up their history. Another reason is, absolutely nobody is talking about them. A third reason is, I'm embarrassed to tell you that we're looking... so it must be worth a look!

None of these are the reasons we started to look in the first place. Ultimately, what drove us to look at these is this: Chinese ceramics were the one big winner near the top of The Big List that we haven't personally invested in yet.

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:

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... 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... As Jim Rogers 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?

This time, commodities and the rest of this stuff will rise as people look for an alternative to stocks, and see prices moving up here.

Tom Dyson, my DailyWealth.com co-editor, who's good at challenging my investment ideas, e-mailed me last night saying "oil has turned over. It looks like gold and silver have too. Is copper next?"

Even if it is, I'm not worried.

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.

As I'll explain today, I think that's a likely case once again – the time to sell these things and buy stocks once again will be about a decade from now.

Again, I think we're about in late 1972... which is very early on this list. Coins provide us a good blueprint for what's possible from here...

The CU3000 Rare Coin Index (at www.pcgs.com) soared 348% from 1972-1974. It took a breather for a few years. Then from 1976 to 1980, it rocketed up 1,195%. Wow!

To put what that really means in perspective, coin legend David Hall says: "With a modest investment in the right coins in the early 1970s, you could cash out and buy a house by 1980, and many did."

To give you an idea of how early we still are in this game, the CU3000 Coin Index is only up 2% in the last 12 months. Our pre-1933 gold coins have done a bit better, up 11%. Coins are up, but the boom has not even begun.

I can say this with confidence, because I know the general public is not buying. We're nowhere close. Heck, even my biggest supporters aren't buying yet. Tom, we're definitely closer to 1972 than 1980...

Not long ago, I talked to a longtime reader, who I've known since I was a kid. (Yes, Ted, I'm talking about you.) He lived a few blocks away. I stayed at his beach house as a kid, and played on the high school soccer team with his son. He recently told me: "Steve, you've made me a lot of money over the last few years. I appreciate your conservative style. But I lost my shirt in coins in the early 1990s, and I'm never buying them again."

When it comes to coins, Ted sounds like my grandparents that lived through the Depression. Ted simply invested in coins at a very bad time. Even today, rare coin prices are down 66% from their highs 16 years ago. Now that's a bear market! Wait, how many years ago was that peak? Was that about a generation ago? Hmm... You don't say...

Ted is not alone. My father is an avid reader of True Wealth. He likes to buy most everything I write about. But he hasn't bought any of my recommended coins either. And my mother-in-law is in the exact same boat – she can tell you all about our stock recommendations, but no coins for her, thanks. They're all from the same generation... a generation that saw coins (and stamps and other collectibles) get annihilated.

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 10 years. It happened the last time around. And I suspect it'll happen again.

It won't be a straight rocket ride, of course. We'll have severe shellackings, like we had this week in gold...

Gold 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 10 years. It'll be a rough ride, but we'll try not to get bucked off, and give it time to develop.

Then in 10 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 10 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 10 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 10 years to shake everyone out of believing in stocks, and into believing in The Big List.

In the latest issue of my Sjuggerud Confidential newsletter, I actually recommended a play on diamonds in Canada. Now most people don't think diamonds could go up in value, yet they have been over the last two years. Diamonds are ignored, and in an uptrend... and they're on The Big List. It's just what we like to see!

People believe that the price of diamonds is artificially controlled by DeBeers, who has an enormous stockpile of diamonds in Africa. But that's no longer true...

The actual truth is DeBeers' stockpile is gone. DeBeers is down to "working stock" and there isn't an enormous stockpile out there anywhere. It's closer to the opposite – in the next two to three years, the diamond industry will face a supply crunch. The demand is coming from everywhere... in Shanghai, for example, 8 out of 10 brides receive a diamond for their wedding, up from 3 out of 10 brides in 1997. Talk about growth! Supply won't be able to keep up with demand, and when that happens, diamond prices will go up – it's Economics 101.

DeBeers has changed its strategy. It's no longer trying to control the supply of diamonds, as it turns out it just wasn't good business in the 1990s. DeBeers is now concentrating on selling diamonds, and investing heavily to find more diamonds, particularly in Canada. It's committed to investing $2 billion in Canada in the next three years simply to find diamonds. (DeBeers owns a significant stake in one of the diamond properties I mentioned in Sjuggerud Confidential.)

Most people don't know it, but DeBeers is not a secretive private company, DeBeers is actually 45% owned by a little-known public company called AngloAmerican – which is this month's recommendation.

With roughly $30 billion in sales this year, AngloAmerican is comically large – yet nobody knows anything about it. DeBeers produces nearly half of the world's diamonds, yet it only makes up 14% of AngloAmerican's earnings.

In addition to ruling the diamond market, AngloAmerican rules the platinum market, contributing 40% of the world's platinum production. While gold grabs all the headlines, the price of platinum has more than doubled since 2002. That's got to help AngloAmerican's bottom line. Like diamonds, AngloAmerican's massive platinum operations only make up 9% of Anglo's earnings. This is one big company.

The biggest contributors to AngloAmerican's earnings are its base metals operations – including copper, nickel, and zinc – making up roughly 40% of earnings last year. Any idea what's happened to these lately? Copper is up over 100% in the last two years, from less than $1.00 a pound to $2.00 a pound. The metals AngloAmerican produces are soaring in price.

Anglo is also a world leader in coal, which made up 13% of earnings last year. My good friend and geologist, Matt Badiali, says coal can be converted into gasoline and work with our existing system of cars and gas stations. We don't need it yet. But if we do, AngloAmerican would no doubt benefit.

Since the commodities that AngloAmerican produces have gone straight up in price, you might think that shares of AngloAmerican would be priced out of this world. You'd be wrong...

For most of the last two years, the share price of AngloAmerican has been parked between $20 and $25 a share. Only in the last few months has the share price finally broken out. The shares are around $33 now.

With the surge in commodity prices this year, AngloAmerican should be able to bring home earnings for the year of just under $3 a share. That puts AngloAmerican's P/E based on this year's earnings somewhere around 11. The company trades for less than two times sales and less than two times book value. The stock's a bargain.

When I looked into AngloAmerican recently, I found just what I wanted... Nobody on Wall Street really covers it. Independent research firm Morningstar does cover the stock. They've got a Sell rating on it. They praise the company, but in the end they don't believe in commodities: "we expect commodity prices will revert toward their historical long-term averages. Our fair value estimate... is predicated upon this pricing revision."

It was just what I wanted to hear...

Morningstar assumes a copper price of 95 cents a pound in its earnings model for AngloAmerican. As I write, copper is currently over $2 a pound – a big difference. Morningstar even said if it raised its commodity price assumptions by 5%, then its share price target for AngloAmerican would be $5 higher, as "the lion's share of the benefit would fall to the bottom line."

Exactly... as commodity prices rise, the lion's share of the benefit will fall to AngloAmerican's bottom line.

All along, analysts have been caught flat-footed. They've used faulty "reversion to the mean" estimates for future commodity prices. The thing is, nobody can know the future. The current price of copper is $2 a pound. The current price of oil is $60 a barrel. Wall Street analysts often use prices of half these levels. (Merrill Lynch finally upped its long-term copper forecast from $0.95 a pound to $1.20 a pound.)

We want to own The Big List. We want to own it as cheaply and as well run as possible. With that, we really can't beat AngloAmerican.

The stock is really cheap. The business has always been very profitable, even in the bad times for commodities. And yet nobody knows anything about it. If you type it up on Yahoo! Finance, nothing shows up. Yet it's a massive $50 billion business.

Analysts hate it, the general public has never heard of it, and yet the uptrend is finally in place. It's just what we want to see...

AngloAmerican is the best, safest way to own The Big List in just one investment. It is the stock for this investment generation.

Buy AngloAmerican (Nasdaq: AAUK) today, and plan on holding it for the next ten years.

As I expect we'll make triple-digits on this one, use a 33% trailing stop. (I always want my reward potential to be at least three times what I'm willing to risk.)

WHERE TO BE INVESTED RIGHT NOW

German Stocks

My dad asked a good question... He said "Steve, when you tell your readers to steer clear of stocks, you really don't mean sell everything, right? You ought to clarify that."

Good thought Dad, thanks. He's right. I don't mean sell everything. Sometimes I feel like I say things strongly, as I know it takes a lot to break people from what they're comfortable with. The best advice for everyone, Dad, is this: Sell down to the sleeping point. If you're up at night worrying about your stocks, you need to sell some more.

Here's another way to look at it. Our True Wealth rule of thumb since day one has been this: Subtract your age from 100. There's your percentage. That's a good ballpark of how much you can have in stocks most of the time in the market. So if you're 40, you could have 60% of your financial assets in stocks.

Our 1-2-3 Model has been in YELLOW LIGHT mode about half the time throughout history. So the 100-minus-your-age rule applies to YELLOW LIGHT mode.

In RED LIGHT mode, you decrease that number by 50%. And in GREEN LIGHT mode, you increase it by 50%. So again, if you're 40, you could have up to 30% in stocks in RED LIGHT mode. And if it's GREEN LIGHT mode, you could have up to 90% in stocks. That's the rule of thumb, increased or decreased by 50%.

For the recommended list, I'm not going to mess with success. Things are working, and you don't mess with that. We do have three black eyes... Cresud, real estate, and Icelandic bonds. I still like 'em, though we may have been early on real estate. I'm watching this one closely, and may shed it if it continues to go against us.

I have a lot of investment ideas in store for 2006. My biggest problem with ideas is I'm often too early (like our short real estate play). Sometimes, when I don't wait for the trend to confirm my idea, I have to pay. I don't want to bring the new ideas up yet – until the trend starts confirming the ideas.

To give you an example, I think the surprise of the second half of 2006 could be a major bust in emerging market stocks. Right now, everyone loves Asia in particular. All the rational reasons make sense. But things are never as neat and rosy as they seem. Markets sure have a tendency to surprise you.

It's all too good, which usually means it can't get better. My hunch is that many emerging markets could lose 25% or more of their values in 2006. But it's way too early to make that call. For another one, in a recent issue of Barron's with the title "Outlook 2006," all the experts agreed that large-cap stocks are the place to be. Again, it's too rational. But it's not smart to buck those trends now.

We've got plenty of things to do this year... but we're not quite there yet on most of them. We'll let things unfold and make our trades in our usual True Wealth way – when the risks are the lowest and the odds are the highest for success.

To wrap things up, I want to thank you for your subscription to my letter. You give me the ability to do two things I really love... which are finding good investment ideas, and sharing with people the true ways you generate wealth through investing. Thank you again.

Good investing,

Steve

*Investment Result: As scripted, commodities are still outperforming stocks to this day… and the stock price of commodity giant Anglo American has soared. The stock remains a mainstay of the True Wealth portfolio, and readers are up over 40%.