We've discussed how declining PC sales have hurt Hewlett-Packard. We've also discussed how online shopping is eating away at brick-and-mortar retailers.
Today, we're going to discuss one of the first industries Porter recognized as obsolete – newspapers...
Newspapers enjoyed near-monopoly status for hundreds of years. For generations, they were the primary source of information for most people. And newspaper owners enjoyed huge profits.
Warren Buffett has long been a fan of the newspaper industry. His holding company, Berkshire Hathaway, still owns stakes in the Washington Post, Lee Enterprises, and Gannett (the publisher of USA Today).
As Buffett's explained over the years in his Berkshire Hathaway letters to investors, even owners of the worst newspapers enjoyed huge profits due to the monopoly nature of the business…
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When Charlie [Munger] and I were young, the newspaper business was as easy a way to make huge returns as existed in America. As one not-too-bright publisher famously said, "I owe my fortune to two great American institutions: monopoly and nepotism." No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits. |
But the Internet is devastating the industry, not even the best managers could help. News became a commodity. And most of it was free on numerous websites. This drove circulation revenue down. (It's been in a steady decline industry-wide since 1987.)
Newspapers make most of their revenue selling space ads, not subscriptions. When they moved their content to online formats, it destroyed that business model... There wasn't enough ad space online. And with Internet ads, advertisers can accurately judge whether space ads are worth the expense. Most of the time, they're not. Advertising revenue also fell off a cliff...
In September 2008, we first shorted Gannett in Stansberry's Investment Advisory at around $17.76 a share to profit from the trend. We closed the position two months later when shares were trading for a little less than $8 for a 60% gain. Shares continued their fall, eventually bottoming near $2 per share in early 2009.
Shares have since recovered to more than $17… but we don't expect that to last…
In our initial analysis of Gannett, we borrowed a tactic from Warren Buffett... I asked myself, "Would a well-financed entrepreneur attempt to create these businesses or industries if they didn't already exist?"
For example, if you had $1 billion to invest, would you try to build a global newspaper franchise? Would you buy up timber forests and paper-pulp factories and printing presses... and hire thousands of unionized employees? Wouldn't you just hire 50 or 100 smart folks and build a website?
Based on Gannett's performance, the answer is clear…
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What happens when a monopoly isn't anymore…
In today's Digest Premium, Porter describes why he sold short one of Warren Buffett's favorite industries… and made 60% in three months.
Click here to continue reading.
What happens when a monopoly isn't anymore…
Chinese buyers are becoming a more important part of the U.S. housing rebound… According to the National Association of Realtors, "non-American" buyers accounted for $82 billion out of about $770 billion in home sales last year. Chinese buyers were responsible for more than $7 billion of sales. Chinese are now the second-largest foreign home buyers after Canada.
Some of the Chinese buyers live in the U.S. full or part time. But realtors estimate 40% of the homes are for investment. According to Shanghai magazine Hurun Report, mainland China has around 1 million millionaires. And almost half of them want to invest in the U.S.
"It's a sign of their status," Betty Chan, who deals with Chinese buyers in Las Vegas, told Fox News. "You can show off to your friends and family that you can buy something overseas, not everybody can do it."
The Chinese are buying high-end properties across the country (though they've focused on hard-hit areas, like Nevada and Florida)… And they're paying cash.
As we've noted, U.S. real estate prices are low… And compared with prices in China, they're especially attractive… In Shanghai, $2 million buys you a two-bedroom condo.
In August, a Hong Kong apartment sold for $61 million ($9,773 per-square-foot), making it the second-most expensive apartment in the world. (An apartment in London holds the top spot. It went for $306 million, about $12,000 a square foot.)
The astronomical prices have caused many investors, including famed short-seller Jim Chanos, to be bearish on Chinese real estate. But True Wealth editor Steve Sjuggerud isn't worried. And he recommended the Guggenheim China Real Estate Fund (TAO) to profit from the opportunity…
Thanks to what Steve calls the "Bernanke Asset Bubble" – aka Federal Reserve Chairman Ben Bernanke's easy money policies, notably quantitative easing – asset prices across the globe will soar. And because the Hong Kong dollar is pegged to the U.S. dollar, a Chinese bubble is inevitable. But Steve thinks prices will hit "crazy" levels before popping.
TAO is full of Hong Kong-listed companies that buy and trade property in China. Because these stocks are listed in Hong Kong (which, again, mirrors U.S. monetary policy), the companies can borrow at incredibly low rates.
As Steve explained to me on the phone this morning, Chinese people don't have many options when investing their cash. They don't trust banks. And they don't buy stocks or bonds. So they hold a large portion of their net worth in property. Consider these stats…
Real estate investment makes up 13% of China's gross domestic product (GDP). And housing constituted 41% of Chinese household wealth in 2011, compared with 26% in the U.S.
The combination of the Bernanke Asset Bubble and the lack of investment alternatives for the Chinese will lead Chinese property to hit obscene levels… "It will go higher than our property bubble went in the States," Steve said.
Steve recommended TAO in September. True Wealth readers are already up more than 16% on the stock. And it continues to hit new highs.
As regular Digest readers know, Steve is also bullish on U.S. housing. And in today's DailyWealth, Steve Sjuggerud tells readers the "most direct housing play in the stock market" – mortgage REIT Two Harbors (TWO).
"Virtual banks," as Steve calls mortgage REITS, borrow money at low rates and invest in mortgage bonds paying higher interest rates. Two Harbors invests 80% of its money in government-guaranteed bonds, which carry virtually no default risk. (If the mortgages default, the U.S. government is on the hook.) Two Harbors invests the other 20% in "mispriced" bonds... These bonds are not government-guaranteed, so they do represent a default risk. But they pay a higher yield to make up for the extra risk.
Two Harbors' biggest risk is rising interest rates. But Bernanke's promise to keep interest rates low for years means Two Harbors will continue to borrow at artificially cheap interest rates. And investors can continue collecting its 12% dividend.
But Two Harbors made a recent announcement that makes it an even better play on U.S. real estate. Steve wrote in today's DailyWealth…
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Over the last couple years, TWO has built up a portfolio of more than 2,200 homes… in the foreclosure capitals of America. Top cities for Two Harbors include Phoenix, Tampa, Atlanta, Las Vegas, and Charlotte. |
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As I write, Two Harbors is in the process of spinning off its portfolio of single-family homes. And you should buy before it does… |
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Two Harbors will spin off its housing portfolio into a stock called Silver Bay Realty Trust (SBY). |
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Silver Bay is not publicly traded yet… but it will soon. By buying shares of Two Harbors today – before the spinoff – chances are good you will end up getting Silver Bay shares, too. Chances are good Two Harbors will pay out shares of Silver Bay in a "special dividend" to Two Harbors shareholders. |
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This will be significant – somewhere between 8% and 10% of the value of Two Harbors. |
As we told you last week, Steve told subscribers in his latest issue of True Wealth about another way to play the U.S. housing market.
The company he recommended is one of the largest buyers of single-family homes in the U.S. It sank more than $1 billion into housing this year alone… And management's track record clearly shows they're some of the best investors in the business… Steve says the stock is "crazy cheap" and pays a solid dividend…
While we can't divulge the name of the stock here… we can say this is a great opportunity to gain exposure to the housing market. Steve says shares could soar from today's level… To sign up for True Wealth – and gain access to Steve's latest recommendations – click here…
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New 52-week highs (as of 12/7/12): iShares Australia Fund (EWA), Guggenheim China Real Estate Fund (TAO), and Procter & Gamble (PG).
Last Friday, Alliance members received the second "beta" test issue of Stansberry's Alpha… And the positive feedback continues rolling in. We welcome all comments on our latest products… Your e-mails help us tailor them to ensure they are as valuable to you as possible. Send your comments to feedback@stansberryresearch.com.
"Compounding may be the safest path to wealth, but Richard Russell's suggested investment vehicles for that process are pathetic. Muni-bonds, T-bills, 5 year T-notes, 'good' money market fund… where are those to be found? His mindset must be stuck in the '80s when interest rates were significantly higher. At current rates 'the money [may never] pour in' over any reasonable time frame.
"The principle of compounding is real, but actual results will fall far short of theory unless riskier securities are employed. Any investor with at least a 25 year time frame and more than a casual interest in monitoring their retirement assets can expect compounding to achieve financial independence by investing in 'world dominating' dividend paying-growing stocks and reinvesting the dividends.
"Anyone interested in running their own compounding scenarios may find the following links useful: http://math.about.com/od/formulas/a/compound.htm
http://www.oup.com/us/pdf/eeconstuds/interestTables.pdf
"The following paper describes how to compound at shorter than annual intervals (like quarterly for dividend payouts): http://www.moneychimp.com/articles/finworks/fmfutval.htm
"To skip the math and manual calculations, here is an on-line compound interest calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm
"A dividend reinvestment calculator I frequently use:
http://buyupside.com/calculators/dividendreinvestmentdec07.htm" – Paid-up subscriber Dave Kean
Goldsmith comment: You make a good point about those investment vehicles in today's environment of record-low interest rates. Keep in mind, the Richard Russell essay we ran in the weekend's Digest Masters Series was originally written in 1958.
But the core idea in that essay stands as true today as it did then… To be a successful investor, you have to get compounding working in your favor. You have to get interest and dividends working for you, rather than against you. You have to focus on building a money snowball that grows larger and larger every year.
If a person learns just this one vital idea, he is ahead of most everyone else. Make your money make more money for you. Compound, compound, compound. It's how the little guy who is not an investment expert or a super-successful business professional can get rich over the long term.
Regards,
Sean Goldsmith
New York, New York
December 10, 2012
Chinese investors buying valuable U.S. properties… Steve's Chinese real estate play hits a new high… The 'most direct housing play in the stock market'… Learn this one rule to become a better investor…