A correction is long overdue... How to prepare for a pullback in stocks... Get paid to protect your investments... The best income strategy you're not using... A 99% success rate... Porter: 'We made a huge mistake'...
Regular Digest readers know our colleague Dr. David "Doc" Eifrig has been incredibly bullish over the past several years. And so far, he has been exactly right...
Doc has led his subscribers to big gains in safe, income-producing investments like blue-chip dividend growers and municipal bonds.
As we've mentioned, Doc is still bullish today...
But that doesn't mean he thinks the market will move higher forever. As he noted earlier this month in his Retirement Trader advisory, market corrections are a normal part of every bull market, and we're currently long overdue for one...
Normally, a rising market "corrects" – or pulls back by at least 10% – an average of every 514 calendar days (according to data from the Stock Trader's Almanac). This run without a correction has gone on for 1,372 days.
Doc doesn't think this is a reason to turn bearish, but he says there are a couple of things investors should do to prepare.
First, review your portfolio, and take a close look at any high-valuation stocks you might own...
When valuing companies, think like a banker who is going to buy the whole company. Using earnings makes sense because it's the number of years that it would take to earn your money back. Using sales is more extreme. After all, sales aren't pure profit. Every business has costs.
If you were to buy a company knowing only the sales number, what might be a reasonable level? For a good deal, you should look for one times annual sales. Two or three times is still reasonable.
For each stock, make sure the reasons you bought it are still valid. If they aren't, consider selling it. And if you own any super-expensive stocks – especially those with price-to-sales ratios of 10 or greater – Doc recommends selling them soon. These stocks are likely to fall the most in a correction.
Second, consider "hedging" your portfolio...
One way to do this is to open a short position or two. Doc recommends the same super-expensive stocks mentioned above as good candidates...
Shorting is when you sell the stock after "borrowing" it from your broker. To close the position, you buy back the shares and "return" them to your broker. So you make money if they are worth less than when you opened the position.
In the case of these stocks, we expect the bad stocks to go down faster than the good stocks. So as a short seller, you'll outperform in any protracted bear market action.
Shorting isn't hard, but it makes some investors uncomfortable because it takes a little bit of imagination to understand how it works.
But selling stocks short isn't the only way to protect your portfolio. If you're not comfortable shorting, Doc says you can accomplish the same thing with some simple options trades.
Now, before we continue, a quick explanation...
We know many investors – especially new investors – think options are risky. And the way many folks use them, they are.
But used correctly, they can dramatically reduce your risk. And as you'll see below, they can help you protect your portfolio in ways you can't do with stocks alone...
In this case, it's a simple strategy you can use on almost any of the stocks in your portfolio when you're worried about a pullback in the market. Here's more from Doc...
One that we used regularly when I was a trader at Wall Street investment bank Goldman Sachs – and you can also use to protect yourself when the market is high – is called a "collar."
A collar allows you to protect the downside on stocks you own. You can do it for little to no cost if you give up a little bit of your upside
Doc walked readers through an example to show how it works...
Let's say you already own 100 shares of soft-drink titan Coca-Cola (KO). If the market were to fall or the company were to release bad earnings, KO shares would likely fall. But let's say you didn't want to lose any more than 5% on the position.
Today, shares trade for about $40. Here's where the collar comes in...
You could buy the September $38 puts for $0.50. That way, no matter what happened to KO in the next two months, you'd know you couldn't end up with less than $38 for your shares. If KO fell to $35 or to $20, you would retain the ability to "put" your shares to someone else at the $38 price.
This single trade would protect you if shares fell. But as Doc explained, it would cost you $0.50 a share, or $50 for every 100 shares you own.
Fortunately, there's a way to protect your shares without the high price. In fact, you can actually get paid to do it. This is where the second step of the collar comes in...
You could also, at the same time, sell the September $41 calls for $0.65. You could use the income from selling the call to pay for your downside protection, plus you'd have $0.15 in income left over.
If KO shares soar, you won't get any more than $41 per share. You've sacrificed that upside to pay for your protection (and the extra income).
In my view, though, if KO makes a big move between now and September, it's more likely to be down than up. A lot of things can go wrong with the individual stock or the market as a whole. But on the upside, KO's not likely to have a big jump in sales or income that the market doesn't see coming.
In this example, you can protect your investment in Coca-Cola from a market decline without having to sell... meaning you can continue collect its quarterly dividend and avoid paying taxes on the sale. Better yet, you can even collect a little income to do it.
For many new investors, finding out about these strategies is a revelation. Taking just a little time to learn about options – and realizing they're nowhere near as complicated as most folks believe – can help you easily reduce risk and make bigger returns from the stocks you already buy.
And if you're an investor desperate for income in today's 0%-interest world, it can be life-changing...
As his subscribers already know, Doc's "bread and butter" in Retirement Trader is helping folks use options to generate safe, consistent income. And his track record shows he is incredibly good at it...
Since launching Retirement Trader, Doc has closed out an unheard-of 222 winners out of 224 series of closed positions. That's a 99% success rate.
Even better, Doc's strategy generates two to five times higher income than the highest dividends you can earn in stocks... but actually involves less risk than buying even the best blue-chip stock outright.
But even though we've documented these returns, and explained again and again how Doc's income strategy works, many readers are still skeptical.
If you're already using Doc's strategies to earn safe income, we want to hear from you. Send us your experience to feedback@stansberryresearch.com.
New 52-week highs (as of 7/28/15): Amgen (AMGN), Becton Dickinson (BDX), Chubb (CB), Cempra (CEMP), and CVS Health (CVS).
A busy day in the mailbag... more feedback on Porter's energy recommendations, two recommendations for foreign brokerages, and a couple notes of thanks. Send your notes to feedback@stansberryresearch.com.
"The fact that you publish the pissed-off screeders proves your commitment to all of us (gripers included) and our long-term investment success. Keep it up. The most successful mutual fund manager of all time (Peter Lynch, Fidelity Magellan, 1977-1990) averaged 25% per year for his shareholders... and even he admitted in One Up on Wall Street that he was 'only' right 60% of the time on his picks. For your griper-screeders to expect perfection in your Stansberry's Investment Advisory recommendations would imply that you own a time machine (in which case, could you please go back to Wrigley Field and let that guy with the goat into the ballpark?)." – Paid-up subscriber L.F.
"Porter, I read all your [natural gas and oil] stuff when you first came out with it. You were right on target. I sort of doubted when you predicted what would happen to oil prices when all the fracking got going, but boy, were you right. Everybody else was shooting for the moon including some in your company. I stayed on the sideline because of your reasoned advice and glad that I did. Right now I'm harboring resources for the next bottom. Keep up the good work." – Paid-up subscriber A. Rutherford
"Your UK subscriber Danny asks about being able to trade US recommendations. I am in the UK (and Retirement Millionaire, True Wealth, & Professional Speculator subscriber) and use OptionsXpress. Their trades aren't cheap ($12.95 a pop), but it's user friendly and there is a very good online helpdesk, and you can use it to trade both stocks and options (as the name suggests)." – Paid-up subscriber Denis
"You received an email from a fellow in the UK. Since he is not a US citizen he will have 30% withholding on all dividends. I am a US citizen residing in South America and I use Investors Europe as a brokerage. I like their Rock Trader Pro platform, as a novice I find it very easy to navigate, however, they only recently added US options to this platform. Hence, options are only available on about 100 US stocks at this point in time (at least the last time I checked)." – Paid-up subscriber James C.
"Awhile back you published a list of companies you said were 'value traps'. I recall that you said they haven't grown their earnings in too many quarters. You said this was not necessarily a list of shorts, but it was a good place to start. I did a little research of my own and shorted 6 or 7 of them, including RJET, CECO, RNWK, and RT. Many of the stocks have fallen dramatically, including some that have fallen 70%+. I'm still making money on these shorts. Thanks for the great advice." – Paid-up subscriber Brian Basil
"Feel free to post this at the end of your newsletters. I have been subscribed for less than a month would say at the age of 23 am glad I have found such a newsletter. Enjoying getting real updates as objectively as I think is possible. Intend to stay. Thanks." – Paid-up subscriber Brendan
Regards,
Justin Brill
Baltimore, Maryland
July 29, 2015
Dear Stansberry Research subscriber,
We recently made a technical change to the way we deliver our monthly newsletters.
As you may have noticed, we no longer include the entire newsletter as a file attached to the e-mail notification. Instead, we include a link inside the e-mail that opens the relevant page of our website. This allows you to choose your preferred format – HTML or PDF – for reading (or printing) our monthly newsletters.
Although this is a small deviation from our historic practice, it changes the way we serve you. As I'll discuss below, we made this change for several important reasons. But before I discuss any of those matters, I first want to acknowledge that making this kind of a change without explaining it to you first was a huge mistake.
Since I launched this business from my kitchen table in August 1999, I've always tried to give you the information and the customer service I'd want if our roles were reversed. In this case, we simply didn't live up to that standard. I deeply regret it. We shouldn't have made a change like this to our service without first explaining why we needed to change the way we're delivering our letters.
I know – and I'm eternally grateful – that many of you view the arrival of our monthly newsletters as a happy occasion. You've gotten used to how and when our letters arrive each month. You've developed a routine around opening the attachments and reading the newsletter directly. By making this change, we've messed up your routine. We did so without warning you about it and without explaining why.
As a result, some of you (we've heard from five or six subscribers directly) have lost a bit of respect for us. Says paid-up subscriber "Rob":
Sorry guys. I hate the new format that the newsletters are coming in. I subscribe to many of the newsletters, and I use my e-mail mailbox to search/sort newsletters for information since I get recommendations for the same stock to both buy and sell based on the publisher. That's challenging to keep track enough. But now you've started to use hyperlinks forcing me to copy and paste and send the e-mail back to myself so I have a log that's searchable... It's simply just a pain on my part and causing more of a disservice for me. I don't offer much feedback. However, I would sincerely appreciate it if you went back to include the subscriptions we are paying for in the e-mail. Furthermore, I cannot read any of the newsletters unless I'm online.
Let me reiterate that I'm embarrassed we made a change like this without first explaining why we needed to stop attaching the newsletters.
I know if I were in your shoes, that kind of a change, without any explanation, would have been extremely annoying. Trust me when I tell you that when I found out what we're doing, I wasn't happy. The simple fact is our technical staff made this change without discussing it first with me or with our Editor in Chief Brian Hunt.
So, yes, I completely agree with our critics who have complained that we shouldn't have done this without first explaining why, and I apologize. Now, let me explain why it's imperative that we change the way we deliver our content to you.
We've been delivering monthly issues as attached files for more than a decade. When our subscriber rolls were smaller, this wasn't difficult to do. However, our file size has grown dramatically over the years. We now publish several of the world's largest financial journals. Today, the "blowback" from sending out so much data across hundreds of Internet service providers (ISPs) around the world has become a serious problem.
Many ISPs now routinely refuse to deliver our newsletters. They do so for a variety of well-intentioned reasons – mostly because attached files carry a much higher risk of carrying a computer virus or spam. These filters also flag very large e-mails. Some of our e-mails have exceeded 150 kilobytes. That's much more than the 100-kilobyte threshold that is generally viewed as "safe" and unlikely to get blocked.
Make no mistake, these ISPs also have an economic incentive to refuse our e-mails when they're carrying a large attached file. These emails take up more bandwidth and cost more to deliver. Therefore, as our subscriber rolls have grown, more and more ISPs have begun to block our e-mails, using the pretext of safety.
This deliverability issue was causing larger and larger percentages of our customers to not receive the issues they paid for. And that, in turn, was causing a customer service problem that we could not fix. After all, we can't control whether or not your ISP delivers our e-mails.
Our technical staff decided that the best way to prevent our monthly newsletters from being rejected as "spam" was to remove the attached file. Making our e-mails much easier to deliver has resolved the problem of subscribers not receiving our e-mails. That's vital to our business and to thousands of our subscribers each month.
This change solves another problem, too – copyright protection. As you may know, as publishers we must take reasonable steps to defend our copyright if we expect the legal system in the U.S. to enforce our rights. Sending out hundreds of thousands of digital copies via e-mail using attachments that require no subscriber verification might end up as "proof" that we don't intend to enforce our copyright. That such files are convenient to use also means they're convenient to share. While we could implement technology to password-protect these files, doing so would make these files still more difficult to deliver (and would take away almost entirely the convenience of the attached file).
And finally, there's the not insignificant matter of expense.
As our file sizes have grown, the bandwidth required to attach newsletters has become a significant operating cost for us, approaching $2 million per year. Cynics among you will surely charge that we've stopped attaching the newsletter files to save these expenses. To these folks, I can only reply that if paying the $2 million each year meant that our e-mails would actually be delivered, we'd continue to do so indefinitely. As a business owner, I constantly strive for both quality and efficiency in the investments I make in our business. Spending $2 million a year on a fulfillment system that doesn't work benefits no one. Not me. And not you.
I'm certain our decision to send our monthly newsletters via links inside e-mails that can be delivered both securely and reliably is the only way forward for our business, regardless of cost.
Yes, this change will be slightly inconvenient for some subscribers. But this is the only way to guarantee the delivery of our e-mails. It is also the best way to safeguard our copyrights for the long term.
Finally... you should know that, prior to making this change, we spent several million dollars upgrading our website. In particular, we invested heavily in our website's search function. I'm certain (as I've been using it myself) that readers who were using their e-mail search functionality in lieu of our website's previous clunky search engine will be pleasantly surprised that our new search engine works very well. That should obviate the need for each subscriber to maintain copies of back issues.
Change is often inconvenient and frequently painful. This change has undoubtedly upset some of our oldest and most devoted subscribers. We sincerely regret that we didn't discuss these changes well in advance or give you adequate time or warning to adjust your routine. But we hope you'll do so.
And we'll continue to do our best to make our work worth the trouble.
With my continued appreciation,
Porter Stansberry
|