The most important country in the world (still)...
It seems Greece is once again the most important country in the world… Its economic problems are once again making headlines…
The benchmark stock index Dow Industrials Average opened lower this morning… and Bloomberg and the rest of the mainstream financial media attributed it to Greece's economic woes, which are once again making headlines.
I always find this puzzling… Greece's gross domestic product (GDP) is about $300 billion. Wal-Mart's revenues are about 45% GREATER than Greece's entire economic output. And Wal-Mart is only one of the Dow's 30 components.
So how is it that Greece's struggle to get its financial affairs in order diminishes the value of those 30 Dow companies, including Coca-Cola, American Express, Intel, IBM, Microsoft, and ExxonMobil (also larger than Greece)? I'm confused... What to do?
I know two guys who aren't at all confused: Warren Buffett and Charlie Munger, chairman and vice chairman, respectively, of the investment holding company Berkshire Hathaway. I saw them a couple weeks ago in Omaha, Nebraska, answering questions for six hours at the annual Berkshire Hathaway shareholders meeting.
Buffett and Munger don't waste time worrying about Europe. Buffett bought eight European stocks last fall. And he said simply of the crisis in European sovereign debt, "I don't know how it plays out in Europe... but I would totally avoid buying medium- and long-term government bonds, our own or other countries'." (Italics added for emphasis.) Buffett also said in the meeting, "Bonds are no good."
In fact, Buffett and Munger don't waste time worrying about any macro concerns (except one – inflation). Buffett said that in the 47 years he and Munger have been running Berkshire, "We've never talked about macro stuff." Never. In 47 years. That's interesting.
It reminds me of another legendary investor – Peter Lynch of Fidelity. Lynch once famously said, "I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going."
So if you read the Digest for a daily dose of clarity on the state of things, there you have it. Greece is smaller than Wal-Mart. You can buy great businesses today even if they're located in Europe. Bonds are no good.
Isn't it funny what Buffett said about bonds? Everyone loves bonds today. Just about every week, mutual-fund researchers at The Investment Company Institute say investors are selling stocks and pouring money into bonds, government and otherwise. Most recently, in the week ending May 2, investors took $5.3 billion out of equity funds and put $7.5 billion into bond funds.
It seems like the best investors are always thinking, doing, and saying something completely different from what dominates the headlines day after day... and what motivates the vast herd of investors determined to react to every last bit of news by buying or selling something immediately.
So millions of people woke up, read more bad news, and concluded a distressed Greece and a depressed Europe will threaten the profits of the 30 most consistently profitable, growing, highly competitive companies in the world...
Somehow, Buffett and Lynch don't seem to think that way... and they're rich... Most of the people in the stock market aren't rich... and will likely lose money in stocks. Makes you wonder if you shouldn't be more like Buffett and Lynch and worry a lot less about bad news from Europe.
Yet, not everybody had a terrible morning. Apparently, bad news from the most important country in the world wasn't enough to dash the hopes of the most hopeful of hopefuls in the market... those speculating on the fortunes of social media companies. Despite the dearth of profits and the ease with which competitors can jump into the market… social media companies were suddenly a better bet this morning...
Groupon – the Internet-based coupon service – is up about 12% today. (At one point, it was up as much as 24%.) Why? It hasn't suddenly become profitable. No, it simply submitted a "good" quarterly earnings report. Groupon reported an 89% surge in revenue. It also reported $0.02 of "adjusted earnings."
"Adjusted earnings" is what you report when you're losing money. Groupon clings to nonstandard accounting jargon – adjusted consolidated segment operating income, or adjusted CSOI – to explain how it's really making money even though it's losing it.
Adjusted CSOI is a new term. It excludes pesky items – like marketing – that make Groupon look like it's not a viable business model. The number is so questionable that the Securities and Exchange Commission started investigating Groupon's use of it before the company went public last November.
The stock is down almost 60% from its post-IPO high of a little more than $31 a share. So while there are still some crazy people willing to take a flyer on the stock today, it's clear that maybe the market is starting to figure out that Groupon probably isn't going to be around for long.
If you haven't read Friday's Digest, you should. In it, Porter extolled the value of "doing nothing" – a subject near and dear to my heart. I can't count the number of times I've written on the importance of being patient and letting the value of your investments compound over time.
Of course, before you can make money by doing nothing… you better have done something right and set yourself up for the long-term effects of compounding. The best long-term compounding vehicles in existence are the big, safe, blue-chip dividend-growth stocks I call World Dominating Dividend Growers (WDDGs) – stocks like Wal-Mart, ExxonMobil, and Coca-Cola.
I recently received an e-mail from a subscriber, who complained that I'm spending too much time talking about these dividend stocks... As if these stocks aren't providing investors with the safest, steadiest, and consistently growing stream of income in the stock market… As if these aren't the world's best businesses, gushing cash flow and earning consistently thick profit margins decade after decade… As if they don't pay out higher and higher dividends each year (which grow faster than inflation, unlike bond yields)… As if they don't have the strongest "financial fortress" balance sheets in the world… As if there's something wrong with trying to steer you away from speculative garbage and toward high-quality, long-term investments. If loving these stocks is wrong, I don't wanna be right.
My research partner, Mike Barrett, and I go out of our way to make sure we only recommend the highest-quality stocks. If we don't have a new one, we don't recommend a new one. In 24 issues of Extreme Value and The 12% Letter last year, I picked only 10 new stocks. I recommended a new stock less than half the time.
If you believe Porter's right when he tells you about the importance of doing nothing, you're looking at the master of doing nothing right here! Who would have thought I'd be bragging about being the epitome of sloth? Finally, I've found my calling. I'm great at doing nothing. Mom will be so proud...
If you want to find out exactly what I'm telling investors not to do this month, you should check out the June issue of The 12% Letter, due out this Thursday.
I will show you what the five best long-term compounding vehicles are today. I'll tell you what they are and show you why they're the best income bets right now. In addition to showing you the best WDDG stocks, I'll comment on the bond market and special high-yielding stocks called "master limited partnerships." This month's issue is one of the most comprehensive looks at income securities we've ever taken in a single letter.
If you need income right now and want to look across a broad spectrum of current opportunities to discover what's safe, what's risky, and where you're likely to see the biggest income gains over the coming year… the June issue of The 12% Letter will be a great place to start.
There's little risk in trying it. The letter costs just $39… And if you don't like it, you can always get your money back within the first four months.
As we did last week, I'd like to once again recommend The 12% Letter as an inexpensive but valuable high school or college graduation gift. There's nothing better a young person can do with his money than put it into these safe, growing income plays and then "do nothing" for the next several decades. He'll come to know a financial security few people have today. To try out The 12% Letter (without watching a long promotional video), click here.
How much income can an investor expect to safely generate on his nest egg?
Some might say 1% or 2%. That's what an investor earns in government bonds… Or you can loan money to U.S. corporations and make 4%-6%. A good dividend-paying stock will generate 3%-4% a year in dividends.
In general, the financial industry will tell you investors can expect to safely generate income streams of 2%-6% on a nest egg. Sure, you can "reach" for higher yields, but you'll usually end up taking on much more risk.
In an upcoming educational video for our newest service, DailyWealth Trader, we're going to explode this "small yield" myth. In our video, we're going to show readers how to SAFELY generate yields of 10%-20% on their money. Using one simple technique, an investor can start earning five times more income than he earns in the "conventional" investments your stockbroker loves (the kind that generate big fees for your broker). We're confident that once you learn this simple technique, you'll never look at investing the same way. You'll feel like you've learned one of the great secrets of finance. We've received more positive feedback from readers about this one technique than any single thing we've ever published.
As we mentioned yesterday, this video is educational in nature. You can learn all about how to apply this technique to start making the safest, biggest profits of your investment career. By signing up to watch this video, you're under zero obligation to buy anything. If we had the time to fly to every reader's house and force them to learn about this strategy, we would. You can sign up to be one of the first people to watch this video here.
New 52-week highs (as of 5/14/2012): Vanguard Inflation Protected Securities (VIPSX) and Hershey (HSY).
In today's mailbag… responses to yesterday's requests for information about China... Thanks for your insights. If you have other stories to share, send them to feedback@stansberryresearch.com.
"I was quite shocked about a week ago to learn how the Chinese wealthy businessmen are moving in and buying up a lot of businesses on the island of Guam. I've spent a number of years there and am quite aware that it is a big military asset to the U.S. They are (of course) trying to do this quietly, but word does get around." – Paid-up subscriber AT
"Being an aero-engineer for 28 years, having graduated from UC Berkeley and worked on the manufacturing side (Numeric Control Programmer) for 12 years and now on the design side for the last 16 years, I see firsthand a change in the cheap labor and experience paradigm.
"Because of my background, I am often asked to interface with Chinese & Malaysian companies. I have noticed they do not know how to think outside the box. I have had to show them methods to reduce machine time and improve efficiency. With the advent of Cell Technology, a US Machine shop is now able to have 1 operator keep 4 to 8 high-speed horizontal machining centers running, thus getting the labor costs down to less than $6.00 per hour. Also using this technology we are able to keep machines running a minimum of 78% of the time versus a maximum of 48% of the time on vertical machining centers.
"When you add it all up American ingenuity should bring a lot of manufacturing work back from Asia. Unfortunately convincing the purchasing value stream of these facts is very difficult. American companies (1/3 of them) who have moved in this direction are able to bid jobs lower with better quality & delivery times. I could spend hours detailing this and will be a great investment or start up in the aero business." – Paid-up subscriber GB
"What is the difference between China Fraud and US Fraud? China is actively doing something about fraud and corruption in my twelve years experience in business here in China.
"The administration blind eye on Wall Street, Banks and Congress means that everyone in a VIP position in American is in on the game? There is no one watching the chicken house. The chickens have fallen in love with the fox.
"What Americans call fraud in another country is not fraud in the US. Why? Japanese, Korean or Chinese business people would have been fired for what has happened in JPM Chase – Why are people afraid to call for the CEO's resignation in JPM CHASE? There are no penalties any more for wrong doers who are 'so big' in the US? Why?
"Rather than worry about China, clean up your own mess, please?" – Paid-up subscriber R L Ogden (in China)
Regards,
Dan Ferris
Medford, Oregon
May 15, 2012
The most important country in the world (still)... Groupon's creative accounting... Porter's latest Friday Digest... The best way to 'do nothing' in stocks...