In the most recent issue of Stansberry's Investment Advisory, Porter introduced one of the most important investing concepts you will ever learn... He and his research team probably spent more time on the research for this issue than any other issue he's ever written.
And if you simply follow this investment strategy and buy a select group of companies at the right prices, you won't need any other investment strategy again... and it's likely you'll get rich.
Porter calls this concept "trophy asset investing." In his issue, Porter discusses the huge returns private-equity companies regularly achieve... For example, investors in asset-management firm Blackstone's private-equity funds have made 22% a year since the firm's inception in the 1980s. And that's after Blackstone takes its 2% annual management fee and 20% cut of profits.
Private-equity firms generate such huge returns because they're leveraged. As Porter wrote…
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They borrow money. Private-equity firms use other people's money to buy assets. Then, they use the earnings from those assets to pay back the debt. After a few years, they're left owning the assets outright and can sell them back to the public via a new IPO. In short... they engineer deals that enable them to transform debt into equity. |
Your average investor can't participate in private-equity deals. The minimum investments are often millions of dollars. And in many cases, a lot of the best managers aren't accepting new funds.
As Porter outlined in his issue, you can always buy shares of publicly traded private-equity companies (like Blackstone or KKR) for exposure to these kinds of deals. Or you can buy shares of the companies private-equity firms are selling back to the public. (The firms often hold their positions for several years after an initial public offering.)
But investors have a third way to invest in private-equity deals. And Porter says it's the most promising... You buy companies that own assets that are so valuable, they always have access to the credit markets. These are "trophy assets." Porter described these companies in his letter…
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These companies own one-of-a-kind assets. When managed the right way, they give public market investors the same high returns as private-equity investors because they can be safely leveraged to produce very high returns on equity. While we wouldn't recommend investing in highly leveraged stocks in most cases... there are some important exceptions. Some assets are of such high quality, they always have access to debt financing. |
One example of a trophy asset is the most valuable mine in the world – the Grasberg complex in Papua, Indonesia. I've excerpted Porter's explanation of Grasberg and the company that controls the mine, Freeport McMoRan, below. It's a long excerpt, but it's important. Again, if you internalize the concept of trophy asset investing, you'll become a vastly more sophisticated investor. From Stansberry's Investment Advisory…
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Discovered in the late 1930s and developed by the Rockefeller family in the 1960s, the mining district began producing copper, gold, and silver in the early 1970s. Today, the mine is still the world's largest source of copper (600,000 tons annually), the third-largest source of gold (58,000 grams annually), and one of the largest sources of silver (175,000 grams annually). |
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The mine is so valuable that its eventual discovery was among the motivations that led the Japanese to invade the South Pacific. Likewise, when the Rockefellers' interest in the mine was threatened in the 1960s, the U.S. government engineered a civil war in Indonesia. The coup included one of the largest mass killing sprees in history, which followed a CIA-orchestrated revolution in September 1965. A reliable death toll number has never been published, but eyewitnesses claim at least 1 million people were murdered. The number of floating corpses seriously impeded Indonesia's river traffic. One of the first major acts of the new government was to annex Papua and take control of the mine. |
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Despite its bloody political origins, the mine itself is a stupendous human achievement. It sits among the highest mountain peaks in the world (more than 14,000 feet high) in one of the most remote places on Earth. Grasberg is a gigantic open-pit mine, with a mile-wide crater, which can be seen from space. A geologist posted some pictures of the mine recently, which you can view here. |
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The facility also includes the world's largest milling equipment, which can process 240,000 metric tons of ore per day. The ore is sent via a slurry pipeline that runs more than 70 miles through the jungle to a seaport built to serve the mine. |
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Grasberg is a global trophy asset, perhaps the single-greatest trophy asset in the world. Ownership is split between the Indonesian government (which controls 10%) and the public investors of global mining giant Freeport-McMoRan (NYSE: FCX), which owns 90%. The company estimates the mine still contains 100 billion pounds of copper, 40 million ounces of gold, and 266 million ounces of silver. |
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The gold alone would be worth more than $60 billion at today's prices. Given the copper and silver resource in the ore, the gold could certainly be mined for free. |
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Interestingly, though... the company's market cap is only $33 billion today. |
Investing in these one-of-a-kind assets can be incredibly profitable for two reasons…
First, you know what they're worth. It's difficult to value an investment bank or a technology company, like Facebook (as we saw with the social-media website's notoriously disappointing initial public offering). But it's easy to value trophy assets.
The second – and most important – thing that makes this type of investing so profitable is high returns on equity – due to leverage. These firms can always access financing because their assets are so valuable. And that high debt load enables them to increase their annual returns on equity (just like private-equity firms).
But private-equity firms take a lot of risk (though the risk is reduced since they control the firms they buy). Since we're passive equity investors, we can reduce our risk by only investing in highly leveraged companies that own high-quality assets.
The trick to making a fortune in trophy-asset investing is to buy these companies at the right price. More specifically, the time to buy these companies is when they're trading at a broad discount to both their historic valuation and their proven tangible asset value.
The discounted price assures a good return over time. But the leverage these companies employ will help you make even more money. A lot of debt boosts returns.
Porter prepared a table that lists the 20 companies in the world that own trophy assets. All you need to do is buy these 20 companies at the right price, and you will set yourself up for big gains...
These opportunities will pop up throughout your investing career. And you should be ready.
Right now, one of these companies is a screaming buy. It owns one of the world's most recognizable trophy assets... And it's trading at a huge discount to its tangible asset value.
If you buy this stock today, Porter believes you can make around 400% over the next decade... That's 18%-22% annually. As Porter wrote in his newsletter, "It's hard to imagine a better or safer investment."
If you can make 20% a year investing in trophy assets, there's little reason to hold anything else in your portfolio. Porter plans on updating his readers with these opportunities as they arise in the future.
To learn more about a Stansberry's Investment Advisory subscription – and start your trophy asset portfolio – click here...
We wrote it, did you short it?
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Today, we're going to show you another "value trap" Chanos has targeted: Coinstar (CSTR). This company runs the green coin-counting machines and red DVD-rental machines you find outside grocery stores, gas stations, and fast-food restaurants. The "Redbox" DVD franchise has been Coinstar's growth engine. But Chanos argues, growth is slowing as the industry shifts to digital distribution. |
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As you can see in the chart below, Coinstar staged a huge rally off its January lows. This rally took shares from $41 to $67 (a 63% gain). Just after Chanos detailed his short thesis on Coinstar at the Grant's Interest Rate Observer conference, the company released an earnings report that the market applauded. Shares climbed another 7%-plus to reach a new 52-week high. |
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But the boost was temporary. Shares have stumbled in the past couple weeks... and now trade near short-term lows. If Coinstar breaks these lows and breaches the $60 level, it's a sign Chanos' bear case is right on. – Amber Lee Mason and Brian Hunt, May 9, 2012, DailyWealth Trader |
When Amber and Brian wrote the above piece, shares of Coinstar traded for more than $62 (down from their high of $67).
Last Friday, Coinstar announced lower-than-expected earnings and shares dropped 14%. Quarterly sales rose 22% to $532.2 million – short of analysts' expectations of $545.7 million.
Second-quarter earnings rose 38% to $36.9 million – again, less than expected.
Investors were expecting faster growth because Coinstar was adding Redbox machines and gaining customers from Netflix and Blockbuster. That's the problem with growth stocks that are priced for perfection... As soon as they disappoint (even if they only miss earnings by a penny), their share prices plunge.
Coinstar is down another 6% today. DailyWealth Trader readers are up 25% on the short. With a subscription to DailyWealth Trader, you get frequent updates on what the world's best investors and traders are doing with their portfolios. You'll hear actionable ideas from elite traders like Jim Chanos... plus stock recommendations from investors like Warren Buffett and David Einhorn. And often, you'll learn how to "leverage" those recommendations with safe option trades. You can learn about the unique DailyWealth Trader strategy here.
New 52-week highs (as of 7/27/12): Berkshire Hathaway (BRK), Guggenheim BulletShares 2015 Corporate Bond Fund (BSJF), Franco-Nevada Corp. (FNV), BlackRock Corporate High Yield Fund (HYV), iShares Nasdaq Biotechnology Fund (IBB), SPDR S&P International HealthCare Sector Fund (IRY), Sandstorm Gold (SSL.V), Utilities Select Sector SPDR Fund (XLU), Anheuser-Busch InBev (BUD), Coca-Cola (KO), Pepsico (PEP), Automatic Data Processing (ADP), 3M (MMM), Dominion Resources (D), Integrys Energy Group (TEG), Loews (L), Two Harbors (TWO), and Wal-Mart (WMT).
More praise in today's mailbag... It must have been a boozy weekend. Send your feedback (praise or otherwise) to feedback@stansberryresearch.com.
"Just to piggy back on the praise... After I applied six (6) times to trade in a Level 5 (of 6) account with Wells Fargo Advisors, I decided to pack up and take my capital to E-TRADE. Being stuck at Level 4 seemed at the time the worst thing imaginable as I always took it personal that they questioned my abilities to sell naked puts.
"Well, I'm glad they did. In that year as a lowly Level 4 trader, I progressed in S&A membership from two newsletters through Wealth Alliance to a full fledged Alliance member (with aspirations of joining the Atlas elite). And as I gained the knowledge and insights of all the S&A analysts, I started to venture out on my own, sometimes successfully (bought SNV at $1.05 and sold half the position at $2.10) and not so successful (bought calls five different times as UNG headed toward sub-$4).
"Bottom line here is that I am glad I wasn't allowed to play with fire until I got my oven mitts. So I went from a 'lifetime holder of GE stock' as my only holding to having a basket of 12-20 option positions and 15-25 stock and bond positions. I'm in investments I never thought a 'little guy' would ever have the opportunity to invest in – naked puts, covered-call spreads, small resource stocks, elite dividend stocks, warrants, leveraged inverse ETFs, preferred stocks, and distressed corporate bonds.
"18 months ago, I would not have even known what half of those terms even meant. Now those terms generate capital for my future. The subscriptions and membership continue to add immense value to my life as an investor and provider for my family. Thank you very much." – Paid-up subscriber DV
Regards,
Sean Goldsmith
New York, New York
July 30, 2012
The only stocks you need to buy... The story of the world's greatest asset... A good short...