How to Operate the World's Best Business From Anywhere

It all started with Porter's presentation... Finding capital-efficient companies... Impossible for management to screw things up... How to operate the world's best business from anywhere... Some insights on SaaS... A match made in heaven... Getting yourself into this business now...

Editor's note: Today, we're kicking off a special holiday series looking back at 2021...

The five days of essays will continue through Friday in lieu of our regular Digest fare. In addition to serving as a valuable reflection on the past 12 months, it's a way to give our publishing team some well-deserved time off for the holidays.

While 2021 was not nearly as unusual as 2020, COVID-19 was still an ongoing story, playing a major role in the economy and in so many investment decisions along the way...

And despite the ongoing pandemic, a historic rise in the inflation rate, and some ups and downs in the political arena, 2021 was a high-performing year for the stock market... In fact, the S&P 500 Index is up nearly 25% for the year... even with a late-December sell-off, mainly in tech stocks.

For the rest of this week, we will share some memorable Digest essays that will refresh for us all what happened in our world and in the markets.

However, we begin today with a fresh Digest inspired by a high point of the year ‒ our Stansberry Conference and Alliance Meeting that took place in Las Vegas this past October, which we were thrilled to host live for the first time in two years...

Jeff Havenstein kicks things off with a look at the traits that make up the world's greatest businesses... inspired by our founder Porter Stansberry's presentation at the conference.

Let me tell you about the greatest business in the world...

I (Jeff Havenstein) have spent a lot of time thinking about this... And today, I want to share what I have learned with you.

The fact is that there is no single business considered the "best in the world." Ask 100 analysts and you'll likely get 100 different answers.

Still, there are traits that all great businesses share...

The reason I've been trying to find the best businesses in the world has to do with Stansberry Research founder Porter Stansberry...

You see, Porter was the keynote speaker at our 2021 Stansberry Conference and Alliance Meeting in Las Vegas this past October. He took the stage and began talking about the importance of "economic goodwill."

I'm sure most of you might be thinking that economic goodwill doesn't sound like the most riveting topic for an 8 a.m. start time... But trust me, it was a can't-miss talk.

Porter described economic goodwill as an asset that doesn't show up on the balance sheet...

It's an asset that can't be purchased... It must be earned.

Basically, all the excess value of a company – all the stuff that isn't property, equipment, and inventory – goes into goodwill. Specifically, I'm talking about a company's reputation for quality, consistency, value, and customer service.

Longtime Digest readers know this. Porter has been writing about economic goodwill for years. Here's what he said in a 2013 Digest...

So the trick to economic goodwill is to understand there is this invisible asset that can play a huge role in corporate earnings. Coke is able to charge more for carbonated sugar water than the oil companies can charge for gasoline. That doesn't make economic sense, unless you understand the value of its brand... the value of the relationship it has with its customers.

It's the same story for companies like Harley-Davidson, Tiffany's, Hershey, etc. These companies that have great relationships with their customers... that have powerful brands... the goodwill that is written out on their balance sheets is totally unrelated to the actual value.

At the conference, Porter said that companies that have the ability to grow their earnings dramatically over time ‒ without comparable capital investments ‒ are considered capital-efficient. And the ability to be capital-efficient is tied to goodwill...

Porter claims that if you understand the concept of goodwill, you'll have a huge advantage over other investors.

And Porter has dedicated his career to understanding it. As a result, it has led him to find and recommend the most capital-efficient businesses in the world.

In Porter's eyes, capital-efficient stocks are the ones to buy if you want to own the best stocks in the world...

Porter went on to talk about the very first capital-efficient company that he recommended ‒ chocolate maker Hershey (HSY)...

Porter would argue that Hershey should be in contention for the best business in the world. It's a stock you can buy and hold and never have to plan on selling. It will just compound your wealth year after year.

In Porter's initial November 2007 recommendation in Stansberry's Investment Advisory, he noted how capital-efficient Hershey is...

Over the last 10 years, the company's annual capital spending has remained essentially unchanged. In 1997, the firm invested $172 million in additions to property and equipment. By the end of 2006, the annual capital budget had only increased to $198 million – a paltry 15%. Meanwhile, cash profits and dividends nearly doubled.

This is the beauty of capital-efficient businesses: As sales and profits grow, capital investments don't. Thus, the amount of money that's available to return to shareholders not only grows in nominal dollars, it also grows as a percentage of sales. In 1999, dividends paid out equaled 3.4% of sales. But by 2006, the company spent $735 million on dividends and share buybacks, an amount equal to 14.8% of sales.

Today, even with a market cap of $39 billion, capital expenditures are only about 5% of sales.

Plus, as Porter explained at the conference, it's nearly impossible for management to screw things up. In Pennsylvania, there is a law that states that the Hershey Trust Company – which has control over the company via its 100% ownership of Hershey's Class B shares – is not allowed to sell the business or to buy another business that would dilute its stake in Hershey.

Basically, there is a government guarantee that the board of directors won't do anything stupid... So the capital-efficient nature of the business will likely never change.

Since Porter recommended buying the stock in November 2007 (right before the financial crisis), shares have returned about 14% a year with dividends reinvested – all with little volatility.

Take a look at the chart below, which shows the share price's extraordinary and steady rise from $40 in 2008 to around $190 today.

Porter mentioned another group of highly capital-efficient stocks during his presentation...

And other Stansberry editors talk about this group as well... For instance, Stansberry's Investment Advisory analyst Mike DiBiase has said many times that Software as a Service (SaaS) stocks are "some of the best businesses you'll find."

The reason? They are among the most capital-efficient companies in the world.

SaaS is a distribution model in which software is hosted on the vendor's servers, not the customer's. To the customer, the software is in the cloud.

Basically, the SaaS model turns what had been an expensive, upfront purchase for customers into an affordable monthly subscription service with instant access and regular updates.

Here's how Mike described the SaaS model in a November 2019 issue of Stansberry's Investment Advisory...

Like all capital-efficient businesses, software makers can grow rapidly without needing to invest larger and larger sums in capital expenditures – like new buildings and equipment – that drain valuable cash and lower returns on investment.

Software companies also make great investments because their cost of producing each sale is very low. It's easy to understand why. Software is nothing more than computer code. The "cost" of producing another copy of a software program is next to nothing. It's virtually the same cost to produce 1 million copies as the cost to produce one copy.

You can see this in their gross margins – the profit after subtracting all direct costs of generating sales. The average gross margins of all software companies in the S&P 500 last year was 81%. That's almost double the 44% average for all other industries.

As a result, SaaS stocks have produced incredible returns for investors.

The average annualized gain from SaaS stocks that Porter and the Stansberry's Investment Advisory team have recommended is a whopping 120% across six picks.

That's huge... But Porter made it clear at the conference that you shouldn't expect 120% gains every year. This is a small portfolio consisting of just six stocks. Plus, we have been in a super-hot bull market. Tech names were flying for most of the year... though they have taken a beating lately as investors have been rotating out of high-growth names.

But given the capital-efficient nature of SaaS companies, you can generally expect market-beating returns over the long term.

One company that I want to nominate for the best business is Match Group (MTCH)...

Match is an online dating giant. It owns apps like Tinder, Plenty of Fish, and Hinge... I first wrote about Match in the Digest in August 2019.

Like Hershey and SaaS stocks, Match Group is also capital-efficient. Capital expenditures have remained steady over the years, while earnings have soared... a very profitable combination.

One way to look at this is through Match's free-cash-flow margin. Free-cash-flow margin is simply free cash flow – the lifeblood of any company – as a percentage of revenue.

Over the last 12 months, Match Group has had a free-cash-flow margin of 31%. That puts it in the top 13% of S&P 500 companies.

Match's economic moat comes from something called the "network effect."

On the surface, an online dating business doesn't sound that great... The barriers to entry are low. New competition can pop up easily since it doesn't take much money to launch an app.

Scratch deeper and you will discover that you need users in order to get users. No one will pay for a dating site if there is no one on the site to date. Single people want many options.

The network effect is why more than 90% of online dating startups fail...

Match owns the top apps with the most users. The more users it gets, the more valuable its platform becomes... Plus, if a new competing app ever catches fire and folks pile into it, Match will simply buy it, bring the new company on board, and integrate it into its existing operations.

Retirement Millionaire editor David "Doc" Eifrig first recommended MTCH in December 2017. The stock is up around 360% since then.

Here is one final group of companies that Porter has called 'the best businesses in the world'...

Again, longtime readers have likely heard us talk about property & casualty (P&C) insurance companies before.

While P&C insurance sounds boring to most folks, the underlying business is anything but.

Porter and his team explained the beauty of insurance in the October 2012 issue of Stansberry's Investment Advisory...

Insurance is the only business in the world that routinely enjoys a positive cost of capital. In every other business, companies must pay for capital. They borrow through loans. They raise equity (and most pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.

But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually be paid to accept it. Insurance companies are all paid a fee to manage capital. All of them. The best insurance companies make sure the fees they charge for capital are in excess of the risks they accept by extending insurance. These companies actually make a profit on their underwriting. They earn money by taking the capital of their customers. It's incredible. These firms compound their equity by simply opening their doors every morning. They don't have to do anything else. Nothing else in business is like it.

The beauty of insurance is that you can get paid to use capital. That's a fantastic way to become very wealthy. And it's precisely how (along with several great stock picks) Warren Buffett became the world's most successful investor.

Porter has gone so far as to say that if individual investors could buy only insurance companies and nothing else, they would greatly increase their average annual returns.

Let me explain why it's hard to argue with that statement...

If you're paying insurance – on your house, your car, or your jewelry – you're getting the raw end of the deal.

You pay a premium month after month and you will likely never file a claim. Your house never burns down, your car doesn't get wrecked, and your jewelry never gets stolen. So the money you pay in premiums is just money down the drain.

But, of course, you're happy to pay for the peace of mind that having coverage provides.

Insurance companies make their living by cashing in on people's fears. Folks fear burglary. They fear natural disasters. They fear misplacing their own valuables. And because of that fear, they're willing to pay up for insurance.

While insurance companies sometimes have to shell out cash to policyholders to satisfy claims, most of the time they collect your premiums, invest it, and watch it grow. It's a fantastic business... when done correctly.

'When done correctly' is the key for insurance companies...

Insurance is done correctly when companies don't sell home insurance to arsonists... car insurance to crash-prone teenagers... and jewelry insurance to someone with a history of losing diamond rings.

Insurance companies need to be selective about who they offer their services to. They need to do their homework or charge higher premiums to offset the risk for certain individuals.

When they do that, insurance can be extremely profitable...

At the conference, Porter shared a slide that showed the returns he and his team have made from recommending the best insurance companies in the industry. In total, his team made 11 picks over roughly 10 years... and the average annualized gain comes out to 20.3%.

Again, you'd do very well by just owning P&C insurance companies... It is one of the best groups of businesses in the world.

I'm writing today to urge you to get into the insurance game for yourself – and all from the comfort of wherever...

You see, the best investors I know sell insurance just about every month. And it's the greatest source of income I've ever come across.

Now, you or I couldn't start our own insurance firm tomorrow... The barriers to entry in the insurance industry are immense. There are strict regulations and significant capital requirements.

But I'm not talking about selling insurance for things like homes or cars... I'm talking about selling insurance to folks who fear falling stock prices.

And given that stock prices have been at all-time highs, with record-high valuations, there is no shortage of investors who are fearful of their portfolio imploding... Everyone, it seems, is talking about when the next downturn will come.

Here's what happens... I convince a worried investor to pay me a premium for market protection every month and – the majority of the time – I simply keep their premiums and never get a claim. Since I'm paid upfront, I can use the cash I receive and invest it – just as the P&C insurance companies invest their float...

The worried investor, of course, gets to wash away his worry...

The returns of selling insurance on individual stocks to investors can be fantastic. You'll likely see 20% annualized gains most years – just like you would see when investing in P&C insurance stocks.

Here is more precisely what I am talking about...

The cheapest and most common form of market protection you can sell is a put option. And no, put options are not as scary as the financial media makes them out to be...

Put simply, put options are just like home insurance... The buyer pays a premium and hopes that he never has to use it. And in most situations, he does not.

Stocks don't crash that often, which means the seller of the put keeps the premium and whistles away his day.

Now, I know many of you are probably wondering what happens when the put buyer – or the person who purchased the insurance – needs to use his policy. Let's say stocks do fall.

You'll have to pay the "claim" by purchasing the stock... but any losses you might take will likely be a small percentage of what you have already received in premium payments... And like I mentioned earlier, you can reduce your risk by not selling insurance to arsonists – and not selling put options on risky stocks.

The best thing to do is sell insurance on big, sturdy blue-chip companies. These are giants like JPMorgan Chase (JPM), Coca-Cola (KO), and Microsoft (MSFT)... These stocks rarely have wild price swings.

And even though these are fantastic businesses that generate massive amounts of cash, there are still investors who want to buy insurance against them.

The likelihood of Coca-Cola falling 20% in a short time is pretty slim. But people want to sleep well at night... so they get insurance by buying a put option.

I'm willing to take the other end of that trade all day long. And here's the thing... If you only sell put options on stocks you want to own, you can't lose.

Let's think about the worst-case scenario...

Coca-Cola falls 10% in a matter of days. The put buyer will use his insurance to sell his Coca-Cola shares to me for the price we agreed upon at the beginning of the trade.

So everything went wrong in this trade... but I end up owning shares of a world-class business for less than it was trading for when both sides entered the trade – and I get to keep the premiums he paid me.

If you sell insurance against low-risk, blue-chip stocks, you'll collect safe income each month... And, that extra income can help you grow your retirement fund, pay bills, and even get you on a flight to the Caribbean.

Insurance is one of the best businesses in the world. And by selling options, you can start your very own insurance firm from the comfort of your own home.

The best person to teach you how to sell options is Doc Eifrig... Doc used to work as an elite derivatives trader at Goldman Sachs. He spent a decade on Wall Street with several major institutions, including Chase Manhattan and Yamaichi (then known as the "Goldman Sachs of Japan").

Since 2010, Doc's options-selling service Retirement Trader has produced a win rate of 93% – an unheard-of track record in the investment community. And just last week, Doc reviewed his results for 2021 and they were fantastic... For the year, Doc averaged 20.1% annualized gains and went a perfect 42 winners out of 42 total trades.

Doc's currently on a 100-consecutive-trade winning streak.

Today, for a limited time only, we are offering a generous 60% discount on a subscription to Doc's Retirement Trader service... where he has taught thousands of people how to sell insurance the right way – and collect hundreds... if not thousands... every month.

Click here now to get all the details.

Here's to safe investing,

Jeff Havenstein
Baltimore, Maryland
December 27, 2021