The First Real Secret of Successful Investing

Classic wisdom from our founder Porter Stansberry... All the best investors do the same things... You can time the market... The risk of 'buy and hold'... A big lie... Don't miss Porter's latest outlook...

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Editor's note: As we've been sharing over the past few days, Stansberry Research founder Porter Stansberry is going live with his latest market outlook tomorrow morning at 10 a.m. Eastern time... and he has got a lot to cover...

You'll hear Porter's take on today's market madness... why the crash he predicted last year hasn't happened yet... when he thinks the current bull market will end... what he's doing with his own money today... and much more.

You can register here for this free event right now to make sure you don't miss a minute.

In the meantime, I (Corey McLaughlin) want to share part of an all-time classic piece of research from Porter...

This essay is from 15 years ago and originally appeared in the August 2009 issue of our flagship Stansberry's Investment Advisory newsletter. It has been lightly edited, but as you'll see, the lessons about successful investing are timeless.

In fact, one of our recent Stansberry Investor Hour podcast guests, Erez Kalir – a savvy biotech investor who works with Porter at his boutique firm Porter & Co. – mentioned this piece to Dan Ferris and me as a source of inspiration for his own investing career. So I want to pass it on.

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It looked like a 'leak'...

When Eduardo Elsztain first read Steve Sjuggerud's True Wealth, he honestly thought someone was leaking his private memos to Sjuggerud.

"Steve, your ideas... your thinking... When I first saw your letter, I honestly thought I had written it myself. I couldn't believe someone else was having all of my same thoughts."

Steve and I were sitting in the main boardroom at the New York Stock Exchange. We'd been invited there by Elsztain, a wildly successful Argentine investor, to ring the opening bell of the exchange. For those of you who don't know his reputation, Elsztain got his start making a pile of money for George Soros in Argentine stocks in the early 1990s. Then, he began compounding his wealth by buying up distressed real estate in Argentina, becoming the country's largest landowner.

We were in New York to celebrate his first U.S. real estate deal, a deal that would net the Elsztain group of investors 20% of one of the country's largest hotel groups (Hersha) for roughly 10 cents on the dollar.

While Elsztain is focused on doing real estate deals, he is still an active investor in gold and stocks, too. He has been a subscriber to our letters for many years because he recognized immediately that we shared the same strategies and core ideas about investing. That's why he wondered at first if someone was sending Steve his memos.

Keep in mind, when I started working with Steve as a financial analyst in 1996, I hardly knew the difference between a stock and a bond. But after a few years of working 14-hour days, six days a week, and after reading hundreds of books about finance and financial history... I still knew almost nothing. Just enough to be dangerous, really.

I kept at it, though. And through the terrible emerging market collapse of 1998-99 and the tech bear of 2001-02, I finally began to acquire the knowledge and the confidence in my own thinking that I needed to make the kind of investment calls I've made since then. Like buying right at the bottom in October 2002. Like calling the top in February 2007. Like predicting General Motors' bankruptcy. And urging my subscribers to buy stocks in November 2008.

So... how did our thinking and Elsztain's end up so closely aligned?

Successful investing involves only a few real secrets...

Almost all of the world's best investors use the same basic principles. Nobody teaches these principles. But everyone who stays in the markets long enough and succeeds eventually discovers them on his own.

Our meeting with Elsztain was a vivid reminder of this fact. It's something I'd taken for granted over the years because I'd seen it so many times. You can put a group of the best investors together anywhere in the world, and nine times out of 10 they will be able to finish each other's sentences. They're all looking at the same things. They are all waiting on the same things. And they all see the same opportunities. Unless I'd lived through dozens of experiences like this, I wouldn't have believed it. But I know from firsthand experience that it is absolutely true: All of the world's best investors use the same handful of techniques and strategies. And as a result, they frequently end up in the same positions.

The purpose of my letter today isn't merely to give you a stock pick, but to do something I've never seen done before. I'm going to teach you these core strategies. The real secrets. And I'm going to show you how to use them – just like I do with my own money.

While this information probably won't make you a great investor overnight, it will surely improve your results dramatically over time...

All you really need to know is right here.

You can time the market...

Please take a moment to look carefully at this chart.

These are the daily closing prices of the Templeton Russia & East European mutual fund (TRF) over the past 15 years. [Editor's note: This refers to 1996-2009. This fund is now liquidated, which only supports the points ahead about the importance of market timing.]

This is one of the oldest and most established emerging market mutual funds. This is the kind of fund people invest in heavily through 401(k) allocations. It is a closed-end fund. It trades like a corporation – like a regular, publicly listed stock. Sometimes it trades at a premium to its net assets and sometimes at a discount. That attracts traders and speculators.

In this one investment vehicle, we have both sides of the investment world. Typical individual investors (lemmings, if you will) are dripping capital into this fund, month after month, regardless of the premium or discount and oblivious of critical factors in the marketplace. Meanwhile, the world's best investors follow this fund closely... waiting. They are like sharks. They know this is one of the most reliably volatile funds in the world... and one of the easiest to trade successfully.

So in this one fund you have a good litmus test to compare the two major philosophies of investing. Should you buy and hold? Should you pour capital into your 401(k) blindly each month? Or should you time the markets? Should you know the factors that lead funds like TRF to soar to absurd levels and then crash?

Looking at this chart, you easily can see the fund peaked twice in 2006 – once in the spring and again at the end of 2006/beginning of 2007. Both of these times, TRF was trading at such an extremely high premium that we noticed it immediately.

Here's exactly what we said:

The Templeton Russia Fund (TRF) is about to get crushed again. Stuffed with Russian oil and bank stocks, this [exchange-traded fund ("ETF")] is one of the few direct Russia plays in the market... This spring, the premium on TRF hit a whopping 35%. You had to pay $1.35 for every $1 of real value. This huge overvaluation was corrected when emerging markets got obliterated in May. The Russia Fund fared the worst, falling 47% from its peak.

With emerging market speculation heating up again, TRF is trading for a 24% premium right now. If that premium climbs any higher, we predict another obliteration. – Brian Hunt, DailyWealth, December 21, 2006

When we published that note in December 2006, the Templeton Russia & East European Fund traded just shy of $95 per share. After falling in nearly a straight line for two years, it was trading for less than $7 per share in March 2009. That's a decline of more than 90%.

Perhaps more importantly to any long-term, buy-and-hold investor, the decline we foresaw in the fund would have wiped out more than 100% of the accumulated capital gains, assuming you invested as long as 15 years ago.

Now... I'd like you to look at the chart one more time. Look at what has happened to the fund over the past six months. [Editor's note: from February 2009 to August 2009.] It has gone nearly straight up.

On April 17, 2009, we told subscribers to buy Russian stocks. Instead of using TRF, Steve Sjuggerud recommended a nearly identical Scudder fund, the Central Europe and Russia Fund (CEE). Both are up 150% since their March lows. [Editor's note: from March 2009 to August 2009.]

So if you followed the buy-and-hold strategy in Russian stocks over the past 15 years, you would have made a very small amount of money – or lost money, depending on when you sold your shares. On the other hand, if you applied a few of our secrets, you could have easily traded this fund for more than 100% gains in only a few weeks...

All you're looking for are extremes in the premium or the discount to net asset value in closed-end country funds. Barron's publishes a complete list of these premiums/discounts in every issue. Or you can use CEFconnect.com, which publishes them each day.

And let me tell you one more thing about this situation. In January 2007, when TRF was widely overvalued and when most individual investors were clamoring to buy shares – despite the premium valuation – we checked to see if we could sell the fund short. We knew it was going to collapse and wanted to profit directly as it fell. But we couldn't. Why not? Because other professionals had already borrowed all of the available shares to short.

In other words, while 401(k) investors were buying and holding a time bomb, Wall Street's pros were lined up, waiting to take their money.

That's why we call "buy and hold" "buy and fold." That's what happens. People think they're investors when they buy. But sooner or later, the pain gets so bad and the loss is so big that they panic and sell. Wall Street wins.

Why does anyone believe 'buy and hold' works?...

The mutual-fund industry, which has boomed since the 1980s, used a bunch of faulty academic research to "prove" you couldn't time the markets. According to these folks, we shouldn't have been able to do the kind of trading we did with the Templeton Russia & East European Fund. They would tell you we didn't have any real edge against the other investors in the fund. They would tell you we just got "lucky" – despite the fact that we do these kinds of trades year after year.

Why would they promote the idea that you can't time the markets? Because they get paid based on assets under management. They need you to leave your money with them, good times or bad. No matter what, a mutual-fund manager isn't going to return your money and tell you, "Sorry, it's just not a good time to buy stocks..." So they have to invent a world where it is always a good time to buy stocks.

You undoubtedly know their mantra: buy and hold. But it's all a lie. It doesn't work. And even if it did work, few people would be able to apply the strategy because most individual investors do not have the risk tolerance required to actually buy and hold.

Would you have been able to continue buying the Templeton Russia & East European Fund through the collapse of 2008? Not many people could. Instead, they chase hot sectors and investment fads and buy in at the worst possible time. Then after prices collapse, sooner or later, the pain and fear become unbearable, and they liquidate their investments – usually at the exact bottom.

Believe me, the pros know that's what individual investors are going to do. That's how they make their living.

Meanwhile, the big mutual-fund companies spend millions on "buy and hold" advertising each year. They give more millions to academic researchers – all of whom "prove" you can't time the market.

It's a big lie...

When researchers study actual mutual-fund returns, the results are nothing like the averages you find in the prospectus. The truth is, most people who invest in mutual funds never make more than 5% a year on average because they buy the wrong funds at the wrong times and sell at exactly the wrong times...

Buy and hold doesn't work for two reasons: It ignores valuation and sentiment (I'll explain these two factors next), and it ignores human nature. (Even if buy and hold did work, it would be a less-than-optimal strategy because, as should be readily apparent to everyone who watches the stock market, the market isn't as "efficient" as so many academics claim.)

The intellectual rationale for buy and hold is the idea that securities prices instantly reflect all the information available. You can't get an advantage on the market. The best investors can hope to do, therefore, is to get the market's average return. And the only sure way to do this is to buy an index fund, year after year, and hold it forever.

This idea – that information is reflected accurately and instantly in the market – is preposterous. In the first place, lots of people trading stocks don't know what they're doing. They can't accurately handicap stock prices because they don't know the first thing about valuation.

But even more than this, most of what's important to stock prices is unknowable. Nobody knows what the future holds for things like interest rates and economic growth. People's emotions about these unknowable variables – what we call "sentiment" – make a far bigger impact on stock prices than the latest earnings report. And people's emotions are anything but rational or efficient.

You can dramatically increase your returns in common stocks if you're simply more disciplined about when you make major investments.

You only want to commit a substantial amount of capital when both valuation and sentiment are in extremely bullish ranges. In short, you want to buy when stocks are cheap and most people are afraid to buy them. Unfortunately, these opportunities don't arise often in U.S. blue-chip stocks. But you can almost always find these conditions somewhere else or in some part of the U.S. market...

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Editor's note: All these years later, I can tell you Porter still doesn't believe "buy and hold," as most Americans understand it, is the strategy to use to be a successful investor. We expect this will be one of the ideas Porter plans to discuss in his briefing tomorrow...

As Porter mentioned in this essay, timing the market is how he has been able to make prescient market calls like buying at the bottom of the dot-com bust or calling a market top in February 2007, more than a year before the financial crisis.

Porter has made more calls since, like nailing the bottom – nearly to the day – of the COVID-19 panic in March 2020. Back then, Porter was a rare voice saying the market was in a temporary panic and stocks would hit new all-time highs by the end of the year. They did.

Tomorrow, Porter plans to share his latest outlook... and we suspect he'll share a few tips for navigating what he sees coming next. So check out tomorrow's free presentation. Sign up now to watch right here.

And we'll share some more of Porter's "secrets" of successful investing in the Digest later this week.

New 52-week highs (as of 7/26/24): AbbVie (ABBV), Alpha Architect 1-3 Month Box Fund (BOXX), Brown & Brown (BRO), Coca-Cola Consolidated (COKE), Danaher (DHR), Enstar (ESGR), Intercontinental Exchange (ICE), iShares Core S&P Small-Cap Fund (IJR), iShares U.S. Aerospace & Defense Fund (ITA), iShares Russell 2000 Value Fund (IWN), Coca-Cola (KO), Lockheed Martin (LMT), Grand Canyon Education (LOPE), Lonza (LZAGY), Altria (MO), VanEck Morningstar Wide Moat Fund (MOAT), Invesco High Yield Equity Dividend Achievers Fund (PEY), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), SPDR S&P 600 Small Cap Value Fund (SLYV), Terex (TEX), Thermo Fisher Scientific (TMO), Tyler Technologies (TYL), and Veralto (VLTO).

In today's mailbag, feedback on Dan Ferris' latest Friday essay... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, this [Brad Jacobs is a 'stone cold' business genius] article was worth the Stansberry subscription price alone; stone cold market history from the not too distant past with parallels to today. Unfortunately, the loneliest man on Wall Street is a bear in a bull market." – Subscriber Ross W.

Good investing,

Porter Stansberry
Baltimore, Maryland
July 29, 2024