The Only Free Lunch in Finance
More on Doc's 'change of heart'... Don't overlook the power of diversification... The only free lunch in finance... A new take on flu shots... A big announcement from Extreme Value editor Dan Ferris...
In Friday's Digest, we noted that our colleague Dr. David 'Doc' Eifrig has had a 'change of heart'...
In short, for the first time in years, Doc has turned near-term bearish on stocks. He shared further details on his cautious stance in the latest issue of his Retirement Trader advisory on Friday.
Because we know many Digest readers share his concern, Doc has graciously allowed us to share a portion of his update here today. From the issue...
For the past nine years, the stock market has plowed relentlessly higher... despite a constant stream of bearish doubts. We've heard warnings of high valuations, double-dip recessions, too-loose monetary policy, and a million other worries. But stocks have defied them all, marching higher...
The good times must end someday. Even we wonder if we aren't "overdue" for a correction. So we looked into it... To figure how often we see corrections, we counted 15% downturns in the market – and we considered the correction "over" when the market rises halfway back to its peak.
The market hasn't seen a 15% correction in an astounding 2,352 calendar days. Back to 1950, we see a 15% correction (or more) every 727 days on average, or about every other year. Right now, we're stretched out to about 3.2 times as long as normal.
Of course, this is nothing new...
As Doc explained, you could have made a similar argument many times in the past...
A die-hard bull would point out that the late 1990s saw a longer run (3,452 days) without a correction, and the run that dominated the 1980s was nearly as long as today's (2,160 days). Just look at a chart of the S&P 500 dating back to 1980...
And if you want to see the magnitude of these bull markets and corrections, take a look at this chart...
Based on history, you could have said we were "due" for a correction for most of the past two years. But history doesn't tell you when a correction will happen. The variability is simply too large.
In other words, simply being overdue for a correction isn't enough...
Doc says you must also turn to the numbers "underpinning" the market. And he notes one big thing has recently changed. More from the issue...
For the first time in almost 10 years... euphoria is creeping into the market. People are buying stocks like they think they can't go down. They're trying to play catch-up on the years they missed.
According to Bank of America Merrill Lynch Global Investment Strategy, about $58 billion of new capital poured into stock funds over the past four weeks. That's the biggest monthly spike in more than 16 years.
And the majority of Americans think the stock market will continue to go higher in 2018, according to a University of Michigan survey. More than 65% are bullish, which is an all-time record high.
It's times like these when the market decides to punish the latecomers.
So... what should you do with this information?
As we mentioned on Friday, Doc doesn't recommend trying to trade around a correction. Your chances of timing both the top and the bottom correctly are next to zero. And while he expects a sharp pullback of as much as 15% in the coming months, none of his trusted indicators suggest that a larger decline – a crash or a bear market – is likely.
Instead, Doc recommends staying invested, but taking a little time today to make sure your portfolio is properly diversified. As he explained, most people underestimate just how powerful diversification can be...
Let's look at the S&P 500 to see just what I'm talking about. Of the companies in the S&P 500, the average stock posted a one-year return of 22.9% with volatility of 21.3%. So if you picked an S&P 500 stock at random, you'd expect to earn 22.9% with risk (i.e. volatility) of 21.3%. That means you'd be earning 1.08% (22.9%/21.3%) for each "unit" of risk you take. (This is what's known as "risk-adjusted returns.")
If that's the average, shouldn't the S&P 500 as a whole have about the same risk-and-return profile? Not even close.
Over the last year, the S&P 500 returned 23.7% with a one-year volatility of about 7%. On a risk-adjusted basis, you earned 3.4% on each unit of risk... triple the rate of a stock at random.
That's the magic of diversification at work. The whole adds up to more than just the average of its parts. While some stocks fall, others rise, and the diverse group gets more predictable, less risky, and more rewarding.
As Doc explained, this is why proper diversification is called 'the only free lunch in finance'...
It's a simple way to earn higher risk-adjusted returns without sacrificing anything.
Again, if you'd like more assistance in setting up a properly diversified portfolio, we encourage you to learn more about our Stansberry Portfolio Solutions products.
Porter, Doc, and Steve Sjuggerud explained exactly how these products work during our webcast last Wednesday. Click here to watch the free video replay for yourself. (Or if you'd rather, you can read a detailed description of Stansberry Portfolio Solutions right here instead.)
Of course, longtime readers know Doc isn't just a trusted source of 'no nonsense' financial guidance...
Doc's readers also depend on him for practical, science-based health and wellness advice. And here, too, Doc has had a recent change of heart... one that is particularly noteworthy today.
You see, right now, the U.S. is in the midst of one of the worst outbreaks of influenza – the "flu" – in years. As the Wall Street Journal reported over the weekend...
Schools in at least 11 states have closed as the worst flu epidemic in nearly a decade intensifies.
The dominant strain of flu this season, H3N2, known for being particularly virulent, has resulted in the deaths of at least 37 children and is expected to cause more as the epidemic persists several more weeks, the Centers for Disease Control and Prevention projected on Friday...
An estimated total number of deaths due to the flu won't be available until next season, according to the CDC. Outpatient hospital visits by people with the flu have been skyrocketing for several weeks, and as of mid-January had surpassed every season except 2009-10, when a new strain of flu caused a global pandemic...
The flu is particularly hard to fight this year because the H3N2 strain tends to strike the elderly and children hard. People over age 65, and between the ages of 50 and 64, are being hospitalized at higher rates, the CDC said.
For years, Doc has been a staunch critic of flu shots...
He argued that they were unnecessary at best... and unsafe at worst. He personally avoided them, and generally recommended others do the same. But last fall, Doc surprised many of his longtime readers...
He told them that he had started to rethink his position on flu shots... and was even considering getting one for the first time.
What had changed? As Doc often says, his medical background allows him to be a scientist first. He bases his decisions on data, not dogma. And when the facts change, he changes his mind.
In this case, new research suggests that the flu vaccine lowers your chance of suffering a heart attack... And it can prevent a future heart attack from occurring.
In short, if you're an American older than 50 – folks who are particularly vulnerable to both heart attacks and flu-related complications – Doc believes the potential benefits of a flu shot now outweigh the risks.
He shared more details on this research in the November 2 issue of his free daily Health & Wealth Bulletin. If you're not already a Health & Wealth Bulletin subscriber, you can read it for yourself right here.
Finally, a special announcement for the serious long-term investors out there...
It comes from our colleague Dan Ferris, editor of our Extreme Value advisory.
If you're not familiar, Dan is a value investor whose particular approach to finding safe, cheap stocks has earned him one of the most impressive long-term track records in our business. It has also earned him a loyal following among the "who's who" of Wall Street... In fact, Dan has counted more than 20 major financial firms and well-known money managers as subscribers over the years.
In short, if you consider yourself a serious investor and you aren't following Dan's work, you owe it to yourself to fix that immediately. Fortunately, there are now more ways to do so than ever before. As Dan explained in his latest Extreme Value monthly update last week...
The Extreme Value social media machine is in motion. It's a modest effort right now, but you can help it grow by following us on YouTube, Facebook, and Twitter...
YouTube is our most recent venture. I started this channel as an alternative to the typical business TV format of fashion models reading teleprompters, always commenting shallowly on the market's last tick – bullish on Monday, bearish on Tuesday, bullish again on Wednesday.
Investors need a talking head with a longer-term view who's willing to look back at his past calls and let you know when he was right or wrong... or perhaps when someone else got something "more right" than he did.
For example, I recently posted that the Bloomberg commentator Matt Levine did me one better on the topic of my January 15 video, "Capitalism Works." Becoming a better class of talking head is a worthy pursuit in this world of 24/7 news and ultra-shallow reporting.
Watch my latest video, "The Most Certain Thing in the World!" It pairs well with Howard Marks' comments about the unavailability of certainty in his latest memo. "Like" the video. Leave a comment. Post the link on your favorite social media websites. And of course, subscribe to the Extreme Value YouTube channel if it interests you.
If you are active on Facebook, you might enjoy our new group, called Value Investor Forum. You'll find discussions on all kinds of investing topics, and posts about specific companies. It's a great place to see what other value investors think about what's going on in the world.
New 52-week highs (as of 1/26/18): AllianceBernstein (AB), AbbVie (ABBV), American Financial (AFG), AMETEK (AME), Amazon (AMZN), Alibaba (BABA), Bancroft Fund (BCV), Becton Dickinson (BDX), Biogen (BIIB), iShares MSCI BRIC Fund (BKF), Berkshire Hathaway (BRK-B), Blackstone (BX), Morgan Stanley China A Share Fund (CAF), CBRE Group (CBG), Global X China Consumer Fund (CHIQ), Global X China Financials Fund (CHIX), First Trust Nasdaq Cybersecurity Fund (CIBR), Cisco (CSCO), WisdomTree Emerging Markets High Dividend Fund (DEM), iShares Select Dividend Fund (DVY), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Japan Fund (EWJ), iShares MSCI Spain Capped Fund (EWP), iShares MSCI South Korea Capped Fund (EWY), iShares MSCI Brazil Fund (EWZ), Facebook (FB), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Fidelity Select Medical Technology and Devices Portfolio Fund (FSMEX), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), Grubhub (GRUB), iShares Nasdaq Biotechnology Fund (IBB), iShares Core S&P Small-Cap Fund (IJR), Intel (INTC), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), JD.com (JD), JPMorgan Chase (JPM), KraneShares Bosera MSCI China A Share Fund (KBA), KraneShares E China Commercial Paper Fund (KCNY), Coca-Cola (KO), VanEck Vectors Coal Fund (KOL), KraneShares CSI China Internet Fund (KWEB), Lockheed Martin (LMT), Mobile TeleSystems (MBT), McDonald's (MCD), iShares MSCI China Index Fund (MCHI), MercadoLibre (MELI), Microsoft (MSFT), Match Group (MTCH), AllianzGI Equity & Convertible Income Fund (NIE), New York Times (NYT), PowerShares High Yield Equity Dividend Achievers Portfolio Fund (PEY), PNC Financial Warrants (PNC-WT), Ralph Lauren (RL), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), SPDR S&P Dividend Fund (SDY), ProShares Ultra S&P 500 Fund (SSO), Steel Dynamics (STLD), Sysco (SYY), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), Travelers (TRV), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Financials Fund (UYG), VF Corporation (VFC), Wal-Mart (WMT), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
A quiet weekend in the mailbag. Let us know what's on your mind. Drop us a line at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
January 29, 2018