Only You Can Save Yourself

The adventure of Erwin Kreuz... Dabbling in 'Wall Street's low-rent district'... Only you can save yourself... Renting the veneer of financial prowess... Nobody ever looks in the mirror... 'There is no new thing under the sun'...

Erwin Kreuz got lost – and became a minor celebrity for 10 days...

The West German brewery worker wasn't a very experienced traveler...

By age 49, Kreuz had only taken one short flight to Berlin in his life. He had never even left West Germany except for a single day trip to neighboring Switzerland.

But in October 1977, Kreuz took off in a World Airways flight... He was hoping to realize his dream of visiting San Francisco and seeing the Golden Gate Bridge. Having only seen a few pictures, though, he didn't know much about the world-famous bridge or its location.

Kreuz awoke in his seat just in time for a departing flight attendant to wish him a nice time in San Francisco.

Still half asleep, Kreuz assumed her well wishes meant the flight had arrived in San Francisco...

So he exited the plane, walked out of the airport, hailed a taxi, and checked into a hotel.

Then, he wandered around the area for the next four days. He looked everywhere for the Golden Gate Bridge and the city's popular Chinatown neighborhood. Eventually, he assumed he just couldn't find the attractions because he was in a suburb of San Francisco.

So Kreuz got into another taxi and asked to be taken into the city of San Francisco itself. But the driver told Kreuz that he couldn't make the trip... because it was 3,700 miles away.

Even then, Kreuz wasn't totally aware of his colossal mistake...

After traveling over the Atlantic Ocean, Kreuz's flight had stopped in Bangor, Maine. It needed to refuel and allow passengers to clear U.S. customs before continuing to the West Coast.

The flight attendant who wished Kreuz well had simply finished her shift before walking off the plane. And the hotel he checked into was the Bangor House, a far cry from California.

Fortunately, Kreuz soon met a German-speaking couple who explained everything...

And in the end, the whole episode turned out well...

Kreuz was treated like a celebrity in Bangor for 10 days. He celebrated his birthday in a local McDonald's, where he was permitted to flip a burger. He became an honorary member of the local Penobscot Indian tribe. And his story was repeated in newspapers and on TV.

Imagine believing you were in San Francisco for four days... when you were really in Maine!

Kreuz got lucky... The people he encountered in Bangor were very friendly and helpful. He wound up having such a great time in Bangor that he vowed to return the next year.

Kreuz had no idea where he was... and he had a rich and extremely rewarding experience.

I (Dan Ferris) came across this old account about Kreuz two weeks ago and instantly thought it could be relevant for investors... but I wasn't sure exactly how. So I forgot about it...

Until yesterday.

That's when I ran into Joe, who I've done business with for the past five years...

Joe is a really friendly guy. And where I live, he's absolutely the No. 1 expert in his field.

We've never spoken about what I do, though. Our commonality is what he does for a living...

We normally see each other between three and five times each year. But we hadn't exchanged so much as a phone call since before the COVID-19 lockdowns began.

And yet, yesterday – after not a word between us in more than a year – it took less than two minutes for the subject to change to all the money he has made in "penny stocks."

Joe told me he's "down some since February, [but] still holding on." And his son, who helps run the business, is also "into trading now." Joe mentioned possibly teaching his staff about trading and "making them all into millionaires." (I immediately told him not to attempt it.)

Joe loves to read books about trading these days... And he was excited to learn that I've interviewed some of his newest heroes on the Stansberry Investor Hour podcast.

As our conversation carried on, I was polite. But I tried to make a critical point to Joe...

Unfortunately, Joe is like a 98-pound weakling who feels great after lifting weights for six months – and now believes he'll be able to compete in the Summer Olympics this year.

In other words, Joe is a sign of the top. He is Erwin Kreuz... minus the happy ending.

Both men were unbelievably lucky. Like Kreuz 44 years ago, Joe has no idea where he is or what he's really doing... Yet he's having the time of his life, making a ton of money.

Joe thinks his success has come from reading books about trading and clicking around the Internet for "good information" about "where to get in and get out, as quickly as possible."

And who knows? Maybe it has...

But I doubt it.

I'm sure hundreds of thousands of folks out there feel just like Joe and his son right now...

They're high on easy bull market gains. They're contemplating a second career earning six figures in their spare time by trading penny stocks... SPACs... cryptos... digital trading cards... and whatever else that has gone up in price fast enough to heat their blood with a feverish greed.

The big difference between these folks like Joe and Kreuz is obvious...

Kreuz had a good attitude, went with the flow, and found himself in a situation that meant little downside after his mishap in Bangor. He wasn't getting hurt. He was just in the wrong place. His experience wasn't financial in nature... And it ended as a roaring success that can't be taken away from him.

But Joe's situation has yet to end... And as long as he's "still holding on," he's fully exposed to the enormous downside of trading penny stocks. It can all be taken away from him.

Penny stocks are the latest example in a seemingly endless string of market manias over the past year...

The New York Times reported last Thursday that 1.9 million transactions were completed last month in over-the-counter markets where penny stocks trade. That's a 20-fold increase from a year earlier.

The Times article calls penny stocks "Wall Street's low-rent district" and points out correctly that, "Penny stock frenzies are common in raging bull markets." It also quoted Jordan Belfort, the real-life fraudster depicted in the 2013 movie, The Wolf of Wall Street. Belfort told the Times...

We all want to believe in Santa Claus, the Tooth Fairy, and Bernie Madoff.

You can add "our own effortlessly acquired financial acumen" to that list, too.

While my visit with Joe was disconcerting, it can serve as a lesson for our legion of faithful Digest readers...

It can help you avoid a bad outcome from participating in the speculative mania...

Do yourself a favor and check out A Short History of Financial Market Euphoria by John Kenneth Galbraith. Early on in the book, Galbraith makes a key point to remember...

Only you can save yourself from the ugly aftermath of a speculative mania.

Those folks who populate big institutions – the regulators, politicians, academics, bankers, brokers, and sponsors of exchange-traded funds (ETFs) – that purport to protect you and your wealth are simply not equipped to do the job any more than they can digest your food for you. As Galbraith writes...

Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns... There is protection only in a clear perception of the characteristics common to these flights into what must certainly be described as mass insanity. Only then is an investor warned and saved.

Galbraith's book is a must-read for the current manic market environment...

It ties in well with my colleague Steve Sjuggerud's work on identifying and exploiting trends – and most important of all right now – knowing how and when to exit once they've run their course.

It's full of some of the best insights on investor manias ever written. But to me, the most brilliant of them all is the running theme throughout the book of what Galbraith calls "the specious association of money and intelligence"...

Those involved with the speculation are experiencing an increase in wealth – getting rich or being further enriched. No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition. The very increase in values thus captures the thoughts and minds of those being rewarded. Speculation buys up, in a very practical way, the intelligence of those involved.

Naïve speculative participants think they're selling dollars to buy stocks... then quickly turning around to sell those stocks for even more dollars. The gains make them feel intelligent.

But in reality, they're selling their intelligence to rent the veneer of financial prowess – as long as the market is rising. As the mania grinds on, the rental period contracts and the price rises. And in the end, these market participants are evicted... penniless and never again able to claim financial brilliance.

Like everything else in a speculative mania, "the specious association of money and intelligence" seems logical and easy to understand. More from Galbraith...

The basic situation is wonderfully clear... The more money [one has], the greater the achievement and the intelligence that supports it... the possession of [money] in large amount seems a miracle... [It] must be associated with some special genius.

Since most folks don't have a lot of money, they assume some great ability and intelligence are needed to get it...

Ultimately, the extra helping of respect we serve to many apparent financial geniuses is revealed as undeserved... if not outright ludicrous.

The example of Bernie Madoff is too easy not to cite. The Ponzi schemer's clients sold all their brains to him... And they wound up believing he was able to earn the eerily consistent returns that he reported.

Of course, it was later revealed that Madoff couldn't possibly have run the strategy he claimed because he would've needed to buy more options than traded on any given day – and that it wasn't too difficult to figure it out.

Had Madoff not been a fraud, he would have been a true genius... But it turns out that nobody is that smart and everyone involved should've known it from the beginning.

In his book, Galbraith cites just about any banker who lent money to the oil industry in the 1970s... turned around and lent the proceeds to Latin America and Africa... and never saw the money again.

And the list of wealthy geniuses whose brilliance later dulled suddenly is long. You can probably cite examples off the top of your head. Here are a few off the top of mine...

• The geniuses behind the savings and loan debacle in the late 1980s and early 1990s
• The Nobel Prize-winning geniuses who blew up Long Term Capital Management in 1998
• The geniuses in the credit-ratings agencies who assigned their highest ratings to piles of the riskiest mortgages
• The geniuses at the banks that held those mortgage-backed securities with leverage in the housing bubble, leading directly to the Great Financial Crisis
• Any of the geniuses who were short volatility ETFs in early February 2018

I could go on and on.

We're captivated by great financial minds no less than we are by great athletic and scientific talents... except it's a lot harder to fake your way onto a professional sports team or through a physics lecture.

Here's another Galbraith theme to keep in mind as we traverse through the late stages of this bull market...

In the aftermath of a great boom, when many quickly and easily acquired fortunes have been quickly and easily lost, nobody ever seems to blame the actual participants. The blame instead goes to some few scoundrels... or perhaps some faceless trends like "budget deficits" or "inflation."

Nobody seems to be able to find the culprit in a mirror. Nobody ever says, "The boom was the result of too much optimism on the part of too many naïve speculators, including me!"

Instead, they always say something like, "The Fed printed too much money... or too little money as in the case of the Great Depression"... or some other version of the excuse that "The market was rigged by powerful people conspiring against the rest of us."

This time, I suppose, the inhabitants and government of China will get plenty of blame.

But whether it's the Chinese government, the Fed, inflation, or anything else... most unwitting investors will once again make the mistake of assigning themselves too little of the blame for losing the money they bet.

That's human nature for you.

By emphasizing the recurring features of speculative episodes, Galbraith channels Ecclesiastes 1:9...

The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.

So today, I want to leave you with this piece of friendly advice...

If, like my pal Joe, you find yourself feeling like Erwin Kreuz these days – falling backward into the time of your life – just remember one thing before you're in too deep...

Many have come before you who thought they were way smarter than they really were. And unfortunately, they didn't get out while the getting was good – like Kreuz did and like I hope Joe does, too.

My own warnings of the past few years – and Steve's more recent warnings that the "Melt Up" is set to become a "Melt Down" soon – aren't because of something new in the world.

They're because, as Ecclesiastes states, "there is no new thing under the sun." In other words, we know this has all happened in a variety of forms dozens of times in the past.

The difference that sets Steve, me, and the rest of our Stansberry Research colleagues apart from the great herd of new speculators who have come into the markets recently is that we've seen it and lived it before. We know what it looks and feels like.

And as a result, when things go south... we can help you do something about it.

Nothing is ever a slam dunk in the markets. But through the years, we've picked up a pretty good bag of tips, techniques, and strategies to help you limit your risk and preserve your wealth no matter what happens – like using stop losses, proper position sizing, and more.

So we're glad you've found us... And we know you will be, too, when the Melt Down arrives.

New 52-week highs (as of 3/22/21): ABB (ABB), American Homes 4 Rent (AMH), AutoZone (AZO), Corteva (CTVA), Hershey (HSY), Altria (MO), Motorola Solutions (MSI), Annaly Capital (NLY), and Radius Health (RDUS).

In today's mailbag, feedback on yesterday's Digest about inflation... and crocodiles. Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.

"I enjoyed your article... Inflation is tame or low, according to the Fed. On the street and especially in construction, it's much different...

"Please find the attached price increase forwarded to me from a general contracting friend..." – Paid-up subscriber Kirk H.

"Corey said in [yesterday's] essay that inflation is good for banks because the higher spread in the yield curve helps them. But I just want to point out that it only helps them in the short term. In the long term, it will bite them. Since they're loaning out today's dollars, the dollars they get paid back are worth less due to inflation, and the longer the term, the worse it is." – Paid-up subscriber Al C.

"In honor of Corey's essay [yesterday] and to hedge my bets I cooked up some crocodile meat for dinner." – Paid-up subscriber Gary S.

Corey McLaughlin comment: We hope you saved us a slice!

Good investing,

Dan Ferris
Vancouver, Washington
March 23, 2021