Our Undying Love for Beautiful, Useless Baubles
The latest example of 'the Economist indicator'... 'The Beginning of the End' has arrived... How you can prepare right now... Addressing bitcoin's recent pullback... Why Warren Buffett is wrong about gold... Our undying love for beautiful, useless baubles... The full story behind my No. 1 recommendation...
Not everyone can scoop the Economist...
But it seems like I (Dan Ferris) just did.
In the February 11 Digest, I highlighted the ballistic price charts of ARK Investment Management's several innovation-focused exchange-traded funds ("ETFs")... And I explained why I believed this firm was "the Mother of All Signs of an Impending Top."
I called ARK founder Cathie Wood "the Gerald Tsai of today"...
As I noted, Tsai was the most famous investor of the 1960s "go-go" era stock market bubble. He generated outrageous returns during the bubble... then his popular Manhattan Fund became the worst-performing mutual fund in the world during the ensuing bust.
Now, the Economist is jumping on to the ARK bandwagon...
This week, the financial publication pointed out in its Buttonwood column that ARK's flagship fund – the ARK Innovation Fund (ARKK) – is the largest actively managed ETF in the world. And the publication referred to Wood as "the investment manager of the moment."
Unfortunately for ARK and Wood, this seems like it could be another example of "the Economist indicator"...
As I explained back in November, the Economist (especially the cover story) is a well-known contrarian indicator. I noted that the magazine itself knows there's some truth to that...
This phenomenon is apparently so undeniable that the Economist published an article in October 2016 about its own value as a contrarian indicator. The article was based on research by two Citigroup analysts, who examined 44 covers of the Economist from 1998 to 2016...
The analysts looked at returns 180 days and 360 days after publication. After 180 days, the Economist covers were a contrarian indicator 53% of the time – roughly a 50-50 toss-up. But after 360 days, the odds were better... A contrarian bet paid off 68% of the time.
A year later, buying after bearish covers of the Economist generated an average return of 18%... while selling short the bullish covers generated an average return of 7.5%.
ARK isn't the cover story this week. But the indicator still appears to be in play yet again...
You see, the Economist seems to have discovered Wood's prominence a little bit late...
The ARK Innovation Fund peaked at $156.58 on February 12 – perhaps coincidentally, one day after my previous Digest on the topic. Since then, it has been dropping almost daily... It closed today at about $130 per share, down around 17% from its high just two weeks ago.
It has been a particularly bad week for electric-car maker Tesla (TSLA) – the biggest holding in the ARK Innovation Fund, at more than 10% – and other tech-oriented holdings...
For example, from last Friday's close of $781.30 per share, Tesla traded as low as $619 per share on Tuesday, a decline of 21% in less than two full trading sessions. The stock closed today at around $680 per share – still down about 13% over the past week. And looking out a little bit further, Tesla has fallen roughly 23% from its late-January peak of $883.09.
It's a similar story for other prominent holdings in the ARK Innovation Fund... Roku (ROKU), Square (SQ), and Teladoc Health (TDOC) all fell between 15% and 25% over the past week.
After a little bit of turmoil hit these current market darlings early this week, it snowballed...
Following the ARK Innovation Fund's worst two-day rout since September, investors pulled their money out of Wood's company in droves. It resulted in ARK's biggest outflows to date... Its three largest funds saw $786 million of investor withdrawals on Monday alone. And due to a combination of these withdrawals and price depreciation, the ARK Innovation Fund lost $3 billion in value.
Look, you can't take anything away from the performance of Wood's ETFs over the past year. They've helped a bunch of investors make a lot of money. And I can see why some folks – including the Economist – would reason that Wood is a brilliant fund manager.
However, you shouldn't forget the flip side to any incredible run higher. Volatility is a two-way street... to both the upside and the downside. As I wrote in the February 11 Digest...
I admit that founding her company based on disruptive-technology investing in 2014 was a stroke of genius. But I am 100% certain the ballistic trajectories of her ETFs and ARK's assets under management absolutely, positively will reverse course in the not-very-far future.
And like I said before, ballistic trajectories don't level off and go sideways. They turn around and fall back to Earth.
So when it comes down to it...
Yes, I'm feeling somewhat vindicated today...
What I said on February 11 is still true... Wood and ARK's funds are still the Mother of All Signs of an Impending Top – if it's still "impending" at least. And the fact that investor money headed for the hills in record amounts amid 15% or 16% drawdowns proves how investors speculating wildly at the top of a decadelong bull market can easily get spooked.
Market bottoms are events... Stocks fall, hit bottom, and turn back up. But market tops don't happen all at once... They're a lengthy process that can take years to unfold.
I'm not saying I successfully called the top. But if nothing else, I believe I successfully identified an important sign for investors to keep an eye on moving forward...
ARK's funds will crash. It's inevitable. That's what always happens when an asset's price goes ballistic, like what happened with these ETFs over the past year or so.
It isn't sustainable forever.
Did the crash begin this week?
I believe it did.
And that's the simple message of the unfolding ARK saga...
The "Beginning of the End" has arrived.
It's as if the standard bearer in a battle has been mortally wounded and thrown from his horse. He's dying on the ground, his flag lying in the mud and a pool of blood... His side might still be in the fight, but most of his comrades don't realize that the tide of battle has turned against them.
And just so we're clear – and so that I can't come back and waffle in a Digest down the road – by the "Beginning of the End," I mean...
This is the beginning of the end of the bull market that started at the bottom of the great financial crisis in March 2009 and continued with just one extremely unpleasant episode, courtesy of government responses to COVID-19 roughly a year ago.
Since tops aren't events but rather processes, it's most appropriate to say...
"The top has begun to form."
That doesn't mean we won't see new highs in the benchmark S&P 500 Index, the tech-heavy Nasdaq Composite Index, or the Dow Jones Industrial Average in the weeks ahead.
It doesn't mean you can't own stocks at all.
It doesn't mean that if you own "Melt Up" beneficiaries like Tesla, Roku, Riot Blockchain (RIOT), and many others that you should sell your shares immediately.
But you should definitely view these stocks as trading vehicles only and not long-term wealth builders. Be mindful of your stop losses with all of these positions. And like my colleague Dr. Steve Sjuggerud told readers of his free DailyWealth e-letter yesterday...
What do you do when you hit a stop? You sell!
Longtime Digest readers know I'm not in the predictions business... That's a foolish game to play. Instead, I prefer to say, "Prepare, don't predict."
Prepare by holding a truly diversified portfolio of stocks, bonds, plenty of cash (at least 20% of the total portfolio), gold, silver, and if you like, a little bitcoin, too. Add other stores of value – like real estate, and maybe art or collectibles (if you understand them well enough).
By doing that, you should be able to grow and preserve your wealth indefinitely for decades.
Something else happened earlier this week that I can't really afford to ignore in today's Digest...
Given the world's obsession with bitcoin right now, I can't go any further without addressing what must be on everyone's mind lately... the cryptocurrency's pullback over the past week.
Bitcoin hit an all-time high of $58,367 last Sunday afternoon. But then, its value dropped... It traded as low as $44,150 in the overnight hours today – a 24% fall from top to bottom. It bounced back throughout the day, but it's still only at around $46,000 as we go to press.
Here's an important thing to remember about bitcoin...
As my friend, investor, and physician Dr. Jeff Ross of Vailshire Capital Management likes to say, bitcoin is not a stock or a business. But the thing is... that's still OK. As I've said before, it still has a valuable place in your portfolio. And I believe it'll prove to be worth it over the long run.
I was reminded of Jeff's comment a few days ago, while reading listener e-mails for the current episode of the Stansberry Investor Hour podcast. (As a quick aside, this episode features a fantastic conversation with portfolio manager Yoav Sharon about event-driven investing. I encourage you to listen to our discussion over the weekend right here.)
A listener asked about 11 bitcoin wallets known to have recently held 273,182 bitcoin. What if they all decided to sell? He likened the situation to a large shareholder selling a big block of stock... And he seemed worried that it represented real risk for the rest of us bitcoin holders.
First of all, the world currently has about 18.6 million bitcoins. Those 11 wallet holders only hold about 1.5% of all bitcoins in existence right now. That isn't a big chunk of the market.
I suppose if they all sold their entire stakes at precisely the same moment, you might see some impact on the price in the short term... But what would happen after that?
No one can predict the future, so it's impossible to say for sure. However, these 11 holders wouldn't have another 273,182 bitcoins to sell after that. So in my mind... I believe it's fair to say that the event would have zero long-term implications for bitcoin's viability.
The listener's concern is an 'apples to oranges' comparison anyway...
You can't really compare big bitcoin holders to large shareholders of a company.
Let's say that a company has been around a long time... And its founding shareholder and CEO owns 30% of the company's stock. If he suddenly sold a big chunk of his stock and resigned, the move would rattle investors... The uncertainty would likely cause a big sell-off.
But on the flip side, those 11 wallet holders don't control bitcoin... Unlike our company example, they're not responsible for day-to-day operations. They don't have their hands on the reins of bitcoin the way a founding CEO has his hands on the reins of a company.
In the end, any or all of those 11 wallet holders selling their bitcoin stakes would be less likely taken as a statement about the crypto's viability as a store of value than if that founding CEO sold a chunk of his stock and moved on.
So I'm not worried about bitcoin at all over the long run...
I believe it has a future in our society. That's why I recommend owning some.
My colleague and Crypto Capital editor Eric Wade likes to say that holding bitcoin gets you a place in line for whatever it will become... And if you believe more and more folks will want to queue up with you, you also must believe it will push the price higher over the long term.
But I expect bitcoin to keep trading with a lot of volatility... It's a 12-year-old store of value in a world where value has been stored in real estate, gold, silver, and art for millennia.
And it's far less tangible than those competing stores of value, so it makes sense that its adoption would be a volatile affair. Investors get comfortable one day... uncomfortable the next... trying all the while to figure out how much to own and just how to think about it.
In the end, most of us are still wondering, "What is it exactly and why should I own it?"
I personally don't believe anybody really knows the answer to that question right now, but I also believe that investors can't afford to ignore bitcoin... the same way they couldn't afford to ignore the Internet in the 1990s, whether they completely understood it or not.
I'm still as skeptical of people who say bitcoin is a slam-dunk multibagger holding in two years as I am of those folks who say that it's valueless and worthless. But just because we don't fully understand how its future will play out doesn't mean we should ignore it.
Throughout history, some folks have looked at gold as similarly valueless and worthless...
In 1924, English economist John Maynard Keynes called the gold standard a "barbarous relic"... meaning that it was effectively out of fashion as money and no longer a valid store of value.
And in the 2011 letter to shareholders of his holding company Berkshire Hathaway (BRK-B), famed investor Warren Buffett put gold in the same category as tulip bulbs. As he wrote...
[These are] assets that will never produce anything, but that are purchased in the buyer's hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future.
But the emphasis on gold's utility is, I would've thought, rather obviously misplaced. In fact, it is gold's status as a thing of beauty that makes it such an excellent store of value...
Human beings can't be human without such beautiful things.
Longshoreman philosopher Eric Hoffer described this idea well in his 1971 book, First Things, Last Things. (Every Hoffer book is a must-read, by the way.) As he wrote...
Man is a luxury-loving animal. Take away play, fancies, and luxuries, and you will turn man into a dull, sluggish creature, barely energetic enough to obtain a bare subsistence. A society becomes stagnant when its people are too rational or too serious to be tempted by baubles.
But Hoffer didn't go far enough... We're not merely "tempted by baubles" (like gold). Humans require baubles and relics – barbarous and otherwise – to be fully human.
Buffett thinks that equating gold with tulips as an unproductive asset, valuable only to greater fools, indicates its limited utility as a store of value. But he has it exactly backwards... It's a wonderful store of value because it is an unproductive object of beauty.
We will never stop wanting gold.
Buffett seems to lack a true understanding of human nature beyond what is necessary to succeed in business and investing. His 2011 screed against gold demonstrates that clearly...
Buffett criticizes the metal's utility and compares the purchase of all the gold in the world (worth $9.6 trillion back then) to an identical amount invested in all the cropland in the U.S., plus 16 ExxonMobils, and $1 trillion in cash. He asks who would choose the gold over the latter collection of assets, implying it would be really stupid to choose the gold.
Buffett is right in his rationale, of course. But it's important to realize... those are not the choices that anyone is presented with. And as a result, the argument works against him...
In real life, humans want to own productive assets like cropland and stocks for one reason...
They want to have the means to purchase those other things that make them feel most human – like Ferraris, vintage guitars, and the ultimate useless bauble, an ounce of gold.
Hoffer's quote says everything you need to know about gold (and also gives you some hints about the future of bitcoin, which has been referred to as "digital gold").
In the 2011 shareholder letter, Buffett – the so-called "Oracle of Omaha" – reasoned that a century later, the 400 million acres of land will have produced "staggering amounts" of crops and the ExxonMobils (all 16 of them) will have generated "trillions of dollars" in value. But the gold will "be unchanged in size and still incapable of producing anything."
First of all, the fact that gold won't change over centuries is good. Humans need things that never change. They can't live without them. Otherwise, we'd all be totally disoriented just by trying to live moment to moment. And most importantly, a store of value must not change (too much) over time... Gold is arguably the best store of value known to man for this reason alone.
Then, Buffett spit in the eye of humanity and showed us how poorly he understands both gold and human nature when he quipped, "You can fondle the cube, but it will not respond."
The inability of gold to produce anything is why we love to hold and fondle it...
Anybody who tells me with a straight face that gold doesn't instantly attract his attention is either lying or impaired in some way. Gold is an object we desire for its own sake... the same way we desire works of fine art. They don't produce anything either... or do they?
Gold and artwork produce that which is useful only to human beings, because only humans beings value inanimate objects for the pure pleasure of looking at them...
Or "fondling" them, as Buffett might say.
The utility is in what we feel when we gaze at them and hold them in our hands. By having no use, and by gold being shiny and rare, it fires up our imagination.
I've wondered lately if visual art and music got so utterly weird – and in many cases, impossible to enjoy – in the early 20th century because that was also when the gold standard came under attack, as European nations abandoned it to finance World War I.
In other words, the minute we gave up on an unproductive, inanimate object of mesmerizing beauty as the standard of value so we could pursue our mutual mass destruction... we descended into chaos.
Coincidence? Maybe. I really don't know, but it feels right to me.
Maybe you don't think I'm countering Buffett's criticism of gold's lack of productivity well enough...
Or at least not well enough to justify putting 15% of your wealth into precious metals. If that's the case, let's agree to disagree. But I want to make sure you see my point...
I'm not telling you Buffett is wrong about gold being unproductive. I'm saying that its lack of productivity to match farmland and one of the world's biggest oil companies is why he's wrong about it... and why gold is so perfect as a long-term store of value for humans.
Part of Buffett's mistake is to view us as being too much like other animals... No other animal in the world has use for unproductive inanimate objects the way that we do.
Go into the average American home... It's loaded with art, knickknacks, keepsakes, and all types of useless objects owned and displayed for the pure pleasure of doing so.
That is why gold will never disappear as a store of value.
And yes, I know Buffett's company owns jewelry stores... but that also supports my argument more than his. He recognizes the value of these jewelry businesses, but he misses the meaning behind the deep need that humans have to possess gold... without which he couldn't make a penny from jewelry!
I mean, the guy has all the answers right in front of him... and he still doesn't get it.
Neither does anyone who says gold is worthless except as a speculation based on some Buffett-like "greater fool" theory. Gold would never still be in use as an important store of value after 5,000 years if that idea were true.
Anything we've done for 5,000 years must be deeply embedded in our nature – for better or worse...
We want gold not because we're easily duped. That's too cynical and shallow. We want – and need – gold because we love beautiful, useless baubles. It's an immutable part of our nature, which we will never, ever get away from. And therefore, we must embrace and feed it to an appropriate extent.
My belief that gold is – and always will be – a great store of value is behind my No. 1 recommendation...
The company is one of the greatest businesses I've ever found. And right now, its stock is trading at an excellent valuation for long-term investors interested in making five to 10 times their money in gold over the next five to 10 years.
But it's not a gold mine or an exploration company. It's sort of like a royalty company, but it's not one of those, either.
I've known the folks running this company for years (including one for more than two decades). And I've rarely found a better, more capital-efficient business model in my 23-year career writing financial newsletters.
That's why I recently invited a camera crew to my house...
I went on record with the whole story of why I love this one business so much. And in the end, I concluded that if you forced me to put all my hard-earned money into just one stock... the decision would be easy.
This would be it...
It's a gold-related company that pays a steady dividend and gushes free cash flow every quarter like clockwork – in a way that no mining company has ever done or will ever do. This is a completely different way to make money from gold, with far less risk than mining it out of the ground.
Now, my loyal Extreme Value subscribers would probably be pretty angry if I gave you the name and ticker symbol for free here in today's Digest...
But as I said, you can hear the whole story about this opportunity in my brand-new presentation. And at the end, you'll find out how to get instant access to this recommendation – and all of my research in Extreme Value for the next two years – at 50% off the normal price. I've written a full report with all the details about this company.
So again, if you want to learn about perhaps the single-best way to earn five to 10 times your money in gold over the next five to 10 years, just check out this video right here. If nothing else, you can see how worked up I get about an investment that I love so much.
Enjoy!
New 52-week highs (as of 2/25/21): Forum Energy Technologies (FET) and VanEck Vectors Oil Services Fund (OIH).
In today's mailbag, additional takes on rising ammo prices and inflation. Do you have a comment or question? As always, send it to feedback@stansberryresearch.com.
"The recent increase in ammunition prices cited in the Digest [in yesterday's mailbag] is more the result of a supply and demand unbalance than a reflection of inflation. There is an extreme ammunition shortage today. As a result of the many uncertainties of COVID early last year, people losing their jobs, their income, their businesses, rioting in our city streets and the defund the police movement in the summer, the prospect of an anti-gun government gaining power, and the concerns associated with a very contentious election in November, there were an estimated 7 million first-time gun purchasers in 2020.
"If each of these first-time gun owners bought only 100 rounds of ammo, that increases demand by 700 million rounds, an increase that ammunition manufacturers were not prepared to accommodate. (And lest anything think that 100 rounds is a high estimate, an experienced gun owner typically shoots at least 100-300 rounds at the range to get comfortable with a new gun. A first time gun owner should ideally shoot at least 300-500 practice rounds to learn to handle the gun safely and develop effective shooting techniques.)
"There is also undoubtedly an increased ammunition demand from existing gun owners to compound the shortage. Most, if not all, ammunition manufacturers are currently working as many shifts as they can, but have barely made a dent in the shortage. Recent industry estimates are that it will be at least another year before ammunition prices return to anything close to 2019 values." – Paid-up subscriber Paul H.
"All these examples that people are providing are not examples of inflation, they are examples of simple supply and demand. Inflation is when prices go up due to creation of a currency even though supply and demand are constant. I currently wish to purchase an RTX 3080 video graphics card (MSRP $699) but I can only find one on eBay for $1,500 to $2,000. That has nothing to do with inflation. It's simply supply and demand." – Paid-up subscriber Mike B.
Good investing,
Dan Ferris
Vancouver, Washington
February 26, 2021