It's Time to Stop Renting Your Stocks and Start Owning Them
It's time to stop renting your stocks and start owning them... Ask yourself these three questions... How to invest like the gurus... It's time to get your financial house in order...
It's time you stop renting your stocks and start to learn to really own them...
When Porter asked me (Austin Root) to write today's Friday Digest, I was thrilled, but also a little intimidated. This is one of the most widely read publications we produce... and few people are the writer Porter is.
One thing I do know, however, is investing. Over the past 20 years, I've learned from some of the world's best investors at blue-chip firms like Blackstone, Soros Fund Management, SAC Capital Advisors, and Tiger Management.
And one of the most important things I can do is help you navigate your investments through today's choppy markets... where volatility and valuations are high, and political and economic risks are mounting.
What I'm going to explain to you today is the simplest and best way I know to improve the long-term durability and performance of your investment portfolio. And it's especially important to think about now, as this nine-year bull market starts to show its age, with loads of worries looming on the horizon.
And the key is learning how to own stocks...
Before you buy your next stock, I want you to ask yourself three questions...
- Do I know this company's business model well enough to describe it to a 10-year-old?
- Am I comfortable putting at least 20% of my entire net worth into this stock?
- Am I comfortable holding this stock for at least 10 years?
If you can answer yes to all three questions, congratulations... You have identified a wonderful long-term investment.
Now, to be clear, I am not recommending that you actually put 20% of your worth into your next stock purchase. Nor am I saying you must hold it for a decade. But I am suggesting you use these heightened thresholds to add incremental discipline to your investment decisions. Your capital is precious. It demands higher standards.
More important, employing this rigor will mean you're investing in stocks the way that buyers of private businesses invest. Think about it... Owning requires more due diligence than renting. And that's a great thing. As you repeat and refine this approach, magnificent things will happen to your investments.
When you rent something like an apartment or a car, you're more likely to act on impulse and throw some money at something that catches your eye... After all, you're only committed for a short time.
But if you're buying that house or car... you're likely to take a little more time to make sure it's something you'll be happy owning for a long time.
Lots of people trade stocks like they're renting them. They impulsively buy whatever names are popular or catch their eye. That works OK in a raging bull market, when everything is moving up.
But now is the time to start buying stocks like you're planning to commit to them... like you really want to own them.
When you do that, your portfolio will begin to fill up with businesses you understand. You'll own more businesses with high-quality operating models. And you'll sleep better at night knowing you own businesses with franchises that will endure for the long haul... regardless of what happens to the market or the overall economy.
In short, you are on your way to becoming a 'whole-business investor'...
I should mention that this idea of being a whole-business investor is not mine alone. In fact, I think it's shared by two of the most talented investors I know. Though they don't use that term exactly, both of these market gurus undeniably think this way when seeking out great investments. Just look at the following quotes...
"If investors would stop focusing on all the short-term noise and instead become connoisseurs of great businesses, their returns will be greatly improved. It can keep you disciplined and keep you in the best long-term investments, regardless of what happens from a macro standpoint." – Guru A
"An investment operation, in my view, is one where you look at the asset itself to determine your decision to lay out some money now, to get more money back later on. And you don't really care whether there's a quote under it at all... When I buy a stock, I don't care whether they close the stock market tomorrow or for a couple of years." – Guru B
See the similarities? These guys are thinking like business owners. They get to know the assets they buy. They understand them. And then they only invest in great businesses they feel comfortable owning for the long run.
So... who are these investment gurus?
Astute readers likely can guess the identity of Guru A... It's none other than our own Porter Stansberry. He has been coaching readers to act like a whole-business investor for years.
Some of you will recall in December 2007, at the end of the last bull market, he recommended that folks buy candy maker Hershey (HSY), a perfect whole-business stock. As it turned out, late 2007 was one on the worst times to buy stocks. Over the next 15 months, the S&P 500 Index lost more than 55% of its value. And yet, Hershey barely budged. Its business endured, and its stock protected your capital.
These are the kinds of stocks Porter and I want you to own right now.
And who is Guru B, who takes a similar investment approach? It's none other than Warren Buffett.
If you only started reading our work in just the past few months, you may be surprised. Porter has lobbed some tough criticism of Buffett's recent investment decisions and track record. How can the two investors be so alike in mindset, and yet Porter has taken to bashing poor Buffett?
In truth, Porter loves Buffett's investing philosophy. Over the course of his career, Porter has always lauded Buffett as one of the world's greatest investors (as do I). Buffett's writings about topics like economic goodwill and the power of investing in insurance companies has influenced us deeply.
Regardless, both men offer wonderful examples of whole-business investing. They push aside the noise. They focus on understanding the business... what makes it tick... and what makes it special. And then they buy only what they're comfortable owning for a long time.
What's the point of these questions?
Let's look at them one by one...
1. Do I know this company's business model well enough to describe it to a 10-year-old?
This question forces you to truly "do the work" to understand what you're buying. How does this company actually make money? Who are its customers and competitors? What do the unit economics look like?
To be able to clearly and succinctly describe a business to a 10-year-old, you must really know it inside and out. This deeper level of understanding will enable you to make better decisions in times of heightened market panic or greed.
2. Am I comfortable putting at least 20% of my entire net worth into this stock?
To answer "yes" to this question, you need to be convinced that the investment represents an exceptional opportunity. You shouldn't invest your hard-earned money in anything less. You must be sure you're buying a high-quality business.
Maybe it's capital-efficient, with excellent returns on investment. Maybe it possesses trophy assets, pricing power, moats, or an extreme "margin of safety" in the form of a low stock valuation relative to its asset value. Whatever the case, you know this business is worth owning in size. And that knowledge will give you courage in your convictions and drown out any market fear or noise.
3. Am I comfortable holding this stock for at least 10 years?
Buffett, like Porter, is a master at putting things in succinct, clear language. So I'll let him describe it...
If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.
That's it. Over the long run, stock prices are highly correlated with earnings growth. Earnings growth over the long run is the single best predictor of share-price growth. Fill your portfolio with businesses you feel confident will be bigger and better in the years to come. This will push flash-in-the-pan companies off your radar. Focus only on those durable, growing franchises that you will be proud to tell your friends you own.
The combined effect of answering yes to these three questions will eliminate marginal ideas from your portfolio. You will stop renting stocks and start owning them. You will become the quintessential whole-business investor – a public-equity shareholder with a private-equity mindset.
You will own the best and forget the rest. And your portfolio will be all the better for it.
One last thing...
Some of you might be asking yourself, "Why is Austin sharing this suggestion now? If valuations for most assets are high – and market volatility is elevated – should we really be looking to invest like private business owners? Wouldn't the flexibility of 'renting' investments trump the illiquidity of 'owning' them?"
The answers are yes and no, respectively. Now is precisely the time to be employing this strategy. A market reckoning is coming. Market wizards like Porter, Doc Eifrig, and Steve Sjuggerud may disagree on when a correction is coming, but not if. Regular Digest readers know it, too. And when markets begin to really drop, weak hands will be folded. Fortunes will be lost.
It's time to get your financial house in order so that you're playing a strong hand. You still need to employ other strategies: Raise some cash... buy some gold... pay off debts... and follow your trailing stops. But you also need to improve the quality of the risky assets that you hold.
Thinking like a whole-business owner will help ensure you own strong, enduring businesses – businesses you know well and are comfortable holding through the storm. And it will let you sleep at night, focus on the big picture, and make better investment decisions in the years to come.
New 52-week highs (as of 5/17/18): ETFMG Prime Mobile Payments Fund (IPAY), Lindsay (LNN), Pioneer Natural Resources (PXD), ALPS Medical Breakthroughs Fund (SBIO), Steel Dynamics (STLD), United States Commodity Index Fund (USCI), and Verisign (VRSN).
Thanks for reading today's Digest. I wish you the best of investment success. Please send your thoughts and questions to feedback@stansberryresearch.com.
Regards,
Austin Root
Baltimore, Maryland
May 18, 2018