What Most People Get Wrong When Buying Stocks

This is a universal impulse, and a terrible choice... What most people get wrong when buying stocks... Don't make this mistake with your frequent-flyer miles... How daylight saving time puts you at risk... P.J. on space travel...

Editor's note: As we mentioned yesterday, the Digest team is in Sea Island, Georgia this week for our annual Spring Editors Conference.

Today, we're continuing a special series excerpted from Dr. David Eifrig's Retirement Millionaire Daily. In this free daily e-letter, "Doc" and his research team share their top health and wealth ideas... and show readers how to live the millionaire lifestyle for far less than you could ever imagine.

We hope you enjoy...

Imagine this simple scenario...

Say you own two stocks. You bought each at $50 a share. Over the course of your investment, one has risen to $75 per share. The other has fallen to $25.

Suddenly, you and your spouse decide you need to raise money for something immediately. Perhaps a car you've wanted is on sale at the local dealer, or a cabin on a lake where you want to retire is suddenly on the market. You decide to sell one of your investments. But which stock do you sell?

If you're like most people, you choose to "capture" your gains... sell the $75 winner and keep holding the $25 loser. You may think the loser stock seems to have more upside potential, and you've probably been waiting to "get even" on the position...

It's a nearly universal impulse... but it's a terrible investing choice.

We love to sell our winners too soon and ride our losers too long. A slew of behavioral finance studies shows it. One, by University of California at Berkeley professor Terry Odean, found investors are almost twice as likely (1.7 times) to sell a winning stock as they are to sell a losing stock.

Following similar logic (urges, really), investors held losing stocks for 124 days and unloaded their winning stocks after 102 days.

But you may wonder, "Maybe the winning stock had grown overvalued and its gains were behind it."

It turns out, in the study, the winning stocks (which had been sold) subsequently outperformed the losing ones (which investors were still holding).

It depends on what time frame you look at, but the general consensus is that over six- to eight-month periods, stocks that are moving up tend to keep moving up, and stocks that are falling keep falling. It's a phenomenon called "autocorrelation."

This confirms the old adage: "Let your winners run, and cut your losers short."

When most people buy a stock, they worry about what to do if it falls. But dealing with rising stocks presents an equal challenge. This blind spot in the human psyche regularly worried Peter Lynch.

Lynch is an investing legend. He averaged 29% annual returns over the 13 years he ran Fidelity's Magellan Fund. He was also an eternal optimist when it came to buying stocks. His analysts joked that he "never met a stock he didn't like," and his fund swelled to more than 1,400 holdings.

Of course, no individual investor should try to manage 140 positions, let alone 1,400. But the point is... Lynch had a different outlook on the market than most folks. Once an investment shows a little gain, fearful ideas permeate our thoughts. Any little bit of news – good or bad – seems like a reason to lock in gains.

But as Lynch said, "We've been warned that a rise in oil prices is a terrible thing and a fall in oil prices is a terrible thing; that a strong dollar is a bad omen and a weak dollar is a bad omen; that a drop in the money supply is cause for alarm and an increase in the money supply is cause for alarm."

Research shows a strategy that buys the 10% of stocks with the highest returns over the previous month and sells the 10% of stocks with the lowest returns in the past month generates about 1% a month – roughly double the expected return on the market. In other words, momentum wins out.

Other studies show stocks that hit a new 52-week high are more likely to outpace the market in the following week... not fall back down.

There's no single rule that will tell you when to sell... And that's because there's no rule that tells you when to buy.

We have discussed the importance of setting an "exit strategy" in our monthly Retirement Millionaire newsletter. At the heart of our advice is this...

The strategy for selling should be determined by the reason you bought in the first place – and should be determined at the time of your initial investment.

When you buy a stock, it's critical to know exactly what you expect to get out of the investment and what would lead you to sell...

Here are three keys that help...

One trick I use to make sure I stick with my discipline is to ask myself whether I'd buy more right now or recommend the investment to friends or family. If the answer is no, it's probably time to sell.

If I'm really worried that I'm making a mistake... I remind myself that I can always open a new position after a 30- or 60-day break. There's nothing magical about the time frame. It just serves as a cooling-off period for my emotions. Most likely, a good investment will still be attractive at that point. And in many cases, I've found better opportunities by then.

There are plenty of valid "sell signals" you can use to cut short your losers. But trailing stops are also a simple, easy-to-understand way to eliminate your emotions and get out of losing positions before they get too large.

I love travel "hacks"...

I'm constantly looking for ways to get more out of the system.

One way that I make sure to take advantage is by always earning frequent-flyer miles when I fly.

But unlike retirement savings, your frequent-flyer miles aren't going to grow over the years. They don't earn interest. And they certainly don't pay dividends.

This isn't advice that you usually hear from a retirement expert when it comes to your assets... But don't hoard your miles.

Every couple of years or so, I get an e-mail from an airline about a new "upgrade" it's making to its points system.

Somehow, those upgrades always seem to result in lower availability, more expensive seats, or fewer benefits.

One of my earliest big airline milestones was with American Airlines...

I had racked up 54,413 miles prior to a 1989 "upgrade" that promised to put any miles earned before the program change into a special bucket.

I still have the letter they sent me announcing the change...

Those 50,000 miles were enough for a free first-class ticket on any American Airline flight... plus a first-class upgrade for a companion flying on a regular ticket on the same itinerary.

I hoarded those miles for a special occasion – a Hawaiian vacation – that I never had enough time for.

Then, American Airlines went bankrupt.

It reorganized the program, axing the promise that the miles wouldn't expire, and I lost them. (I did join the class-action lawsuit after the airline's changes, but I received next to nothing.)

Do what I do now: Don't hoard your miles. Take a trip. Visit family or friends, or just explore a new place.

It's not just for the experience. Travel can be great for your health...

For example, a 20-year follow-up to a longitudinal heart study following women in Framingham, Massachusetts, found that women who vacationed at least twice a year had a significantly lower heart-attack risk than women who vacationed just once every six years.

Another study published in the Wisconsin Medical Journal indicated that the odds of marital satisfaction decreased as the frequency of vacations decreased... and the odds of depression were higher.

A nine-year study showed that men who did not take an annual vacation had a 20% higher overall mortality risk and a 30% greater risk of death from heart disease. The study concluded: Vacationing may be good for your health.

And of course, one of the most immediate and important benefits of vacationing is reduced stress.

Stress can wreak havoc on your body. It boosts inflammation and can speed up the cell-division process. In addition, it's associated with higher risks of dementia and Alzheimer's.

So this year, make it a priority to take that trip you've been dreaming about.

Folks around the office were dragging a little more than usual...

Last month, the U.S. and 70 other countries around the world switched to daylight saving time.

That means your "regular" wake-up time is an hour earlier than normal... with the trade-off that there's an extra hour of sun at the end of the workday.

But there are serious health consequences surrounding the decision to mess with our clocks twice a year...

A recent study based on Michigan hospital admissions data found a 25% increase in the number of patients admitted to hospitals suffering from heart attacks on the Monday following the spring daylight saving time switch. Heart-attack risk fell 21% on the Tuesday after going back to standard time.

Another a study at the University of Alabama at Birmingham found a 10% increase in the risk of having a heart attack in the 48 hours following the March time change. Then, after the switch back to "regular time" in November, heart-attack risk decreased by 10%.

Last month, a bigger study using more than 10 years' worth of data from Finland compared the week following a daylight saving time shift to the two weeks before and after...

The overall rate of stroke was 8% higher during the first two days after the time change. More important... cancer patients were 25% more likely to have a stroke right after the time shift than other periods, and the risk of stroke was 20% higher for folks aged 65 years or older.

Generally, a few days after the time change, risks return to normal as our bodies adapt to the new daily rhythm.

But because Americans are generally already sleep-deprived, changing the clocks in the spring may amplify those effects...

According to a recent survey from the U.S. Centers for Disease Control and Prevention, more than a third of Americans aren't getting enough sleep, putting themselves at risk of obesity, heart disease, and other issues.

Folks in Hawaii, Kentucky, and Maryland reported the worst sleep-deprived percentages, while my home state of Minnesota, as well as Colorado and South Dakota, had the highest number of folks who got seven hours or more of sleep. You can see a graphic below of the states, shaded according to reported numbers...

The good news... Almost 75% of U.S. residents aged 65 and over reported getting seven hours or more of sleep, the highest of any age group. The lowest age group reporting was folks between 35 and 44 years old... with just 62% getting seven hours or more.

The key is setting yourself up for a good night's sleep...

Keep your room dark, quiet, and cool. Get rid of electronics by your head and bed. And make sleep a routine. Go to bed at the same time each night. This helps your body know when to wind itself down. And when possible, avoid using an alarm clock to wake you up. Our bodies naturally wake us up when we've had enough sleep. This will leave you feeling better rested and more awake throughout the day.

Try it this weekend.

Getting around eight hours of sleep a night helps reduce stress, makes you three times less likely to catch a cold, helps you maintain a healthy weight, and reduces your risk of diseases like cancer and diabetes.

As for me, I'd like to stop messing with the clocks twice a year and simply shift permanently to daylight time... I love having a little bit of extra sun at the end of the day when I leave the office.

Editor's note: Doc has never done things the "typical" way... He's always looking for "hacks"... simple ways to live a happier, healthier, and richer retirement. That's why he writes a retirement newsletter (Retirement Millionaire), an income-advisory service (Income Intelligence), and an options-trading service (Retirement Trader)...

If you've read any of these publications, you know firsthand that these newsletters can improve your life and your retirement in a dramatic way.

But there was so much more Doc wanted to share with his readers. So late last year, he launched a brand-new daily e-letter called Retirement Millionaire Daily. It's delivered every weekday afternoon, and it's jam-packed with secrets, tips, and strategies to help you save your money... improve your health... and live better.

Best of all, Doc's new e-letter is totally free of charge. Sign up for Retirement Millionaire Daily by clicking here.

One last note... Today, we're featuring the latest essay from contributing editor P.J. O'Rourke, who just returned from the annual Space Symposium in Colorado Springs, Colorado. You won't want to miss it. Be sure to read it at the end of today's Digest.

New 52-week highs (as of 4/18/16): Aflac (AFL), Becton Dickinson (BDX), Central Fund of Canada (CEF), Dalradian Resources (DNA.TO), Johnson & Johnson (JNJ), Kaminak Gold (KAM.V), McDonald's (MCD), 3M (MMM), Nuveen AMT-Free Municipal Income Fund (NEA), New Gold (NGD), and Nuveen Premium Income Municipal Fund 2 (NPM).

In today's mailbag, more subscribers weigh in on gold. Send your questions and comments to feedback@stansberryresearch.com. As always, we're prohibited from giving individual investment advice, but we read every e-mail.

"Porter, your answer to the folks today was excellent and thorough, on what and how you would use gold in a collapse. Thought I could add to that with a story written by a man who lived through the German Weimar hyperinflation. He said it got so bad a wagon-load of money would not buy a loaf of bread! But he was one of the lucky ones. His grandfather had given him his gold watch before he died. He used a knife to shave off gold from the watch, which allowed him to buy bread and got them through this period. This is a true story. That's what you do with your gold!" – Paid-up subscriber J.R.

"I just want to confirm what Porter said GOLD IS MONEY. Back in 1987 as a young man I decided to defect from my home country once called Czechoslovakia. I took a vacation trip to Yugoslavia (which doesn't exist anymore too), but was not allowed to have any extra currency like USD or German Marks. If I would have them and soldiers at the border would find them, I would have to go back home, wouldn't be allowed to travel again outside the country and spent some time in jail.

"To make the story short, I figured out if I buy gold jewelry and put it on my body I will have a money in other form than just a forbidden paper. And that was it, once I crossed the border, I had no problem in Yugoslavia and then in Austria... That's it. GOLD IS MONEY!!!" – Paid-up subscriber S.M.

Regards,

Justin Brill and Dr. David Eifrig
Sea Island, Georgia
April 18, 2016

Should You Put Your Money in Orbit?
By P.J. O'Rourke

Stansberry Digest readers may be surprised to hear that extraterrestrials really exist. But they're not little green men... they're big investment opportunities.

The global space economy has now grown to more than $330 billion – nearly equal to Germany's gross domestic product. The private commercial space industry is expanding by 10% per year. Governments around the world are increasing their investments in space at almost the same pace. In 2015, seven orbital rockets were launched every month. Countries as unlikely as Laos and Turkmenistan now have their own satellites.

I just came back from the 32nd annual Space Symposium in Colorado Springs, Colorado. If you're interested in leaving the planet, it's the best place on Earth to be.

The Space Symposium is the premier international gathering of businesses, industries, organizations, institutions, and people who send things "to infinity and beyond."

The U.S. military was there. So was NASA, as well as the space agencies of 13 other countries and official representatives from 50 nations, plus 12,000 other attendees.

(The Space Symposium, held every April, is open to the public. The venue – an added attraction – is the spectacular Broadmoor Hotel.)

Sponsors included Boeing, SpaceX, Lockheed Martin, Northrop Grumman, United Launch Alliance, Arianespace, General Dynamics, Raytheon, Aerojet Rocketdyne, and America's foremost tech consulting firm Booz Allen Hamilton.

Two vast pavilions accommodated 189 exhibitors. Displays ranged from models of the gargantuan boosters and goliath payloads of the aerospace giants to small booths where wonders of circuitry miniaturization were shown off by start-up tech geniuses, who speak only in math symbols when asked what their products do.

The four-day symposium included more than 100 special sessions and workshops. Among the people giving speeches and presentations were NASA Administrator Charles Bolden, Blue Origin space entrepreneur (and, in his spare time, Amazon CEO) Jeff Bezos, Colorado governor John Hickenlooper, and Commander, Air Force Space Command General John E. Hyten.

I didn't get to hear a few other people because their sessions required a security clearance. Whatever its other failings, the U.S. government isn't crazy enough to give me a security clearance.

I'm a devoted (but amateur) fan of rockets, spacecraft, satellites, and everything about space exploration. It's the technology of hope rising from a world bogged down in earthly concerns. If you're a space wonk like me and can remember the July 20, 1969, Apollo 11 Moon landing more vividly than things like your children's birthdays and your wedding anniversary, the Space Symposium is – it's appropriate to say – heavenly.

But why am I going on about this to Stansberry Digest readers? Aerospace companies, which depend on politics as much as on economics, are notoriously tricky investments. Private spaceflights are a long way from making money without government contracts or subsidies. Taking a stake in Jeff Bezos's Blue Origin, Elon Musk's SpaceX, or Richard Branson's Virgin Galactic is best left to the billionaire enthusiasts who founded the companies. It's not something to put in your Keogh plan.

However, the Space Symposium gave me a chance to ask space industry experts: "How do you really make money in space?"

I got the same answer from every person I questioned. Whether they were industry executives, military brass, government officials, scientists, engineers, researchers, or astronauts... they all said: "data."

I had the good fortune to be able to talk to all these people because I'm on the board of the nonprofit Space Foundation, which created the Space Symposium and is devoted to furthering international space endeavors.

(I'm not sure why the Space Foundation put me on the board. Unlike my fellow board members, I don't actually know anything about space. Maybe they wanted someone to go to when the subject doesn't require a four-digit IQ or a degree in astrophysics. "Hey," says the Space Foundation board, "this isn't rocket science. Let's ask P.J.")

A senior executive at one of Europe's largest developers and manufacturers of satellites said, "Where the money is made is not satellites."

"It's not the rockets, either," he said. "The money is not made by the people who make space hardware or the people who launch space hardware. The money is made by the clever end-users of what the hardware provides."

What the hardware provides is data.

"Satellites just suck up data," said a senior executive at Arianespace, the French commercial launch service provider that controls 50% of the market for putting geostationary satellites into orbit. These are the satellites that "hold still" in the sky and are vital to telecommunications, weather forecasts, and TV broadcasting – and to collecting data.

We think of satellites as "beaming down" content – entertainment, pictures of Earth, phone and Internet connections. But an endless stream of content is on its way up into space.

We're already making profitable use of that data. I sat down with a top space-industry analyst. I asked him how many commercial companies use space technology in their businesses.

He looked at me as if I were as much of a techno-idiot as... well, as I am.

"All of them," he said.

And he explained that in not even one word, just three letters: "GPS."

He also explained something that wasn't as obvious: "The whole global banking system depends on what time it is."

Satellites collect precise information about international credits and debits. It's crucial to know exactly when each financial transaction is made. Otherwise, I could claim that it's currently 9:30 a.m. on December 12, 1980, and that I have a right to purchase Apple at an adjusted IPO cost of $0.39 a share.

My analyst friend thinks we've only begun to profit from space information. A lot of money will be made with the sensor and imaging data accumulated by relatively cheap low-Earth-orbit (LEO) satellites flying as close as 400 miles above the ground.

Large-scale growers of wheat, corn, soybeans, and other staple crops are already widely dependent on satellite data. E-I-E-I-LEO.

Law firms are starting to use space data in property-rights cases. Satellites are infallible surveyors and can spot unauthorized land use, such as illegal mining or dumping, in the remotest regions.

Space could even be useful in criminal cases if GPS data can show that the law firm's client was, for example, growing marijuana on the right side of the Colorado state line, where it's legal.

Prospecting is much harder with a mule than with a satellite sensor that's too far away to kick or bite. And satellites are opening up new fields of prospecting – in landfills where they can detect the presence of materials worth recycling.

There really will be such a thing as a "Space Cowboy." Cattle can be fitted with GPS tracking collars. The collars show where the cattle are. Soon, the collars will also keep the cattle where they're supposed to be.

Satellites can send radio waves to specific grazing perimeters. These radio waves will activate electric shock mechanisms in the tracking collars if the cattle stray – an enormous git-along-little-doggies version of a PetSafe invisible fence.

Next, satellites will be able to shift their radio-wave perimeters, allowing cattle herds to be moved to better pastures with a few keyboard clicks. The cowboys will be on laptops, not getting saddle sores.

Perhaps the most intriguing thing my analyst friend told me was about OneWeb, which is planning to put 700 satellites in orbit to provide the entire world with Wi-Fi.

I'm not suggesting an investment in OneWeb. A constellation of 700 satellites means a lot of launch and orbital hardware that can blow up or fall down. (A precursor to OneWeb already went bust.)

What's intriguing is that Coca-Cola has invested in OneWeb. Coke's idea is to use Wi-Fi data availability as a brilliant product promotion.

There's hardly a place on Earth where you can't buy a Coke. And if you can "Have a Coke and a smile and Wi-Fi," this beats the Pepsi Challenge.

Space is one business about which we truly can say, "It has nowhere to go but up."

Regards,

P.J. O'Rourke