The greatest gains over the next five years will be made in those securities people are panicked about today. Today fear dominates the pricing of housing stocks, of mortgage related securities, of financials, and of many consumer stocks.
Large-cap U.S. is the cheapest part of the equity market.
The stock market rally has been led by the same groups that have led for five years: energy, materials, industrials, and technology. Confidence and optimism underlay the pricing of energy, materials, industrials and non-U.S. stocks, especially those of emerging markets, and China in particular. It seems to me the leadership is about to change. Where will the new leadership come from? The same place it usually does: the old laggards.
This is the first time since 1990 we have had two calendar years behind the S&P 500. Perhaps not surprisingly, that was also a time of panic due to a housing market recession, soaring oil prices, banks and financials collapsing. We were able to take advantage of the values then offered to begin a pretty good period of excess returns.
~ Bill Miller, portfolio manager of Legg Mason Value Trust, November 1 letter to shareholders, as reported on MarketWatch, "Legg Mason's Miller: Buy financials, housing stocks," November 2, 2007