The Asset That Outperformed 90% of Its Peers This Year

The asset that outperformed 90% of its peers this year... Why holding cash is a great idea today... What happens when stocks have gotten this expensive in the past... One benefit to holding cash that almost nobody realizes...

Everybody wants to talk about stocks...

Some want to talk about bonds. And a few still want to talk about bitcoin.

But at Stansberry Research, I (Dan Ferris) am not paid to tell you what's popular. My job is to tell you what's good for you... and where I think you should put your money to work.

So in today's Digest, I'm going to discuss something nobody ever seems interested in talking about...

For a couple of years now, I've recommended investors hold plenty of cash...

Cash is the easiest way to reduce risk in your portfolio. It limits your downside and can deliver unlimited upside in the form of opportunities that have yet to come.

That's why I've continued to recommend that Extreme Value readers hold plenty of cash over the past year and a half.

Folks who have taken my advice should have nearly half their equity accounts in cash right now. They've reduced their exposure to the enormous risks we've warned about with U.S. stocks near their most expensive valuations of all time.

Investors who took our advice should be feeling pretty good today...

As you can see, cash – as measured by the iShares 1-3 Year Treasury Bond Fund (SHY) –has outperformed U.S. and global stocks this year...

Cash has also outperformed long-term Treasury bonds, junk bonds, and investment-grade corporate bonds this year...

And it has even outperformed precious metals like gold and silver this year...

The S&P 500 is down about 2% year to date. But stocks haven't been the only sore spot for investors this year. Most asset holders are worse off. Jim Grant, who writes the excellent Grant's Interest Rate Observer, recently reported that 90% of dollar-denominated assets tracked by investment bank Deutsche Bank were down for the year as of mid-November. In other words, 90% of global assets underperformed cash.

Even with the market's recent fall, cash is still a great idea today (though speculating on the 'Melt Up' also makes sense)...

In late August, economist John Hussman reported that his five S&P 500 valuation metrics had hit their "most offensive valuation extreme" ever – higher than the dot-com bubble and 1929 peaks.

A few weeks later, the S&P 500 hit a new all-time high, closing at 2,930.75, an even more offensive, extreme valuation. By late October, the S&P 500 had fallen 10% to 2,641.25.

Today, the U.S. stock market is still less than 10% off its highest valuation in history. I rarely worry about the direction and valuation of the overall stock market. But experience has taught me to think about it when it's near extreme lows and when it's near extreme highs (like today).

Hussman has published some data that suggests the next few years could be difficult for many investors...

When stocks have been this expensive in the past, they've fallen roughly 60% from their peak...

From its closing high in September, a 60% fall would put the S&P 500 somewhere below 1,200. (It's around 2,600 now.) Even if it never crashes, it's still unattractively priced.

For the last three years, I've been telling readers that identifying downside risk is more important than trying to maximize upside potential. That's the value investor in me. And like many things, it didn't look smart until it did.

The market has been super volatile after a relatively calm, long bull run. That has made short-term trading difficult. Consider this: Last year, the benchmark S&P 500 Index moved 1% (higher or lower) just nine times, according to closing price data compiled by Bloomberg. This year, we've seen 56 such moves. Whether the market is up or down over the next few years, I expect higher volatility is here to stay.

(All of these concerns are why I continue to recommend all short-term traders subscribe to my colleague Steve Sjuggerud's True Wealth Systems trading service. You can't trade in a volatile market without a seasoned pro on your side. Steve has tools designed to make good profits and reduce risk in a volatile, toppy market. If you're interested in short-term trading, do so without Steve's guidance at your own peril.)

As long as equity prices remain exorbitant and unattractive, I'll continue to recommend holding plenty of cash...

Most people don't want to hear this because they're only interested in what's going to go up next week or next month – a terrible way to build lasting wealth. Most of those people will be out of the stock market, many for good, within a couple years.

Investors tend to suffer from the impulse to do something. Holding cash feels wrong. But it's not wrong... It's exactly what you're supposed to do when it becomes difficult to find good deals in the market.

Even small value investors like Centaur Value Fund's Zeke Ashton are closing up shop, citing the difficulty of finding value-priced businesses in the stock market. In his last letter to clients, Ashton lamented how hard it has been to keep up with a rising market when you invest based on disciplined valuation parameters.

Ashton – whose fund has returned 423% since 2002, beating the S&P 500 – isn't satisfied with his fund's performance the last several years. He isn't alone... Warren Buffett's Berkshire Hathaway value investing empire has had more than $100 billion in cash on its balance sheet for five straight quarters. He just can't find anything cheap enough (and big enough) to buy.

Holding cash right now is the contrarian move, especially for anyone who has been in stocks over the past decade. As the Wall Street Journal recently reported...

For most of the past decade, holding cash... has failed to pay off. A person who invested $100 in the S&P 500 about 10 years ago would have about $396 by now, compared with roughly $104.50 [if they'd just held cash].

Nobody wants to hold cash today. It's boring and won't make you a ton of money. But of course, that's the wrong perspective. When great investors don't see a risk worth taking, they hold cash and wait.

There's one last benefit to holding plenty of cash, which many people don't realize...

As I mentioned in the beginning of today's Digest, the No. 1 thing most folks don't understand about cash is its optionality.

I covered this topic for the first time in the October 2015 issue of Extreme Value, titled "The No-Risk 'Call Option' That Never Expires."

Optionality means low (or no) downside and high (or unlimited) upside.

Cash is the most valuable option of all. It's more valuable than any call or put option you'll ever trade. It's a no-risk call option that never expires. The cash you hold today is the value-priced stock you'll buy tomorrow. As famed value investor Seth Klarman told his clients back in 2005...

Why should the immediate opportunity set be the only one considered, when tomorrow's may well be considerably more fertile than today's?

The downside in cash is virtually zero. The upside for a disciplined valued investor is huge, because he won't buy anything but attractive businesses at attractive prices.

To be clear, I'm not predicting a market crash today...

And more important, you don't need one for an opportunity to put large sums of cash to work. In fact, all you need is for a great business to go "on sale." (We've found four such bargains since July.)

Sometimes, an entire industry will go on sale, generating great opportunities for patient investors. A couple value investors I know have found multiple opportunities in the pharmaceutical industry recently. (We found one of those in the November issue of Extreme Value, too.)

Elsewhere in the market, we've found incredible bargains in the shipping industry. We added two shipping stocks to the Extreme Value model portfolio earlier this year that we believe could rise as much as 10 times from today's prices.

And as regular Digest readers know, we've identified the two best businesses in the global mining industry... both of which are screaming buys right now.

When you learn the value of holding cash, you'll know how to employ it for long-term, multi-bagger returns...

Again, I'm not predicting a market crash. But cycles matter, and we're late into this bull market. When stocks have been this expensive in the past, they've gone on to get crushed.

Disciplined investors who don't overpay should outperform the vast majority of investors over the next few years... and could make an absolute fortune over the next decade.

With value stocks set to overtake growth stocks once more, this is the best time in more than a decade to be a value investor... And I'm excited about the opportunities I see shaping up for subscribers to my service, Extreme Value.

Speaking of which... In the December issue of Extreme Value, out today, we've found a company run by one of the greatest capital allocators in history. It has more than half its market cap in cash. As we explain in the issue, if stocks fall sharply from here, this company would put billions of dollars to work and could quickly double its share price.

Shares have four times more upside potential than downside risk as a result of holding so much cash and being run by such a brilliant management team. To become an Extreme Value subscriber right now and access this issue immediately, click here.

New 52-week highs (as of 12/13/18): MarketAxess (MKTX) and Procter & Gamble (PG).

In today's mailbag, several folks send support for our friend and pro surfer Sean Poynter, who is currently competing in the paddle surfing world championships. As always, send your notes to feedback@stansberryresearch.com. We can't provide individual investment advice, but we read every one.

"Great update on Sean. I'm heaping praise on his mentor in my mind right now. I think Albert Schweitzer and Stepan Rak and Laird Hamilton and Mother Teresa and Ben Graham and the Renaissance Man all got together (somehow) and had a baby. And named him Steve." – Paid-up subscriber L.F.

"Steve, I recently subscribed because your analysis makes a lot of sense to me. As a 20 year veteran CRE mortgage broker/ banker, I am very familiar with leverage and have been arranging CMBS loans for almost 2 decades.

"The reason for the note... is that I am lifelong surfer and thought it was awesome you are supporting Sean. Sometimes closings are like barrel rides and you just have to make it... Cheers!" – Paid-up subscriber Nick V.

"Geaux Sean!! Awesome!!!" – Paid-up subscriber Kevin L.

Regards,

Dan Ferris
Vancouver, Washington
December 14, 2018