Trade Bitcoin? Grab gold? Buy bonds? No thanks. I’d rather own these cheap shares!

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Businessman looking at a red arrow crashing through the floor

In 34 years as an investor, I’ve witnessed four stock-market crashes (1987, 2000/03, 2007/09 and 2020). As a share owner, the first three market meltdowns hurt me. But this has been a great year for my family. As cheap shares plunged in late March, we moved our entire wealth into stocks shortly after the March madness. This decision has really helped us to retire richer and earlier.

The year everything went up

What puzzles me about 2020 is the usual concepts of risk and return have been abandoned. This year has seen rising values in asset classes across the board. Bonds (fixed-income IOUs issued by governments and corporates) surged in value as investors fled to safety. This pushed bond prices higher and their income yields lower. Likewise, as risk appetite returned after the US presidential election, stock prices soared globally. The FTSE 100 index had a near-record month in November as buyers snapped up cheap shares.

Owners of alternative investments also enjoyed healthy gains. Cryptocurrency Bitcoin has had a good 2020, spiking to nearly $20,000 and almost tripling in value. Likewise, gold also shone this year — at around $1,865 an ounce, the price is up almost 28% in 2020. This confuses me. How can the price of everything — cheap shares, high-priced bonds, gold, Bitcoin, etc. — all rise together? Can we really enjoy an ‘all-assets rally’ without paying for it in the future?

I believe in cheap shares

As a value investor drawn to cheap shares, I read an excellent warning recently from Jeremy Grantham of GMO, a fund manager I greatly admire. In November, Grantham cautioned: “The one reality you can never change is that a higher-priced asset will always produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both. And the price we will pay for having this market go higher and higher is a lower and lower 10-year return from the peak.”

Thus, investors paying high prices today should expect low returns in future. This financial reality is almost impossible to avoid. Therefore, as a long-term value investor, I stick with the simple strategy of buying stakes in quality companies at fair prices. I won’t buy bonds with negligible or even negative income yields. Also, I won’t speculate on the price of gold or crypto, because short-term trading is terribly difficult to do well.

I’d buy this cheap stock

As exuberance rises in melt-up markets, I seek low-priced stocks primed for recovery. Today, I like the cheap shares of global mining giant Rio Tinto (LSE: RIO), as it is heavily exposed to a global rebound in 2021. The Anglo-Australian multinational is a colossus: at the current share price of 5,443p, Rio is valued at £92.3bn. Rio is also a dividend dynamo, paying out a total of £3.65bn in shareholder dividends last year. That’s the fourth-largest cash payout in the FTSE 100, plus I expect this cash flood to keep rising.

In a world of near-zero and negative interest rates, I think Rio’s stock should attract income investors. Right now, it offers a dividend yield of almost 5.5% a year, paid in quarterly instalments. That’s a compelling reason to buy and hold these cheap shares while they head for new highs. Hence, I’d happily buy Rio Tinto stock today!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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