One of the most important investing lessons you can learn...

What major investors are learning about housing...

We continue our weeklong Digest Premium series featuring Pensam Capital cofounder Michael Stein. Today, Michael focuses on the sudden rush of major investors renting single-family homes... and the lessons they're learning.

To continue reading, scroll down or click here.

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What major investors are learning about the housing market...

We continue our weeklong Digest Premium series featuring Pensam Capital cofounder Michael Stein. Today, Michael focuses on the sudden rush of major investors renting single-family homes... and the lessons they're learning.

To subscribe to Digest Premium and access today's analysis risk-free, click here.

One of the most important investing lessons you can learn... How to know when to buy... One of Sjug's top ideas today...

 We wrote it. Did you recognize the "bad to less bad" opportunity and buy it?

In mid-August, your Digest editors (Brian Hunt and Amber Lee Mason) urged DailyWealth Trader readers to buy shares in America's largest steelmaker, U.S. Steel (X). The trade has been a huge success. Readers are up 30% in just over two months.

We'll discuss the dynamics of this particular trade today. Why?

Because the method we used to select it is one of the most important lessons an investor can ever learn...

 Before we get into this lesson, let's go over the trade. In our original write-up, we noted...

Because of sluggish economic growth and excess production capacity, steel has been in "bust mode" for the past few years. Prices have fallen more than 30% from their pre-financial-crisis levels. Low prices produced big losses for steelmakers... Earnings plummeted. The stocks were crushed.

 U.S. Steel is America's largest steelmaker. The company makes steel that goes into automobiles, structures, appliances, and containers. The sector's "bust" conditions destroyed the stock. Shares fell from a high of $60 in early 2011 to their recent low of $16 – a 73% decline.

In other words, times were definitely "bad" for the steel sector. The news was terrible. The share price downtrends were terrible. The sentiment was terrible. Few Wall Street analysts would have dreamed of telling clients to "buy steel!"

 This is precisely the time to buy stocks, bonds, and commodities... when the idea makes most people sick to their stomachs. This is when you can make large returns, very quickly, by getting into "bad to less bad" trades.

As we noted in our U.S. Steel write-up:

In other words: The big money is made not by waiting for things to go from "good to better," but from "bad to less bad."

 We added this to the end of our U.S. Steel commentary:

As you can see from the three-year chart below, U.S. Steel has "popped." Investors are warming up to the idea that the global economy is gradually improving. And DailyWealth Trader subscribers are up 30% in just over two months.

 This isn't the only "bad to less bad" trade that has taken off recently…

Like the steel business, the aluminum business is prone to major booms and busts. It's sensitive to economic cycles. When the economy slows down, aluminum tends to bust. When the economy picks up, aluminum tends to boom.

Alcoa (AA) is America's largest aluminum producer. And like U.S. Steel, Alcoa shares suffered a brutal period from early 2011 to mid-2012. Alcoa dropped from a high of around $18 to a low of around $8.

Again, things have been "bad" for this sector: The news was terrible. The share downtrends were terrible. The sentiment was terrible. No one on Wall Street is telling clients to buy aluminum… which is why we recommended buying shares of Alcoa on Monday.

Take a look at what happened yesterday:

 Shares of Alcoa and other aluminum producers were up on news that China's monthly aluminum imports were up 118% over the last two months and reached their highest levels in over a year. Things are getting "less bad" for aluminum. And that produced a huge gain in Alcoa.

 One more example… And don't skip it. This is probably the most important. And it probably represents the best buying opportunity right now…

We're not telling folks to open up new trades in U.S. Steel or Alcoa… These stocks have "ripped," and some of the early, easy gains are behind us. But this idea, from Steve Sjuggerud, still has the potential to return hundreds of percent.

Steve says, in his decades of market experience, he has NEVER seen a stock market opportunity this good… And if you're familiar with his work, you know he doesn't make claims like this lightly.

In a recent issue of True Wealth, he told the story of one opportunity that got close… In 1998, in the heart of the Asian crisis, Steve flew out to Jakarta, Indonesia…

The reason Steve told that story is because when things can't get any worse, they generally don't. They simply get "less bad." And as he explained, that's exactly when you want to be buying as an investor... When there's blood in the streets.

Steve is talking about the opportunity in emerging markets…

In short, things have been "bad" for emerging markets. But they're just starting to get "less bad."

 Steve showed his True Wealth readers a specific way to buy emerging markets…

This fund holds some of the world's biggest companies trading at absurd prices: around five times 2013 earnings estimates and less than book value. This fund also pays a big, 4.1% dividend.

The fund is up 11% since Steve showed it to readers… but he sees much bigger gains ahead. You can learn more about this idea right here (without watching a long presentation).

 Again, when you can find a "bad to less bad" situation, you can make a low-risk trade with huge upside… if you're willing to buy when almost no one else will.

This is such a lucrative strategy, we produced one of our "Three Minute Trading Expert" videos about it. This goes into more detail about how to use the strategy… and it walks you through a few more examples…

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As we've been explaining this week, each installment of the "Three Minute Trading Expert" lasts about three minutes… and it teaches an important investment or trading lesson. It's part of our ongoing efforts to help subscribers learn timeless wealth ideas.

You can watch the two other videos we've shared so far right here and right here.

 New 52-week highs (as of 10/22/13): Automatic Data Processing (ADP), American Financial Group (AFG), Brookfield Asset Management (BAM), Becton-Dickinson (BDX), Anheuser-Busch InBev (BUD), Blackstone Group (BX), Chubb (CB), Dominion Resources (D), Dolby Laboratories (DLB), Devon Energy (DVN), Energy Transfer Equity (ETE), iShares Germany Fund (EWG), SPDR Euro Stoxx 50 Fund (FEZ), Fuidigm (FLDM), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Dow Jones U.S. Insurance Fund (IAK), SPDR International Health Care Fund (IRY), KBR (KBR), Kohlberg Kravis Roberts (KKR), KLA-Tencor (KLAC), ProShares Ultra KBW Regional Banking Fund (KRU), Loews (L), Longleaf Partners Fund (LLPFX), Medtronic (MDT), 3M (MMM), National Fuel Gas (NFG), ONEOK (OKE), PowerShares Buyback Achievers Fund (PKW), Sturm, Ruger (RGR), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), Sanchez Energy (SN), ProShares Ultra S&P 500 Fund (SSO), Steel Dynamics (STLD), Cambria Shareholder Yield Fund (SYLD), Targa Resources (TRGP), and WPX Energy (WPX).

 In the mailbag, we hear more on creeping capital controls… and a subscriber nominates another "sensible" government policy to add to Porter's. What policy would you recommend? Let us know here: feedback@stansberryresearch.com.

 "After reading your 22/10 Digest, I would like to share my experience with TD Ameritrade and capital controls…

"Earlier this year I needed to withdraw some funds, and made the request to wire the funds back to the same account from which the funds were originally transferred in (a self-named account in Hong Kong).

"After initially 'going through' the transaction was reversed overnight, and I was asked to contact Customer Service. They said 'under the US Patriot Act' I (a non-US citizen) had to provide reasons for my transfer of funds. That they were 'my funds' was not a good enough reason. Furthermore, the staff are not permitted to coach anyone on what reasons may be accepted 'under the US Patriot Act.'" – Anonymous

 "Porter, I couldn't agree more with your article in Wednesday's DailyWealth Premium. But I believe there's a fourth sensible policy that should be placed in the number one slot.

"Sensible Policy Number 1: We need to teach our citizens how to think for themselves and to come to their own logical conclusions. Our education system and our government has effectively brainwashed the bulk of the population. People believe everything teachers, politicians, professors, and anyone else famous tells them without doing any of their own critical thinking.

"For example, when I first heard of global warming and that it was caused by manmade greenhouse gases I thought to myself, 'Well, I guess that's possible. But what caused this planet's climate changes in the past before man existed?' I have asked many individuals 'What other possible causes of global warming have you considered and why have you ruled them out in favor of manmade causes?' I have never, ever, gotten a response! Usually the response is silence with a deer-in-the-headlights look. It's hard to believe that many of these individuals had a PHD in technical and scientific fields.

"Another example is a discussion I had with my plumber after the 2012 election. He voted for OBAMA! because he was going to tax the rich. So I asked him, 'As a business owner, what will you have to do if your supply costs go up, or your labor costs go up, or your tax liability increases?' His response was that he would have to charge his customers more. So who ends up paying for taxing the rich? The middle class.

"Without a successful implementation of this sensible policy, the remaining three will not happen." – Ron Mueller

Amber comment: Folks can read Porter's essay right here: Three Ways to Get America Back on Track. "If we just did these three things," he writes, "the size of our economy could double in five years."

 "Love the 'Three Minute Trading Expert!' One single concept presented clearly, succinctly and in a brief time frame. Brilliant! I hope you keep them coming." – Judy B.

Regards,

What major investors are learning about housing...

Editor's note: Today's Digest Premium continues our weeklong series featuring Pensam Capital cofounder Michael Stein. Today's essay focuses on the sudden rush of major investors renting single-family homes... and the lessons they're learning.

 Following the real estate crash, it has become much more difficult for people to buy homes. The data are pretty clear... Home ownership has dropped from almost 70% at the peak to 65% as of the second quarter of this year. Around 5 million homeowners have shifted from the ownership market into the rental market. And the apartment development pipeline has not kept up with the amount of renters who dropped out of the home ownership arena and the so-called "Generation Y" young adults who are coming into the rental market.

 In our portfolio, occupancies are at an all-time high.

Average occupancy in our portfolio is about 95%. Rent growth has been 3%-5% year over year from 2012-2013. In some markets, we've seen 7%-8% rent growth, which is considerably higher than the 2%-3% rent growth that you may underwrite in the normal market.

And I (Michael) think the public apartment REITs and other large apartment investors would confirm the trend.

 So people will continue to rent for a number of reasons, not the least of which is lack of credit to buy homes, higher down payments required by lenders, and the flexibility that a renter has over someone who owns a home. Our generation of renters is somewhat transient. They move around a lot and switch jobs a lot. So having that flexibility of an annual lease is appealing.

In addition to multi-family, which is our area of expertise, we've seen a lot of private money going into single-family homes, for the purpose of renting them. But there's a big difference between the two sectors.

 Some large investors – like private-equity firm Blackstone Group – are buying 20,000-30,000 homes and creating a renter business out of single-family homes. That is a completely different model. For one, it targets a different demographic. The single-family homes of three and four bedrooms that these firms are buying are targeting more of a family type of situation. In speaking to our rental staffs, I have not heard of a lot of cases where people move out of our rental communities into a rental home.

Renters – like the majority of ours – prefer living in a professionally managed, intact rental apartment community. They prefer that to a home that can be sold after a year or two, forcing them to move. So it's more of an acceptable form of renting, being in a professionally managed apartment community. I don't think we really compete with the single-family home rental market at this point.

 Renting homes is a completely new business for private equity... It's an interesting capital-appreciation play. If they're buying at 100 and selling five years from now at 150, it's an interesting model.

But for consistent cash flow and having to continually look for a renter who wants to live in a single-family home, I just don't see it. Whether these firms will be successful or not, it's too early to say. It's really a new industry. Traditionally, this market has been dominated by Mom-and-Pop investors. And it works well for the guy who has 10 or 15 homes in his backyard that he's self-managing.

 And these firms are finding that the model is a lot more difficult than it looks on paper. And my guess is (some of the major investors now selling some properties) probably got a good run up in value from the time they bought at a low to today... and they're cashing out. Our model is based on long-term capital appreciation, sort of slow, steady growth. It's not a quick flip in-and-out model. So it'll be interesting to see how that model does over the near term here.

– Michael Stein