A great investing lesson in the headlines... Income that goes up every year... Italy's new 'high yield' offer... Is Jeff's gold-trading streak over?... The end of municipal finance in America!?...
A great lesson in investing played out in the press recently, but you might have missed it if you didn't know how to connect the dots...
First, Warren Buffett invested more than $10 billion to buy around 5% of big technology company IBM. Buffett commented plainly, "I felt that IBM had a very good business." He also noted IBM's customers rarely jump ship for a competitor. They tend to stay put, giving IBM a great advantage.
The other part of the lesson was on the Wall Street Journal's home page, where the newspaper reported AMR Corp. (better known as American Airlines) had filed for Chapter 11 bankruptcy.
The stock is down more than 80% today, to about $0.26 a share. The company has lost $10 billion since 2001. It needs to go bankrupt so it can reduce its debt burden and remain competitive with United and Delta – both of which have been through bankruptcy and mergers. It seems the only way to stay in the airline business is to declare bankruptcy. As with almost all bankruptcies, it's likely common shareholders will get nothing.
Buffett would never invest in an airline. He joked years ago that there should be a hotline for airline investors, where the operator could "talk him down" if he was ever tempted to invest in another airline. The implication is clear. The greatest investor of our time thinks investing in airlines is financial suicide.
If you want to do as well as the greatest investor of all time, you should only invest in very good businesses. Airlines aren't good businesses. Before you can sell one ticket, you need airplanes and all kinds of machines and people to keep the planes loaded and functioning. You need to deal with unions. You need to borrow huge sums of money. And you need to compete on price with a dozen other airlines. So you really don't have any pricing power as an airline. The cost of fuel can rise anytime and eat into profits.
That's why American Airlines, like so many airlines before it, is going bankrupt. It's just too hard to run a great airline business.
IBM, on the other hand, is the go-to provider of services to Information Technology departments of companies all over the world. It doesn't need to spend huge amounts of capital up front. It doesn't need to buy airplanes and machines. It simply hires skilled people and gives them the tools they need to keep in good working order the rat's nests of computers and wires that power the world's biggest firms. In his research on IBM, Buffett says he was told more than once that "nobody ever got fired" for using IBM.
IBM exhibits all the financial clues that tell you it's a very good business. It has consistently thick profit margins (gross margins around 45%, net margins 12%-14%). It gushes cash. IBM earned $15 billion of free cash flow last year, on just shy of $100 billion in sales. That's $0.15 in free cash flow for every $1 of sales.
Avoid airlines and other lousy businesses. Buy very good businesses. It's a simple formula. Most folks don't have the discipline to follow it, but that's the surest strategy to making money in stocks.
That's why since 2006, I (Dan Ferris) have been building a portfolio of the world's best businesses. I only add one when shares of one of the world's best businesses go on sale, providing investors with a fantastic opportunity to own an IBM-like, consistently profitable, cash-gushing, very good business.
And after doing a little more homework… I discovered something Buffett didn't mention about these excellent businesses. Some of them provide investors with consistently rising income… a cash stream that grows year after year, no matter what's happening in the world.
These rising income streams are key to an investing program that could replace Social Security, 401(k)s, IRAs, and pension plans for many people. We've prepared a new report about this income program. One company offering this program has raised its payouts every year for more than 35 years, no matter what. It's made a lot of people rich (as we show you in the report). Through wars, inflation, the crash of 1987, and the crisis years of 2008-2009... every year without fail… this payout has gone up, up, up.
The company's payout went up again this year… by a lot. Retirees and other investors who entered the plan got a 20.7% raise this year. I doubt you can name another investment safe enough to retire on, pays you more and more each year no matter what's happening in the world, and that gave investors a 20.7% raise in 2011. This is the No. 1 way for retirees and other investors to earn enough income to beat inflation every year.
If you want to discover the names of a few great businesses that make this simple plan available to you and claim your FREE copy of our brand new special report about it, click here.
Last month, Jeff Clark recommended trading options on gold miner New Gold. He thought the trade could return hundreds of percent. He was wrong. His New Gold trade "only" made S&A Short Report readers 35% in two weeks.
A 35% gain in two weeks should make just about any trader smile… It's a sign of how great Jeff's doing that anyone would look on this as a rare "shortcoming." Digest readers know he's produced an incredible streak of triple-digit gold stock trades for S&A Short Report subscribers. And if you haven't traded with Jeff on this streak yet, it's not too late…
Jeff sent an issue to readers today saying we're about to see a "bullish seasonal influence" on the stock market, or the so-called "Santa Claus rally."
He's recommending another gold stock that has fallen 23% in the past four weeks. Now, it's oversold... Last time it was this oversold, in early October, the stock jumped 30%. Jeff thinks it will rally again... And he expects S&A Short Report readers to make around 150% on this trade. To learn more about Jeff's gold-trading techniques and access his latest trade, click here...
Also, be sure to read our interview with Jeff from last Friday's Digest.
Italy sold 7.5 billion euros of various government bonds today, close to the top of its range. The three-year yield hit 7.89%. The 10-year yield hit a new euro-era high of 7.56%. And we'd guess those rising yields are with generous European Central Bank support. Is that support the difference between less than 8% and true, double-digit junk-bond yields? I'm sure the country of Italy has more going for it than the central bank's ability to print money and buy bonds... but it doesn't look like its government does.
As we've said many times, the ongoing credit crisis in Europe is America's problem. Our dollar is the world's reserve currency… and the Federal Reserve's printing press will be called on to create the dollars to backstop the inevitable bailouts of these bankrupt nations.
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New 52-week highs (as of 11/28/11): None.
If you've had experience investing in or working for a business like IBM... or a business like AMR… we'd like to hear from you. Send us a line and tell us how it worked out. Write to us at feedback@stansberryresearch.com.
"I understand and appreciate your recommendation regarding investing in physical gold, but my concern is the possibility of confiscation. How likely (or unlikely) is confiscation in your opinion? By the way I currently own a limited amount (less that 4%) of physical gold and silver." – Paid-up subscriber John
Ferris comment: If you're worried about U.S. gold confiscation, perhaps you should consider holding some of your gold in different countries.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
November 29, 2011