ECB lets 'er rip...
The European Central Bank (ECB) announced its most aggressive bond-buying plan since the European debt crisis began three years ago. The ECB says it'll buy existing bonds with one- to three-year maturities of European Union countries. It's targeting Spain and Italy, where economic woes have scared investors away from these countries' bonds, causing borrowing costs to rise.
Of course, the European bond market loves it. Even Spanish 10-year yields fell to a three-month low, despite the program targeting shorter maturities. Spanish and Italian short-term yields fell, too. But not by as much as you'd think… less than 20 basis points ("bps"), or 0.2 percentage points, for Italian two-year bonds… and about 7 bps, or 0.07 percentage points, for Spanish two-year bonds, according to the Wall Street Journal.
Most major U.S. stock indexes are rising. The Nasdaq and S&P 500 are both up about 2%, and the Dow Jones Industrials is up about 1.9%.
I can't fathom the twisted logic that gets you from the news that the ECB is printing money to buy Spanish and Italian bonds to a decision to buy… say… online auction site eBay, which is up almost 4% today. But hey, whatever floats your boat.
Did you notice I said the European debt crisis is three years old? It really only got cooking last year. But it was late 2009 when investors began getting anxious about European debt. Greece received its first bailout in the spring of 2010.
Three years... wow. You'd think after three years of pure gloom and doom, Europe would have shut down by now…
But it didn't. People there just kept waking up in the morning and going to work. Billionaire investor Warren Buffett bought eight European stocks last fall. And good businesses in U.S. markets continue to make new highs.
The overall market is at its highest level in four years. You could have read the headlines about an impending crisis three years ago, bought U.S. stocks, and fallen asleep like Rip Van Winkle. Despite the unpleasantness (the market plunged 20% between May and October last year), you'd have more dough than just before you fell asleep.
And do I really need to tell you all over again about all the World Dominator stocks that have made new highs recently? Anheuser-Busch InBev, Automatic Data Processing, Constellation Brands, Altria Group, Philip Morris International... They've all hit new highs in the past month or so.
This is one of the hardest lessons for investors to learn… If you focus on buying great businesses that can ride out (and even exploit) macro problems like recessions and interest-rate movements, you can turn down the volume on cable news' fretting about Europe's debt, Obamacare, and the Fed's latest pronouncement.
The fact that most investors will never learn this concept gives those of us who do a huge advantage now and forever. I've been saying this a bit more than usual lately, and I've gotten reader feedback indicating many folks refuse to stop obsessing about economic and political problems. They just don't believe it.
What's a fella to do? It's my job to show you the way, to help you become a better investor. But lots of folks don't seem to want to hear it.
Maybe it would help to cite the recent work of Ben Inker from the investment management firm GMO... Inker's recent paper shows there's no meaningful correlation between gross domestic product (GDP) growth and investment returns. He explains the phenomenon, too (though in a somewhat technical manner).
And how many times has Buffett told us that if Ben Bernanke whispered all his upcoming interest-rate decisions into Buffett's ear, it wouldn't make one lick of difference?
The real problem is that focusing on all the fearful economic and political news keeps you from buying great businesses and making great money. If you exited the market late last year, like so many other members of the great thundering herd, you threw a 33% gain in the garbage can.
Yes, I said it. Focusing too much on headlines and macro concerns can be bad for your financial health.
One macro issue you should keep an eye on is inflation. You must be able to compound your money at rates that beat inflation, or you'll never build true wealth. If inflation is running 2% and you're earning less than that, you're losing money. Your purchasing power is falling. As an investor, you have to make sure that doesn't happen.
What do you do about inflation?
Of course, we like gold for an inflation protection. Yesterday, we told you about an excellent way to make money in gold that doesn't involve investing directly in a capital-intensive gold-mining business.
We love great businesses for inflation protection, too. I've got another one for Extreme Value readers in the September issue, which comes out tomorrow. It's one of the most valuable assets you can own. I mentioned it in Tuesday's Digest.
Porter recommended Hershey's, a fantastic brand name and wonderfully profitable business… and his readers are up by about 93% since the end of 2007.
Being a smart speculator who knows how to play it safe and make big returns quickly can certainly help you beat inflation, too. Good speculators buy valuable assets when the market is in total revulsion over them. That can help you counteract inflation. Steve Sjuggerud did this when he recommended housing earlier this year. His recommendation to buy the iShares Dow Jones U.S. Home Construction (ITB) trade is up about 40% since February.
Knowing how to trade options – like Jeff Clark does in the S&A Short Report, Dr. David "Doc" Eifrig does in Retirement Trader, and Amber Lee Mason and Brian Hunt do in DailyWealth Trader – will help you earn double-digit, inflation-beating income.
Yes, we've got lots of ways to beat inflation. We come out with new ideas on this several times a year.
But they, too, require you to stop letting the headlines tell you what to do. Who wanted to buy housing when Steve said buy back in February? Who wanted to buy a big company like Hershey's when Porter recommended it nearly five years ago (or ever)? Who wanted to buy Wal-Mart any of the times I've hollered about it since 2006?
Nobody, nobody, and nobody.
It's like Steve has been trying to tell the world for a long, long time... Look at the hated assets. That's where the good bargains are found.
A really great way to learn how to stop letting the market tell you what to do and exploit its frequent ups and downs is to read the end of Chapter 8 of the classic investment book The Intelligent Investor by Benjamin Graham. Chapters 8 and 20 of this book are so important, I have a reminder on my computer to re-read them once a month. I recommend you do the same.
Graham describes the stock market as a manic-depressive business partner. Every day, you come to work with him, and he's willing to buy your half of the business or sell his. When he's manic and happy, no price is too high to pay for your half. When he's depressed, no price is too low to accept for his half.
You've got to learn to take advantage of Mr. Market. Buy from him when he's depressed, and sell to him when he's manic. But you have to get the jump on him, instead of giving him the advantage by letting him act before you do. Reading Graham once a month will help you do this. It'll keep you from missing a lot of great opportunities.
New 52-week highs (as of 9/5/2012): Franco Nevada Corp. (FNV), Western Asset High Income Opportunity Fund (HIO), Anheuser-Busch InBev (BUD), Eli Lilly (LLY), Royal Gold (RGLD), and Two Harbors (TWO).
In today's mailbag... more great feedback from subscribers who are profiting from the ideas they're reading in our newest service, DailyWealth Trader. Send your e-mail to feedback@stansberryresearch.com.
"This has been the best service by far. I don't have a lot to invest but out of the $25,000 that I've been able to utilize for investment, I've made over $2,000 in returns in the last few months. Thank you so much for the outstanding service." – Paid-up subscriber Darrel Harris
"I just wanted to give you a big thanks for providing the DailyWealth Trader service. I've learned a lot from the training center and have made a few really good trades." – Paid-up subscriber Steve K.
Dan Ferris
September 6, 2012
Medford, Oregon
ECB lets 'er rip... Spanish and Italian yields fall – a little... The macro issue that matters... Good advice ain't worth much if you won't do this... A perennial 'must read'... Taking advantage of Mr. Market...