Shades of 1999... Berkshire Hathaway split its B shares 50-1 last week... and the stock rose 4% that day. Then yesterday, Standard & Poor's added Berkshire to its S&P 500 index... and poof, another 5% rise.
A couple weeks ago, Warren Buffett mentioned Berkshire was undervalued. This is something he's rarely done. Thing is, the stock didn't soar 5% that day. Mr. Market didn't care a lick what the world's most successful investor thought about the value of his own company. But when the same stock splits and gets added to the most popular index on Earth a few days later... then Mr. Market can't get enough.
The Berkshire stock split/S&P 500 story shows you why most investors don't make money in stocks. They're very interested in what the stock price did yesterday. But they're completely uninterested in the value of the businesses they're buying and selling. You can't get rich buying and selling businesses without knowing what they're worth.
The easiest way to get rich in the stock market is by learning to buy and sell the best businesses. The best businesses are those least likely to change over the next 10 years – except by growing their earnings steadily. The overwhelming majority of investors should own these businesses because they are the easiest to value.
Small, speculative stocks like mining and biotech companies can produce the largest, quickest gains... but they are the hardest stocks to value. That's why investors routinely lose their shirts on them.
Each week, I publish a list of about a dozen stocks trading at big discounts to the value of the business. Most of these are safe, blue-chip stocks.
Stock prices have been falling over the last couple weeks. When stock prices fall, you should buy safe, blue-chip stocks... and be very careful about owning anything else.
These few safe, blue-chip stocks are part of a special list I publish every Monday, exclusively for Extreme Value readers. The list includes the safest company in the world (the only truly triple-A company). It also includes two special "utility" companies that pay out about a third of their revenues to the government, even before they pay incomes taxes.
In exchange for this payment, they get to keep the largest worldwide share of a huge, profitable market. As Obama makes the government bigger, these two companies become better investments. They become more competitive, not less.
To get access to the safest stock on earth, two "utility" stocks, and to the weekly Extreme Value list of stocks trading at sizeable discounts to their intrinsic value, click here.
If you want to know what sort of shape the U.S. economy is really in, you just might find out in the next several months...
Yesterday, the Federal Reserve declared the U.S. economy is in "recovery" and signaled it will gradually wind down several liquidity initiatives. That includes emergency lending to investment banks and the $1.25 trillion program to buy mortgage-backed securities, which ends March 31.
Despite the optimism, the federal-funds rate (the Fed's primary inflation control) will remain between zero and 0.25% – the level it has been at since December 2008. Lower fed-funds rates expand credit, thereby leading to inflation down the road. In a statement after the meeting, the Fed hinted at inflation concerns, saying inflation "is likely to be subdued for some time." In December, the Fed said it "will remain subdued for some time."
When the Fed says it'll keep interest rates near zero and inflation will remain subdued, it's like when Bill Clinton said, "I did not have sexual relations with that woman." Everybody already knows what has happened. The Fed has printed money and kept interest rates below the levels that caused the housing bubble to begin with, all in a vain attempt to prevent the world from concluding that it's not in control of the economy.
The Fed's ability to control interest rates is like Bill Clinton's ability to keep his fly zipped. They both have control over something, but we're just not sure what or if they'll exercise their control in a way that won't lead to another disaster.
At the World Economic Forum in Davos, Switzerland, hedge-fund billionaire George Soros argued low interest rates are already causing bubbles. He says, "The ultimate asset bubble is gold." Soros also said we're in danger of a double-dip in the global economy as the government withdraws its support from the markets.
His recipe: more stimulus... "Some countries, like the U.S. and European countries, have plenty of room to increase their deficits. The political resistance to doing so increases the chances of a double dip in the economy in 2011 and after that."
It's beyond us how you can argue for higher deficits and more money printing while simultaneously saying gold is a bubble. Foreign central banks are already leery of buying Treasuries. Who would lend the U.S. government money for 30 years at 4.55%? Adding to the deficit will only make it worse. The only way to make Treasuries more attractive is to raise rates, which will lead to inflation, a weakened dollar, and higher gold prices.
Soros did have one moment of clarity in Davos... In an uncharacteristic move, he said Obama's plan to tax large banks is a bad idea: "To tax the banks when they are doing everything they can to get out of a hole is the exact opposite of the policy you are trying to pursue."
Another Davos attendee, Blackstone founder Steve Schwarzman, went a step further, saying the government should leave banks alone at this point: "They don't know their taxes, they don't know what amount of equity, they don't know what businesses they're going to be allowed to stay in. There is enormous uncertainty, not so much in the economic environment. We've now increased the uncertainty in the political environment."
Schwarzman donned an air of impartiality during his interview with Bloomberg. He said Blackstone isn't affected by Obama's measures because it doesn't take customer deposits. However, his firm does finance the majority of its deals with debt. And where will he raise the debt if banks aren't lending?
In the last issue of Retirement Millionaire, which Doc titled "How to Get Paid 12% with Almost No Risk," readers learned two ways to profit on the real estate market's desperate need for capital. You might not like the idea of putting your cash in real estate, but as Doc explained:
Look, I know real estate has a bad name right now... but both of these ideas return money to us with interest payments and the return of our principal at the end – much like a bond or other fixed-income investment. And in both cases, the asset securing our money is worth well more than the capital we're putting up... and that means safety, too.
I can guarantee you won't read about Doc's first idea anywhere else... But you've got to put up $50,000 to get in on the deal. Fortunately, Doc's second idea is open to anyone for a couple thousand dollars or less. If you're looking for high income without a boatload of risk, this is just about the only way to get it these days. And the money you make in one year on a $500 investment will more than cover your subscription price. To learn more about Retirement Millionaire, click here.
New high: Burlington Northern Santa Fe (BNI).
More nice words in the mailbag... And how to find out more about the Alliance. Drop us a line: feedback@stansberryresearch.com.
"Even if you have to beg borrow or... well... not steal, find the money to become an alliance member as soon as you can. I have been one for a year or so and I didn't think I could afford it either but my simple IRA is up almost 90 % since March. Somebody always has a good recommend and if you set your stops to tight and get taken out of a position there are always more ideas out there than you can use any way. Besides, whether you agree with their political views or not they are honest about them and very entertaining." – Paid-up subscriber Dave
Ferris comment: I think I speak for everyone at Stansberry when I say thanks for your kind words. We view our lifetime memberships as the best values in the financial publishing industry.
A word of caution about your recent returns: Short-term performance is a bit of a red herring. Last March, nobody anywhere in the world wanted to take risk. So all kinds of undesirable and super-risky assets were priced to evaporate off the face of the Earth. A few evaporated. The rest soared, some more than 1,000%.
What counts over the long term is how good you are at avoiding risk. Keep that in mind as you consider all the research now at your fingertips.
And once again, welcome aboard. We're honored you've chosen our service and found it to your liking. I hope you'll enjoy a long and profitable relationship with Stansberry & Associates.
"I would highly recommend you invest in the Wealth Alliance, or, if you can, the S&A Alliance. I started out with True Wealth, and it was a great success for me. Then I added Porter's Investment Advisory, and that also worked out exceptionally well. Then I think I did The 12% Letter and Extreme Value. It was all so good, and my investments were finally making money. So, even when I thought I couldn't afford it, I bit the bullet and joined the S&A Alliance. It's the absolute best financial purchase I have ever made.
"These guys are top notch. The value you will receive is much, much more than you pay for. You will gain an education in investments and the financial world that is second to none. I cancelled all other subscriptions from all other companies, and I throw all new offers in the trash. I have everything I need with S&A Alliance to make sound investment decisions... for life!" – Paid-up subscriber Kevin Wood
Ferris comment: Wow. Thanks, Kevin. Better lay off the hard stuff for awhile.
If you'd like more information on our Private Wealth Alliance or the S&A Alliance, call Mike Cottet at (888) 863-9356.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
January 28, 2010