A rare opportunity to make 250% or more... The best 'buy signal' we've ever found... A sign of the bottom in gold: friends asking for money... Read The Ivy Portfolio... Reader feedback: When 23% average gains aren't good enough...
How much is a good idea worth?
Hundreds of millions of dollars? Maybe more? Today's Digest is certainly worth that much in the hands of the right investors. Below, you'll find details on what I believe is a very good idea.
This strategy rarely works – but only because it's rarely available. When it is available, it's essentially a "lock."
What you'll find below is the most valuable strategy in the markets. It's also one of the hardest things for investors to do emotionally. The only way to overcome that critical barrier to success is by studying this idea and trying it a few times yourself.
Remember: There is no teaching. There is only learning.
As longtime subscribers know, I spend my Fridays writing to you about the one thing I'd most like to know if our roles were reversed. More often than not, this involves trying to show you an investment strategy I know you're unlikely to actually try – like selling puts, buying discounted bonds, or learning how to invest in insurance stocks.
These strategies involve many complicated ideas. They would take most investors a lot of studying to understand and execute. Those barriers are good in a way, as they encourage readers to be conservative.
My fear with this week's idea is actually the opposite. What I'm going to show you below is so simple and so intuitive, everyone reading this Friday Digest will know exactly how to execute this strategy.
The hard part, for conservative investors, will be managing the emotions of this trade. On the flip side, if you know that you're a gambler at heart... if you inevitably bet too big... if you can't tolerate volatility... stop reading right now. What follows is a strategy that requires an ironclad grip on your emotions and a dedication to supremely disciplined investing.
Meb Faber (www.mebfaber.com) is brilliant and one of the few truly original thinkers in finance. The chief investment officer of Cambria Investment Management, Meb has been coming to our annual Spring Editor's Conference for a decade. He always brings an insightful idea to the table – one that has been seriously vetted and researched.
Recently, he sent around a note about one of the most valuable and "core" ideas in finance – reversion to the mean.
As every investor knows, nothing goes up forever. The current bull market (from 2011 to present) is one of the longest running in history. Sooner or later, the "gravity" will cause the market's momentum to slow, and then to reverse. And when the market "reverts to the mean," stocks, on average, will plummet. Some investors will have "reasons" to sell. But most investors will simply sell because everyone else is selling. Lots of money will be lost.
Every investor who lived through the 1987 market crash, Russia's 1998 default, the tech wreck of 2000-2002, or the mortgage debacle of 2008 knows that every six to 10 years, something goes awry in the stock market.
It's obvious. It's common sense. Trees don't grow to the sky. Sooner or later, the market "reverts to the mean."
Meb's idea is based on this concept. Just like stocks don't go up forever, they don't go down forever, either. Sooner or later, financial markets form a bottom. Sooner or later, the correction or bear market creates such value that it attracts new buyers. And sometimes, for no apparent reason at all, stocks will suddenly shoot higher.
Meb decided to study both whole countries (with an investable stock market) and asset classes (types of investments) to determine if they showed any obvious or tradable pattern. What he found is interesting...
Meb studied five major stock markets from 1903 until 2007. He wanted to know what stock prices did on average in these markets after falling for three consecutive years. He discovered that in major stock markets, share prices didn't often fall three years in a row. Three consecutive years of lower prices almost never happened – those instances occurred less than 3% of the time.
But when markets fell three years in a row, the following bull market was extremely powerful. The average return in stocks during the fourth year was more than 30%. That's a significant result, something that wouldn't happen by chance. This big move higher is caused by reversion to the mean, not chance.
When Meb studied asset classes, he found similar numbers. After three years in a row of declining equity prices, the average return in the fourth year was 34%, almost three times higher than the average return of all the years in the study. Again, statistical analysis tells us these are meaningful results, not justchance. They're proof of mean reversion in equity prices. Buying markets and asset classes that are down three years in a row is a rare and valuable speculation. But... can we make the results even better?
Meb also believed that mean reversion would lead to even more powerful rebounds in prices where the value destruction had been the greatest. He studied countries with stock markets that declined by 80% or more. On average, these countries saw their indexes rebound by nearly 120% in the three years that followed.
And that's not all...
Meb found the same kind of powerful rebounds in different industry groups, too. He studied U.S. industry groups going back to the 1920s. When a U.S. industry group fell by 80% or more from a peak, the average return three years later was more than 170%.
Here's my humble suggestion...
I believe that some combination of rising interest rates, rising defaults in the corporate bond market, and global currency/trade wars will likely cause the U.S. stock market to decline substantially. No, I don't know the exact timing of such a move. But I believe it will happen with the next few months. Downward reversion to the mean will play a role.
Likewise, I notice that the gold and precious-metals sector is in the midst of a three-year decline. I see that junior mining stocks have declined every year since 2011. Most of the best names in the space are down more than 80%.
I'm 100% certain that eventually, this downward trend will reverse. And I know that when that occurs, the resulting price increases will be dramatic. I believe average gains in excess of 250% are likely.
Investors smart enough to "hedge" their exposure to the U.S. stock market by establishing a "toehold" in the highest-quality gold and junior gold-mining stocks will likely be far more successful over the next three to five years than investors who don't.
I have another reason to believe we're approaching a significant bottom in gold: I've been getting phone calls from leading precious-metals investors. They're looking to sell assets and asking me for terms. They're getting desperate to raise money. These were some of the richest men in the world five years ago... and now a few of them are virtually broke. That's what happens when an industry declines by 80% or more. And that's what a bottom "feels" like.
I've seen this happen in lots of cyclical industries, most notably in gold mining and commercial real estate. The leaders in these industries are risk junkies and cowboys. They always go broke at the bottom.
So... what should you do with this information?
Start with the most basic thing: Just learn more about reversion to the mean. Go buy Meb's book, The Ivy Portfolio, where he discusses his research in detail.
A used copy will cost you less than $10. A digital version that you can begin reading immediately on a Kindle costs around $10. And a new hardback version will run you $35. I'd recommend springing for the new hardback version, as you'll want to reference it again and again.
Getting this education will allow you to make better (less emotional) decisions about whether you want to try this kind of investing. The best way to manage the emotional fear of buying into a distressed sector is simply to learn more about timing the bottom. Meb has done the most homework on this topic.
The next thing I recommend that you do is sell about 10% of your existing portfolio. Take profits from things like biotech and airlines – industries that have enjoyed huge runs higher. With this 10% of your portfolio, identify eight to 10 gold stocks that you're certain will be in business five years from now.
Focus on high-quality business models (like royalty companies) and companies with high-quality balance sheets. Focus on great management teams. Buy these eight to 10 names on days when gold gets kicked lower and the stocks sell off even more. Learn to enter "stink bids" – limit orders that are 5%-7% below the market price. You'll be surprised how often those bids will get filled in a weak market.
Build this portfolio patiently over the next six months. Be a buyer this fall when other investors are selling for tax-loss reasons. That'll be the bottom.
If you don't know the gold sector well, I recommend subscribing to my friend John Doody's newsletter, Gold Stock Analyst. No, I'm not being paid for this endorsement. John is simply the most knowledgeable analyst following gold-production companies, by a wide margin. He has been doing it full-time since the early 1990s and has a great track record. He's well-known in the industry, and he talks to all of the management teams regularly.
The biggest gains, however, will come from junior mining companies. John doesn't cover junior mining stocks. He only covers companies that are in production (or starting production soon).
I recently invested in Casey Research, the leading research firm that covers junior gold-mining stocks. My friend, founder Doug Casey, has been following junior gold-mining stocks since the 1970s. No one else on the planet has his knowledge and his connections. If I were you, I wouldn't buy any junior gold-mining stocks without a subscription to Casey Research. And... to encourage you to try what I believe is its best product – International Speculator – I've put together a special offer.
I know Doug is one of the world's best crisis investors, and his team at Casey Research is the world's top research firm covering junior gold-mining stocks. So I've taken all of their work on junior gold-mining stocks and put it together with my staff's work on high-quality gold production and royalty firms.
Using all of these resources, I've compiled a report called "Porter's 10-for-10."
The premise is simple: You take 10% of your portfolio and buy 10 gold/precious-metals stocks. We won't use trailing stops in this portfolio because these names are too volatile. Instead, we'll use small position sizes (each individual stock should start as no more than 1% of your entire portfolio). I will update this portfolio once a year.
These aren't the kind of stocks you should try to trade in and out of. They're small, and the spreads are wide. Instead, do what I mentioned above: Buy them on down days. Put limit orders in below the market. Build this portfolio over the next six months.
Here's my prediction: By the end of 2019, this report will have closed out four to six positions (maybe more) with gains averaging 250% or more. And yes, it will also result in some losing positions. But those losses will be dwarfed by the gains we make as the entire industry rebounds higher.
This report – "Porter's 10-for-10" – will be free to anyone who buys a one-year subscription to Casey Research's best product – International Speculator. (It will also be available to all Stansberry Alliance subscribers.)
Obviously, as an investor in Casey Research, I would like to see International Speculator do well. But my interest in Casey Research is minor compared with my position in Stansberry Research. I'm recommending Casey Research's publication (instead of one of my own) because I know Casey Research is perfectly positioned to take advantage of the market rebound that is sure to occur in junior gold-mining stocks.
You should absolutely be reading Casey Research over the next three years. And hopefully after reading today's Digest, you will understand why I feel so strongly about this opportunity.
So for anyone who wants to take advantage of a big reversion to the mean trade, let me be your guide. We'll publish "Porter's 10-for-10" next week and will e-mail it to Alliance members and anyone who's willing to try a subscription to Casey Research's best newsletter, International Speculator. Click here for more information.
New 52-week highs (as of 7/23/15): short position in Viacom (VIAB).
In the mailbag, a subscriber complains about our focus on out-of-favor industries, like natural gas back in 2011 and 2012. What's your opinion, dear subscriber? Should we follow the herd, or blaze our own trail? Let me know at feedback@stansberryresearch.com.
"Porter and Company plugging the Jr. Resource/gold sector today while it is priced low seems much like Porter and Company plugging the natural gas/drilling sector in 2011 when prices were low. There has been no breakout or upside to investment in natural gas 4 years ago, so why should I take your advice on investing 'near the bottom' of the Jr. Resources/gold sector?
"In short, Porter and Company were wrong about natural gas when it was priced low, and it has continued to stagnate. Why won't the Jr. Resources and gold sector do the same thing for the next 4-5 years if I park my money there? I'm sure many other subscribers have this question, but I will be surprised if you print it in the daily Digest." Paid-up subscriber Jim
Porter comment: What an ironic letter...
I began recommending the U.S. natural gas industry in July 2011. Please, go back and read that newsletter. (Subscribers to my Investment Advisory can check the archive for the issue titled "The Energy of the 21st Century.")
When I wrote it, I knew that the changes taking place in the oil and gas sector were the most important and valuable changes happening in the world economy. I foresaw huge changes – a complete global restructuring of the world's energy markets. Meanwhile, a lot of my competitors were still warning about Peak Oil... the wrongheaded idea that the world was running out of oil and gas.
It's a bit sad that Jim either didn't read what I wrote or didn't understand it. Yes, I expected natural gas prices to rebound. And contrary to his letter, they did. Natural gas went from less than $2 per million British thermal units (mmBtu) when I predicted its bottom to more than $8 per mmBtu last winter. Over the longer term, natural gas prices have doubled from where I predicted the bottom. That's a breakout.
But these price changes aren't the real story. They're almost irrelevant to the big trends I was predicting...
My main prediction wasn't that natural gas would suddenly go back to $15 per mmBtu. It was that the gap between natural gas prices and oil prices would close and U.S. exports of natural gas would soar. I believed investors who focused on opportunities to export natural gas would make a killing. Here's what I wrote...
One way or another, in five to 10 years, the prices of crude oil and natural gas will not sit so far apart. They will converge, because wherever and however possible, natural gas will be used in place of more expensive forms of energy, such as coal and crude oil...
Later in that same issue, I wrote...
I believe a gigantic expansion of liquefied natural gas fleets and export plants in the U.S. combined with a move away from nuclear power in both Japan and Europe will result in a 50% increase in natural gas consumption in the next 10 years. I believe natural gas will grow from fueling roughly 21% of energy used worldwide today to close to 40% within a decade.
Quite simply, natural gas is the safest and cleanest fuel available on the market... and it's the cheapest by a wide margin. All that remains is to build a global transportation system to support the marketing of the fuel.
That's why so many of our recommendations to take advantage of the natural gas boom have been in the infrastructure space – like Chicago Bridge and Iron (infrastructure engineering and construction)... Cheniere Energy (liquefied natural gas ports)... and Teekay LNG Partners (shipping tankers). These stock recommendations have been amazing performers.
In all, we made 27 recommendations based on our idea that natural gas production in the U.S. would continue to boom and that lower natural gas prices would lead to a huge global market for U.S. natural gas. That has clearly happened.
Our strategy was to capture the price arbitrage between low U.S. prices for energy and high global prices – a trade we fully explained all the way back in July 2011.
These export-centric recommendations were some of the safest and best of my career: Transport firms Targa Resources and Energy Transfer Partners returned 133% and 77.5%, respectively. Chicago Bridge and Iron made 77%. Cheniere returned 76%, and producer Dominion Energy posted a 62% gain.
Of the 27 recommendations we made across the sector since 2011, only five lost money. We broke even on another four. And the average gain on all 27 recommendations, winners and losers, was 23.7%. That was good enough for annualized returns (for comparison with the stock market) of 17% – clearly market-beating results.
But even these excellent numbers don't tell the whole story.
You see, we first recommended Cheniere in July 2011... right before a big correction in the stock market. As result, even though we recommended the stock at a low price, around $9 a share, we were forced to sell it around $6 because of our stop-loss policy. Meanwhile, today it trades for more than $70 per share. This was our best idea – our top recommendation. And except for some really unlucky timing, we nearly earned a six-bagger.
I know many investors bought Cheniere on our recommendation and because they bought at a lower price, they didn't stop out. Some of those folks may have made millions on this one idea.
In short, our focus on unloved and overlooked opportunities earned us safe, market-beating returns. And for some... they earned huge returns.
I'd really like to know what you think about this letter and my reply.
It's incredibly frustrating to me to work so hard to uncover such a huge opportunity for my subscribers... and see someone miss that opportunity completely. I mean, the guy above says we were "wrong" about natural gas. What?! Not only was our work absolutely spot on, but our recommendations have performed great. How does that add up to "wrong"? If you've followed our work on natural gas/oil, let me know what you think at feedback@stansberryresearch.com.
Regards,
Porter Stansberry
Duck, North Carolina
July 24, 2015
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