In yesterday's Digest Premium, I (Porter) discussed how Disney has succeeded as a company against the odds… The company needs massive amounts of capital and skilled employees to survive – two factors that typically cause businesses to fail. Still, Disney has thrived.
The reason why Disney has been successful is because it created a story. It created characters. It created a vision that everyone around the world knows and loves. And that's hard to do. The only other people who've even come close to doing anything like that over the last 50 years are the people at Pixar – the digital animation studio responsible for Toy Story (among other hit movies). Pixar succeeded in a similarly tough business because the company created a brand and characters that everybody loves.
I'm constantly looking for companies that make products, stories, or characters that people love through generations. It's difficult, and there's no science to finding them. But Disney clearly has mastered it. And if you look at the stock over the long term, it's performed very well…
Disney has been able to constantly improve its business and profitability by taking on huge amounts of debt. At any given time, Disney will have a total debt of more than $30 billion, which is nearly half its annual sales.
It's a highly indebted business. So as an investor in the common stock, you're faced with the risk that Disney management will make poor choices, like moving away from their core style, brand, and story line. If this happens, it would be catastrophic. But it hasn't happened. And I personally don't believe that's likely, as the company has such a strong culture. Still, that's the big risk.
And risk can be nerve-wracking for a passive, common stock investor who has little control over what happens in the future. Personally, I'd rather invest in a company that has a similarly powerful brand that doesn't require as much capital…
The best example of a company with a similarly powerful brand that I'd rather own is Hershey. I've said many times I believe Hershey will go down as the highest-performing stock I ever recommend. And there's no risk Hershey's management will mess things up too badly, because the board has its hands tied…
The majority owner of the stock is a trust, the Milton Hershey Trust. And the Milton Hershey Trust is forbidden by law in the state of Pennsylvania to sell the company. That's fantastic because it means Hershey can never get caught up in the nonsense that lures most corporate managers – like the idea of selling the company… or taking it private (as we discussed with Dell)… or any other kind of major restructuring that steals wealth from shareholders.
– Porter Stansberry with Sean Goldsmith
It's déjà vu all over again...
Today, the Dow Jones Industrials Average beat its all-time high of 14,164.53, reached in October 2007.
The rally has been great for many of our portfolio stocks…
Along with the Dow hitting a record high, Japanese stocks also rose to new highs. Steve Sjuggerud recommended Japanese stocks in True Wealth... He called it his "No. 1 opportunity for 2013." Steve was bullish on Japanese stocks because former Japanese Prime Minister Shinzo Abe came back into power... After his resignation in September 2007, the Nikkei (Japan's benchmark index) fell in half and the yen soared by 40%.
This time, Abe swore he'd beat Japan's decade-long deflation... And that meant printing tons of money. To date, Abe has kept his promise. And he's filled the highest positions in Japanese government with cronies who will carry out his goals.
The two Japanese stock funds in Steve's True Wealth model portfolio – WisdomTree Japan Hedged Equity Fund (DXJ) and WisdomTree Japan Small-Cap Dividend Fund (DFJ) – both hit new highs today. Readers are up 15% and 26%, respectively.
Hershey, which Porter says will be the best-performing stock he recommends in his career, also hit a new high today. The chocolate company is the definition of a "Buffett-esque" company. Hershey is a rock-solid brand… And the company is "capital efficient," meaning it doesn't have to spend a lot of money maintaining the business... Instead, it pays that cash to shareholders.
Hershey has paid a dividend every year since 1985, and it's raised that dividend from $0.03 a quarter to $0.42 a quarter today.
And one of Hershey's best qualities is that the company can never sell itself... The Milton Hershey Trust is the majority shareholder in the company. And the Trust says it's against the law for the company to be sold. That means shareholders can profit from increasing payouts for decades to come.
Many of our other recommended companies are trading at new highs today... The world's largest payment processing company, World Dominator Automatic Data Processing, hit a new high. So did private equity powerhouse Kohlberg Kravis Roberts (which Frank Curzio recommended in Small Stock Specialist). Retirement Millionaire recommendation, food and beverage giant Pepsico, hit a new high today.
Of course, the wide-ranging rise in equity prices can't go on forever… It's being fueled by global central banks churning out new paper at a historic rate…
Still, most people are heedless of that reality… Instead, they'll simply greet the new highs with cheers – and a lot more buying.
It's almost like nobody remembers that October 2007 was the top of a huge bubble... brought about in part by low interest rates... Today, we have even lower rates...
But no… once again, the vast, thundering herd will be obsessed with the wrong stuff. It's too focused on headlines... and living under the spell of interesting times.
Smart as billionaire investor Warren Buffett is, he's far from perfect... For example, I wonder how he survived the 2010 Lubrizol fiasco with his job and reputation intact.
In case you don't remember, former Berkshire executive David Sokol lobbied his boss to buy chemical-maker Lubrizol while holding its shares. Berkshire wound up buying the stock, and Sokol made about $3 million, according to various reports.
The Securities and Exchange Commission investigated Sokol's Lubrizol deal and decided against taking action... But to most folks, it looks a lot like a kind of insider trading, known as front running. And everyone in the financial world knows that's a crime.
Sokol wasn't just any executive, either. He was Buffett's top lieutenant. I, for one, assumed he'd be the next CEO of Buffett's Berkshire Hathaway. Sokol ran Mid-American Energy, Berkshire's large utility subsidiary. But he was also Buffett's go-to guy to fix problems at other subsidiaries.
When Berkshire Hathaway bought corporate jet business NetJets… Sokol replaced then-CEO Rich Santulli, fired pilots, and wrote down airplane values to turn the company around and make it profitable.
Sokol's actions were bad. Buffett's were worse. Buffett knew of Sokol's holding, and yet it was never publicly disclosed. When it came to light, Buffett sent out a terse press release that asserted, "Neither Dave nor I feel his Lubrizol purchases were in any way unlawful."
Buffett has spoken many times on the value of reputation. For 25 years before Lubrizol, Buffett regularly sent Berkshire managers a memo. It said "zealously" guarding Berkshire's reputation was their top priority. A version of the memo appeared in Berkshire's 2010 annual report. The memo includes a famous oft-quoted passage...
|
We must continue to measure every act against not only what is legal but also what we would be happy to have written on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.
|
Sokol didn't survive the national news headlines. He resigned. Buffett also wrote...
|
There's plenty of money to be made in the center of the court. If it's questionable whether some action is close to the line, just assume it is outside and forget it.
|
Are we all really supposed to believe the most knowledgeable investor alive didn't think Sokol's actions approached "the line"?
And where was the SEC? The SEC looked past Bernie Madoff's Ponzi scheme many times until Madoff confessed and made them show up for work. Deciding to pass on Buffett's Lubrizol episode was child's play.
The best criticism I remember of Buffett's actions regarding Lubrizol came from portfolio manager Jeff Matthews. He wrote it up in his book, Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett… Matthews is more gentlemanly than I am. But it's clear he'd like some answers about Lubrizol.
Overall, the book is an excellent read. It praises Buffett when he deserves it and criticizes him when he deserves it. It's intelligent and insightful, not blindly worshipful. It's also not too long, so you can read it quickly.
Buffett's success as an investor is undeniable. Berkshire's book value has grown at 19.7% after taxes per year since 1965. The S&P 500 has grown 9.4% a year – a pretax figure. You can park a jet in the 10.3% difference between the two. Buffett has crushed it like nobody else.
One of the primary reasons for Buffett's success is his understanding of the dynamic nature of the U.S. economy. No matter what's happening in the world, no matter what awful political nonsense we're asked to endure, Buffett believes in the awesome power of millions of people getting up every day and trying to improve their lot in life.
In that way, he's smarter than some of the self-proclaimed libertarians... who claim to worship free markets, but spend their time cowering in fear of the government. It's funny how many of these seem more scared of government than they are confident in the power of markets. [I (Dan Ferris) first noticed this when I attended FreedomFest for the one and only time a few years ago. It was populated by too many 40-something males who looked like they read lots of science fiction and lived with their mothers.]
And Buffett – a political liberal – believes in the power of markets, no matter what nonsense he and his political friends cook up.
Once I figured out what Buffett was saying about the power of the market, I did something about it. I decided I'd never recommend anything but the highest-quality companies. I also decided to keep fear-mongering out of my work. I've done an OK job on those two fronts. But I still can (and will) do better.
I don't know of anyone in the newsletter business who has focused on recommending high-quality businesses with more zeal than I have since I started recommending blue-chip "World Dominators" in 2006. That's helped me build a great track record in Extreme Value. And it's helped Extreme Value make more money by taking less risk.
Studying Buffett's ideas has been valuable to me. We've seen many awful crises in the U.S. We're certain to see another one, likely sooner than we suspect. But we're as certain to endure it as it occurs.
S&A Resource Report editor Matt Badiali is in Toronto for the annual Prospectors & Developers Association of Canada (PDAC) Conference. All the major companies and investors attend. Matt sent along some notes from the conference, which we'll feature in the Digest this week. Today, Matt writes…
It's getting ugly... The PDAC is one of the world's largest mining conferences. I (Matt Badiali) have heard attendance estimates between 30,000 and 35,000 people. It's a zoo here right now. But there is an air of desperation here that I don't recall from the past.
One newsletter writer discussed mining companies selling shares to raise only $500,000... That's not enough money to do any meaningful exploration. The reason we're seeing that is because the Toronto Stock Exchange rules say that if a company doesn't have enough money to last the year, it has to disclose that fact. So when you see these small amounts of fundraising, it's triage for a dying company.
The message is clear... Proceed with caution in the junior resource market today.
Rick Rule is one of the greatest resource investors I know. He's made a fortune for himself and his investors over the decades. And he recently sold his resource brokerage, Global Resource Investors Limited, to another resource heavyweight, Eric Sprott. Rick is one of the many heavyweights at the PDAC Conference this week.
And he's different now than a year ago. There's a spring to his step, he's reinvigorated, and he's smiling... all the time. I caught Rick's talk at the end of the day on Sunday.
He's talking about history now. About how in the 1990s bull market, he paid out more to investors in capital gains in 1996 than he had to invest in 1993. He's talking about how much money he made for his fund in the bull market from 2000 to 2007. He's pushing the greed button hard.
Part of it is pure sales. He's selling his brokers to the crowd. But it's not all that... a big part of Rick's new spiel is that he's having fun again. It's fun to make money. And Rick sees a target-rich environment right now.
What's critical is that he doesn't think we're going to see the TSX Venture exchange (the bellwether for junior resource stocks) recover soon. He's waiting for about half of the market to "achieve its intrinsic value," which is zero. However, he sees the market diverging. According to Rick, 5% of the market is actually worth something. And that 5% should be close to its bottom and should head higher soon. Meanwhile, the other 95% of the market will continue lower.
He also had some strong words about gold. He said the sentiment today is identical to the big bull market in the 1970s. Back then, gold soared from $35 per ounce to $200 per ounce. However, it retrenched all the way back to $100 per ounce. And many investors declared the bull market dead, sold out, and left.
But the gold price retraced itself from $100 to $200 and ultimately peaked at $800 per ounce. According to Rick, this is a normal, "cyclical decline in a secular bull market."
Porter and I (Sean Goldsmith) are hosting another group of folks at Rancho Santana in Nicaragua from April 10-14...
The folks developing Rancho are building a world-class, 17-room "Inn" on the property. It will have an art gallery featuring local artists and an interior courtyard for guests.
They've already built a new restaurant (which I believe is the best in the country) and clubhouse. You can have your breakfast (or margaritas, depending on the time of day) outside, underneath giant arches overlooking the ocean.
We've been visiting Nicaragua for a decade... In fact, Steve Sjuggerud and Porter first saw the property on horseback, clearing the brush with machetes. And every year it improves... The land is getting more and more developed. The service and language barrier improves. The food and amenities improve. But I feel it's reaching a tipping point.
In the past few months, Nicaragua was mentioned on the front page of the Wall Street Journal, the New York Times magazine, Departures (the magazine for American Express platinum members), and Delta's in-flight magazine.
And the latest Golf Magazine features a top-notch golf course just miles from Rancho Santana, at Guacalito de la Isla.
Guacalito, as we've mentioned in previous Digests, is the nearby development by Nicaragua's richest man, Carlos Pellas. He's spent hundreds of millions of his personal fortune on this legacy project.
Among the many jewels of Guacalito is the 18-hole David Kidd-designed golf course. (He also designed the St. Andrews Links Castle Course and Bandon Dunes in Oregon.) The course is open to the public...
If you're interested in property and Nicaragua, and you'd like to join Porter and myself at Rancho Santana from April 10-14, please e-mail Marc Brown (marcb@ranchosantana.com). There are a small number of spaces available... and Marc decides who makes the cut.
We hope to see you next month in Nicaragua...
New 52-week highs (as of 3/4/13): ProShares Ultra Biotech Fund (BIB), Berkshire Hathaway (BRK), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares Biotech Fund (IBB), SPDR International Health Care Fund (IRY), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Pepsico (PEP), Johnson & Johnson (JNJ), Automatic Data Processing (ADP), Hershey (HSY), Chubb (CB), Alleghany (Y), Kohlberg Kravis Roberts (KKR), BLADEX (BLX), Enterprise Products Partners (EPD), Union Pacific (UNP), Government Properties Income Trust (GOV), Two Harbors (TWO), Sysco (SYY), Target (TGT), and Fluidigm (FLDM).
In today's mailbag, one reader is rolling up his sleeves and buying land. Send us your notes to feedback@stansberryresearch.com.
"I recently bought 110 acres of land in the eastern panhandle of WV for $122,000. The land is a 90 minute drive from Washington, DC and part of a 10,000+ acre gated community. I divided the land into a 20 acre lot and a 90 acre lot. I did some minor work on the 20 acre lot to prep it to build on at a cost of $5,000. I just accepted an offer to sell the 20 acre lot for $125,000. I will own 90 acres with a cost basis of $2,000, $22 per acre. I am undecided if I will allow someone to cut the timber on the land for profit or simply use it as hunting/recreation land. Probably the latter. I expect to sell the land in 5+ years." – Anonymous
"Thank you for your insights into Warren Buffett's thinking and why he is buying back his stock... and how we can profit from this ourselves. I truly appreciate your analysis." – Paid-up subscriber Bill Deiz
Goldsmith comment: We're glad you enjoyed it, Bill. Yesterday, we featured Steve Sjuggerud and his analyst Brett Eversole using the powerful software tools behind True Wealth Systems to evaluate Buffett's strategy for buying back shares of his own holding company. (To see the results, click here.)
Since last week, we've featured one of these "True Wealth Challenges" every day in the Digest… As we've said, we spent years and nearly $1 million building computer systems that quantify the investing strategies Steve developed over his career.
In his high-end trading service, True Wealth Systems, Steve uses these sophisticated tools to analyze a huge array of market data. We've designed the True Wealth Challenges… to demonstrate the power of these tools. (We compiled the first four in the weekend edition of our daily e-letter Growth Stock Wire.)
In today's challenge… at the end of today's Digest… Steve shows how the Federal Reserve manipulates the stock market.
Regards,
Dan Ferris, Sean Goldsmith, and Matt Badiali
Medford, Oregon, New York, New York, and Toronto, Canada
March 5, 2013
How the Fed Controls the Stock Market
By Steve Sjuggerud
I don't think of myself as a conspiracy wacko... but I do believe that the Fed controls the stock market (at least, to some degree)...
Our True Wealth Systems computers fully back me up on this one... to the point where you could make a lot of money.
Don't get me wrong... I DON'T think that Federal Reserve Chairman Ben Bernanke is sitting on his throne pulling levers to make certain stocks go up or down.
What I mean is, I believe that what the Federal Reserve does matters to stock prices... a lot.
I believe this because history proves it's true...
Our True Wealth Systems computers tested this simple idea over the last 50 years.
How do you test when the Fed is "manipulating" interest rates? It's simple... We compared short-term interest rates (which the Fed controls) to long-term interest rates (which are more market-driven). Whenever these were out of balance, the Fed was attempting to manipulate the economy in some direction.
For example, when the Fed wants to give the economy a boost, it cuts interest rates, which makes this spread wider between long-term and short-term interest rates. Astoundingly, when this spread is wider than 1.5 percentage points (which it is about half the time), you make about 9% a year in stocks, versus buy-and-hold of 6% (both not counting dividends).
(You could have done much better in a double-long ETF, like we trade in True Wealth Systems.)
On the flip side, when the Fed wants to slow the economy down – when the spread is lower than 0.5 percentage points (which it is about 25% of the time) – you LOSE money in stocks.
We have sliced and diced this data further... but the gory details probably aren't as interesting as the big conclusion... The big conclusion is: When the spread between long-term and short-term interest rates is wide, you want to own stocks. And when it's tight (below 0.5), you lose money in stocks... so you don't want to own them.
Fortunately, today, the Fed is in "boosting the economy" mode. And this historically has the effect of boosting the stock market. You want to own stocks now...
Good investing,
Steve Sjuggerud