Improve Your Portfolio With One Simple Secret

 
You won't believe how many things in life can be explained with a simple curve…
 
I first learned about this secret in medical school.
 
Getting just the right amount of many key aspects of life – avoiding too much or too little – will help you lead a better, healthier life.
 
You can use this simple chart to help figure out how to reap the most benefits on things like how much sleep you should get, alcohol consumption, salt intake, exercise, and sunlight. It can even help you figure out the secret to happiness…
 
All of these tend to fall on a U-shaped curve… You want to get right in the middle to reap the most benefits…
 
Research shows that people's overall happiness falls into a U-shaped curve based on age. That midlife crisis you went through actually has some scientific backing.
 
But measuring happiness is difficult.
 
Happiness depends on key factors like physical health, relationships, and job satisfaction.
 
And your happiness significantly influences your health and wealth.
 
In 2007, researchers published a paper reviewing data from 2,000 households in the Netherlands. What they saw was that happier people made better investments. They were more willing to save their money instead of spend it on material goods. And when they invested, they were more willing to take healthy risks because they anticipated better outcomes.
 
Overall, these folks showed that happiness and optimism made them better able to look forward to a positive future. That meant they anticipated better returns and, consequently, took more risks.
 
The statistics on why this happens and how to measure happiness get a bit complicated (enough that we could write an entire issue on it), but if you'd like to read more, start with this paper from the Journal of Financial and Quantitative Analysis and this one from the Deakin University School of Accounting.
 
The reason behind this relationship between happiness and investment ability is that happier people can better adjust to losses because they don't give in to their amygdala…
 
The amygdala is the tiny region of your brain responsible for fear. It's the driving force for your primitive flight-or-fight response. Any kind of threat, including losing money, triggers a rush of emotions, including fear and anxiety.
 
The area of the brain that keeps the amygdala in line is the prefrontal cortex, or PFC. The PFC sits right at the top of your brain near your forehead. It's the center of all your planning, decision-making, and behavior control.
 
As we age and gain experience, our PFC learns to easily overpower the amygdala. This is one of the reasons why older folks are happier than those at middle age on that U-shaped curve.
 
Similarly, several articles have shown that day traders with positive attitudes see better performance in their portfolios over time. In studies by researchers for the National Bureau of Economic Research, traders with consistently better, more stable moods had overall better portfolio performances. Because their PFCs had more activity, they were able to fight the erratic fears of their amygdalas, meaning big wins or losses did not sway their judgment.
 
Further studies have shown that practicing ways to actively improve your mood and fight stress directly helps calm the signals in your amygdala.
 
Here are three things you can do to be happier…
 
1. Meditate. I love meditation and its powerful effects. Buddhist monks who practice meditation daily have much higher levels of activity in their PFCs. Even people beginning meditation see decreased anxiety. In a 2011 study from the brain research journal NeuroImage, beginning meditators showed reduced activity levels in their amygdalas when faced with fear-inducing images.
 
2. Unplug. Penn State University sociologist Glenn Firebaugh researched the resulting depression we have when we see what we have compared with our friends and neighbors, something called the "comparison complex."
 
Our obsession with the digital age feeds into this negative thinking. Not only are we flooded by television shows and commercials that remind us to buy more to be happier, but social media sites like Facebook let us see at a glance how much better off our neighbors are (or at least appear to be). Falling into the trap of not feeling "good enough" is easy.
 
So take some time each week to unplug. Try getting outside, for instance, and leaving the technology in the house. If you want an easy activity to do, garden.
 
3. Exercise. Exercise does wonders for happiness. When you work your body, you produce tons of feel-good chemicals, including serotonin. About two and a half hours of exercise per week offers the peak benefit. That's less than 22 minutes of activity a day.
 
I also enjoy taking walks during the day in the sun. Your body naturally converts sunlight to vitamin D, which helps lift your mood as well.
 
Taking care of your happiness should be as much of a priority as taking care of your portfolio and your body. Make these tips part of your lifestyle and enjoy the benefits to your wealth and health.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
Editor's note: Doc's free Retirement Millionaire Daily e-letter is PACKED with tips on how to live a healthier and wealthier life. This week, he has shown readers a strategy he calls "thrift arbitrage," which can put cash in your pocket right away… and the dangers in taking a popular supplement. To start receiving Retirement Millionaire Daily straight to your inbox, click here.

Source: DailyWealth

The Japanese Yen Is on the Verge of a Major Fall

 
The Japanese yen just had its worst week in years…
 
Seriously… the yen fell 4.1% two weeks ago, its worst one-week fall since 2009.
 
That alone is a rare event. But there's something even rarer about this big decline.
 
The computers behind our high-priced True Wealth Systems service helped spot this anomaly. And based on history, it will lead to even greater losses in the yen, starting now.
 
Let me explain…
 
A 4%-plus weekly fall is rare for a major currency. In the case of the yen, we've seen one-week losses of 4% or more only 11 times going all the way back to 1971.
 
That means these large one-week declines happen less than once every four years, on average. But there's something even rarer in this case…
 
Again, this isn't something most folks would notice… even folks who track the currency markets closely. But our True Wealth Systems computers helped spot it…
 
You see, most of the yen's large one-week declines came while it was already in a downtrend. But this month's major loss came after the yen had been making new highs.
 
Specifically, the yen hit a 52-week high at the beginning of July… and then fell 4% in a week starting just a few days later. That situation has only happened four other times since 1971… making it incredibly rare.
 
Importantly, these were not good times to bet on a higher yen. All four occasions led to losses over the next year… and major underperformance versus the typical return for the yen. Take a look…
 
 
1-Month
6-Month
12-Month 
Return after extreme
-1.5%
-0.4%
-5.1%
All periods
0.2%
1.4%
2.8%
A 5.1% loss might not seem large… But remember, this is a currency. Currencies tend to move glacially compared with other markets.
 
Even so, this shows a total underperformance of nearly 8% versus the typical one-year return for the yen. That's huge for a currency.
 
What is happening here is simple: The yen was in an uptrend. It was making new 52-week highs. But then it suffered a terrible weekly return. And history says this usually signals the end of a major move higher.
 
Is a new downtrend beginning? We can't know for sure. But history shows that betting on a higher yen today is a bad idea.
 
The smart money says the yen will likely fall even further over the next year.
 
Good investing,
 
Brett Eversole
 
Editor's note: While Brett is bearish on the yen, he's equally bullish on a "secret currency" that is like gold… only better. The last time conditions were this good, this investment rose 665%. Learn more about this opportunity right here.

Source: DailyWealth

The One Secret of the World's Greatest Investors

 
Only a handful of investors beat the market by a substantial margin over the long haul.
 
Some of them do it by pursuing growth. Others focus on value. But all of them know one big secret.
 
What is it? I'll give you three hints:
 
Lord Rothschild said, "The time to buy is when there is blood in the streets."
 
John Templeton, the man who almost single-handedly pioneered the field of global investing, said the best bargains can be found only "at the point of maximum pessimism."
 
And Warren Buffett, the most successful investor of our lifetime, said, "Be fearful when others are greedy, and greedy when others are fearful."
 
The best investors have a contrarian spirit. They don't care about the consensus. They draw their own conclusions.
 
Contrarians understand that fear and greed cause people to push prices too high or too low. So the key is to look at market fluctuations as your friend rather than your enemy.
 
That way, you can profit from folly rather than participate in it.
 
How can you tell if something is truly a contrarian investment? There are three primary metrics…
 
The first is if an asset class has underperformed its long-term average return for a substantial period of time. Another is if valuation metrics show the asset is extraordinarily cheap relative to traditional assessments.
 
But the third metric is the clincher… When you tell your friends and family what you're buying, they have to scrunch up their faces and say, "But why would you invest in that?"
 
With these metrics in mind, let me suggest that now is probably an excellent time for long-term investors to buy – egad – European stocks.
 
On the bases of sales, earnings, book value, and dividends, European stocks were already nearly back to their 2011-2012 crisis lows before the "Brexit" vote.
 
Since then, they have gotten considerably cheaper.
 
On the day after the British vote to exit the European Union, the Vanguard FTSE Europe Fund (VGK) plunged 11.3%. That was the worst one-day return in the fund's history.
 
The next day, it fell another 3%.
 
Metric 1: The fund has way underperformed its long-term average.
 
Over the last century, European stocks have returned 10% a year, the same as U.S. stocks.
 
However, U.S. stocks have outperformed European stocks by 9.8% per year for five years running. In fact, European stocks have lost an average of 0.5% annually over the past decade, according to financial-data provider MSCI.
 
Metric 2: Are European stocks unequivocally cheap?
 
Yep. They are 20% cheaper than U.S. stocks on an earnings basis. Also, the S&P 500 currently yields 2%. European stocks yield 3.2%.
 
Metric 3: Are investors optimistic or pessimistic about Europe right now?
 
Prepare for a lot of face-scrunching. Most have very little invested there. And those who do – after experiencing a down decade – are wondering whether investing there will ever pay off.
 
Who says no one rings a bell at the bottom?
 
Of course, actual market bottoms can only be identified with the luxury of hindsight. And European stocks could certainly go lower in the near term.
 
But if you have any contrarian blood at all, take a half-position in a European fund like the Vanguard FTSE Europe Fund (VGK). If Old World stocks sell off substantially further, buy the other half.
 
True contrarians will instinctively recognize the benefit of investing this way. (Higher returns with less risk.) The rest – the great majority of investors – will not put a single penny to work here.
 
In a speech in 1963, securities analyst Benjamin Graham, Warren Buffett's mentor, said, "In my nearly 50 years of experience in Wall Street I've found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do."
 
Indeed. If Benjamin Graham – the father of value investing – were alive today, one thing is clear: He would be buying the best European stocks.
 
Good investing,
 
Alexander Green
 
Editor's note: Alexander and his colleagues at the Oxford Club recently discovered that the U.S. government owes "unclaimed money" to 117 million people – or about half of U.S. adults. Learn how you may be one of them – and how to get the money you are owed – right here.

Source: DailyWealth

Expect Double-Digit Losses in Silver by the End of 2016

 
The price of silver is going crazy…
 
The metal jumped 35% in the first half of 2016. It soared 17% in June alone.
 
The trend is certainly up in this precious metal. But things could be getting out of hand right now, according to history.
 
That means we could see losses – not gains – through the end of the year. And a fall of 10% is possible, starting now.
 
Let me explain…
 
After years of declines, investors are in love with precious metals once again.
 
Silver is no exception. Based on the Commitment of Traders (COT) Report – a weekly report that shows the real-money bets of futures traders – bullish bets on silver are at their highest level in history.
 
Not even in 2011, when silver prices nearly hit $50 an ounce, were futures traders more bullish than they are today.
 
This is not a good sign. It shows that the "buy silver" trade is getting crowded today.
 
Typically, when sentiment reaches an extreme like this, the opposite happens over the next three months or so.
 
That's exactly what has played out in the past in silver as well…
 
You see, optimism on silver is high thanks to the precious metal's recent gains – specifically the massive 17% gain in June.
 
Now, a gain that big in just one month is rare in silver. It has only happened six other times over the last decade. And it has only happened 22 other times going all the way back to 1970.
 
Importantly, these large monthly gains tend to signal that silver is getting ahead of itself… Based on history, instead of continuing higher, the metal tends to fall. Take a look…
 
Silver Returns
1-Month
3-Month
6-Month
After Extreme Monthly Gain
-3.1%
-4.3%
-9.7%
All Periods
0.4%
1.2%
2.4%
Silver tends to fall over the six-month period following these big monthly gains. The metal's typical six-month return is 2.4%… But these extremes have led to losses of roughly 10%.
 
Based on the historical precedent, we could see a double-digit fall in silver prices by the end of the year.
 
This is a sentiment extreme. This type of extreme typically affects performance over the next one to six months.
 
Looking at the bigger picture, I believe precious metals could head much higher in the coming years.
 
I do like silver and other precious metals… But I believe you'll get a better chance to buy silver in the coming months, once today's optimism extreme wears off.
 
Good investing,
 
Steve
 

Source: DailyWealth

Cheapest It Has Been in 25 Years

 
I love to find BIG investing ideas – and once-in-a-generation trades…
 
I love to find assets that are so cheap, you can even get some of the investment thesis a bit wrong – and still make a LOT of money.
 
Trades like this don't come along often.
 
But I found one over the weekend, in a place you'd least expect… the McDonald's (MCD) Big Mac.
 
No, I didn't eat a Big Mac… Instead, The Economist's latest Big Mac Index came out.
 
This simple fast-food burger, it turns out, is an excellent barometer of extremes in the world's currency markets. Here's how it works…
 
The price of a Big Mac in England or Canada, for example, should be roughly the same as in the U.S. The "inputs" are the same – beef, cheese, bread, and labor. So the prices should be the same in all developed countries, for the most part.
 
But right now, a Big Mac is 8.6% cheaper in Canada than it is in the U.S., according to The Economist.
 
This makes at least some sense… Canada is a major commodities country, and commodities have been in a slump for a few years. So the Canadian dollar is currently cheaper than the U.S. dollar.
 
I'm not interested in the ordinary numbers like Canada's today, though… I'm looking for extremes.
 
I want to see situations where a Big Mac is radically more expensive or cheaper than it has been in the past, relative to the U.S. dollar.
 
We're seeing that in England today…
 
After last month's "Brexit" vote, when the British voted to leave the European Union, the British pound fell to multi-decade lows. Take a look:
 
More important, take a look at the bottom half of the chart. It tells us whether a Big Mac is more expensive in England than in the U.S.
 
For all of the 1990s and the 2000s, a Big Mac was more expensive in England than in the U.S. But today – after the Brexit vote – a Big Mac in England is cheaper than ever, relative to a Big Mac in the U.S.
 
This is the kind of extreme I like to see.
 
Don't get me wrong… I'm not going to rush out and buy British pounds today just because a Big Mac is cheaper across the pond than here at home.
 
But I do look for moments when one asset is seriously mispriced relative to another asset – and this is one of those moments.
 
I will, of course, do what I usually do before buying…
 
1.   I will wait for the uptrend to confirm my idea.
2.   I will do some more homework.
I do like to find unconventional sources of once-in-a-generation ideas… And The Economist's twice-yearly Big Mac Index is one of those unconventional sources.
 
While I'm not buying the British pound yet, chances are very good that I will sometime in the next year or two…
 
For more on the latest Big Mac Index, click here.
 
Good investing,
 
Steve
 

Source: DailyWealth

Everything You Need to Know About Investing in One Sentence

 
I know. It starts to sound like a broken record.
 
"Finding successful new investment ideas is hard work." I've said it a lot – and I've written over and over about what it means to put in that work.
 
But today, it's time for a breath of fresh air – a simple and effective strategy for building long-term wealth that isn't hard to understand or difficult to use.
 
Dave Sather, a successful Texas-based money manager and mentor to the value investing community, had the good luck to come across this strategy early in his career, back in the 1990s.
 
And today, I'm going to share it with you…
 
In a recent interview, the El Paso native recalled his chance conversation with a still-active money manager who was well into his 80s.
 
Dave was headed to New York to further his investment studies. Upon mentioning this, the elderly gentleman offered to save him the effort and expense by telling Dave everything he needed to know about investing in a single sentence:
 
"Eat 'em, drink 'em, smoke 'em, go to the doctor, and look good when you get there."
 
Dave didn't get it at first. "Come again?" he said.
 
The wise octogenarian then offered an explanation that went something like this…
 
"Eat 'em" is your food companies. "Drink 'em" is your beverage companies, milk, soda, beer. "Go to the doctor" is your medical companies, like Johnson & Johnson (JNJ). And remember, your wife will let the house get repossessed before she goes outside without having her hair done.
Though comical, this sage advice is still as relevant today as it was when Dave received it a quarter-century ago: Investing in businesses that 1) meet basic human needs like food, drink, and health care, 2) cater to vices like smoking, eating candy, and drinking alcohol, and 3) supply beauty products that help women look their best can be a great way to build long-term wealth.
 
Amazon (AMZN) founder and CEO Jeff Bezos opened his 2014 letter to shareholders discussing "dreamy" businesses. Many companies operating in the three categories noted above meet Bezos' definition…
 
A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it's durable in time – with the potential to endure for decades. When you find one of these, don't just swipe right, get married.
Dreamy businesses sound a lot like "World Dominators," a term Dan Ferris coined a decade ago for our monthly service, Extreme Value. And buying World Dominators when they're cheap has worked out well for our readers over the years.
 
A key trait of "eat 'em, drink 'em, smoke 'em" businesses is durability. Many of these businesses have been serving basic human needs for decades, such as Coca-Cola (KO), Altria (MO), McDonald's (MCD), and Procter & Gamble (PG). Their durability enables patient, long-term-oriented investors to hop on and enjoy the ride for years and years.
 
Sometimes, investing isn't hard work. It's simply a matter of understanding basic human needs and desires.
 
Marry that understanding with a portfolio of "dreamy" businesses and you have a recipe for long-term wealth creation.
 
Good investing,
 
Mike Barrett
 
P.S. Mike and Dan track several "dreamy businesses" in their Extreme Value monthly publication – and their latest recommendation is a one-of-a-kind opportunity with substantial long-term upside. Today, the market is hugely undervaluing its assets… Plus, customers love it and will keep coming back for decades to come. Click here to learn more.

Source: DailyWealth

One Investment You MUST Avoid Right Now

 
Remember when EVERYONE was getting into real estate a decade ago?
 
How many times did you hear "you can't go wrong in real estate" back then? House prices were going up faster than I'd ever seen.
 
And remember what happened next?
 
Prices crashed… worse than they had in generations.
 
Today, we're seeing a similar setup – which could lead to a similar outcome – in another asset class. You must avoid this asset class right now.
 
Here's the story…
 
Investors are desperate for income, or "yield."
 
You earn close to zero percent in the bank. And 1.5% on 10-year government bonds. Corporate bonds pay you barely more than 3%.
 
None of that is enough to live on. So desperate investors are looking elsewhere to find a higher yield… Right now, they're finding it in emerging market bond exchange-traded funds (ETFs).
 
"Investors are piling into emerging market bond funds at the fastest pace on record," the Financial Times reported yesterday.
 
An individual investor might not realize it – but by buying these funds, he's risking his life's earnings on the governments of Brazil and Russia, among others.
 
The benefit is dubious… The largest emerging market bond ETF pays less than 5% interest. Five percent! Meanwhile, the price of this ETF could easily fall 5% in less than a week – wiping out a whole year's worth of interest.
 
"Especially eye-catching are recent flows into exchange-traded funds," the Financial Times continued. "Emerging market fixed-income ETFs have seen inflows of $8.3 billion this year, more than two and a half times the amount at the same time last year."
 
We see this in the largest emerging market bond ETF, the iShares JPMorgan USD Emerging Markets Bond Fund (EMB). Shares outstanding have soared in recent months…
 
To be clear, huge inflows into an investment don't mean that the good times will end immediately… Rather, huge fund inflows are a sign that a big move is nearing its end… just like we saw in the U.S. housing market in 2006.
 
Emerging market bond funds have seen record inflows. That's enough for me to know that there's likely not much upside in this trade.
 
I am standing aside… And I strongly urge you to do the same…
 
Don't get tempted by the yields these funds offer… The pain these funds will eventually deliver will be a lot greater than the benefit of the tiny bit of extra income you can earn from them today.
 
Stand aside…
 
Good investing,
 
Steve
 

Source: DailyWealth

This Cheap and Hated Investment Just Popped up on My Radar

 
Everything is up!
 
Stocks, bonds, gold, property… they're all up. Investors love 'em all.
 
That's good for our net worth… But what does it mean for new investments?
 
Longtime readers know I like to find hated investments – that's where the biggest returns come from. So what's hated today?
 
It's the same investment – with the same setup – that I told my True Wealth readers was "The No. 1 Opportunity of 2013."
 
This investment had fallen for years… It had actually fallen in half from its 2007 highs to its lows in 2012. Investors had given up. That's when we bought it. And this investment soared nearly 40% in 2013.
 
Let me explain…
 
Today, a similar thing has happened… This investment lost 38% of its value from its 2015 highs to its 2016 lows. That's nearly identical to what we saw at the end of 2012, before the massive profits kicked in…
 
But most important to me, investors have given up again… This investment is hated.
 
How do I know investors have given up?
 
I look at the shares outstanding for this investment, which is an exchange-traded fund (ETF)…
 
You can see in the chart below that, in 2011 and 2012, the number of shares outstanding of this investment consistently went down… which means that investors were continually getting out.
 
They were throwing in the towel… And that's what I like to see. You can see that a decrease in shares outstanding is happening now, too… Investors have been steadily giving up on this investment.
 
Take a look…
 
We recommended buying shares in late 2012. It was exactly the right thing to do. We took profits of 60%-plus in 2015.
 
The same type of setup we saw in late 2012 is happening now…
 
Once we start to see a solid uptrend, this is an investing idea that I will seriously consider. The ingredients are there.
 
So what is this investment? It's the WisdomTree Japan Hedged Equity Fund (DXJ).
 
I haven't been to Japan in a few years. Japan's investment prospects haven't been on my radar this year… But with these near-perfect setup conditions, they are now.
 
Based on how DXJ performed the last time we saw these setup conditions, it should be on your radar, too.
 
Good investing,
 
Steve
 

Source: DailyWealth

Don't Buy That Stock… Until You Answer These Three Questions

 
Legendary investor Peter Lynch once said you should spend as much time figuring out which stock to buy as you do picking out a new refrigerator.
 
The thing is, few people spend that much time thinking about their stock purchases.
 
We recently talked about three questions you should ask yourself before you buy an asset – whether it's a refrigerator, a beach house, or a stock. Those questions are a good place to start.
 
But when you're buying a stock, there are a few more questions to ask before you begin to dig more deeply. The wrong answer to any one of these questions is a sign you should look elsewhere…
 
1) How does this company make money?
 
Lots of companies make a lot of money doing very complicated things. And that's good for them. But if you can't explain what a company does – and how it makes money doing it – in a way that a child could understand, then you should probably look elsewhere.
 
There's a very good reason for this. Simple businesses are more difficult for bad managers to mess up. The more "idiot proof" the business, the lower the execution risk. (That's the danger of management not being able to do its job.)
 
And as an investor, if you can understand how the company works, you'll have a better sense of what's really going on at the company.
 
Of course, what is "simple" to you might not be "simple" to others. If you're a biochemist, you might understand what a pharmaceutical company does in a way that most people can't. If you're a financial analyst, reading a bank's balance sheet might be easier for you than boiling water. You should use that special insight and expertise to your advantage.
 
But whether you're a rocket scientist or a truck driver, use your edge – and stick to what you know.
 
2) Is the stock already "done"?
 
A few hints that the stock you're looking at has already enjoyed its day in the sun:
 
•   If your great idea is on the "Focus List" of the big brokerage house where you trade, don't buy it.
   
•   If your broker sends you a thick research report on a stock, with "Buy" stamped on the front, don't buy it. (I used to write this sort of report for hedge funds and mutual-fund investors. They're 95% worthless to most people.)
   
•   If you discovered your great stock idea on the cover of Forbes or Fortune magazine, it's already over. Don't buy it.
You don't want to buy the stock that everyone has already picked over – a stock that most other investors have already digested and acted on. Remember, a stock will only go up if there are more buyers than sellers.
 
If your broker's largest clients have already bought the stock, there's not much left for you. If it's an idea big enough to make the cover of a magazine, then it has already been acted on by countless others. And those earlier buyers will be selling to you. Being the "last buyer" of a stock is a bad place to be because there won't be anyone else for you to sell to.
 
One exception here is if you're wrong about a stock being "done." You might have some unique insight on an industry that you think everyone else knows – but in fact few people at all know.
 
So treat your own ideas with more respect (than you might otherwise) if they're from direct professional experience. And in this special case, don't assume everyone else knows what you know.
 
3) Is management on your side?
 
There's a big difference between just earning a salary – and owning the company you're working for. If a lot of your personal wealth is tied up in the success of your enterprise, you're going to work a lot harder than if you just collected a salary.
 
Few investors see it this way – but when you buy shares, you're actually buying a small portion of a company. You're not collecting a salary. You make money only if the company does well and the share price increases.
 
What you want is a management team that also has a lot of reasons – and financial incentives – to make the company grow and the share price rise. The senior management of the company should own a lot of shares of the company and should buy more all the time. If they don't, you should look elsewhere.
 
These questions are just the first steps in figuring out whether a stock is worth adding to your portfolio. But if you don't completely understand how a company makes money… if the stock already has all the exposure that it's going to get and is "done"… and if management isn't laser-focused on making the share price go up… then you should move on.
 
Regards,
 
Kim Iskyan
 
Editor's note: Recently, Kim and his colleagues at Truewealth Asian Investment Daily put together a special report to show investors what to watch for in order to protect their hard-earned money from the dangers of the market. Find out how you can receive the report right here. And if you're interested in receiving their free daily e-letter, click here.
 

Source: DailyWealth

How to Take Advantage of the Biggest Anomaly in Finance

 
It is, in my opinion, the biggest anomaly in finance…
 
Just think about how crazy this is for a second…
 
Apple, for example, trades for around US$100 a share.
 
But imagine for a moment that you could buy the identical shares today in Canada for US$70 a share.
 
I promise, there is no difference in the shares – at all. The only difference is that these shares trade on another stock exchange.
 
What would you do?
 
A smart investor would buy those Canadian-traded shares, right? A smarter investor would sell his U.S. Apple shares for US$100 and use the proceeds to buy the shares in Canada at US$70.
 
A hedge-fund manager would take it one step further… and sell short at US$100 and simultaneously buy at US$70.
 
This situation is happening right now. Some of the world's biggest companies trade on two different exchanges, at massively different prices.
 
In China, identical shares of many companies trade in Hong Kong (called "H" shares) and in Shanghai (called "A" shares).
 
In recent years, the so-called "A-H premium" soared to nearly 50%. That means you'd pay 50% more on average for the same stock in Shanghai versus in Hong Kong. It's crazy. Take a look…
 
These are some of the world's largest companies. These premiums shouldn't exist – but they do. That's why I called this the biggest anomaly in finance.
 
With the Hong Kong/Shanghai "Stock Connect" in place, it should be even easier for investors to instantly buy for $70 in Hong Kong and sell for $100 in Shanghai, so to speak.
 
I was in China earlier this month. While visiting Hong Kong and Shanghai (and Beijing), I repeatedly asked the top guys at the best firms why this premium is so crazy.
 
"Don't you agree the A-H premium will go away eventually," I asked.
 
"Of course," everyone answered.
 
"But when?" I asked. "Why does it even exist today?"
 
And that's when the stumbling started. The reality is, not a single expert gave me a decent answer.
 
Here's a common answer I heard in Shanghai: "Sometimes when your home market is doing well, you don't look outside your borders for better values."
 
That answer doesn't hold up, though… First, Shanghai's market hasn't been doing well. And second, people are surprisingly crafty when it comes to eking out a buck. If there were a way to get a $2-per-share-better deal, people would do it. A $30 better deal is crazy.
 
Here's another common answer: "Chinese market players are typically individual investors who are gamblers, gambling on our local market."
 
Again, it doesn't hold up… Gamblers are crafty, too. If there's a better way, they'll find it.
 
Right now, companies listed in China are selling for a roughly 30% premium to the identical companies listed in Hong Kong.
 
So what should you do? You should buy the Chinese companies listed in Hong Kong!
 
The simplest way to do that is through the iShares China Large-Cap Fund (FXI).
 
Get this: Three of FXI's top five holdings trade at a forward price-to-earnings ratio of just 5. That is absurdly low.
 
I wish I had a great answer for you for why the greatest anomaly in finance exists. Believe me, I tried. I heard plenty of answers – but no good ones.
 
For now, I recommend taking advantage of it… by buying Chinese companies trading in Hong Kong. FXI is the easy way to do it…
 
Good investing,
 
Steve
 

Source: DailyWealth