The Truth Shall Make You Mad
'The truth shall make you mad'... The stock market will crash at some point, but when?... Trying to tame an uncertain beast... An important lesson from every bust... Frame your mindset in a different (and better) way... One valuable detail of every bet you make... Picking proper position sizes isn't always easy...
Editor's note: Extreme Value editor Dan Ferris is bearish about stocks today... And True Wealth editor Dr. Steve Sjuggerud is still bullish.
But what about Retirement Millionaire editor Dr. David "Doc" Eifrig?
Well, as you'll see in today's Digest, he considers himself more of a "realist" when it comes to the stock market. And as Doc explains, that's key to growing your long-term wealth...
No one summed up the 'truth' better than English writer Aldous Huxley...
Huxley, who lived from 1894 to 1963, wrote nearly 50 books in his distinguished career – both nonfiction and novels. He was nominated for the Nobel Prize in Literature nine times.
And somewhere along the way, he said...
You shall know the truth, and the truth shall make you mad.
That's a great summation of what's happening in the stock market right now. The "truth" I (Doc Eifrig) want to discuss in today's Digest can get you rather steamed fairly quickly...
We're clearly toying with the conditions for a market crash these days...
Valuations are stretched to near all-time highs... That's true even though my colleague Steve Sjuggerud reasoned yesterday that it'll take more than that to kill the bull market.
Also, while things might not be as crazy as they were earlier this year, speculators are still running at almost full speed without hardly any fears. And just look at the numbers...
Let's say the stock market returns about 10% each year. That means it would usually return about 61% over five years (with compounding).
But since the end of September 2016, it has returned 118%. That's an incredible surge over a five-year period.
To get back on our long-term pace of around 10% annually, stocks would need to return just 3% per year over the next five years. That would be a significant stretch of underperformance.
In other words, for the stock market to return to the performance we expect based on a century of economic history... it simply can't keep up its current pace.
That leads us directly into the second half of the 'truth' about the stock market today...
The market is going to crash at some point... But you'll go "mad" trying to figure out exactly when.
I don't know when the bull run will end. And neither do you, nor anyone else.
I get why that admission could upset some people, though... It sounds wishy-washy or like I'm withholding something valuable from you.
You may be searching for someone who can tell you exactly what to expect – and exactly when to expect it. So then, when you're faced with the truth that no one can consistently and accurately predict every single thing that will happen in the market... it's disappointing.
The problem is... most investors are fundamentally asking the wrong question. They want to know for certain what the market will do, so they can decide whether to get out or stay in.
During a recent presentation that we did together, my colleague Dan Ferris shared a quote from bestselling author Robert Greene...
The need for certainty is the greatest disease the mind faces.
That's just not how investing works, though.
You can't get certainty here... The stock market is an uncertain beast. Rather, you must understand and embrace the fact that the market does unpredictable things all the time.
The sooner you can embrace the uncertainty, the sooner you can properly position yourself to prosper.
The truth is that I'm neither a bull, nor a bear. Rather, I'm a 'realist'...
I'm the type of person who says, "Nobody panic. Let's all take a deep breath."
I've traded through Black Monday in 1987... the savings and loan crisis that followed into the mid-1990s... the Asian debt crisis in 1997... the dot-com bubble and bust in the early 2000s... the Great Recession in 2009... and of course, the COVID-19 crash just last year.
Throughout them all, I learned an important lesson...
The only folks who make it out unscathed are those who keep a cool head.
Building wealth as an investor doesn't come from making rash decisions. That's true on both sides of the coin – the way up and the way down.
Yes, maintaining a portfolio takes good investment ideas... But it also requires a careful balance between conviction and position size – and another careful balance between risk and reward.
When the market is rising, it's easy to forget this discipline... It's easy to slide too much capital into the speculative and fastest-rising investments... It's easy to get too greedy.
The best analogy I can think of to show what I mean is driving down the highway...
On a smooth road with no traffic, you feel comfortable driving faster and faster... The pedal sinks deeper and deeper... And the speedometer creeps higher and higher.
But then, just when you let your guard down, a pothole rocks your vehicle... That's when you realize you're moving far too fast.
You need that dose of reality to remember to stick to a reasonable speed limit. Otherwise, you could lose everything with just one bad move or one divot in the asphalt.
The same thing is true for all types of investors in the stock market...
For professionals, sticking to the speed limit often means limiting leverage. For individuals, it means managing your position sizes and your broader exposure to the market.
It doesn't mean predicting when the market will crash. That's the wrong question.
Instead, you must frame your mindset in a different (and better) way. Here's how I explained this idea to subscribers of my Income Intelligence newsletter in October 2018...
Many investors think of the stock market like a rocket that they ride higher and higher. A rocket, of course, goes up... until it doesn't. They think if only they could release right as the rocket peaks, they could float in orbit – the world of the wealthy – and watch the rocket plummet back to Earth.
That sounds fun, but it's wrong. The market doesn't have one trajectory – up and then down.
In order to time the market correctly, you need to get more than just your sell decision right... You also must decide when to get back in. (You may have to pay taxes on your realized gains as well.)
And more often than not, this will happen... The market will whipsaw back upward and force you to buy back in at a higher price, or you'll be forced to sit on the sidelines as you miss out on the bigger gains. More from that Income Intelligence issue...
It rarely works.
Fortunately, there's a better way to play the market's ups and downs. Don't try to time them with an "all or nothing" decision, simply tilt your allocations. It's that easy.
Don't ever decide that it's time to sell all your stocks... or to load every penny you have into them.
You have far more possibilities for how much risk you want to allocate between stocks, bonds, cash, and other investments.
It's a timeless piece of advice that every investor can use in any market environment...
Don't time. Tilt.
Keep your bets properly sized for the risk that they entail...
If you want to speculate in cryptos, go ahead. Non-fungible tokens could work, too. You could even bet that the NFL's Houston Texans will win the next Super Bowl at 100,000-to-1 odds if you'd like. Any or all of these wagers could pay off.
But you must remember one valuable detail if you do that... Bet small!
Your position size needs to be commensurate with the risk and likelihood of the payoff.
The beauty of growth stocks is that their entire appeal is in their upside. If they can return 100%, 200%, or more... even a small position will end up delivering a sizable return.
When the upside is big, the bet can be small.
On the flip side, proper position sizing is also critical for maximizing your returns...
Trading coach Van K. Tharp runs a test whenever he speaks to a crowd.
He tells attendees to imagine they each have $100,000 to use for trades. The attendees can invest whatever amount they would like before each trade. He plays for 50 rounds.
Then, Tharp starts pulling marbles out of a bag. Each marble includes the results of a trade.
Now, everybody playing this game makes the exact same trades... But they all end up with different amounts of money. Their performances have ranged from bankrupt to $13 million.
The only difference is how big they all bet.
So it's important to bet small when a lot of risk is involved... That way, you won't lose a ton if the decision goes against you. But at the same time, you want to make sure that you're taking a large enough position to get the biggest reward possible from your capital.
It's a delicate balance of risk and reward.
Of course, picking the proper position sizes isn't always easy when it comes to your entire portfolio...
As you add more positions to your portfolio, the interplay between everything starts stacking on top of each other... That results in a complex set of exposures and relationships.
It can be hard to track everything in your head.
And frankly, it's difficult for us as financial publishers to help with that, too...
We deliver a steady stream of valuable investment ideas – and guidelines for how to think about each of them. But we can't give you a particular position size for each recommendation without knowing the rest of your portfolios.
That doesn't mean we've given up trying to help, though...
In fact, we've found plenty of ways to continue delivering all the information you need to build a robust portfolio – including our suite of Stansberry Portfolio Solutions products.
And Steve, Dan, and I recently did something else to help folks succeed whether the bull market keeps going for years or the good times end soon... It's our way of helping you take advantage of the different opportunities we're seeing today – with the least amount of risk.
In short, each of us sent four of our favorite stock recommendations over to our corporate affiliate TradeSmith. These are all recommendations that you've likely already read about in our various newsletters.
TradeSmith's tools can help you take all the guesswork and stress out of investing. And they've done exactly that in this case, with the 12 stocks that we delivered to them...
TradeSmith CEO Keith Kaplan ran all these recommendations through the "Pure Quant Portfolio Builder" and created a fully allocated model portfolio – Stansberry's Ultimate Edge Portfolio. It's designed to capture the most upside in the fastest and safest way possible.
If you want to learn more, here's what you can do...
We covered all the details about how to claim instant access to this portfolio in our recent "Bull vs. Bear Summit." And beyond that... everyone who tunes in will hear what Keith believes is the "most dangerous stock in the world." Watch the full replay right here.
New 52-week highs (as of 10/4/21): Black Stone Minerals (BSM), Continental Resources (CLR), Freehold Royalties (FRU.TO), Cheniere Energy (LNG), Mosaic (MOS), Royal Dutch Shell (RDS-B), Telekomunikasi Indonesia (TLK), United States Commodity Index Fund (USCI), and Viper Energy Partners (VNOM).
In today's mailbag, a note of thanks for our Stansberry Research "gang"... As always, send your comments – praise or rage – to feedback@stansberryresearch.com.
"Hi Gang, I've been much more intimately involved with trading over the last 3 years despite a 26-year involvement. Three years ago, I expected a large increase in income, so I became more involved with the day to day affairs associated with 'following the market.'
"I saw one of [Stansberry Research founder] Porter Stansberry's talks last December and was very impressed. I signed up for some stuff. I am pleased and confident with the things I read. I am a close follower of Greg Diamond.
"Please extend my regards and 'job well done' to the whole group." – Paid-up subscriber Dean F.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Dry Creek Valley, California
October 5, 2021