The Moneyballer and the Politician
The Fidelity 'dead investor' hoax... How risk works... The world is leveraged to Nvidia... A simple question... Billy Beane and Rick Perry... Don't worry about November 5...
I (Dan Ferris) had a wonderful three days at Stansberry Research's annual conference in Las Vegas this week...
On Monday afternoon, I gave my annual "State of the Market" address...
Before I said anything else, I implored the audience to be long-term investors, not short-term market timers.
I told attendees that Fidelity, the big mutual-fund company, once studied its clients' accounts to see who performed best over time.
It found that all the best-performing accounts belonged to clients who had passed away.
Since they were dead, they didn't sell. Their accounts just sat, with zero trading, compounding without interruption.
Now... what I didn't mention on Monday is that the Fidelity story is a hoax. It has been going around for years, but nobody from Fidelity has ever confirmed that any such research was done.
But I tell the story anyway, because I'm hoping the humorous jolt you get from it will help you remember it. In fact, I bet a "dead" investor who put $10,000 into a portfolio of great businesses and executed zero transactions for 10 years or more would outperform most investors who trade frequently. Trading is overwhelmingly a sucker's bet.
So if you're investing in stocks, you should be a long-term investor...
Stocks are long-term assets. Growing companies tend to earn modestly more from one year to the next. So you hold on to them and let that growth compound your money over time. Another benefit of not selling for many years is that you don't pay any taxes until you sell.
The best way to understand compounding is an old illustration that I hope you'll remember as well as the Fidelity story about dead investors. It goes like this...
Suppose I were to give you a penny. Suppose the next day you were to double it, then on Day 3 you double your money again... and then again and again... how long would it take until you had a million dollars?
The answer is that you'd hit $1.3 million on Day 28...
This is why Warren Buffett has said once or twice over the years that it's not that hard to get rich in the stock market as long as you're not in a big hurry.
Notice that the big gains from the compounding series come at the end. You still have less than a dollar after a week... don't break $100 until Day 15... and don't hit six figures until Day 25. But just three days later, you're a millionaire.
That's how all compounding works. It's true whether you're growing your money at 100% a day, like in the example, or 10% a year, like you've been able to do in the S&P 500 Index in recent history.
So be a long-term investor who maximizes the power of compounding.
Then I continued by telling the crowd what many Digest readers would expect, that the combination of an exorbitantly expensive stock market and global central banks all cutting rates has made this the riskiest moment of their investing careers.
It's unprecedented for central banks to cut rates with the market this expensive. The closest analog we have is from 1995 to 1999, when the Federal Reserve cut the federal-funds rate from 6.00% to 4.75%. The S&P 500 rose by an average of more than 20% per year from 1996 to 1999.
But rate-cutting cycles have also frequently accompanied recessions and bear markets.
These two completely opposite scenarios show the true nature of risk...
Author/investor Howard Marks showed it in a 2006 memo with the following graph...
The point of the graph is that, as risk rises, so does the range of potential outcomes... and the magnitude of potential losses.
For example, the far left of the graph represents safe instruments like short-term Treasury bills. You'll get your principal back, plus a little interest. Losses are possible but highly improbable. And it's equally unlikely that you'll get a big gain.
At the other end of the risk spectrum (to the far right on Marks' graph), you might find, say, biotech or exploration-mining stocks. The outcomes there can range anywhere from losing all your money to making 1,000 times your money... and everything in between. Though potential returns are many times larger, potential losses are bigger and more likely to occur.
In the '90s, plenty of stocks underperformed as tech and telecom stocks soared out of sight. The boom turned to bust... and folks abandoned tech and telecom for previously neglected banks, homebuilders, and mining stocks.
When the stock market gets as expensive as it is today, it usually means there are many forgotten, underperforming stocks that will turn around and start heading higher when the darlings of the moment begin to falter.
If I'm right about this moment resembling the '90s, that's what we'll see again soon. And subscribers to The Ferris Report just learned how to invest in a whole sector full of them in the current issue, which came out today.
The darlings of this moment are mega-cap tech stocks investing big money into artificial intelligence...
They're the Magnificent Seven (Apple, Amazon, Alphabet, Microsoft, Nvidia, Meta Platforms, and Tesla) that have outperformed the market for years. They're the (allegedly) safe, no-brainer stocks that "everybody knows" will continue to make you rich without effort.
The market is highly concentrated in them, with the top 10 S&P 500 stocks accounting for nearly 36% of the index.
And according to Apollo Global economist Torsten Slok, the market isn't merely highly concentrated in a few stocks... it's too highly concentrated in a single company. Yesterday in a blog post titled, "It Is All About Nvidia," Slok reported:
The bottom line is that global equity markets, including retirement allocations to equities, are basically leveraged to NVIDIA.
Why would he say such a thing, you ask? Here's his rationale...
NVIDIA is now bigger than the total market cap of five of the G7 countries... And foreigners own 18% of the US stock market.
The five countries are Canada, the U.K., France, Germany, and Italy, by the way. And Nvidia's market cap is larger than Germany's and Italy's stock markets combined.
Slok concluded:
Let's hope the value of NVIDIA doesn't decline significantly.
The idea that public markets are safe and retirement savings in public markets are safe is misguided.
Some investments in public markets are safe, and some are risky.
Slok raises an interesting point that I've heard before...
The global financial market is a massive machine whose job is to price securities. It is constantly registering events, information, company news, and other inputs to determine the value of equity and debt securities, as well as options, futures, and other derivatives.
It's probably asking too much of the markets to take on the added job of keeping millions of retirees' life savings safe.
If you could describe your ideal retirement investment, I doubt you'd say, "I want something that goes up and down every year and seems to respond to all manner of inputs, from the sublime to the ridiculous. I want it to crash every now and then, and I want the country's central bank to bail it out by inflating an asset bubble that takes the price of many of its components well above fair value, then crashes well below fair value, then trades sideways for decades at a time. And I'd like to have the least diversified portfolio I could have, especially at times when the market is betting on a risky new technology like artificial intelligence..."
I could go on, but you get the point. The stock market isn't well designed to keep retirees' assets safe. What if you retire and a brutal bear market ensues, followed by a multidecade sideways market, like the Japanese stock market did from 1989 to 2024?
I bet that's not in anyone's retirement plan.
But the situation is not at all hopeless. All you have to do is answer a simple question...
If the risk is in Nvidia and other mega-cap tech names, where's the opportunity?...
At the height of the dot-com bubble, the answers were value stocks, banks, homebuilders, and commodity producers.
Here are some of the answers today...
Gold and silver are already doing well, and I believe they'll perform well for several years to come. Of course, they'll always be volatile, but gold has outperformed both the S&P 500 and the Nasdaq so far this century. It wouldn't surprise me at all if it had at least another decade to go.
Copper has had two excellent runs since the pandemic and should perform well for years to come due to global supply deficits amidst growing demand. (I've recommended two best-of-the-best copper stocks, one in Extreme Value and one in The Ferris Report.)
Energy is at its second cheapest level relative to the S&P 500 (which is heavily weighted toward the Magnificent Seven) in nearly 40 years. Every long-term equity investor should probably own energy giant ExxonMobil (XOM), the very best capital allocator in the industry.
That's what I left my conference audience with on Monday: the notion that, though there's lots of risk in stocks due to high concentration and high valuations, there's also plenty of opportunity in the stocks that aren't overvalued and that investors aren't overconcentrated in.
Then, on Tuesday morning, I went down to the conference hall to listen to a sports legend tell a story that all serious investors must hear...
I'm talking about former Oakland A's general manager Billy Beane...
He gave us his version of the story told by another of our conference speakers, author Michael Lewis, in the 2004 book Moneyball.
If you don't know the story, I highly recommend you read it. It's probably the best thing Lewis has ever written, and the story is an important one for investors.
It describes how Beane made the A's a successful baseball team with one of the smallest budgets in the league. He hired a Yale graduate named Paul DePodesta to help him use statistics to change the way the team hired players.
I won't spoil it for you, but investors will find it fascinating that Beane and DePodesta figured out that teams were undervaluing certain baseball skills. So they were able to hire players who had those skills without spending tons of money on them.
They were essentially value investors. They had a better idea of what players were worth because they knew what data to use to evaluate them.
And they built a great team.
Though he never won the World Series, Beane led the A's to the playoffs 11 times, including four times in a row from 2000 to 2003. And in 2002, between August 13 and September 4, the A's became the first team in the American League to win 20 games in a row. And they did it with little money, no big star players, and no big fancy stadium.
As you might guess, Beane's successful emphasis on data analytics was eventually adopted by every major league baseball team. Beane told us that, by 2012, every team in the league had a staff of statisticians collecting data and making proprietary statistical models.
I found a parallel in former Texas Governor Rick Perry's talk, also on Tuesday...
Perry spoke of how he transformed Texas into an economic powerhouse. He served as the state's governor from 2000 to 2015... making him the longest-serving governor in Texas history.
While Perry was in office, Texas accounted for three out of every 10 new jobs in America. Employment increased nearly 25% during his tenure, compared with national payroll growth of just 6%. The state now accounts for more than 9% of U.S. GDP, second only to California.
On stage Tuesday morning in Las Vegas, Perry delivered the simple formula that he used to transform Texas...
How do you govern? Don't overtax, don't overregulate, don't overlitigate, and have a skilled workforce.
Perry clarified the last point, saying that it meant a state needs a good public school system to produce a skilled workforce.
I rarely praise politicians because they tend to create problems, spend too much of other people's money, and pursue political power for nefarious purposes. But any politician who wants less taxes and regulations is at least headed in the right general direction as far as I'm concerned.
What flabbergasts me about Perry's prescription for good governance is that hardly any state in the union has sought to imitate his success...
New Hampshire comes to mind, with its strong libertarian streak, deep respect for the Bill of Rights, and light tax burden. And I'm sure many readers will write in and say their state is even better than Texas.
If I ever became a governor, I'd go out of my way to put Perry's formula into practice. I would reduce and even eliminate as many taxes as possible. I'd shrink government down to the barest necessity, and I'd make sure the state government prosecuted all infringements against person and property.
After that, it's best to get out of citizens' way and let them run their own lives and pursue the opportunities they desire.
State governments should create an atmosphere in which folks are sure they're not going to wake up to some new tax or other burden spewing from the state legislature or the governor's office.
I know Stansberry Research is not a political organization. I simply think it's very curious that an obvious success wasn't more widely imitated. It's funny that so many people nowadays are moving from states like California, New York, and Illinois to states like Florida, Idaho, and yes, Texas.
But nobody in the states that are losing population seems very interested in learning anything from the states that are gaining population.
I ultimately don't know why that is...
I suspect it's because, though some states have worse tax burdens and other problems caused by too much government, we all have a high standard of living in the U.S. – no matter which state we're in.
We should all probably make a more concerted effort to remember that.
On Wednesday, a panel discussion at our Alliance Meeting discussed who would win the presidential election...
Stansberry's Investment Advisory lead editor Whitney Tilson pointed out that people said they'd sell all their stocks if the candidate they didn't like won in 2016 and again in 2020... and that it would've been a huge mistake both times.
From an investor's perspective, it doesn't matter who will win on November 5. Keep pursuing a prudent, long-term equity strategy designed to maximize your compounding. Never let your politics influence your investing.
And one day, you'll be as rich as those dead folks I told you about.
New 52-week highs (as of 10/24/24): Booz Allen Hamilton (BAH), CBOE Global Markets (CBOE), CME Group (CME), Gilead Sciences (GILD), Intercontinental Exchange (ICE), Kinross Gold (KGC), Kinder Morgan (KMI), Omega Healthcare Investors (OHI), and Tyler Technologies (TYL).
In today's mailbag, feedback on our Stansberry Research conference from an attendee... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Thanks for a great conference! I was only free this year to attend Wednesday... very informative and engaging! I hope to be able to attend the entire session next year..." – Alliance member Scott M.
Corey McLaughlin comment: Thanks, Scott. I'm glad you enjoyed Alliance Day and hope you can make the full slate next year. Stay tuned for more information on the 2025 conference soon. We'll have an early-bird presale for tickets starting next month.
Good investing,
Dan Ferris
Eagle Point, Oregon
October 25, 2024