Horse, Meet Water

Crossing the desert... Some of Porter Stansberry's classic, timeless advice... There are lots of ways to die... Three things every investor must know to succeed... Horse, meet water...

Editor's note: Today, we're taking a detour from our regular daily fare to share a special, classic essay from Stansberry Research founder Porter Stansberry.

If you've already watched Porter's latest video presentation or have seen some of our e-mails over the past week or so, you know Porter is very concerned about the U.S. economy. In part, he's forecasting a deep recession in 2024, unemployment to go above 10%, and a potential run on one of America's biggest banks.

It's no doubt a grim outlook, and that's not all of it...

As Porter sees it, a financial crisis is brewing that's on the same scale as the residential mortgage crisis we saw in 2008 and 2009... And Uncle Sam can't use the old bailout playbook because, he says, "the government is broke" and risks losing control of the U.S. dollar.

However, here's the better news Porter is sharing along with these warnings...

There is a simple strategy any individual investor can use today to prepare for what he believes is ahead. If you do, you'll likely not only weather the storm but come out the other side wealthier... or, at the very least, avoid the worst of the next crisis.

Porter talked about how to do this – how to really build long-term wealth with stocks – in his brand-new free presentation that debuted last week, which I urge you to watch or listen to now. It won't be online much longer...

After all, for those that don't know, Porter predicted the bankruptcy of the world's largest mortgage brokers 15 years ago, the collapse of General Motors, the 500%-plus rise in the price of bitcoin in the summer of 2022, and more. And he has guided subscribers and readers through market uncertainties since starting this business in 1999.

So to make sure I (Corey McLaughlin) do my best to highlight his latest message before it goes offline, today I wanted to share some "classic" Porter thoughts, in his own words.

The following essay originally ran in the Digest in 2015.

That might make it sound like the content is outdated, but as I expect you'll see, it's not. In fact, that these ideas are timeless only supports the points Porter was trying to make then – and now – about how to be a successful investor.

Let's start here... in the desert...

Imagine you had to walk across the Rub' al Khali – the "Empty Quarter" – of the Arabian Peninsula.

This 250,000-square-mile desert is the largest sand desert in the world. Sand dunes there reach as high as 800 feet. It rains less than two inches a year. The surface temperatures reach 125 degrees.

Think about the three most important pieces of equipment you'd need, beyond the most basic stuff like shoes, clothes, food, water, etc.

This isn't hypothetical. Three guys decided to try and walk across this desert completely unassisted. In 2013, South Africans Dave Joyce, Marco Broccardo, and Alex Harris became the first humans to walk completely unassisted through the Empty Quarter. They plotted a 1,000-kilometer course from Salalah, Oman to Dubai. Their story is completely nuts... but fascinating.

The most obvious piece of advanced equipment you'd need? A GPS, right? Nope. What they needed most wasn't a GPS... or even a map. What they had to have to make it across 1,000 kilometers of desert in 40 days (after which they would have quickly starved to death) was Google Earth.

They needed to know their precise position in the desert relative to the giant sand dunes, which you can only see using Google Earth's satellite photos. Before the advent of publicly available satellite photos, walking across this desert would have been impossible. GPS alone wouldn't have been enough.

The second item Joyce, Broccardo, and Harris needed was a strong, lightweight, easy-to-pull cart, so they could carry enough water for the journey. Obviously, they needed food, too. But the water was far more critical and heavy to carry. (You can survive for up to three weeks without food. But most people would only make it three days without water.)

They spent about three years testing various designs for carrying enough water. The key to success was using mountain bike tires on their cart, rather than wide full tires, which were too difficult to pull through the sand.

And finally... to make sure they had continuous access to Google Earth, they needed to use a solar-based charger to power up a satellite phone. They lost the charger on the 10th day of the trip. So one of them had to turn around and follow their tracks for 25 kilometers to find the charger before it got dark. Without it, they probably would have died. Imagine trying to find that charger... before dark... in the desert... by yourself... knowing that if you couldn't find it, you and your friends would probably die.

So what the heck do three crazy South Africans hiking across a giant desert have to do with investing? It's obvious (to me).

For most individual investors, the process of trying to manage their savings in the stock market is a lot like trying to cross the Rub' al Khali desert on foot. You have few landmarks to guide your way. And there are lots of ways to die. Most people don't make it.

Learning the story about the guys crossing the desert, I started thinking about the most important things investors need to understand if they're going to be successful in the stock market.

I'm not talking about the obvious stuff... like the way dividends compound returns or the time-value-money formula (which explains that your returns will be driven by how much time your investments have to compound and how much money you save).

I'm not talking about the more advanced, but still simple, concepts like position sizing, trailing stop losses, and avoiding taxes (where possible).

It's not that these things are unnecessary. They're critical. But they're like shoes, hats, and sunglasses when you're crossing a desert. Nobody would go without them, and they really don't require much foresight or wisdom. Instead, I wanted to answer two more difficult questions...

What are the three things every investor in common stocks must know to succeed, but that you believe most people don't know how to do? Where is the greatest gap between the value of knowledge and the inexperience of most individual investors?

I thought about these questions for a long time. Here's my list...

The No. 1 Thing Every Investor Must Know to Succeed

The most important thing for investors to understand about investing in stocks is simply what kinds of businesses make for great investments and how to properly value these kinds of businesses.

You can think of this knowledge as your personal Google Earth for crossing "the desert" of investing. Knowing how to recognize great businesses and what they're worth is like knowing where the sand dunes are and how to get past them.

Here's an example of what I mean: Do you think coffee giant Starbucks (SBUX) is an expensive stock at around $100 per share today? Why or why not?

If you can answer this question within 30 seconds by looking at a few key statistics, you're ready to cross the desert. If you can't... you're not ready. You have to power up your satellite phone and spend more time studying your maps.

If you have no idea whether Starbucks is expensive or cheap, don't worry. You're not alone. Judging by my experiences with wealthy and business-savvy subscribers, I estimate that fewer than 10% of our readers really understand these concepts.

Without this knowledge, you can't be successful as an investor. Not for long, at least. But that's why I'm writing to you today.

The No. 2 Thing Every Investor Must Know to Succeed

The second thing I know you must have to "cross the desert" successfully is a strategy that will continue to make you money even when you're wrong about the big picture.

When we grow worried about a serious crash in stocks, we close some of our long positions. And we hedge our exposure to the market by selling short (betting against) some stocks.

But we don't sell everything. And we don't move to a 100% short portfolio. (In other words, we aren't "all in" on betting that the market will fall.) As a result, we'll do well even when the market defies our expectations.

The lesson is... you don't ever want to bet the farm on any particular outlook (or any particular investment recommendation). That's a hard idea for most investors to understand and implement...

When events in the world spook individual investors, they tend to pull out of stocks completely. They generally do so at the worst possible time. You have to learn how to make money even when you're wrong about the market as a whole. And you have to follow your strategy... even when it's scary.

The No. 3 Thing Every Investor Must Know to Succeed

The last thing I think most individual investors either never learn or only learn the hard way after several big beatings is to never, ever chase what's "hot."

Investment "mirages" will cost you almost every time. It takes a lot of discipline to stick with great businesses that you can personally understand. It takes discipline to buy them when you can get them at a reasonable price. It takes discipline to follow your position-size limits.

When a great new business comes along – like online auctioneer eBay (EBAY) in the early 2000s – learn to be patient. Follow it for years, and buy it when it comes into your range.

If you had bought eBay back in December 2004, you'd have done great. Factoring in shares of PayPal (eBay spun off PayPal to its shareholders in 2015), you could have pocketed hundreds-of-percent gains on your investment. Sure, eBay was a great business with a huge "moat."

Nevertheless, investors who chased after eBay while it was "hot" saw their investments decline as much as 80% by early 2009. It was far better to have bought it for less than $5 a share once it was trading for a reasonable price.

So again, I believe there are three things every investor in common stocks must know to succeed. If you can follow these ideas, you'll be well on your way to crossing the desert...

1. Know what kind of businesses make for great investments and how to properly value these kinds of businesses.

2. Use strategies that will continue to make you money even when you're wrong about the big picture.

3. Never, ever chase what's "hot."

Editor's note: If you're not compelled to put these ideas into action after reading this essay from Porter, I don't know what else to say... other than this...

The last time Porter did one of these presentations for Stansberry Research three years ago – nearly to the day of the COVID-19 panic bottom – he recommended buying a set of stocks that have averaged 16% annual gains. That's nearly twice the historic average of the overall market. And seven of the recommendations in his Forever Portfolio are up at least 100% today, with one up more than 200%.

That performance includes the broad market sell-off in 2022 and the past few months this year. (Of note: Existing Forever Portfolio subscribers and Stansberry Alliance members have access to these and Porter's latest recommendations here.)

For anyone else, if you're still not convinced to hear Porter out, I'm reminded of something he used to frequently say in these Digest pages: "Horse, meet water." As he wrote in a 2018 essay, for example...

I use these pages (and my own newsletter's recommended list) to educate, cajole, threaten, and bully people into doing smarter and safer things with their money. How many times have you seen me write "There's no such thing as teaching, there's only learning"? And how many times have I written "Horse, meet water"? How many times have you seen me essentially berate our customers, telling them "I know you won't ever do this, no matter how obvious it is that you should"?

I don't know how many people actually learn anything or how many people take my warnings seriously. What I do know is, ironically, our business tends to sell more subscriptions when investors are excited and doing a lot of risky (i.e., dumb) things with their money. And virtually every time investors get excited, a lot of people lose money. That's what happened in the Internet stock bubble of 2000. That's what happened in the real estate/commodity bubble of 2008. And that's what happened – in a truly astounding way – during the bitcoin bubble last fall.

In his latest presentation (which, again, is totally free for Stansberry Research readers), Porter offers actionable advice to put the lessons he has been trying to share for 20 years into practice and shares how to access his latest, up-to-date recommendations on the type of stocks he says everyone should own today. As he says...

It's the only thing that I know for certain will work in these kinds of markets.

And, as I mentioned earlier, Porter explains why you'll want to learn and put this strategy to work, given the state of the U.S. economy, the crisis he sees brewing, and the state of the stock market today. Click here now for all the details and to hear Porter's full thoughts. The video will go offline in a few days.

New 52-week highs (as of 11/1/23): CBOE Global Markets (CBOE), RenaissanceRe (RNR), Trane Technologies (TT), and Invesco DB U.S. Dollar Index Bullish Fund (UUP).

We'll forgo today's mailbag given all the different things going on in today's Digest... But, as always, send your comments or questions to feedback@stansberryresearch.com.

Regards,

Porter Stansberry
Baltimore, Maryland
November 2, 2023