It's Not Easy Telling the World It's Wrong

When you make the biggest gains... Perception versus reality... Lucrative lessons from the housing bubble and bust... It's not easy telling the world it's wrong... The green-energy fallacy... Today's obvious opportunity...

You don't need a time machine or a magic eight ball...

There's a foolproof way to spot the biggest moves in the investment world before they happen... and there's no funny business required with the strategy I (Brett Eversole) will share today.

It's a simple and repeatable strategy. But few people can capitalize on it.

That's because it requires us to think drastically different than the masses.

At Stansberry Research, we like to find investment opportunities by taking a contrarian view. But while it's easy to say that's something you'll do, it's harder to put this way of thinking into practice.

Sure, everyone thinks they're a contrarian. But espousing the virtues of thinking different and actually getting your hands dirty are wildly different things.

You can't be a contrarian just for the sake of it...

Being different "just because" is a great way to take a beating in the investment world.

Instead, you need to have a good reason – and a plan for finding the right opportunities. In my experience, to make a successful contrarian investment, you need to see the one thing that is obviously taking place while everyone else sees something else.

This is when you have a chance at the biggest gains... when there's a breakdown between perception and reality.

Investors are a fickle bunch... We like to think that, as a whole, we get things right. That's mostly true. But in certain instances, the crowd is dead wrong.

Today, I'll prove it to you. And I'll share one area of the market where this scenario is unfolding right now... and why you ought to consider taking advantage of it in your own portfolio today...

Let's go back to the housing market during the 'bubble' years of the 2000s...

Most people think of it as a mid-2000s boom. But that's actually when the boom turned into a bubble. There's a difference.

The market was hot for years before the mid-2000s...

New home sales in the U.S. hit an all-time high in June 1998. And from 1998 to 2001, they stayed well above historical levels. Going back several decades, that was closer to 600,000 homes sold, on average.

Then, from those already elevated levels, they soared by roughly 50% from 2002 to the 2005 peak...

We saw this long boom-to-bubble trend play out in home prices as well...

Home prices had barely moved higher for most of the 1990s. But they quickly jumped in 1998. And the year-over-year gains neared 10% by 2001. Then, once again, the real estate market entered bubble territory... with prices rising by 14% in 2005...

This chart shows the year-over-year gains of the S&P CoreLogic Case-Shiller U.S. National Home Price Index, which measures the changes in prices of single-family homes sold. You can see the multiyear boom in place before it turned into a bubble (and where the bubble burst)...

Of course, by 2004, when the real estate market really got crazy, everyone thought housing was a one-way street to profits. No one thought prices could drop. And to be fair, they never had in modern history.

So the world leveraged itself to the hilt, betting a decline would never come. The perception was that housing was a one-way street. But the reality was much different.

Instead of rising indefinitely, the housing market began to show cracks. The wild bets overzealous investors made quickly unwound. And they helped spark the worst global recession in nearly a century.

The few folks that saw the crash coming – and positioned themselves to profit – made billions...

John Paulson famously walked away from $4 billion after betting on a looming bust. And Michael Lewis' fantastic book The Big Short detailed several other investors that made the same trade.

If you've studied this period, you know it was difficult for those folks to make that bet. It's not easy telling the entire world it's wrong, and then sticking to your guns.

But for those that saw it through, it was truly one of the best moneymaking opportunities of our lifetimes.

Funny enough, the same thing happened on the other side of the bust...

A Business Insider headline on January 3, 2011, said...

The Atlantic thought the same thing. Here's the headline it ran three days later...

The point is, the world gave up on real estate during the bust...

And it's no surprise why... Prices had absolutely crashed.

Jacksonville, Florida, the closest major market to where I live, fell nearly 40% peak to trough. Many markets fared worse. And by the bottom of the housing crash, no one wanted to invest in real estate. Investors had left it for dead after it burned them so badly.

The perception was that housing was risky. But the only issue was the price paid for real estate, not the real value of the asset. And after a major bust, housing was more affordable than ever.

This next chart shows it...

By combining incomes, home prices, and prevailing interest rates, the National Association of Homebuilders puts out a monthly housing affordability index. At a level of 100, it means the median income can afford the median home. At 200, the median income can afford twice the price of the median home, so a home is more affordable...

Post-bust, housing was clearly an incredible deal...

It's no surprise that housing was unaffordable during the bubble peak. But during the bust, affordability skyrocketed to levels we had never seen before.

Again, the perception was that housing was dead. The reality was that it was the best deal of our lifetimes.

If you saw that mismatch, you'd have known to invest heavily in real estate. Prices have roughly doubled since. And it has been one of the steadiest bull markets on record...

I've talked exclusively about housing so far. But this strategy – identifying the difference between perception and reality and seeing the investment opportunity in it – can apply to all kinds of assets...

Perception and reality break down every time stocks fall...

After all, does anyone cheer for a stock market bust?

I'm sure there are a few crazy folks out there or folks with heavy bearish bets that are pleased. But generally, when stocks plunge, so does sentiment.

It happened this year. Sentiment crashed to multiyear lows as the market has fallen. One way to see it is using data from the American Association of Individual Investors ("AAII") survey.

This is a weekly survey that asks individual investors if they're bullish, bearish, or neutral on stocks over the next six months. We can use that to build the "bull ratio"... that is, total bulls divided by both bulls and bears.

In April, the bull ratio hit its lowest level since March 2009. Take a look...

I'm not saying the bottom is in or this bear market is over. But this tells us the perception is that stocks were a better buy at their peak than they are today.

Everyone knows that's wrong though. It's not reality...

Digging deeper, stocks tend to do well anytime this ratio hits a low level...

It happened in March 2020. The S&P 500 doubled in record time from there. There was a similar low at the end of 2018, when stocks nearly hit bear market territory. Then stocks soared in 2019.

And of course, the low of March 2009 in this sentiment ratio nearly pegged the market bottom to the day.

You can look at just about any low in this measure and you'll see stocks performing well in the months and years that follow. It's obvious. And it happens for a simple reason...

When investors give up on stocks, it's because the perception is that they're risky...

People naturally think about what has happened most recently. They figure that if stocks have been down lately, they will only lead to more losses. But in all cases, the reality is much different.

If you take nothing else from today's Digest, make it this: The toughest times to buy always lead to the biggest gains.

I don't want to talk about the overall market though. Let's apply this line of thinking to a specific opportunity...

In one sector, there's a larger breakdown between perception and reality than anywhere else...

Today's best setup is happening in the energy market.

There are two main breakdowns in perception and reality in the energy market... and they present excellent short- and long-term investing opportunities.

The first common perception is that the biggest gains in the sector are already behind us. Energy stocks have absolutely soared from their pandemic bottom. And they kept soaring this year – when everything else in the world crashed.

The consensus is that the current boom can't last. But selling just because something is up can be a foolish move.

If you did that, you likely would have gotten out of real estate in 1998, just as it was heating up... Or sold out of tech stocks in 2013, when there was a clear boom underway, but valuations were hitting crazy levels.

I think selling out of the energy sector today could leave similar profits on the table.

As I will explain in more detail in tomorrow's Digest, there are certain features of the oil and gas industry and the world in general that suggest energy prices have room to run much higher in the short and long term.

You see, the world is convinced that green technology is 'here'...

Everyone thinks we're ready to put fossil fuels to bed for good and that everyone will be driving electric vehicles when it's time to buy their next car.

But in reality, that world is years – maybe even decades – away.

In any case, though, these beliefs about an imminent green future are having huge impacts in the energy market. They've caused investment in the industry to drop. And that shift nearly guarantees that high energy prices are here to stay.

I'll get more into this story in tomorrow's Digest. But remember...

You make the biggest money when you can find an opportunity where perception doesn't match reality. Those bets are emotionally hard to make. But they're how you can set yourself up for hundreds-of-percent gains.

And today, the energy market is home to the biggest breakdown between perception and reality... in the investment world, at least.

This story is big and won't go away overnight...

And that means savvy investors have a chance to set themselves up for years of profits, starting now.

That's why I recently put together a presentation with more detail on this precise opportunity. There's a lot to talk about... and a lot of surprises in the story of higher energy prices... including who's most to blame.

But importantly, there are also clear winners that can deliver outsized gains.

I've identified five companies that can soar hundreds of percent in the coming years as a result of this breakdown between perception and reality. As I said, I'll share more tomorrow, but you can check out the presentation right now if you want to.

Click here to watch now. (And Stansberry Alliance members and existing True Wealth Systems subscribers, I encourage you to watch, but also know you have access to these new recommendations already right here.)

New 52-week highs (as of 9/2/22): Texas Pacific Land (TPL).

In today's mailbag, feedback on observations about chipmaker Nvidia (NVDA) from last Thursday's Digest, plus notes on Dan Ferris' Friday essay and Marc Chaikin's Sunday Masters Series essay... What's on your mind? As always, send your notes to feedback@stansberryresearch.com.

"Dear Corey, I love your work. In the section 'Speaking of semiconductors...' [in the September 1 Digest] you wrote about the impact [of the U.S. telling Nvidia not to sell certain chips in China] on Nvidia, but I think you are missing the big picture.

"Obviously, someone in the executive branch has come back into the real world long enough to realize that the U.S. is screwed. We have an awful lot of National Security eggs in the China basket, particularly in Taiwan. This action by the U.S. government will not be isolated to Nvidia. The list of sensitive technologies is long. Think, supercomputing, nanomaterials, robotics... the list is long.

"In my opinion, we have the signal of yet another regime change in addition to inflation and a slightly more hawkish Fed. This is going to hit certain areas of the tech market pretty hard if we continue to move towards war. It's not the end of the world for the western companies but they will start thinking of moving their design centers out of harm's way along with their production. This will also have a ripple effect in China as the Communist Party responds and businesses reduce their exposure to materials from the West. This is the beginning of WW3 – the economic front." – Paid-up subscriber Stewart H.

Corey McLaughlin comment: Stewart, thanks for the note. And I'm actually with you 100% on these ideas. Every day it feels like we're becoming a more "bipolar" world. Countries withholding exports is a big example...

"Thank you Dan for another insightful essay! As I read your take on the bull and bear clubs, I had a nagging thought that our Congressional representatives, doesn't matter which side you pick, are in similar 'clubs', blue bozos and red bozos.

"I also remembered today a Stansberry piece from September 2021 regarding the lunacy of calling inflation transitory. Alas, the bozo clubs have done nothing about the obvious. The rich keep the bozos elected and the poor just keep getting poorer. So, I continue to prepare and not predict.

"Thank you also to everyone at Stansberry: especially those at Daily Wealth Trader, Retirement Trader, and True Wealth Systems. My retirement income is now higher than my employment income by about 20%, encompassing two to three hours a day instead of 65 hours a week. I have to go, I hear a put calling, or do I need to call a put?" – Paid-up subscriber Ralph B.

"It's difficult to disagree with Marc Chaikin when he says that Europe will learn how to deal with Russia's weaponizing their energy resources. When Europe does adjust, Russia will go through a rough time figuring out where else to sell their oil and gas.

"What we don't seem to give enough attention to is the United States' weaponizing of the U.S. dollar. The world will also figure out how to limit their exposure to the U.S. dollar. When the world learns to do so, you and I will have to figure out how to live at our own expense rather than at the expense the rest of the world." – Paid-up subscriber Luis A.

Good investing,

Brett Eversole
Jacksonville, Florida
September 6, 2022