Why You Absolutely Cannot Trust Your Retirement to a Broker
$18 billion of 'dirty laundry'... Tesla is profitable?!... What Elon Musk doesn't want you to know... New research every investor should see... Why you absolutely cannot trust your retirement to a broker... 'The next 10 years will be ugly'... Must-see: Exclusive video from our private Stansberry Alliance meeting...
This is why severance packages exist...
Earlier this week, Indian mega-conglomerate Tata Sons fired its chairman, Cyrus Mistry.
This was unusual... Tata – which owns more than 100 businesses in industries ranging from retail to financial services to manufacturing – has long been considered one of India's most conservative firms. The board of directors gave no reason for the move, other than saying it was "for the long-term interest" of the company. Former Chairman Ratan Tata was named as interim chair.
The move caught virtually everyone off-guard... including Mistry himself. And he is apparently not happy. Yesterday, he sent a letter to the board – and a few others as well – airing the company's "dirty laundry." As the Wall Street Journal reported last night (emphasis added)...
In a letter... that was seen by [the Journal], Mr. Mistry said he was "shocked" at being replaced without any opportunity to defend himself and outlined how many of the group's businesses were struggling.
In his letter, Mr. Mistry accused the conglomerate of propping up money-losing arms of the group for too long, saying if it took a closer look at the five companies that are struggling most – Tata Motors, Tata Steel, Tata Power, Tata Teleservices (Maharashtra), and Indian Hotels Co. – "a realistic assessment of the fair value [of] these businesses could potentially result in a write-down over time of about 1.18 trillion rupees ($17.6 billion)."
In other words, Mistry accused the company of hiding up to $18 billion in losses. Of course, the company has denied these claims. But its reputation has already been damaged. It's likely to face increased scrutiny going forward, and if Mistry's accusations are even partially true, he likely won't be the last executive to be removed.
Folks are often outraged when companies reward terrible managers with lucrative severance packages. They'll never admit it, but this is a big reason why. These packages typically come with non-compete and non-disclosure agreements that ensure things like this don't occur.
Elon Musk's shenanigans pay off (for now)...
One of our favorite whipping boys – electric car-maker Tesla Motors (TSLA) – reported earnings last night. And the market cheered... well, at least initially...
The company earned an adjusted $0.71 a share in the third quarter on $2.3 billion in revenue, topping analyst estimates of a loss of $0.54 per share on $2 billion in revenue. It also reported a small unadjusted or "GAAP" (reporting that follows "generally accepted accounting principles") profit for the first time.
This wasn't entirely unexpected... As regular readers know, in late August, an e-mail from Musk was leaked to the mainstream press. In it, he implored employees to focus on cash flows in an effort to impress investors...
The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not "Tesla Loses Money Again," but rather "Tesla Defies All Expectations and Achieves Profitability." It would be awesome to throw a pie in the face of all naysayers on Wall Street who keep insisting that Tesla will always be a money loser!
Ever since that e-mail leaked, folks have widely speculated that Musk would do whatever it took to make the third quarter look good, especially as the company prepares to dilute current shareholders with an equity raise. We asked Stansberry's Investment Advisory analyst Bryan Beach for his thoughts on the news. Here's what he told us in a private e-mail this morning before the market opened...
It was fun to watch the press and market react to this earnings release. Initial headlines were overwhelmingly positive, and in the after-hours market, the stock popped 10% to $220 within minutes of the release. But by this morning, the initial euphoria wore off a bit.
As Bryan explained, once Musk's e-mail came out in August, he clearly would do whatever he could to put "lipstick" on the company's third-quarter earnings. Some speculated that Musk would cash in a load of zero-emission vehicle ("ZEV") government credits. And that he did...
About $140 million of Tesla's revenues came from taxpayer credits – that's more than any other quarter, and almost as much as all of last year.
The company reported GAAP profits of $20 million, or just $0.14 per share for the first time ever. That made the bulls happy. But that is a profit margin of less than 1%... And without those ZEV credits, Tesla would have posted yet another loss.
Bryan says the most interesting part of Musk's e-mail was his focus on cash flows...
We always say "you can fake earnings, but you can't fake cash flows"... and Musk has historically ignored the fact that his companies burn ridiculous amounts of cash. So I was interested to see how he could address his newfound respect for actually generating money. You have to hand it to him – in the third quarter, Tesla's free cash flows were indeed positive, $176 million.
How did he do it? Bryan explains...
Again, a portion of these positive cash flows is directly attributable to those government credits the company sold. But if you look at the balance sheet, you'll find the real source of Tesla's flush third-quarter cash numbers. Accounts payable and accrued expenses ballooned by more than $600 million from the previous quarter and were more than twice as high as the same period of 2015.
This suggests that late in the third quarter, Tesla simply stopped paying its bills. It's not exactly Enron-esque high finance. The same thing works for a personal checking account. If you want your cash balance to temporarily increase... just stop paying bills for a while.
Bryan also noticed that Musk reduced capital expenditures (which helps cash flows) and said he will cut even more in the future. That's an odd move for someone who has committed to building a robust network of super-charger stations and plans to roll out the Model 3 next year. As Bryan explains...
You can't make bold growth promises and cut capex. But that's what Musk did. Next quarter, he admitted the company will have virtually no ZEV credits. And at some point, Tesla is going to have to start paying its utility bills again. As we all saw in that leaked e-mail, the third quarter was obviously important to Musk. But he cashed in a couple of chips that won't be around in the future. He has successfully kicked the can.
Fortunately for Musk, it looks like Tesla may meet its already reduced production and delivery goal of 80,000 cars this year. Musk also made bold promises about next year's production and delivery numbers.
In the end, Tesla bulls and bears both found reason to say, "I told you so." I'm guessing the elation from the initial headlines will fade by the time trading closes. Tesla will probably close right around where it opened. We're still up on our short. And nothing about our outlook on the company has changed.
Bryan's early morning call was correct... Tesla shares closed up less than 1% today. Bryan and the rest of the Stansberry's Investment Advisory team will take a closer look at the company's earnings in the November issue, due out next Friday, November 4.
In other news, the sky is blue...
A new study from the MIT Sloan School of Management confirms what many Stansberry Research readers likely already know: Most investment professionals don't have your best interest at heart.
The researchers analyzed the quality of financial advice given to individual clients. They sent "mystery shoppers" to a number of financial advisers in the Boston area. These folks impersonated new customers seeking advice on retirement investing, each with varying degrees of "bias or misinformation" about the financial markets. And the researchers were disturbed by the results. As Antoinette Schoar, the study's lead author, explained (courtesy of the Journal)...
By and large, the advice our shoppers received did not correct any of their misconceptions. Even more troubling, the advisers seemed to exaggerate the existing misconceptions of clients if it made it easier to sell more expensive and higher-fee products.
In addition, advisers strongly favored actively managed funds over index funds. In only 7.5% of sessions did advisers encourage investing in index funds. This is exactly counter to insights from finance research, which suggest that the average investor should choose low-cost index funds over actively managed funds. If advisers did happen to mention fees, they usually downplayed their importance.
Of course, no one expects financial advisers to work pro-bono. But what is alarming is that adviser incentives seem to be set in such a way as to move clients away from the existing strategy regardless of its merit, i.e., even when they looked at a low‐fee-diversified portfolio. As a result, we found that advisers appeared willing to make their clients worse off in order to secure financial gain for themselves.
Now, it's important to note that most financial professionals aren't actually registered as financial advisers, who have a fiduciary responsibility to their clients (meaning they're expected to put client interests first). Instead, most are registered as brokers, which is an important distinction. More from Schoar (emphasis added)...
Brokers... only adhere to what is known as a "suitability" standard, which is much vaguer and only asks brokers to make recommendations that are consistent with the client's interest. In addition, the majority of brokers are not paid on the basis of the quality of their advice, but rather on the fee income they generate from their clients.
To resort to a medical analogy, this is equivalent to simply prohibiting doctors from recommending drugs that kill you, while not actually requiring they prescribe the best drugs to cure your disease.
In short, in investment management – as in all areas of human interaction – incentives still matter. When you pay someone not for great advice, but to sell expensive investment products, you shouldn't be surprised when they do just that.
Earlier this year, the U.S. Department of Labor issued new rules that will require even brokers to act as fiduciaries starting next year. But these rules will only apply to advice regarding 401(k)s and individual retirement accounts... meaning taxable accounts are still "fair game."
As our colleague Dr. David "Doc" Eifrig often stresses, your best defense remains education... Whether that means personally managing your investment accounts as many of our readers have done, or simply keeping a close eye on the choices your broker is making (and the fees he is charging), you absolutely must take responsibility for your financial future.
"The next 10 years will be ugly"...
If a new report from investment-advisory firm Research Affiliates is correct, taking control of your investment portfolio will be more important than ever over the next several years.
The firm analyzed historical returns of a typical "balanced" portfolio – holding 60% in stocks and 40% in bonds, via low-cost index funds – and predicted such a portfolio has a 0% probability of achieving 5% or greater annualized returns over the next 10 years.
Yes, you read that correctly... Folks who invest in the "balanced" portfolio recommended by most advisers have no chance of earning even 5% a year from their portfolios for the next decade.
According to the firm, your only chance to beat the odds is to hold a portfolio that looks "very different" from the broad market. By default, this means being something of a contrarian...
It generally means avoiding what is popular and expensive, and being willing to hold more cash when opportunities are limited, like they are today. It also generally means buying what is cheap and out of favor... and being willing to buy when other investors are fearful.
But it can also mean devoting a small portion of your portfolio to more speculative areas of the market where most investors won't go. When done correctly – with proper position sizing and appropriate trailing stops – and set up at the right time, these calculated "bets" can dramatically boost your returns.
Folks who took our advice to buy gold stocks earlier this year – or more recently, followed Steve Sjuggerud's advice to buy select Chinese stocks – know how profitable these kinds of opportunities can be in a short period of time.
Today, we'd like to share another...
It comes from Jeff Brown, a colleague at Bonner & Partners, our corporate affiliate.
If you aren't yet familiar with Jeff, you should be. He has led teams at some of the world's largest technology firms... And he's an active "angel investor" who has funded dozens of technology startups over the years. In short, he is nothing like the average tech analyst who sits behind a desk all day. He has lived and breathed the industry for years... and is one of the most experienced and connected tech experts in the world.
Today, he works full-time showing readers how to profit from early stage technology companies. And he believes right now is one of the most exciting – and potentially most profitable – times in history to be investing in this sector.
And that's not just talk... In his short time at Bonner & Partners, he has already racked up an impressive track record with tech companies, including gains of 73% in 284 days on Imprivata (IMPR), 239% in 126 days on Twilio (TWLO), 97% in 98 days on Impinj (PI), and 100% in 27 days on Nutanix (NTNX).
Jeff's strategy involves identifying the next game-changing companies before they go public, showing readers the three key ways to profit as they eventually go public.
But rather than tell you about it ourselves, we're going to let Jeff tell you...
You see, Jeff presented this strategy at our annual Alliance meeting in Las Vegas last month. This meeting is reserved exclusively for our lifetime Stansberry Alliance members, who have paid as much as $15,000 for this access. Typically, no one besides Alliance members and Stansberry Research staff get to hear these presentations. But for a few days only, we're making an exception...
Because we believe the opportunity in early stage technology is so great today... and because we know of no one else that has Jeff's experience in the field... we're making Jeff's presentation available to all of our readers for FREE. It even includes one of his current recommendations that you can potentially take advantage of for yourself.
Click here to see Jeff's presentation. But again, please note... This opportunity will only be available for a few days.
|
New 52-week highs (as of 10/26/16): CONE Midstream Partners (CNNX).
Lots of praise in the mailbag today... Clearly, the booze has been flowing. Send your questions and comments – good and bad – to feedback@stansberryresearch.com.
"I just want to commend [you] for maintaining a consistently high standard for the Digest. I often read through it twice to fully comprehend the subtle economic relationships you discuss. I'm a complete junkie for Austrian-economics-oriented newsletters, but I'm going through them to cut back based on how superior your analysis is. Also, it's always good to hear from Porter and his clear emphasis on what's important. The publication is a sanity check given the statist serfs that surround me in here in the people's republic of California. And of course, P.J. O'Rourke tops off the sanity-check with a nice emotional boost. Don't change a thing." – Paid-up subscriber Carlos C.
"P.J., great fantasy about the political debate. I can't help but wonder if this election will prompt people to look outside the Dem and Rep parties and make it possible for a Libertarian, or someone that might possibly possess the good points of both the democratic and republican party candidates. As someone recently said on Facebook: 'guys, I'm really worried that someone is going to win this election.'" – Paid-up subscriber Lee T.
"Love the new website... makes it easy to 'look back' and reread recent issues of my Alliance subscription." – Paid-up subscriber Dennis P.
Regards,
Justin Brill
Baltimore, Maryland
October 27, 2016