Another real secret...
Another real secret... How to invest in the world's best hedge funds without paying any fees... These are the funds your broker should tell you about... Why Biglari could be the next Buffett... In the mailbag: how NOT to use trailing stops...
Inside today's Digest... an overview of one of the few true investment secrets.
Most people don't know that they don't have to settle for poorly run mutual funds or "buy everything" exchange-traded funds. There are a handful of nearly secret investment funds that trade on the public market, have excellent track records, and treat their shareholders with great care and respect. Best of all, outside of paying a one-time brokerage fee, it costs nothing to own these funds.
I (Porter) am going to detail the funds you can join and the secret "backdoor" way you can buy them below. The summary is pretty simple: You can invest alongside the best and brightest investors in the world... You can gain substantial tax advantages (in some cases) by doing so... And executing these trades is no more difficult (or more expensive) than simply buying a stock.
But first, a favor. This is Day 6 of my nine-day run in the Digest. When I started last Tuesday, I promised to write nine of the most valuable essays I could, attempting to give you all of the best ideas I've learned during my nearly 20-year career. I told you that you would want to print these essays out and save them for future reference. Am I delivering on that promise so far? Do you think I'll make it through nine straight days without dropping the ball? Please, don't let this week go by without letting me hear from you: feedback@stansberryresearch.com.
So far, I've given you: seven ETFs that you can safely own. They will give you a diversified portfolio and beat the global stock market indexes handily. Then I wrote about the three sectors I believe outside, passive investors (aka you) should focus on if you're going to do your own investing: insurance (profitable underwriters), capital-efficient businesses (especially those with addictive products), and, perhaps strangely, resource stocks, when you can see that a commodity price cycle is making a major change in direction.
In these sectors, the most important, market-moving information is widely available, easy to understand... and largely ignored. Yesterday, I wrote about how I "time" the market by focusing on intrinsic value, investor sentiment, and managing asset allocation.
Let's start here. Do you have any of your assets being managed by David Einhorn? What about Dan Loeb? Maybe you have cash with Prem Watsa or Carl Icahn. What about Sardar Biglari? He's one of the most talented young activist investors in the world. Do you think having at least some of your long-term savings with these guys would be a good idea?
I would argue that even if you're a professional investor and working on your portfolio full-time, it's unlikely that you're going to produce long-term results on par with these guys. They're the best in the world and they have the best analysts working for them, guys in their 20s and 30s who are blindingly smart and working 80 hours a week.
There are three reasons why more investors don't invest with these guys.
First, obviously, most people don't know how. They think they have to have millions to get into their hedge funds. They don't know that many of the most successful investors in the world offer their portfolios to public market investors.
The next problem is harder to solve: these holding companies typically have complex structures that make them very difficult to analyze and understand. I'll do what I can for you to show you how to make sense of them, but if you're going to invest in these firms, you really have to read their annual reports and their quarterly reports. You should really go to the annual meetings, too. There's no substitute for looking these guys in the eye and hearing about their plans.
Finally... you have to be prepared for significant volatility. These guys are essentially leveraged financial firms. That means when a cold wind blows in the financial sector, these stocks are going to get "blown around." I have suggested some ways to help you deal with this problem in the past. But remember that Warren Buffett's Berkshire Hathaway saw its share price drop 50% twice during Buffett's tenure (1974 and 2000). Trust me when I tell you that the intrinsic value of Berkshire Hathaway didn't change much at all.
With these kinds of companies, you have to really understand what you own and what it's worth. The public-equity markets do a terrible job at pricing these kinds of companies.
Let's start with the most famous – Carl Icahn. There's a public vehicle that owns essentially all of Icahn's investment assets – Icahn Enterprises (IEP). The company owns his direct investments, including eight casinos and other interests in railcars, steel, packaging, and real estate.
Roughly half of the company's assets are invested in Icahn's hedge funds, which include offshore funds that don't have to pay capital-gains taxes in the U.S. He personally owns 87% of the stock, which has a market capitalization of $12 billion and holds around $8 billion in net debt. Over the last 10 years, Icahn has grown the book value of this business at an annualized rate of 18%. Currently, the stock trades at a significant 97% premium to book value...
The next most famous member of this group is probably David Einhorn. He's the founder of Greenlight Capital, a hedge fund that's value-oriented and also shorts stocks to hedge its exposure to the stock market – the same strategy I follow in my Investment Advisory.
Einhorn launched his hedge fund in 1996 with less than $1 million... and now manages around $10 billion. He launched a "captured" reinsurance company in 2004. Public-market investors can now buy shares of Greenlight Capital Re (GLRE), Einhorn's Cayman Islands-based reinsurance company. The insurance company underwrites profitably and invests 80% of its float back into Einhorn's hedge fund. Since its inception in 1996, Einhorn has returned almost 20% a year to his investors. This reinsurance operation has seen its book value grow 19% a year. It currently trades at a 17% premium to book value...
Activist investor Daniel Loeb has a similar reinsurance firm set up in Bermuda. It's called Third Point Reinsurance (TPRE). Since inception in 1995, Loeb's Master Fund has returned more than 20% a year to its investors, making Loeb one of the greatest investors of this era.
His insurance company will underwrite profitably (although it hasn't yet) and invest its float in Loeb's funds, which are hedged with short positions, again, like my newsletter. There's a very short operating history here, as the reinsurance company only went public in New York last year. But so far, Loeb has grown its book value 35% annually. Currently, Third Point Re trades at a 13% premium to book value.
These first three investors are well-established and have proven their "chops" in a wide variety of markets and investments. The next investor I'd like to introduce you to hasn't done that... yet. I believe he's on his way to becoming a financial titan, and it may well pay huge dividends to hop on the boat before he's as big as an Einhorn or a Loeb. His name is Sardar Biglari. His company is Biglari Holdings (BH).
Like Buffett, Biglari holds an annual meeting worth attending every year that features a tough Q&A session that lasts for hours. He, like Buffett, also writes annual letters that are brilliant. But unlike Buffett, he's known for being arrogant and doesn't suffer fools gladly... at all. Naturally, I like him.
Whatever you think of his personality, his track record is among the best in the world. He used a private investment fund to take over and turn around fast-food chain Steak & Shake, a move that required tremendous financial risk-taking and true operational excellence.
Biglari is one of the few executives who can operate at a high level both on the financial side and on the business side – something that Sears Holdings CEO Eddie Lampert, for example, has failed to do so far. Biglari began to funnel Steak & Shake cash flows into activist campaigns (against fellow restaurant Cracker Barrel) and, more recently, he bought his first insurance company (First Guard Insurance).
Out of all the young guys in finance these days, Biglari is the most fascinating... and I believe he will become the most successful. The company is still very small – the market cap is less than $1 billion. It holds very little net debt. Over the last 10 years, Biglari has grown the firm's book value 12% annually. I believe, as his insurance operations ramp up, this figure will grow substantially, pushing annualized results up to 16%-18% annually. Currently, Biglari Holdings trades at a 21% premium to book value.
The last "secret" fund I'd like to show you isn't a secret at all. It's a well-known insurance company – Fairfax Financial – headquartered in Toronto. What makes Fairfax unusual is that, like Buffett's Berkshire Hathaway, the company invests most of its insurance float in value stocks. Its chief investment officer – Prem Watsa – is one of the world's leading value investors.
As an example of the contrarian ideas Watsa follows, he's now the largest holder of Blackberry stock – the totally out-of-favor cell-phone company. He also owns large positions in Sandridge Energy, one of the most overleveraged new oil and gas companies in the U.S. Sandridge was created by Aubrey McClendon's former Chesapeake Energy business partner, Tom Ward.
Like he did at Chesapeake, Ward borrowed too much money at Sandridge to buy too many marginal oil and gas properties. The result was a stock that fell from $60 to less than $5. Investors finally kicked him out and have slowly repaired the balance sheet and increased production to levels where the company is producing significant amounts of cash flow (more than $1 billion is expected in 2014). This situation is classic Watsa. Over the last 10 years, Fairfax Financial has grown its book value 10% annually, using no net debt and carrying very large amounts of cash. Currently, Fairfax Financial is trading at a 25% premium to book value.
What should you do with this information? I have a few suggestions. First, read whatever you can from these companies' public filings. Fairfax Financial, for example, has to report its positions in a 13F each quarter, giving you a free look at what one of the world's best value investors is buying. Right now, there's one stock that makes up 40% of his U.S. equity portfolio. Sure, I could tell you the name of the stock, but there's no such thing as teaching. There's only learning. Just Google "Fairfax Financial, 13F". Figure it out yourself. You'll learn something.
And obviously, I recommend buying shares of these firms. I believe there's a near-certainty that they will grow their book value at a faster rate than you will grow your overall portfolio. Nothing is certain, of course... but the odds favor these investors in a massive way.
Here's a tip: From time to time, these shares trade for less than book value. That's because most investors don't understand insurance stocks, or because, in Biglari's case, most investors simply think he's going to fail in his efforts to turn around or take over new businesses.
I don't think you should buy these stocks today. Financial stocks and financial operators have had huge runs higher. What you should do is wait, read, meet, and learn. By that, I mean watch the stocks carefully. Read their quarterly and annual reports. Attend their annual meetings. (Buy one share so you can attend.)
Learn what makes these businesses work… and when you feel comfortable that you really understand what they do and why, begin to invest. Do your best to buy when other investors won't. And try to pay less than book value. You might also wait to see when these financial gurus – Einhorn, Loeb, Watsa, Biglari, etc. – begin to buy their shares. If you're patient, you'll get those opportunities.
Here's another tip. During periods of market uncertainty, these stocks will fall – usually more than the market falls. That means the prices on options for these stocks will tend to be rich. That makes these stocks great vehicles on which to sell puts. You can sometimes garner huge premiums, which can greatly reduce your acquisition cost. If you have no idea what I'm talking about, this strategy can reduce the cost of buying stocks like these by 25%-50% over the course of a year. I would love to show you exactly how to do it. And I will. For free (yes, really). Just sign up for my Stansberry Alpha webinar. I'm hosting it this coming Thursday night. It's live. Don't miss it. Click here to learn more.
New 52-week highs (as of 6/23/14): Alcoa (AA), Apache (APA), Activision Blizzard (ATVI), Bank of Montreal (BMO), BP (BP), Chesapeake Energy (CHK), Callon Petroleum (CPE), Chevron (CVX), ProShares Ultra Oil & Gas Fund (DIG), Dorchester Minerals (DMLP), Eni (E), Enterprise Products Partners (EPD), Energy Transfer Equity (ETE), GW Pharmaceuticals (GWPH), Intel (INTC), Eli Lilly (LLY), Microsoft (MSFT), Royal Gold (RGLD), RPM International (RPM), Sandstorm Gold (SAND), Sanchez Energy (SN), Constellation Brands (STZ), Integrys Energy Group (TEG), Triangle Petroleum (TPLM), Vanguard Natural Resources (VNR), and ExxonMobil (XOM).
In the mailbag... no vitriol yet. Pretty amazing. This must be one heck of a bull market if none of our subscribers are blaming us for their losses. Well, there was one poor fella who clearly doesn't know how to use trailing stop losses yet. There's still a good chance he'll blame that on us. So, maybe the vitriol will come tomorrow. Send whatever you want – praise or blame – to feedback@stansberryresearch.com. We'll read it.
"I follow your investment advice quite closely but, sometimes, it doesn't work the way one expects. A trailing stop closed me out of Targa Resources stock on Friday, the day you praised it quite highly, because on Wednesday, 6/18, it spiked from about $126 to $160 and then dropped back to $136 on Friday, 6/20. I made a 130% profit over 17 months but had to buy it back at $142." – Paid-up subscriber Bob
Porter comment: Well, fault me if you want to... but it's clear from your example that you haven't followed our advice. (Imagine me pulling out my hair.) I know for certain we have not stopped out of Targa. Not even close. I don't mean to be coy, but I've long since learned that there's no such thing as teaching. You have to learn this for yourself. Here's a simple essay that explains it...
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"A while back, you remarked something to effect that most all MLPs were traps for unwary investors. The reason you gave for that assessment was that MLPs have to distribute nearly all their earnings (to qualify for not having those earnings taxed @ corp level), and so cannot build necessary capital for maintaining/expanding their operations. I had not thought of that point, though it does make sense to me. But, I suspect you were being overly broad in your denunciation. Would you please re-visit that topic – and hopefully provide us some guidelines to separate the (perhaps very few) good MLPs, from all the chaff. On another, perhaps more recent episode, you made another pretty much categorical dismissal. This time, it was of the type of investment 'stories' which are only available to 'qualified' investors (whom you referred to as more like 'qualified suckers/ fools'). Again, I'm pretty sure that not all these things are sinkholes, and that we subscribers could benefit from some of your astute guidance on separating the rotten from the possibly good ones." – Paid-up subscriber Will W.
Porter comment: I believe that most MLPs are far too leveraged. As a result, during periods of financial stress, they can have difficulty renewing their lines of credit – cash that's necessary for their operations. In short, any serious financial crisis will leave almost all of these firms insolvent.
That's a nonsensical way to build a key sector of our economy. But for years, we've done the same thing with real estate (through REITs). Investors have to be very cautious with these instruments – far more cautious than most investors realize. Regarding private investments... when your broker calls you with a chance to buy some kind of private equity, always say no thanks. Then ask him what the difference is between his commission for public equity and private equity. You'll soon realize why he called.
I have followed the coal industry for over a decade... You are spot on with your coal industry analysis. I had the opportunity to witness the startup of one of Cline's mines in the mid 2000's when he was looking to produce out of Illinois and export out of the gulf to the UK and Europe. You could tell then he was ahead of the slow moving coal industry, which was bogged down by stubborn unions (don't get me started). Now those other firms are bankrupt and their union members are largely unemployed... seriously sad all around. Thanks for the royalty play, very interesting... And the true cause of me writing in, was your comment about management teams rewarding customers and themselves rather than shareholders, 'a new kind of socialism.'
"In the same way the ignorant American public bought into 'home prices always go up' and buying a home is the smartest investment you can make (even though it barely keeps pace with inflation), I believe they are also making the same mistake with investing in stocks blindly. This blind investment, specifically through 401k's, allows large American corporations to have a consistent buyer of their companies which they can leverage for their own benefit, while the 'smart money' can milk them unknowingly. I could go on for days about this, also able to play the other side that defends the 401k investors (which includes me mind you, although I am now investing after tax in the 401k to avoid the inevitable hike of tax rates which will be required in my later years to try to keep this country together)... I.e where else is there to invest when there are zero interest rates, and potential/likely bubbles in stocks, bonds, and real estate? Bottom line questions...
"1) what do you think of 401k investing, particularly these targeted funds everyone is pushing now? I think they are just more dumbed down ways to milk investors for fees and average returns.
"2) the new kind of socialism, as you called it, is driven by capitalists taking advantage of the unknowing, financially uneducated, arguably lazy public. Who is to blame? The management teams/money managers or the enablers (the public)? I can argue both sides." – Paid-up subscriber Don B.
Porter comment: I invest in a 401(k) to capture some tax advantages and some asset protection and because I like the idea of having lots of different "pockets." I don't actively manage the account. And I don't expect superior (or even acceptable) investment performance. I think of it as I do my universal life insurance – it's just an alternative form of savings and a hedge against catastrophe.
For investors who can, I would recommend taking control of their 401(k)s and investing in the ideas I've been writing about here and in my Investment Advisory. Avoid mutual funds and pay close attention to fees being charged. Complain to your H.R. department if your 401(k) administrator isn't doing a good job.
Regarding the absurd way that most management teams treat their public shareholders... it's simply a disgrace. The problem, mostly, is that mutual funds and institutional investors refuse to do their jobs. They hold hundreds of stocks so that their analysis doesn't matter (they're just 'closet' indexing the S&P 500). And they have no idea what's going on in the companies they own. It's disgraceful.
"I missed part of the last bull market because I was reading about 'the sky is falling any second now!' Hmm. I discovered Bill Bonner's writings, which somehow led me to Stansberry Research. I started with [Stansberry's] Investment Advisory, then added The 12% Letter. I discovered that financial guys are the absolute best at making predictions... With doomsayers it is always *any second now*! With financial guys, it is 'how can we take advantage of the situation today while we prepare for tomorrow?' Much more level headed. An interesting thing happened. I stopped worrying about it. And I made a decision, to learn about investing and finance... I invested in a few stocks, Bank of America, Cheniere, Intel.
"What I found is that my 'boring' stocks made the best returns by far. And instead of being completely distracted all day worrying about whether a certain stock went down, I could go for weeks without checking. I would get an email if a trailing stop triggers. Ahh. Now that is more like it... The main thing I have learned is to be able to answer to myself these two questions: 1. Why am I buying this stock or ETF, and 2. What is my exit strategy... This has really helped me to avoid getting into investments that I don't understand well enough, and best of all to let the winners run. No more churning the brokerage account. Time to get nervous? No problem. I tightened my trailing stops. That way I can capture some gains while being more conservative. No worries. In fact I am looking forward to this commodities bull market shaping up (already up nicely in silver). Thanks for the excellent research, and showing me what to learn." – Paid-up subscriber Jonathan D.
"Some years ago I decided that an Alliance membership, while seemingly expensive, was in reality a great value. If I recall, it cost somewhere around $5000 at the time. It had an intrinsic value far above the cost because I specifically wanted access to several newsletters... Within a year I'd made up the cost of my membership with gains on the bonds in True Income. Extreme Value (which I wasn't even considering buying) has given me 150% on BUD and 310% on STZ among others. All this to say that in hindsight, my Alliance membership was one of the best values I've ever purchased. Even if it were possible, I wouldn't sell it back to you for 10 times what I paid. Not everything has been a 'winner'. But I can hardly blame you or your writers for that. Learning about trailing stops (and purchasing TradeStops as a result) has taught me how to NOT ride a stock up and back down. I could go on and on, but you're looking for vitriol. Sorry." – Paid-up subscriber C.W.
Regards,
Porter Stansberry
Baltimore, Maryland
June 24, 2014
Looking for value in today's market...
Yesterday, Porter discussed the effect that the Federal Reserve's money-printing policies are having on the market.
In today's Digest Premium, he examines whether there is any value left in the market...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Looking for value in today's market...
Editor's note: Yesterday, Porter discussed the effect that the Federal Reserve's money-printing policies are having on the market. In today's Digest Premium, he examines whether there is any value left in the market...
There is, unfortunately, very little obvious value in the market today.
You can make an argument for comparative values. We have been buying Greek stocks in Stansberry International because on a comparative basis, Greece offers us the highest real interest rates in the world and the lowest stock valuations. Historically, we know that's a great bet to make. But that will be a disaster for us if there is any kind of material change to the European Union or if the euro breaks down. And that, of course, is a real possibility.
People don't talk about it anymore, but the euro is in no better shape – no more cohesive or logical – than it was back in 2009 and 2010, when people thought it would fall apart. The governments are still fudging their targets, and the European Central Bank is now grossly violating the Maastricht Treaty that led to the creation of the euro. So what is it: A single economy or a bunch of poorly run little countries? It's probably more the latter.
But even so, Greek stocks are so much cheaper than the rest of Europe that it's a compelling comparative opportunity. Those kinds of comparative opportunities are in no way, shape, or form as compelling or as important as absolute value.
I (Porter) am seeing bond yields at all-time lows, which is the same thing as saying bond prices are at all-time highs. Stocks are trading at record-high and near-record-high earnings ratios and record-low or near-record-low dividend yields. That is another way of saying stocks are really expensive. And I mean all stocks. There is not a lot of value out there, unless you're willing to go into extremely high-risk places like Greece, Ukraine, and Russia.
The few exceptions to this fully valued world may be China. Chinese stocks are cheap and attractive, but there's no transparency in anything that goes on in China. I can't trust the accounting and the rule of law. It's just not the kind of market that is appropriate for outsiders. It's not really a first-world stock market there yet.
Back in 2011 and 2012, I was able to recommend stocks, bonds, and real estate with impunity. Today, I don't see things the way they were back then. You may be wondering what to do in a world that's fully valued?
You begin to short stocks. Look for companies with shares that are fully valued and are either frauds or have too much debt on their balance sheets and will eventually go bankrupt. Also, short companies that exist in obsolete industries. Shorting stocks that fit into one of those three categories is what you should do when you see the world is dangerous and fully valued. And we've been doing some of that in my Investment Advisory newsletter.
The other thing we're doing is buying the few sectors of the market that are still completely out of favor. Coal and uranium are two commodities that have not benefited whatsoever from the Fed's money-printing campaign. In fact, if you look at those sectors, you'll see that prices are at or below the lows from 2008-2009.
There are very few contrarian opportunities left to us. Most people won't short stocks and most people will never buy coal or uranium. We also have analysts as I mentioned in Greece, and we have had an analyst in Ukraine. Again, these are places and things that most people would never buy. But we can still find value in those places today.
– Porter Stansberry
Editor's note: Porter and his research team have done a terrific job of finding ways to profit despite today's expensive market. His portfolio is showing an average gain of 43%... including four triple-digit winners. To learn more about Stansberry's Investment Advisory – and get started with a four-month, risk-free trial – click here.
Looking for value in today's market...
Yesterday, Porter discussed the effect that the Federal Reserve's money-printing policies are having on the market.
In today's Digest Premium, he examines whether there is any value left in the market...
To continue reading, scroll down or click here.