The Meat of the Matter

Left hanging... The skill (finally!) defined... The darkest abyss is inside you... Are you a time master?... A million marshmallows are within reach...

I (Dan Ferris) took you to the edge of a black abyss in last Friday's Digest...

First, I recalled a shark encounter I had 46 years ago in 50 feet of water off the Bahamas.

On a school trip, two friends and I broke away from the group and swam past coral reefs and a flat shelf of white sand... until we were perhaps 50 yards from the edge of the shelf.

Ahead of us was a black abyss, a sheer drop 15,000 feet straight to the Atlantic Ocean floor. The deep consumed all the bright Bahamian sunlight, turning the water below black.

Two sharks appeared at the edge of this abyss. We had headed confidently into the unknown, with no thought that it might involve imminent danger to life and limb. (Thankfully, we all turned around and swam straight back to shore with no injuries.)

I used that experience as a metaphor for the deep, dark unknown that lies ahead in the stock market today. I concluded with the following passage...

I can tell you all the stories I want to about big risks in the market and historically similar conditions that led to big losses. But you'll never feel them as if they're there in the water with you.

I can tell you the abyss and the sharks are just ahead, but if you don't see them, your heart won't beat faster and you'll see no reason to worry.

It doesn't take a genius to look at the S&P 500 trading near dot-com-peak valuations and figure that the next several years likely won't resemble the past several.

It's much harder to feel that insight deep in your bones, the way you'd feel it if you could see the sharks darting back and forth in front of you.

That's the skill nobody is talking about right now, probably because nobody has it anymore.

I didn't think I'd left you hanging, but that's the consensus among several readers who wrote in...

Subscriber Joan D. said...

I wasn't ready to just be left hanging, because I too believe there are dark waters ahead, and just "tryna" figure out what to do (slowly swim away).

Meanwhile, subscriber John O. said...

Your narrative about the perils of visiting far away places is enlightening and informative. I would prefer greater insight into "the skill nobody is talking about right now, probably because nobody has it anymore."

John suggested I write an executive summary "for those disinclined to read the fluff and prefer the meat of the matter."

Finally, subscriber Jerry W. summed it up well when he wrote:

I feel the same way. Yet it's still not breaking. Could the madness keep going?... It looks like a deep rocky abyss ahead to me.

The good news...

Joan, John, and Jerry are all describing the same feeling... the one you get when you have the skill nobody is talking about right now.

When you have a skill, you don't merely know it. You feel it. You've done the work, so you don't need to think about it anymore. You just do it. Hardly anybody today is just doing "it."

I'm talking about understanding, recognizing, and controlling risk.

That's the skill.

The definition of a skilled investor is someone who prioritizes risk management.

When stocks trade at dot-com valuations and you feel like there's something dangerous unfolding, that demonstrates an understanding of risk and the ability to recognize it when it shows up.

When call-option volume on the S&P 500 Index hits a record high of 4 million contracts like it did Tuesday and you shake your head and call it gambling, that's the feeling you get when you have the skill.

When you learn about Strategy (MSTR), the bitcoin treasury company that issues massive amounts of securities and buys bitcoin with the proceeds, and know you're looking at a disaster waiting to happen, that's the feeling I'm talking about...

Though, with Strategy trading 80% below its November 2024 high, you could argue that the disaster has already arrived, and you wouldn't be wrong.

When you hear that margin debt rose nearly 8% to a new all-time high of $1.53 trillion in June, and you look at your accounts to make sure you have plenty of cash on hand, that's the skill.

Refusing to participate in all of the above is what controlling risk looks like. It's a negative skill. It's the risky behavior you don't do.

Having this skill means you can feel the edge of the abyss. You know there's something deep, dark, and potentially fatal (financially speaking) lurking in the market.

But the deepest, darkest abyss in the market (and life) isn't out there...

It's inside of you. The danger isn't what the market will do. It's what you'll do if the market drops a bunch... your account falls in value... the back of your neck feels hot... and you feel like you need to do something immediately to stop that feeling. Those moments can make or break you.

Value-investing guru Ben Graham personified the stock market as a manic-depressive he called Mr. Market. When Mr. Market is euphoric, he'll pay any price, no matter how high, to own the hottest stocks. When he's depressed, he'll sell even the highest-quality stocks at any price, just to be rid of the anxiety of watching his account fall.

Those with the skill of risk management behave the opposite of Mr. Market. They practice caution when stocks are expensive and markets are speculative. They get excited when good stocks have fallen and are more attractively priced.

The point is, the market is just one ingredient in any investor's success – and not the most important one. You can't control what the market does. You can only control what you do and don't do in it. As the poet Rudyard Kipling once put it, learn to "keep your head when all about you are losing theirs."

Perhaps a lack of understanding and recognition isn't the problem...

Maybe the "meat of the matter" John mentioned is the third part of the skill: controlling risk. In other words, how you do it.

You're probably already better at it than you think. The main issue is time, and there's an easy way to gauge how well you're handling it.

Do you have a 401(k)? If so, you're a time master.

Folks who push stock valuations to new heights and call-option volumes to new records have a different view of the world from those who put money into a 401(k) every two weeks for decades and don't touch it until retirement.

That difference is a psychological trait called time preference.

Simply by owning a 401(k), you're exhibiting a low time preference, which is the foundation of understanding, recognizing, and controlling risk.

If you're focused on holding good businesses for the long term, your risk isn't in what the market will do next week, next month, or even next year. It's what those businesses will be doing five or more years from now. That's where the big gains hide... well out of sight of the high-time-preference crowd.

Warren Buffett is a great example of this skill. His favorite holding period is forever, and Berkshire Hathaway (BRK-B) is up around 2,300% since 1996. He bought great businesses when the rest of the world was selling them and held through subsequent downturns.

Unfortunately, the general time preference is troublingly high right now...

On Wednesday, the Institute for Family Studies published the second part of an ongoing study of 2,000 American men aged 18 to 29 who responded to a survey.

The study showed that 25% of respondents said they trade stocks daily. And 23% of them said they gamble daily on sports and other events.

It reminds me of FBI crime statistics showing that men aged 18 to 34 make up about 22.4% of arrests in the U.S.

The demographics are of different, but both groups are accurately described as young American men.

I don't mean to pick on young guys, but the correlation of risky behavior in the stock market with criminal behavior feels right to me. Young men tend to fear risk less than the rest of us and tend to find more ways to go wrong in life.

Of course, that willingness to take risks means they're also very good at inventing, innovating, improving our lives, and pushing the boundaries of human performance in sports, business, and the arts and humanities. The downside of their risk-seeking tendency just comes with the territory.

When you consider this research in light of the record call-option volumes and margin debt... it feels like we're smack in the middle of a major speculative episode in the market. And those never end well for anybody – except those who ride out the downturn and keep buying good stocks.

Psychologist Walter Mischel did the ultimate time preference study at Stanford University in 1970...

The Marshmallow Test was performed on kindergarten-aged children.

Each child was shown two treats, a marshmallow and a pretzel, and asked to pick their favorite. They were told that they could eat one right away, or they could have two if they waited 15 minutes.

For whatever reason, some kids had a lower time preference. They could wait 15 minutes. The high-time-preference kids couldn't wait.

Follow-up studies showed that kids who waited had better life outcomes, including higher SAT scores, better health, and more career success.

The 401(k) investors don't merely want two treats. They want a million of them and are willing to wait however long it takes to get them.

The option buyers and margin-debt abusers are voracious marshmallow consumers, gambling on the market's near-term direction (and losing the overwhelming majority of the time). Their few wins just keep them at the slot machines longer, likely guaranteeing bigger losses than if they'd cut and run sooner.

Later studies of the Stanford kids suggested that those from more stable homes had a lower time preference than kids from less stable ones. So maybe it's harder for some folks to learn the skill, but that's true of anything. Fortunately, unlike being a virtuoso violinist or a Major League Baseball player, the skill of keeping your time preference low and your risk under control is available to everyone. It's perhaps the lowest-hanging fruit available to investors seeking an edge in the market.

Still, the stock market's current action and elevated level, plus all the call-option trading and margin debt, suggest that most people don't have this skill. They don't understand or recognize risk, and they sure can't control it. They don't feel it.

What's worse, they feel the opposite. They want to maximize leverage and short-term results, oblivious to how that exposes them to a high likelihood of loss (the simplest definition of high risk).

If I've left you unsatisfied again this week, there's a reason for that...

Most folks want to be told what to do. They don't want to learn to think or feel a certain way when the market is acting poorly. That's just too hard.

But if you don't learn to think a certain way, the darkness and fear will engulf you when the market plunges into the abyss... and you'll behave in ways that will permanently impair your capital.

That's the real meat of the matter, no matter what anybody tells you. Thinking right precedes acting right, more so with investing than with many things in life.

Sure, you can learn by doing. You'll incur losses, which will teach you things you wouldn't have learned otherwise. But investing is a challenge that constantly tests your intellect and emotions. It requires sustained learning, thought, research, and consistently disciplined action over a long period of time. Most of that happens between your ears, not in your account.

Lots of folks in my position would be happy to skip all this "fluff" and tell you that "you'll get rich quick if you buy this right now." But that's shallow, and I won't do it.

My hope is that anyone reading this is willing to embrace the intellectual and spiritual challenge of learning the skill of understanding, recognizing, and controlling risk.

P.S. If you're still left hanging, feel free to write in at feedback@stansberryresearch.com. I'll see what sort of meat I can hunt down for next Friday.

New 52-week highs (as of 8/6/26): Alpha Architect 1-3 Month Box Fund (BOXX), Brady (BRC), Berkshire Hathaway (BRK-B), Chemed (CHE), Quest Diagnostics (DGX), DXP Enterprises (DXPE), iShares MSCI Spain Fund (EWP), NewMarket (NEU), Translational Development Acquisition (TDAC), and Visa (V).

In today's mailbag, a question about our Stansberry Score rating system for stocks... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Where can I find more explanation about the components in the Stansberry score? e.g. Does an A in Valuation mean the stock is fairly valued? Or undervalued and therefore a good buy? Or something else. A general description of how to interpret the scores on each of the score components would be greatly appreciated." – Subscriber Britt L.

Corey McLaughlin comment: Thanks for the note, Britt. You can find everything you need to know about our Stansberry Score here, including what goes into the indicators behind the score, top-ranked stocks according to each component, and the top 10 overall list (and more).

As for your direct question about what an "A" in valuation means, stocks with an "A" rating have affordable valuations. But probably the most powerful part of the valuation measure is using it to avoid overpriced stocks, which are those with ratings of "C" or lower.

Good investing,

Dan Ferris
Medford, Oregon
August 7, 2026