One Dirty Little Secret About Our Business
It's not just about picking the right stocks... One dirty little secret about our business... What drives 90% of portfolio returns... Listen to Steve, Doc, and Matt explain... Marc Chaikin's fresh take... Dan Ferris details the dollar...
Let's begin today with a little-known investing secret...
What if I (Corey McLaughlin) said I could tell you the one investing fundamental that is responsible for 90% of the returns made by professional portfolio managers?
I'm talking about the people who manage big-money mutual funds, pension funds, and hedge funds...
If you care about making money in the markets or protecting your portfolio, I'm willing to bet you probably would want me to tell you what that one fundamental is.
It might not be what first comes to mind...
The secret is not just picking the right stocks...
Don't get me wrong, you need to pick the right companies, but something else drives most investing returns...
This can be hard for folks in our business to admit.
Frankly, saying "stock picking is not the secret" in this space might not make us many friends among our colleagues and associates who do great work researching and analyzing stocks and trends and other money-making opportunities...
There's a reason that people rarely make this confession.
But our Director of Research Matt Weinschenk, who manages our many editors and analysts, did just that last week in a special 2022 look-ahead presentation with True Wealth editor Dr. Steve Sjuggerud and Retirement Millionaire editor Dr. David "Doc" Eifrig.
He cited a study by a pair of finance Ph.D.s – Roger Ibbotson and Paul Kaplan – who analyzed decades of data and found that 90% of an investment fund's returns over time were explained by its asset allocation... not by the specific stocks it held. Not what stocks were in it necessarily, but how much of each stock was in it...
Said another way, you can identify the next Amazon (AMZN) or Apple (AAPL) years before anyone else... but even if you do spot that "next big winner," the thing that will likely determine the magnitude of your return is how much money you allocate to that stock compared with what else you hold in your portfolio...
It makes sense when you hear it said out loud, but it's amazing how often we find that nobody gives this concept – portfolio management – much thought.
Most folks spend their investing energy on finding the right companies instead of the right asset allocation...
But many studies have shown it would be wise to do the opposite... and have a set strategy to manage your portfolio and your risk in order to maximize returns and minimize underperformance... But it's also not easy to do yourself, unless you have a good guide, the right tools, and, frankly, years of experience doing it.
This was a big topic of discussion among Steve, Doc, and Matt last week...
Three of our "big guns" sat down for an all-new, beginning-of-the-year presentation. Thousands tuned in for the broadcast last Thursday night. If you missed it, good news... You can catch the replay and the transcript here.
It's well worth the watch... Not only did Matt discuss this nugget of investing wisdom that we just shared with you, but the trio offered up plenty of illuminating insights...
Among other things, Steve shared thoughts on where the "Melt Up" stands today... The entire group looked ahead to what to expect in 2022... And each offered a free stock recommendation...
Fellow Stansberry Research editors Matt McCall and Eric Wade also joined the group...
But the most important part of the evening was probably making people aware of the easy-to-use solution from Stansberry Research to manage your own portfolio...
This is a tool that will help you manage the part of investing that, as we just revealed, is responsible for most of your returns... It's something our founder Porter Stansberry, Steve, and Doc decided to launch five years ago for the kind of reasons we've talked about.
As Doc said...
The biggest difference, at least from what I've seen, between the professional investors and our subscribers – or just individual investors in general – is that they aren't well-versed in portfolio construction and management. They don't know how to put it all together.
Look, this is not something you get taught in school, so you don't need to blame yourself.
But I would guess that every one of our subscribers has too much money and too few stocks...
And it's a massive problem, because if you're not diversified enough across our ideas, it puts you in a position to either have really big outperformance... or really big underperformance.
We call the answer to this problem Portfolio Solutions...
Longtime readers and Stansberry Alliance members know what it is.
Each month, a committee of our editors and analysts combs through more than 200 active recommendations to pick our favorite ideas... and then hand you a fully allocated portfolio you can act on, requiring probably less than an hour of your time a month.
Over the last five years, one of our suggested allocations, the Capital Portfolio, not only outperformed the benchmark S&P 500 Index by roughly 30%... but has done so with much less risk than owning a simple index fund.
I can't tell you how valuable something like this is for anyone who subscribes to any of our research services. Or actually, I can... It will probably be somewhere around 90% of your investment returns if history is any guide.
Click here to listen or watch the replay of Steve, Doc, and Matt's event... And if you already subscribe to Portfolio Solutions, check your inbox for our team's latest portfolio allocation recommendations.
The latest updates were published today after the markets closed, and it's not too late at all to take advantage of them... In fact, now is a great time.
We also heard recently from our friend Marc Chaikin...
Marc is the founder of our corporate affiliate, Chaikin Analytics.
As close readers know, we introduced Marc to you in May 2021. Simply put, he's a Wall Street legend with more than 50 years of experience working closely with the world's largest institutions and well-known, high-profile investors...
Probably the most telling thing I can say right now about Marc is that his inventions are part of the Bloomberg Terminal that people spend tens of thousands of dollars each year to use to follow the markets...
As Marc told us in a special two-part Q&A last year (here and here), about 10 years ago and disillusioned with the financial crisis, he decided to focus his time on helping individual investors as best he could... Today, we're happy to be affiliated with him in those efforts.
Yesterday, we traded a few e-mails with Marc after he sent us some nice comments on a Digest from last week. With all the volatility we've been seeing, he is watching the markets closely of course too...
In his e-mails to us, he shared his outlook for the major U.S. stock indexes...
I want to pass along his take here... In short, Marc said that he sees a "massive buying opportunity" sometime later this year, but how we get to a "bottom" will be messy. He said...
My best guess is we see a tradeable bottom soon, with a relief rally to 4,600 in the S&P 500 that fails, and lower lows into a May/June bottom...
But then we have the midterm elections to contend with, so we could see a possible final bottom in October.
Like we've been saying here since the start of the year... Marc expects "lots of volatility" in 2022, and he said he anticipates more losses in tech stocks to come.
This is where we insert our thoughts with a reminder to please heed your predetermined stop losses. We've seen why before... selling and "raising cash" early to buy back in later is far from the worst strategy to have... In fact, it's a very good one.
Marc says if you want a sign that a "better bottom" is in, meaning one that makes for the very best long-term buying opportunity, he said it might be when Cathie Wood's much-ballyhooed ARK Innovation Fund (ARKK) trades below $60... It's currently around $75.
That would be a 61% drop from that fund's all-time high in February 2021, when it was all the rage of the financial media and Wood was the recipient of an endless parade of glowing stories... and our colleague Dan Ferris was warning people about the hype... nearly to the day of ARKK's all-time high.
Today, the fund is down 50% from that date...
If you want to hear more from Marc, consider subscribing to his signature newsletter...
Marc has compiled his life's work into a monthly research service where he puts his trademark tool – the "Power Gauge" – to work to spot investment opportunities that he places in a model portfolio...
As we've written before, the Power Gauge is a tool that everyday investors need so they can finally get an edge on Wall Street. It's really what many folks have been waiting years to get their hands on... and Marc and his research team make it very easy to use.
If you're interested in learning more, click here to hear more from Marc right now.
The Fed Enters the Danger Zone
The markets are reacting to the Federal Reserve being late to "doing their job," best-selling author Nomi Prins tells our editor-at-large Daniela Cambone.
In the conclusion of Daniela's Outlook 2022 series, Prins details how the central bank continues to create abstract fear and uncertainty... and why it won't stop this year.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 1/31/22): Bunge (BG), Freehold Royalties (FRU.TO), McCormick (MKC), Osisko Mining (OBNNF), Shell (SHEL), and United States Commodity Index Fund (USCI).
In today's mailbag, Dan responds to a subscriber's analysis of his Friday Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Dan, All of your cycles are one – the U.S. dollar. If you expect a change in cycles right now, that means you expect the U.S. dollar to drop. It's not dropping. You asked for some history that suggests the U.S. dollar is not being debased. Well, here you go, the long-term chart of the trade-weighted U.S. dollar index.
"Does that look like a downtrend to you? The flaw in your thesis is that the U.S. dollar is not merely the currency of the U.S., it is the currency of the world. The world grows faster than the U.S. and international trade uses dollars. The world gets them by undercutting American producers, then uses extra dollars to buy U.S. assets like stocks and bonds.
"That's how the bubble got so big, and it's not going to pop until global trade stops using the U.S. dollar. What's going to stop it? That's what you need to explain to find your cycle trigger.
"The pre-2008 dynamic of U.S. banks taking obscene risks to flood the world with dollars is not possible until [Jamie] Dimon's generation all retire, so you have to come up with something else." – Paid-up subscriber Deane M.
Dan Ferris comment: Deane, Thanks for writing.
The trade-weighted dollar was invented by the Federal Reserve in the 1970s to compare the U.S. dollar to the currencies of its largest trading partners. The U.S. dollar had become a floating abstraction once President Richard Nixon ended Bretton Woods in August 1971, cutting the dollar's last ties to gold. So the Fed figured it would compare the U.S.'s garbage currency with a weaker garbage currency and call it by a fancy name.
Back then, the index was 79% weighted to our largest trading partner... Canada.
In 2019, the Fed reweighted the index as follows: euro (19%), Chinese renminbi (16%), Canadian dollar (14%), Mexican peso (13%). That's 62% of the index.
To say the trade-weighted index went up just says that the dollar strengthened relative to other fiat currencies. You are not wrong in your observation about that, but I disagree that it in any way invalidates my thesis that several major inflection points are upon us, each with potentially multiple-profit opportunities attached.
So what if most people use dollars? The dollar's hegemony is also its greatest vulnerability. Other currencies will be measured against it and have nowhere to go but up. The dollar is the yardstick and has nowhere to go but down.
If I wanted to pretend any of this mattered, I might have mentioned the U.S. Dollar Index ("DXY") instead.
The U.S. Dollar Index is more indicative of the importance of the value of other currencies in the world versus the dollar. It's 58% euro, 14% Japanese yen, 12% British pound sterling, 9% Canadian dollar, then 4% each Swedish kroner and Swiss franc. (That totals up to 101% due to my rounding off the decimals.)
Here's a chart of the U.S. Dollar Index over the same period as your chart...
It looks more cyclical, more volatile... And the recent upward move since 2008 looks like it's well within the bounds of the long-term down trend.
Why is the trade-weighted chart more meaningful than the much more widely used DXY chart?
Bottom line: Comparing a piece of garbage to other pieces of garbage that have stunk worse than it has since the 1970s doesn't have anything to do with my recognition that cycles are real... Again, the dollar's reserve currency status might have you and others singing "Can't touch this," but I say the bigger they are, the harder they fall.
Perhaps the biggest error you might have made is thinking there's one way to measure any fiat currency, whether it's the global reserve currency or not. The U.S. dollar is a floating abstraction. You can measure it any way you want to fit whatever outcome you desire.
Problem is, you never really know which asset is doing the measuring. For example, does the dollar measure gold's value? Or does gold measure the dollar's value? Gold has risen roughly 50-fold against the dollar during the period on the trade-weighted chart.
Just like all the investors who can't imagine Amazon (AMZN) or Apple (AAPL) losing 50% to 60% of their value and taking a decade to recover ‒ as what happened to many large-cap stocks in the dot-com bust ‒ you can't seem to imagine the dollar losing just enough value to make it lose value versus the trade-weighted index components.
None of this changes the fact that economic cycles and capital-investment cycles are more a result of human nature than anything else... You can no more avoid them than you could stop the change of seasons or the revolutions of planets.
And you can, and should, learn to exploit them for fun and profit.
All the best,
Corey McLaughlin with Dan Ferris
Baltimore, Maryland and Eagle Point, Oregon
February 1, 2022