This Classic Investment Strategy Is Dead
This classic investment strategy is dead... Should you even care?... The best way to play the market's ups and downs... Here's what the U.S. economy is telling us right now... What we're telling our readers to buy today...
Editor's note: This week, we've been featuring a series of exclusive guest essays from some of Stansberry Research's top analysts... including Alan Gula on the future of blockchain and bitcoin... Austin Root on the biggest enigma on Wall Street... and Mike DiBiase on why share buybacks can be a bad thing.
In today's essay, Income Intelligence senior analyst Matt Weinschenk expands on some lessons about the market's ups and downs that he and Dr. David "Doc" Eifrig discussed in a recent issue...
For years now, one broad investment strategy has worked...
Buy the dip.
In hindsight, every time stocks fell, you should have used it as a buying opportunity. The declines were short-lived, and the following rallies were quick and rewarding.
Nearly 10 years into the current bull run, this pattern has played out again and again. Every time we saw a dip, it was always followed by another rally. Another dip, another rally.
This feedback loop has conditioned investors to get comfortable – and even excited – to buy the dip. But the market doesn't like complacency... So as soon as everyone was as calm as could be, the bottom finally dropped out.
That's what has happened over the last two months. "Buy the dip" is dead. Lately, it pays more to "sell the rally."
But the bigger question is this...
What's the point of trying to figure this out, anyway?
Many investors and other wealth seekers take the view that they have to seek out one big bet and pile in... They figure if they search hard enough, they can find that sure-thing stock or strategy that will turn them from a wage-earner to a wealth spender.
Everybody wants to be the bold investor who shorted the housing market or the dot-com boom at exactly the right time.
But for every investor who pulled those tricks off, there are hundreds who went bankrupt.
Fortunately, you have a far better option than such wild bets. Better yet, it's easier, safer, and more profitable. In today's Digest, I (Matt Weinschenk) will show you how.
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. These investors 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.
Sounds fun, but it's wrong. The market doesn't have one trajectory higher... it then goes down. So in order to time the market correctly, you have to not only get your sell decision right, you also have to decide when to get back in. And more often than not, the market will whipsaw back upward and force you to either buy back in at a higher price or sit on the sidelines, missing big gains.
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. You can be 90% in stocks or 10% in stocks. I don't (and can't) know what number is right for you, but it's rarely 100% or 0%.
Longtime readers of Doc's Retirement Millionaire, Retirement Trader, and Income Intelligence newsletters know we've been bullish since 2009. We've argued the economy was "grinding higher" and that income investors could earn good returns – even with low interest rates – thanks to positive fundamentals. We have not once called for a bear market that didn't happen.
And we're not calling for a bear market now. If you think we should, you're missing the point.
Rather, a sensible reading of the market suggests that raising some "dry powder" will serve you well.
We've been working on this for months by outlining the risks and positioning our readers in safe investments...
At our annual Alliance Meeting in Las Vegas last month, Doc told attendees that his No. 1 piece of advice was to move to "cash and cash-like" investments. Coincidentally, that was prior to the market crash...
Some folks interpreted that as a grand call of an impending bear market. In reality, it just makes sense to position yourself so that you can sleep well at night no matter what the market is doing.
There's still a good chance the market can go higher. We're on board with my colleague Steve Sjuggerud's "Melt Up" thesis that the market likely has a final leg upward. Markets do tend to end in blow-off tops that post very generous returns in their final months.
You should bet on a Melt Up... with the right amount of money.
After all, while the market has seen a sharp correction, the underlying economy does look healthy.
Right now, all of my gauges – both real-world ones and more traditional economic measures – tell me the economy is cooking. It couldn't really be performing much better.
The fastest and easiest way to check in on the economy is the Conference Board's Leading Economic Index ("LEI"). The LEI combines 10 powerful signals that tend to move ahead of the broader economy.
Lately, half of these are still moving into growth territory: consumer expectations, the interest-rate spread, credit, and two measures of manufacturing orders. In the end, we're seeing positive growth, though you can see in the following chart that the rate of growth has dipped a bit...
With that in mind, it's certainly possible that the market could go higher. Stocks haven't been this cheap since 2016, as measured by the price-to-earnings ratio.
All of this is to say that we don't know what the market will do in the short term...
Nor can we control it. But what we can control is our overall portfolio allocation. We can also understand what risks a particular allocation will expose us to.
In short, we're doing a few things... We're making sure our readers' stock allocations reflect our risk tolerance. Thanks to higher interest rates, we're happy to put cash into certificates of deposit (CDs) and money-market accounts to earn interest. Just two years ago, the average five-year CD paid about 1.2% per year. Now, it's up to 2% across the country, with some paying more than 3%.
That won't get you rich quickly... But it's good to get an actual return on your cash at zero risk.
We're also looking at gold for the first time in a few years, and royalty companies in particular. We recommended one last month in Income Intelligence. We like gold's prospects, but we're on the search for great income opportunities... So a dividend-paying gold-royalty company fit the bill.
Within our stock holdings, we've been recommending conservative, "boring" stocks like drugstore chain CVS Health (CVS), a paper company, a funeral-services company, and a cheap restaurant chain. These companies are about as "recession-proof" as it gets, and their businesses don't rely strongly on the health of the overall U.S. economy.
You never know if the upcoming month will deliver a record rise in stocks... or a record decline. But smart, seasoned investors are prepared for either scenario, both mentally and financially. Are you?
New 52-week highs (as of 11/28/18): American Express (AXP), Blackstone Mortgage Trust (BXMT), Essex Property Trust (ESS), Ionis Pharmaceuticals (IONS), McDonald's (MCD), O'Reilly Automotive (ORLY), Service Corp International (SCI), and Walgreens Boots Alliance (WBA).
A busy day in today's mailbag, as Mike DiBiase responds to questions from two readers about the staggering increase in share buybacks. Have you enjoyed this week's guest essays? Let us know what you think atfeedback@stansberryresearch.com.
"Thank you for an excellent and revealing article that exposes the greed in our today's predatory capitalism which, I am afraid will doom our nation. I strongly recommend you post the article in Yahoo.com, DrudgeReport.com, and any web page that receives high visibility. Again thank you for enlightening us and for your public service to raise awareness." – Paid-up subscriber Pascal L.
"Thanks so much for your 2 previous exposes (Netflix and the reality on stock buy-backs). Very informative and scary smart!" – Paid-up Alliance member Joe M.
"I have been trying out find out which companies are now so overloaded with debt that they are unlikely to be able to survive further interest rate increases, but without much success. Your list helps somewhat. I have avoided those with financial statements which include figures attained by 'other than generally accepted accounting principals,' which seems like a red flag to me! Can you give a more complete list of such companies to avoid? I am on the verge of just selling everything in self defense because of my ignorance!" – Paid-up subscriber Janice M.
Mike DiBiase comment: Janice, every month in Stansberry's Big Trade, we publish the "Dirty Thirty" – a list of troubled companies with heavy debt loads.
Or, if you want to do the work yourself or research a specific company, you can go to Yahoo Finance and enter the ticker of the company you're interested in. Click on the "Financials" tab, and then select the "Income Statement." Scroll down to "Interest Expense" and take note of that number.
Next, click on "Cash Flow" and scroll down to "Total Cash Flow From Operating Activities" (in other words, what I like to call cash profits). If this number is smaller than the interest expense number, the company is choking on debt. Avoid any company whose cash profits aren't at least double its interest.
By the way, there's no need to avoid companies just because they report numbers that are "other than generally accepted accounting principles" (or "non-GAAP"). A lot of companies report non-GAAP numbers in addition to their GAAP numbers. Non-GAAP numbers are intended to give investors a clearer picture of their results by excluding non-recurring revenue or expenses.
It's true that some companies take non-GAAP numbers to an extreme, but it's not a sole reason to avoid a company. That said, you raise a good point... The confusion over non-GAAP numbers is why I like to focus on cash flows instead of accounting profits. As we often say, "you can't fake cash."
"Hi Mike, I very much appreciated your thoughtful analysis in the Digest today. But it seems to me that you left one very important loose end hanging that should be tied to the whole case that you were making, as follows: 'But the end is near. Beginning next year, I expect we'll see buybacks decrease for the first time since 2009.' Why is that your expectation? Please do tell!" – Paid-up subscriber Garry G.
Mike DiBiase comment: Thanks, Garry. I expect buybacks to start decreasing next year for two reasons...
First, this year, many U.S. companies took advantage of the new tax law that temporarily lowered taxes on cash held overseas brought back to the U.S. That's why we're seeing such a large spike in buybacks this year.
But more important, most companies can no longer afford to keep buying back shares. Companies have used debt to fund most of the buybacks over the past nine years. Corporate debt is at record levels. It's like a giant rubber band that's stretched so far it's about to snap.
Around 40% of this debt is rated "BBB," the lowest level of investment-grade. These companies are dangerously close to being downgraded to dreaded "junk" status. If they're downgraded, lenders will demand much higher interest rates when it comes time to refinance their debts. They can't afford to take on more debt with the risk of being downgraded. And many of the companies that are already junk-rated are having trouble paying their interest today. Rising interest rates alone could force some companies into bankruptcy. In other words, corporate America's debt is stretched to the limit.
Regards,
Matt Weinschenk
Baltimore, Maryland
November 29, 2018