The Market Is Rumbling Like an Active Volcano

An unusual and bold prediction... The economy is a complex system... You don't know what will happen... The era of overweighted 'FAANG' stocks... The market is rumbling like an active volcano... Managing your portfolio...

I (Doc Eifrig) am no expert in volcanic activity...

But sometimes you just have a feeling about things.

That's why, in early 2017, when my colleagues Porter Stansberry, Steve Sjuggerud, and I gathered for our annual Portfolio Solutions event, I made a bold move...

We were each asked to share our biggest predictions... Porter suggested it'd be a good year for small-cap value stocks. Steve predicted Japanese stocks would do well...

And I predicted that Mount Stromboli, on an island off the northern coast of Sicily, would have a major eruption...

Those who heard my prediction gave a little chuckle. Possibly because they didn't think I knew anything about volcanoes... Or maybe they knew that Stromboli, though constantly active, hadn't had a major eruption since 1921.

Or maybe they laughed because they were expecting a stock-market prediction instead of a geological one...

And it turns out I was wrong ‒ or rather, I was early. Two years later, in 2019, a series of paroxysms ‒ as these types of eruptions are called ‒ happened at the volcano's peak... The blast could be heard 17 miles away.

So what? Why predict a volcanic eruption halfway around the world on a remote island ‒ to readers of an investment advisory?

But I go one question further and ask, what's the point of predictions at all?

We live in a complex world. And I don't mean that in a philosophical sense... but in a mathematical one.

Complex systems involve many moving parts that have intricate feedback mechanisms. More specifically, a small change in inputs can lead to huge changes in outcomes...

The study of complexity theory began when weather modelers noticed that just a subtle difference of a setting in their models didn't lead to tiny changes. It often led to major changes...

Starting the model with a slightly warmer baseline didn't point to a slightly warmer weather forecast... Rather, the changes were much more significant... and went off in unexpected directions.

It's the same with our economic system. Little changes can lead to widely divergent outcomes for the market... And you simply can't predict them.

And by "can't predict them," I don't mean it's hard to figure it all out... I mean it's fundamentally impossible.

Look, people often overstate the importance of the role the Federal Reserve plays in markets, but right now it matters... The Fed's actions will directly determine whether we face rising inflation or rising interest rates that could stifle asset prices.

Those decisions will be made by a handful of people in a room... or in a Zoom meeting! They will debate and discuss. Perhaps one makes a particularly persuasive argument that day and alters the path of interest rates... You can't know.

If we had less faith in the Fed, we could even say that maybe Chair Jerome Powell wakes up on the wrong side of the bed one morning and decides to jack up the federal funds rate. Or maybe a bad mood means he lowers it... Another thing we can't know.

We do think the Fed is a more deliberate and data-dependent institution than that. But perhaps one machine in a semiconductor plant somewhere breaks down... It ripples through the supply chain.

It's enough to spike the inflation data in the month before the Fed's decision, and it changes the course of the economy... potentially for years.

Even the engineers in that factory can't predict the failure of a particular machine.

This often gets reduced to the cliché of 'a butterfly flaps its wings'...

But there are a few things you can take from this...

I, for one, derive a sort of stoic calm from thinking about the randomness of the universe... This feeling crops up in all sorts of philosophies, in sayings like, "part of God's plan" or "it is what it is."

On a more practical level, it forces humility in what you are able to predict and a focus on the level at which you can operate... So if the butterfly in Beijing causes a hurricane in the Atlantic, what are you supposed to study... butterflies, historical weather patterns, satellite data?

I think you just build a hurricane-proof house.

I knew they wanted a financial prediction...

But I like to needle people... And I did provide a financial prediction for our Portfolio Solutions viewers. I just wanted to get people to think.

The point here is that your investments aren't much different than a volcano... You don't know what will happen.

They may explode. They may thrive.... You just don't know.

And you can do all the work in the world to figure it out, but you'll never get it perfect.

Scientists have worked for decades to get better at predicting volcano eruptions. And they've gotten a little better...

But the ultimate answer has always been to stay away from the edge of the crater... I went to the edge of a volcano a few decades ago. It's a scary place. And I've never been back... So there's that.

And then there's this ‒ tech shares are falling...

Look at your portfolio over the last three years. Because your success essentially depends on where you fell on a single prediction... that is, how overweight you decided to be in the big tech stocks.

The Nasdaq Composite Index is down almost 16% since its most recent high in November... The S&P 500 Index has also cratered but not nearly as much...

If you bought heavily into what are commonly known as "FAANG" stocks ‒ Facebook (FB), now Meta Platforms, Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL), now Alphabet, you trounced the market... And now you are paying the price.

These companies make up such a large portion of the S&P 500 that without them, the oversized returns over the last few years start to look about average... And the recent pullback is more than you think your portfolio can handle.

These oscillations have rested solely on your call on this prediction... And here's the thing, you may not have even known that was a prediction you needed to make... or that it was a prediction that you even made in the first place.

And we don't like to invest that way. We don't want to rely on one big call or a guess at whether the market has bottomed or not. We like to build a portfolio of rock-solid businesses...

Investing in a complex world requires a complex answer...

Now, complex doesn't necessarily mean difficult. It just means there are a lot of moving parts...

Let's say you need 20 stocks to build a portfolio. You can't just make 20 predictions on what stocks will go up and go buy those stocks... No, because predictions are worthless.

Rather, you need to map the connections between them. You may think, "If this stock rises because tech stocks shoot up, then this industrial stock may decline."

And while it sounds like you want some sort of magic portfolio in which they all go up, it's not going to happen.

You want the stock that will decline, so long as it's moving against your other positions.

Here's an example... On a financial level, gold mines are a tough business. They have an asset in the ground that costs a lot of money to get out of the ground, and then they run down that asset over time.

You could consider a gold-mining stock to be an investment you expect to post a negative return. But you can still hold this negative-expectation investment in a portfolio – because we know it can soar when the rest of your portfolio falls.

It's the same thing with negative-yielding bonds or certain value stocks. Your prediction can be that they will fall… but you still buy them.

Back to your 20-stock portfolio, you've got to break this all down…You have 20 stocks with 19 relations to each of the others, and you have 190 relationships to parse through...

How do you manage that? The answer is a little bit of spreadsheet building and portfolio math... and a wealth of experience... If you watch the market every day for a decade or so, you can get a sense for when something isn't behaving correctly...

Keeping track of all that sounds impossible. But it's not... You can earn returns without making onerous predictions.

Stock-picking is difficult...

Putting those stocks together into a coherent and robust portfolio is even harder... It takes years of experience to get a feel for how markets can move.

Few everyday investors ever get the reps in to hold all those moving parts in their head.

And while many readers enjoy receiving our stock ideas and incorporate them into their overall plan, we hear from many others who want a fuller design that shows how it all works together.

You will get predictions wrong... There's no doubt. But you will get others right. When you put them together, carefully and strategically, the correct predictions cover the rest and push your net worth higher.

We know that you don't want a prediction about a volcano... You want to know what to do about it, how it will play a role in your life, and what other risks may be around the corner...

Let's bring it back to finance...

Should you own technology shares now? They have fallen and may fall more... On the other hand, they are cheaper than they were last quarter and some of these are stellar businesses.

The frustrating answer is... it depends. Own the right technology businesses, in the right amounts, and in the right relation to your other investments, and you can win either way.

That's the potential for a well-constructed portfolio... It isn't easy, but it's extremely satisfying to sleep at night knowing that you fully understand your risks and feel confident in your ability to grow your wealth each year.

It's the feeling we've been delivering to readers for five years now with Portfolio Solutions...

I have another prediction for you...

This one is financial – it has to do with a specific stock you can buy that has an incredible medical advance in store in the near-term future... And tomorrow, January 27, at 8 p.m. Eastern time, I'm giving it away for free.

It'll tell you the details – along with other top plays from Steve Sjuggerud and Director of Research Matt Weinschenk.

But we're not just going to share a single idea. We plan to have a conversation about the biggest threats to your wealth today… inflation, China, tech stocks, and more.

You need to know this stuff, and we cover it all, as we do every year.

And it's 100% free to join us… But you have to sign up here to be part of it.

New 52-week highs (as of 1/25/22): Osisko Mining (OBNNF) and Telekomunikasi Indonesia (TLK).

In today's mailbag, feedback on part of yesterday's Digest that mentioned the unprecedented stimulus we've seen the last two years... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I'm curious how many Stansberry subscribers actually got stimulus money, considering the demographics of people who manage their own money. No (free) money for me due to IRS limits, but I would have bought a lone one-ounce gold coin.

"I've done well over the decades with Stansberry recommendations. Lately, I've lightened up on speculations, and stick with tried and true like Doc and Dan recommend. I have lots of cash and a shopping list – if the price is right." – Paid-up subscriber Rob C.

Corey McLaughlin comment: Thanks for the note, Rob.

We received a bunch of messages on this topic at the time the "stimmy" money was being sent and the American Rescue Plan was passed... Check out the mailbags here, here, and here for a look and some subscribers' stories and thoughts...

One of the takeaway points for me was that many Digest readers had been getting stimulus money and admitted they didn't need it.

Part of the reason was some folks were "asset heavy" in their wealth, having built it up over time, and were able to be "income light"... so they still qualified for stimulus money given the income tax threshold the government decided to use to determine if people would get it.

Others said they could use the money considering how high their expenses were in a particular part the country, but they made too much income to qualify, so they weren't getting anything.

And others simply saw many other folks around the country who needed help stemming from the pandemic and ensuing shutdowns and regulations.

To that point, one of our readers even started an online forum to share ideas on where to send the money they received but didn't need, such as their favorite charities... That was nice to see.

But it was all also one very large example of how great the government is at wasting money.

In any case, I'm glad you've done well with our recommendations over the years and congrats on having lots of cash ready to deploy.

And if anyone else wants to chime in on Rob's question and this topic, or anything else on your mind, we'd love to hear from you. Send us a note at feedback@stansberryresearch.com.

Dr. David Eifrig
Dry Creek Valley, California
January 26, 2022