What's the Point of Investing?

Editor's note: This week, we're publishing a series of classic essays from Steve on how to live a rich life. Today, we conclude the series with Steve's thoughts on saving money versus spending it. This essay originally published in DailyWealth in 2008. And while iPhones have become commonplace since then, Steve's message still remains true today. (Also, the markets are closed on Monday, so we won't publish DailyWealth that day. Look for your next issue on Tuesday, January 3.)
 
"Nice to meet you Hang on a sec Let me text my husband."
 
My wife and I stood there waiting. The girl busily tapped out a text message on her new iPhone.
 
She wasn't so quick with the typing, but we knew what was going on… She was just showing off that she owned a $500 cellphone – hot stuff in rural Georgia.
 
We saw her arrive… She drove a black Suburban of some sort, with enough chrome to make a Detroit drug dealer blush.
 
She and her husband were young… probably in their late twenties. He was apparently a builder in Georgia. Of course, homebuilding in Georgia died several years ago… But even though their income must be down, their spending hadn't changed.
 
These aren't the only people out there sporting an iPhone and a blingy black Suburban. What's going on here?
 
Me? I don't have an iPhone… or a blingy Suburban… But I probably have one thing these conspicuous consumers don't: The house I live in is fully paid for.
 
I handle my money differently. I could buy an iPhone or a Suburban tomorrow. I wouldn't need a penny of debt to do it. But I won't… Why? Because I know those things won't make me the slightest bit happier. I'd be the same dolt I was before… only I'd be $50,000 poorer!
 
It took me a while to get to this point in my life. But I'm glad I made it… I'm at the point where I can buy what I want. But I don't. It's an important point to reach.
 
I don't try to keep up with the Joneses. I'm doing the opposite, actually. I'm downsizing. I'm reducing my "stuff."
 
Think about this… What good is all this stuff, really? You can't take it with you when you die… Legendary newsletter writer Doug Casey says it best:
 
"I've never seen a hearse with luggage racks."
 
Doug is extremely wealthy… and has been for a while. But he doesn't drive around a decked out Suburban, chatting on an iPhone.
 
My friend Bob Bishop is a wealthy guy like Doug. Bob wrote the excellent Gold Mining Stock Report newsletter for a few decades. He retired a couple years ago. Bob decided to sell some of his extraordinary possessions… for no particular reason that I could see. He didn't need the money. And they weren't really taking up space. I asked him why he was selling. He said…
 
"After a while, you don't own your stuff… Your stuff owns you. Steve, you're young… so you're probably in the accumulation phase. Me? I've been there. Now I want to downsize and simplify. I don't need all this stuff."
 
Bob can buy anything he wants. But, like Doug, he doesn't drive a blingy Suburban, and I doubt he's got an iPhone. It's just stuff!
 
This brings me to the point of this essay… What's the point of saving money anyway? What's the point of investing?
 
When you get older (if you're not already older!), just what are you going to buy with that money you've saved?
 
Jonathan Clements gave a good answer to this in his farewell column for the Wall Street Journal in 2008. (Clements wrote more than 1,000 columns for the Wall Street Journal.)
 
Clements says your savings "can deliver three key benefits." Even better, he says, "You can enjoy this trio of benefits even if you don't have great wads of cash." Here's how:
 
1.   "If you have money, you don't have to worry about it."
2.   "Money can give you the freedom to pursue your passions."
3.   "Money can buy you time with friends and family."
When I think about it, these three things are exactly what Doug and Bob are doing with their lives. The great thing is, it doesn't (usually) take millions of dollars to spend time with friends and family or pursue your passions. You don't need a fortune to live well.
 
But in order to get there, the Georgia-homebuilder couple needs to skip out on "his and her" bling-mobiles.
 
The quicker you grasp this about saving versus spending, the quicker you'll be able to start living like Doug and Bob… even if you don't have millions of dollars in the bank.
 
You might think it's hard to stop buying ultimately useless stuff… You might think it's hard to stop keeping up with the Joneses.
 
But actually, it is quite liberating… And even better, you'll be financially free much quicker. So give it a try…
 
Good investing,
 
Steve
 
P.S. I just released a video detailing the six best opportunities to make huge gains in 2017. And I discuss the one move you need to make before Trump takes office. Don't wait another minute… Watch this time-sensitive presentation right here.

Source: DailyWealth

You Can't Be a Millionaire. Unless…

Editor's note: Today, we're sharing the third of a four-part series from Steve on some of his most popular, timeless wealth-building tips. In this essay, he explains how one of his close friends got rich…
 
A friend of mine has a net worth that's comfortably in the tens of millions of dollars.
 
I don't know for sure, of course… It's not polite to ask. But I know of his business dealings. And I've been to his stunning house on the ocean in Palm Beach County, Florida. (A few years ago, he bought his neighbor's house – rumor had it he didn't like the dog barking next door. He connected the two properties, renovating the neighbor's house to match his own.)
 
For the last decade or so, he's spent his days doing what he wants… which, it turns out, ends up making him even more money…
 
My friend's story starts at a Dale Carnegie public speaking course maybe 30 years ago. In that course, my friend was asked to pick the one thing he'd like to achieve in life and give a speech on how he planned to achieve it.
 
My friend wanted to do so many things in life… He wanted to teach a college-level course (his father was a college professor), he wanted to write a screenplay for a movie, he wanted to appreciate art as well as any critic, he wanted to write a fiction story and have it published… The list goes on. Oh, also on the list was "make a lot of money."
 
He thought about his list. And he figured if he accomplished the last one – "make a lot of money" – then he'd have the opportunity to accomplish the other things on that list, too. So that's what he gave his speech about… how he'd get rich.
 
And so my friend set out to get rich. For years, he made that his main goal. You might not like the idea of dedicating your life to amassing wealth. (And you don't need a fortune to live well.) But it worked for my friend… And it worked for Felix Dennis.
 
Recently, I read one of the best books ever written on getting rich. It's Felix Dennis' How to Get Rich.
 
Unlike most of the writers of self-help books, Dennis is actually very rich. And unlike most self-help writers, he didn't make his money pitching self-help seminars or DVDs. Instead, he made hundreds of millions of dollars publishing magazines like Maxim.
 
In short, he didn't need to write How to Get Rich. But I'm glad he did. It is brutally honest and filled with wisdom. You should read it with a highlighter in hand. Like my friend, Dennis set out to get rich. He makes no bones about it… which makes reading this book refreshing.
 
As Dennis says, getting rich isn't easy to do, and most people won't even try. People as rich as Dennis are rare. Few people as rich as Dennis have actually tried to put down on paper, for the layman, the legitimate secrets of getting rich. Dennis did, and did it well.
 
At DailyWealth, we have spent lots of time with many hugely rich entrepreneurs… We have heard the stories of how they got to where they are now… We've heard their insights. No book we're aware of captures those insights as well as this one.
 
Are you capable of becoming rich? Are you willing to make it your goal now, so you can later conquer all your other dreams like my friend and Felix Dennis?
 
Read How to Get Rich and find out…
 
Good investing,
 
Steve
 
P.S. I just released a video detailing the six best opportunities to make huge gains in 2017. And I discuss the one move you need to make before Trump takes office. Don't wait another minute… Watch this time-sensitive presentation right here.

Source: DailyWealth

Is That a Legitimate Shot at a 200% Gain? Or Just a Headache?

Editor's note: This week, we're sharing some of Steve's best tips on living a richer life. Today, he explains how to decide whether that next business deal is worth your trouble…
 
"Steve, you've got to think of every one of these deals as buying another headache Do you really want THIS PARTICULAR headache?"
 
My friend Brad Thomason gave me that advice a few years ago, and it stuck.
 
I'd asked him for his advice… I was interested in a tiny property-investment deal that I thought was a "slam dunk." I called Brad for his advice because he sizes up thousands of potential property deals similar to this one each year.
 
Based on Brad's advice, I didn't make the deal. And I'm sure glad I didn't…
 
If I'd made the deal, I would have been taking on a big headache that, in the long run, really wouldn't have been worth it…
 
While the return percentage would have been high, the actual dollar return wouldn't have been that high – particularly considering the amount of time and effort I would have needed to put in.
 
And that's the crucial point.
 
I've repeated Brad's advice to myself ("Do you really want THIS PARTICULAR headache?") many times since then… And I've kept myself headache-free.
 
Last year, Brad and I met up on the courthouse steps of a county auctioning off distressed real estate.
 
Dozens of properties were being sold… But we didn't bite on anything. The best property sold had a tax-assessed value of $266,000 – and it ended up selling for $40,000.
 
Buying a $266,000 property for $40,000 sounds like a good deal to me. It seems like I could have potentially made a 200% return on that property.
 
Brad didn't bid on it. And he didn't lose any sleep over it. In his case, he didn't need THIS PARTICULAR headache. That deal would have been a small one for his business. It was nowhere near his office or any of his other operations. So he decided he didn't need to spin his wheels on it.
 
I thought it showed restraint and judgment on Brad's part… He could have made a big percentage return on his investment. But for his actual business, it wouldn't have been that big a dollar return, relative to the time and effort required. So he passed.
 
The best investors and businesspeople I know fully understand this idea, and they use it every day. They know which particular headaches are worth taking on.
 
I remember a publisher in my industry telling me (more than once), "Steve, that's a good idea… But since it won't make $500,000, we can't spend our time on it."
 
He wasn't being arrogant or condescending… He is simply a keen businessman. He understands the value of his time and the value of his employees' time. This publisher had the restraint and judgment to know it was better to either improve my idea or find a bigger one, rather than waste time on a smaller idea.
 
I also worked for a billion-dollar New York hedge-fund manager, and he understood this concept. My marching orders were simple: Find any investment idea that can potentially make a profit of $25 million or more.
 
Easier said than done! But thanks to this mandate, the fund manager didn't end up with 1,000 little investment ideas to watch. Instead, he ended up with a couple dozen ideas that he got to know REALLY well.
 
The point is, just because an investment could make you a big return, doesn't mean you should do it.
 
Remember that each business deal or investment you enter into is another "headache." It will require effort to monitor and move forward. You have to ask yourself if this is the particular headache you want.
 
Brad passed on the $40,000 deal. That will keep his head and his time clear for a larger property deal closer to his home – one that could net his fund $1 million-plus in profits over a couple years. One that he's excited about.
 
I saw the publisher I wrote about pass up on certain profits as well. They both were smart to do it…
 
The best investors and businesspeople I know have a remarkable ability to say "no" to many likely profitable ideas, simply because they're not worth the headache.
 
Once you take on this mindset, you'll find that deals that are actually worth your time and hassle are rare. You'll learn to take on projects only when they're really worth it… And you'll have the energy to make those deals count.
 
Good investing,
 
Steve
 
P.S. I just released a video detailing the six best opportunities to make huge gains in 2017. And I discuss the one move you need to make before Trump takes office. Don't wait another minute… Watch this time-sensitive presentation right here.

Source: DailyWealth

How to Become Friends With Your Heroes

Editor's note: Regular DailyWealth readers know we typically focus on safe and unconventional ways to invest. But the holidays are a great time to think about how to live a richer, fuller life.
 
So this week, we're running a series of classic essays from Steve that cover different perspectives on "the rich life" and how to achieve it. Today, Steve explains how he has had the opportunity to work with some of his heroes…
 
"You're so lucky Steve You've gotten to meet and work with all these famous guys…"
 
When I hear that, I usually say something like, "Yeah, it's hard to believe I have been pretty fortunate!" And I leave it at that.
 
But the truth is much different… It's NOT luck. It's NOT good fortune.
 
There's a secret to doing what I've done. And I will share it with you today…
 
Maybe there is a bit of "luck" involved… But it didn't happen without me putting myself in luck's line of fire. Let me give you an example of what I mean…
 
A while back, I knew I was going to have the chance to shake hands with one of my heroes.
 
When I met him, I could have just said, "Uh, gee, it's nice to meet you. I'm a big fan." But that would have been a missed opportunity.
 
Instead, I spent a few days thinking before I met him… I came up with a plan to make an impact – to give him a chance to want to get to know me…
 
I got out a 3-by-5 note card. And I wrote out what I called "12 Ways to Take Over Your Industry." I included my name, phone number, and e-mail address. When I shook his hand, I smiled and handed him the card. And that was that…
 
He could have easily thrown the card away. He could have thought, "Who is this joker?" He could have taken my suggestions… but still never bothered contacting me. For any number of reasons, he could have ignored me.
 
Instead, he reached out to me… In the end, he tried all of my dozen ideas, except one. Now, when he wants a second opinion on something (outside of his corporate yes-men), he sends me an e-mail or gives me a call. And he has included me in events around the world and decisions that I've been grateful and flattered to be a part of.
 
The best part to me is that I can call a hero of mine a friend as well.
 
That didn't happen because I'm "lucky." It happened because of a simple secret. There are two parts to it:
 
1.   Whenever there is any moment – any crack in the door to put your foot in to meet your hero – you must shove your foot in… and not let it out.
   
2.   You must find a way to give a big benefit to your hero without asking for anything in return.
Then you're off… At that point, you have done your best to kick off a potential legitimate friendship.
 
I often had to create these moments. Usually, they don't just happen.
 
For example, a few years ago, I ended up on the phone with another hero of mine. He said: "Next time you're in Nashville, give me a call and we can get together." Look, I'm NEVER in Nashville… But I went to Nashville that week. (I re-routed a flight to have a long layover there.)
 
I made it happen when the opportunity was there. And it was a fantastic few hours. Another hero of mine is now a friend of mine, too.
 
Most of the time, it doesn't work out this way. But it's 100% worth trying… Your downside risk is a little wasted effort. Your upside is a legitimate friendship with one of your heroes. That's worth it to me!
 
You can do it. You have to get creative to create the opportunity. You have to offer something that benefits your hero. And you have to do it without asking for anything in return.
 
You have to create your "luck."
 
It has worked for me. I have been able to get close to many of my heroes – both in business and in my hobbies. And I believe it can work for you, too…
 
How cool is it to have your heroes as your friends? Just follow these tips, figure out your opportunity, and go for it… You can do it…
 
Regards,
 
Steve
 
P.S. I just released a video detailing the six best opportunities to make huge gains in 2017. And I discuss the one move you need to make before Trump takes office. Don't wait another minute… Watch this time-sensitive presentation right here.

Source: DailyWealth

We Could See LOWER Interest Rates in Early 2017

 
"It's finally behind us. We've finally seen the bottom in interest rates."
 
How many times have we heard that before? How many times have experts "called the bottom," only to see rates fall once more?
 
It's happening again today…
 
Interest rates soared in recent months… to a multi-year high. Most people expect that trend to continue.
 
But chances are good that long-term interest rates will fall, not rise, in 2017.
 
Let me explain why…
 
Long-term interest rates have been falling for decades. Ten-year U.S. government bonds paid roughly 5% in interest a decade ago. Today, they pay around half that.
 
Despite the long-term downtrend, most people are convinced that rates will head higher from here. They think we've seen the ultimate bottom.
 
Folks said the same thing three years ago. Interest rates bottomed in the summer of 2012 at around 1.5%. They doubled to around 3% by the end of 2013.
 
Hitting 1.5% had to be the ultimate bottom in rates, right?
 
Wrong.
 
It was wrong back then for the same reason it's likely wrong today: Most people believed it.
 
This is the crux of using sentiment in investing – when everyone believes in one outcome, the opposite tends to happen.
 
That is what's happening in the government bond market today. We can see this by looking at where the real-money bets are right now. And we can see them through the Commitment of Traders (COT) report.
 
The COT report shows the real-money bets of futures traders (the "smart money"). Right now, the smart money is betting on lower rates… which is exactly what we saw in 2013. Take a look…
 
The smart money expects higher bond prices (which means lower interest rates).
 
You can see that the COT reached a similar top at the end of 2013. And 10-year government bond rates then fell from around 3% to below 2% over the next 13 months. They eventually reached a new all-time low this summer.
 
Will we see a new all-time low in the coming months or years? I don't know. But that's not important. What's important is that everyone expects higher rates to continue.
 
Today, the trade of betting on higher long-term interest rates is crowded… And when a trade gets this crowded, the opposite tends to happen.
 
That's why we could see long-term interest rates fall – not rise – in early 2017.
 
Good investing,
 

Steve Sjuggerud

 
P.S. Falling interest rates are just one of my big predictions for 2017. I recently gave an exclusive interview about five other huge opportunities for next year under a Trump administration. If you want to know exactly what to buy now, I urge you to watch this free video right here.

Source: DailyWealth

Ten Attributes of Great Fundamental Investors, Part II

 
In yesterday's essay, I introduced you to Michael J. Mauboussin, a prominent value investor, author, and longtime adjunct professor at Columbia University.
 
Mauboussin estimates he has devoted two-thirds of his 30-year investing career to thinking and writing about the investment process. Last summer, he condensed those two decades of insights and analysis into an essay titled "Reflections on the 10 Attributes of Great Investors."
 
Yesterday, we reviewed five of those attributes. Today, we'll explore the remaining five…
 
6. "Beware of behavioral biases (minimizing constraints to good thinking)."
The way we think and feel directly affects our investment behavior and "biases" our decision-making process. Robert P. Seawright, a successful money manager and author, considers what I've summarized below to be some of the most common behavioral biases for investors:
 
•   Confirmation Bias: It's a tendency to reach a conclusion first, then gather data that "confirm" this preconception.
 

•   Loss Aversion: Investors are twice as likely to be influenced by the pain of a loss than the enjoyment of a gain. This favors inaction over action, even when the facts suggest otherwise.
 

•   Choice Paralysis: Information overload fosters indecision.
 

•   Herding: Following the crowd, even if the facts suggest you shouldn't. Warren Buffett refers to this as the "institutional imperative," a tendency of money managers to follow the actions of their peers, even when it makes no sense.
 

•   Recency Bias: Notable short seller and money manager Scott Fearon calls this "historical myopia," a tendency to assume the recent past is a better predictor of the future than the distant past.
 

•   The Bias Blind Spot: This is our inclination to believe we aren't susceptible to the preceding behavioral biases that plague everyone else.
Mauboussin believes great investors are generally less affected by these behavioral biases because they acknowledge the existence of these biases, learning how to cope with them. They create a working (investing) environment that helps them "think well."
 
7. "Think probabilistically (there are few sure things)."
The late Amos Tversky was a brilliant mathematical psychologist and author of highly regarded works on behavioral economics. Philip E. Tetlock, in his excellent book, Superforecasting: The Art and Science of Prediction, recalls Tversky telling him that most people only have three probability settings: "gonna happen," "not gonna happen," and "maybe."
 
If you aspire to investing greatness, this three-setting dial won't cut it. As Mauboussin says, superior returns come from constantly seeking an edge "where the price for an asset misrepresents either the probabilities or the outcomes."
 
Superforecasters – a group of ordinary folks who consistently out-forecasted their peers in the U.S. intelligence community – routinely demanded far greater granularity of themselves. The lesson they teach us is this: Your edge comes from digging so deeply into the problem at hand that you understand the finer-grained issues – and how they're likely to influence the outcome.
 
8. "Update your views effectively."
Mauboussin says great investors do two things that most of us do not: 1) They seek out information and/or views different from their own, and 2) they update their beliefs when the evidence suggests they should.
 
As he puts it: "Beliefs are hypotheses to be tested, not treasures to be protected."
 
9. "Position sizing (maximizing the payoff from edge)."
It's easy to forget that there are two aspects to superior returns: finding an edge, then exploiting it with proper position sizing.
 
If you develop a strong conviction for a particular investment but don't size it accordingly, you're not maximizing the potential payoff from your edge. That's why, in Extreme Value, we recommend subscribers allocate higher proportions of capital to our highest-conviction picks.
 
10. "Read (and keep an open mind)."
Berkshire Hathaway's Charlie Munger says it best: "In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time – none, zero."
 
Many successful people make reading a priority. If you aspire to investing greatness, you should, too.
 
Every investor, novice or pro, should aspire to realize Mauboussin's 10 attributes. If you aspire to be a great fundamental investor, consider this your trusted playbook.
 
Good investing,
 
Mike Barrett
 
P.S. If you want to invest like a pro, grab a copy of my colleague Dan Ferris' book, World Dominating Dividend Growers: Income Streams that Never Go Down. In it, you'll learn why certain companies are incredible income investments… how to identify them… and how they can produce safe, double-digit annual income streams. Buy your copy here.

Source: DailyWealth

Ten Attributes of Great Fundamental Investors, Part I

 
"Trust the process."
 
That's what highly regarded Florida State University football coach Jimbo Fisher tells his players, over and over again. Trust the system we've created here. Learn it, and you'll be successful.
 
Fisher is a brilliant gridiron tactician who has built a first-class, state-of-the-art training and development system. My nephew is a redshirt freshman on this year's team… And he has nothing but high praise for "the process," which is drilled into them during daily six-hour practice sessions.
 
A superior process and greatness often go hand in hand in athletics. This is also true for investing.
 
Serious investors would be wise to learn to trust the process that generates winning investment results…
 
I'm referring specifically to the process recently laid out in "Reflections on the 10 Attributes of Great Investors," an essay by Michael J. Mauboussin. He's a prominent value investor, author, and longtime adjunct professor at Columbia University.
 
Investors seeking a winning process they can lean on day after day should consider Mauboussin's list an early holiday gift. Today, I'd like to review the first five of Mauboussin's 10 attributes.
 
1.   "Be numerate (and understand accounting)."
You don't have to be a savant or an accountant to be a successful investor. You do, however, need to be comfortable with numbers to find companies worthy of your investment capital.
 
Mauboussin says the first goal of your analysis should be to "translate financial statements into free cash flow." That's what's left after you subtract capital investments from cash earnings.
 
Ultimately, free cash flow ("FCF") is the precious capital that management has at its disposal to enhance shareholder returns (dividends or share repurchases) without jeopardizing the company's future value-creation prospects. That's why it's far more important than net income. As regarded economist Alfred Rappaport likes to say, "Cash is a fact, profit is an opinion."
 
2.   "Understand value (the present value of free cash flow)."
Great fundamental investors never forget that a business' intrinsic value is the present value of all of its future FCFs. That's why they're just as concerned about cash-flow sustainability as they are about magnitude.
 
Half a century ago, legendary value investor Warren Buffett knew he had found a winner in insurance agency Geico because its hard-to-duplicate low-cost business model ensured annuity-like FCFs that would continue through today.
 
When you're evaluating a company for the first time, ask yourself: Does the company consistently generate FCF year after year, even during difficult economic periods? When the answer is yes, it's a business you definitely want to learn more about.
 
3.   "Properly assess strategy (or how a business makes money)."
Mauboussin says great investors can clearly explain how a company makes money, can grasp any changes in what drives its profitability, and will never own a company's stock if they don't understand these crucial factors.
 
In other words, there's absolutely no shame in keeping it simple. If you don't understand how a business makes money, move on to the next one.
 
4.   "Know the difference between information and influence."
Mauboussin says it best…
 
Great investors don't get sucked into the vortex of influence. This requires the trait of not caring what others think of you… Success entails considering various points of view but ultimately shaping a thesis that is thoughtful and away from the consensus. The crowd is often right, but when it is wrong you need the psychological fortitude to go against the grain.
 

5.   "Compare effectively (expectations versus fundamentals)."
Mauboussin believes that what really separates great investors from everybody else is their skill at comparing a given company's "fundamentals" (i.e. sales growth, profit margins, capital structure…) with the "expectations" implied by its stock price.
 
Rather than attempting to estimate how future FCFs might look over the next decade for a given company, the idea here is to estimate the level of growth currently baked into the stock price, then correctly anticipate any changes that aren't yet fully reflected in that price.
 
Buying a stock before other investors recognize the disparity creates the opportunity to earn a superior return.
 
It's also important to keep in mind that great businesses with bright, long-term outlooks don't always deliver superior returns. That's because the lofty growth expectations are already baked into the stock price.
 
For instance, if a business is likely to grow 20% per year for the foreseeable future, but investors have pushed its share price so high that said growth is already reflected in the stock price, you're destined for modest investment returns (or worse) – unless the company can somehow accelerate growth expectations even higher.
 
In short, as Mauboussin sees it, those aspiring to investment greatness must become adroit at comparing a company's fundamentals with the expectations implied in its stock price. Superior returns await those who do.
 
Tomorrow, in Part II, we'll review Mauboussin's remaining five attributes of great fundamental investors. Until then…
 
Good investing,
 
Mike Barrett
 
P.S. If you're interested in improving your investment knowledge, be sure to check out my colleague Dan Ferris' book, World Dominating Dividend Growers: Income Streams that Never Go Down. In it, you'll learn why certain companies are incredible income investments… how to identify them… and how they can produce safe, double-digit annual income streams. Get your copy here.

Source: DailyWealth

A Big Warning Sign on Stocks From One of Our Top Indicators

 
Uh-oh…
 
For years, I've been extremely bullish on the stock market. And I still am, over the next year or two.
 
However, in the short term, one of our top indicators is giving us a big warning sign…
 
This indicator tells us that the stock market is getting "overly loved" by investors – and this is a bad thing.
 
You see, typically when a market gets "overly loved," it often struggles to rise (at best) or even falls (at worst) over the following three months or so.
 
Let me explain…
 
"Overly loved" is not a technical term, of course. It's a simplified way of describing investor sentiment…
 
If you've read my writings in the past, you know that I want to buy an investment when it's HATED.
 
(For example, you would have wanted to buy U.S real estate in 2011, when it was hated, as opposed to 2007, when it was loved.)
 
One of our favorite indicators for whether an asset class is hated or loved is what's happening with the "shares outstanding" of exchange-traded funds (ETFs).
 
When investors get excited about an asset class, money flows into its ETFs. When a LOT of money flows in, those ETFs have to create more shares. And this is where the problem comes in right now…
 
"In the past few days, we've noted that several of the major-index ETFs have taken in their largest daily inflows of the year," my friend Jason Goepfert of SentimenTrader.com wrote this week. That includes the funds that track the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the Nasdaq-100 Index (QQQ)…
 
SPY, DIA, and QQQ all saw one-day records in the past couple of days. On Thursday, IWM [which tracks the Russell 2000 Index] nearly joined them, taking in almost $1 billion, not quite its best inflow so far this year.
Jason explained that the shares outstanding in all of these major ETFs "have seen rapid growth in the past week. The past several weeks, actually. Over the past 30 days, the funds have grown their shares outstanding by more than 13%, the second-fastest pace of the bull market."
 
What does this tell us? Jason gives us the answer:
 
When the funds have seen such rapid growth over a compressed period since 2010, the broader market has tended to struggle in the short term.
While the market could struggle in the near term based on this indicator, Jason normally sees this indicator as most valuable for finding market bottoms, as opposed to market peaks…
 
The number of shares outstanding tends to be a better contrary indicator when there is a sharp, severe decline in shares as opposed to an increase. In other words, it's a better gauge of excessive pessimism than optimism.
Still, it's a warning sign that the market could struggle in the next few weeks, or even months.
 
I don't think this means we're at the end of the great bull market. I don't think it's time to sell everything and batten down the hatches. To me, this probably means that we're near the end of the Trump rally… that it's time for the Trump optimism in stocks to burn off.
 
Stocks will likely take a break and let all of this investor optimism wear off a bit… before the bull market resumes in full again.
 
Good investing,
 
Steve
 

Source: DailyWealth

One Reason Oil Prices Could Soar to $70 in 2017

 
The price of oil is up 22% over the last month. More than 9% of that return came in just one day.
 
That's crazy! After a move like that, oil must be due for a breather, right?
 
History tells a different story… one that's far more interesting…
 
In short, larger gains are possible. We could see $70-a-barrel oil over the next year. And 41% gains are possible over the next two years, based on history.
 
Let me explain…
 
Oil prices have been all over the place in 2016.
 
They were in the $20s at the start of the year. They then nearly doubled… And they have bounced around at less than $50 since.
 
Until the recent breakout, at least.
 
Oil jumped 9% in a single day. And it's up 22% over the past month. That's a major breakout. Take a look…
 
What caused this incredible return?
 
OPEC – the global oil cartel – recently announced it would cut global oil production. And that dramatically changed the supply-and-demand outlook for oil.
 
History says it could mean much higher oil prices, starting now.
 
OPEC's ability to control oil's price isn't what it used to be. But the organization still makes up roughly one-third of the global oil market share… And it controls more than 80% of the world's proven crude-oil reserves (based on OPEC's 2015 estimates).
 
OPEC has only cut its production a handful of times since 1998. But as the table below shows, production cuts usually lead to higher oil prices. Take a look at the returns…
 
 
6-Month

1-Year

2-Year
After OPEC Cut
6.9%
31.5%
41%
All Periods
3.2%
6.4%
13.3%
OPEC's production cuts don't happen often – only 14 other times since 1998. But oil prices generally soared after these cuts…
 
We've seen average one-year gains of 31.5% and average two-year gains of 41%.
 
A 31.5% gain from here means oil prices would hit $70 sometime next year. And a 41% two-year gain would put oil around $75 a barrel.
 
That might seem like a crazy move higher. A $75 price is roughly triple the low we saw earlier this year… But it's completely possible, based on history.
 
The facts here are simple… OPEC agreed to make production cuts. And oil staged a major breakout as a result.
 
If history is any guide, we should expect much higher oil prices next year. And 41% gains are possible over the next two years.
 
Good investing,
 
Brett Eversole
 

Source: DailyWealth

How Much Risk Are YOU Willing to Take?

 
Investing isn't a one-size-fits-all process. Everyone does it for different reasons.
 
And your personal goals have a lot to do with how you decide to manage your investments.
 
You could be looking to earn enough money in the stock market to send your child to college in 10 years. Or you might want to position yourself to make huge gains from a major macro event that you believe is on the horizon.
 
Maybe you want to protect yourself against economic calamity. Maybe you just want to continue to generate steady income to maintain your current lifestyle.
 
Your decision-making process and the risk-management strategies you use will be completely different in each of the above scenarios. It's important to realize that your goals matter. The more you understand your own goals, the more likely you are to achieve them.
 
And consistently achieving the goals you set will make you a successful investor…
 
Let's face it, no stock purchase will ever be risk-free… Taking risks gives investors opportunities to succeed. But different stocks have different levels of risk… And those levels can vary dramatically. So how much risk is the right amount? Again, there is no one-size-fits-all answer. It all depends on your level of risk tolerance.
 
Risk tolerance is how much exposure to loss you're comfortable with. It's how much you can afford to lose in pursuit of a big payoff… and how long you can wait to get paid.
 
The amount of risk you take can determine how quickly you meet your goals… or whether you even meet them at all. If your goals involve a short time frame, playing it safe might not be good enough. But for someone with more modest goals and a couple of decades to work with, the "slow and steady" approach could be smarter.
 
Start by taking a look at your investing goals. Can you reach your goals by gradually growing your money over a long period of time? Or do you have lofty goals that require big gains quickly?
 
Also remember that different portfolios can handle different levels of risk. A large and carefully diversified portfolio can usually rebound from a loss due to a risky investment, while a smaller portfolio could be destroyed by too many risks or even one big risk.
 
Consider, for example, two portfolios – one with $25,000 and one with $250,000. Now, let's look at how different levels of losses could affect each of them:
 
Amount Lost
Percent of
$25,000 Portfolio
Percent of
$250,000 Portfolio
$1,000
4%
0.4%
$2,500
10%
1%
$5,000
20%
2%
$10,000
40%
4%
Losing $5,000 in the $25,000 portfolio would be devastating. It would cost you one-fifth of your savings. But a $5,000 loss in the $250,000 portfolio would only be 2%.
 
It's a simple example. But it's an important one to keep in mind. And it's exactly why position sizing is so important to you as an investor.
 
What is position sizing? It's the idea that you put the right amount of money into your investments relative to your total portfolio size. It's a challenging concept to grasp, though, because you have to think about something that most people don't want to think about: how much you're willing to risk losing on any single investment.
 
A good rule of thumb is to risk no more than 4% or 5% of your entire portfolio on any one idea. If you're risking 4% of a $25,000 portfolio, you're limiting your potential loss to $1,000 on each investment. If you're risking 4% of a $250,000 portfolio, then your potential loss would be $10,000 per investment.
 
Now, let's see how using a trailing stop will limit your losses. A common strategy to follow is the 25% rule. It's simple: Sell if your investment drops 25% from its highs.
 
Let's go back to the $25,000 portfolio. If you're willing to lose $1,000 on each investment and you're using a 25% trailing stop, how much money should you invest in each position? The answer is $4,000. If your $4,000 investment falls 25%, you will have lost $1,000 – or 4% of your $25,000 portfolio. That's far less devastating than the earlier example, where a $5,000 loss would cost you 20% of your $25,000 portfolio.
 
Again… investing isn't a one-size-fits-all process. An experienced investor with a good track record of success and a large portfolio can afford to take a larger position size. But if you're just starting out, you likely can't do that.
 
Decide what your individual investing goals are. Then figure out the amount of risk you're willing to take in each investment. Use that amount to determine how much money you should put into each position.
 
Regardless of your goals, losing too much of your money when you're just getting started in investing is a surefire way to ruin your financial future.
 
If you know your risk tolerance, you'll be able to confidently make the right decisions with your money… and give yourself the tools you need to successfully grow your portfolio.
 
Regards,
 
Dr. Richard Smith
 
Editor's note: Earlier this week, Richard showed investors how to collect thousands of dollars of unclaimed money on every stock you own. And for a limited time, he's making DailyWealth readers an incredible offer. Learn more here.

Source: DailyWealth