How to Diversify With Four Unique Real Estate Investments

If you want to profit from real estate stocks, you need to know one important thing…
Not all real estate stocks are the same.
Some real estate stocks offer growth… Others offer value… And others offer income.
Different real estate stocks also present different risk/reward profiles. At one end of the spectrum, we have stable, low-volatility, income-generating investments… At the other end, we have speculative growth plays… And in the middle, we have everything in between.
As an investor, this gives you the flexibility to structure your real estate portfolio in a way that suits your preferred risk/return profile. And it allows you to diversify.
So let's go over the four different types of real estate stocks…
     1. Developers
These property companies are like manufacturers. They buy raw material (land), they manufacture (build), and then they sell the completed product.
This is a buy-and-sell model. It's all about buying land, building, and selling… then repeating the process all over again. The faster and more efficiently a company can do this, the more profitable it can be.
Pure developers all have certain characteristics… Their businesses are highly cyclical, as are their earnings. They have the highest asset turnover of all property models – that is, they don't hold on to assets for long periods.
And in many markets, these stocks have a high beta. That means that they tend to go up and down at a greater rate than the overall market. So investors should be ready to stomach higher volatility.
     2. Investment-property companies
This group typically buys or builds properties to hold for longer-term rental income and capital growth.
Their rentals and capital values can be cyclical. But their earnings are more reliable than those of developers, because they come from regular rent payments.
Finally, these companies typically have low asset turnover (they hold on to assets for long periods), and therefore a lower return on equity or return on capital.
     3. Real estate investment trusts (REITs)
These real estate companies follow specific rules dictating what they can do and how they behave.
REITs hold investment properties for the long term. The law requires them to pay out at least 90% of their net income as dividends to their shareholders.
In most jurisdictions, these companies can only undertake a set amount of development. And some places set maximum "gearing" (borrowing) levels, or allow REITs to hold only properties in certain jurisdictions.
Such vehicles are designed to provide a low-risk, high-dividend asset class for investors in real estate…
Earnings and dividends tend to be predictable and have low volatility. However, earnings growth tends to be low (since it is largely based on rental growth), along with return on equity.
REITs also tend to have a lower beta. Their shares typically go up less than the overall market, but they also go down less in a falling market.
     4. Real estate services, suppliers, and contractors
This group includes real estate agencies, property-management companies, real estate finance companies, construction companies, and building-materials suppliers.
Many banks have a high proportion of their total loan books allocated to real estate of one kind or other – including real estate services, such as materials and equipment suppliers. (For example, in Asia, many banks have had more than 50% of their loan books exposed to real estate at various times.)
Now we've gone over the four main types of real estate stocks. You may have good reasons to focus on one type over another, depending on what's going on in the market…
For example, in an environment of low interest rates, investors usually start searching for low-risk yields. In some markets, that demand has led investors to REITs… Their dividend yields tend to be substantially higher than interest on bank deposits or bonds.
Or consider this… Housing development slowed dramatically in many countries in the immediate aftermath of the 2008 global financial crisis. As demand for housing came back on line with the economic recovery, it was met with a shortage of new supply. So developers were needed to fill the gap… which increased their prospects.
Rapid growth in populations or exports can also increase the demand for new housing, buildings, or manufacturing centers… another positive tailwind for developers.
So before you invest in real estate stocks, consider the risks, rewards, and what's happening in the market.
Good investing,
Peter Churchouse
Editor's note: Peter believes real estate could be the No. 1 investment of the next decade… which is why he's releasing a new special report on his favorite real estate stocks to own today. To learn how you can access these five recommendations – along with a free trial of Steve's flagship True Wealth newsletter – click here.

Source: DailyWealth

Why a Great Economy Means Bad Stock Returns

In tonight's State of the Union address, President Donald Trump will surely brag about today's low unemployment rate.
He has good reason to be excited about the economy…
Today's unemployment rate is 4.1% – the lowest we've seen since the dot-com era, when it bottomed at 3.8% in April 2000. And it's nearly the lowest we've seen since 1970.
But here's the important part for us as investors – the part that most people don't realize:
A great economy is typically bad for the stock market going forward
To start with one example… Did you notice when I said the unemployment rate last bottomed at less than 4.1%?
It was April 2000 – one month after the dot-com bubble burst. The Nasdaq Composite Index went on to lose nearly 80% of its value.
"But that's a one-time occurrence, Steve," you might say. "You can't possibly tie a good economy to a bad stock market because of that one occurrence."
Good point. So let's take a look back at history…
Let's look back over the past 70 years to see how stocks performed each time the unemployment rate was less than 4.5% (remember, it's 4.1% today)…
Unemployment Rate
One-Year Return
Less than 4.5%
All periods
Greater than 7%
The results are, frankly, amazing…
If you bought stocks when the economy was in bad shape (when unemployment was 7% or higher), you would have made double-digit returns on average 12 months later.
On the flip side, if you'd bought stocks when the economy looked great (when unemployment was 4.5% or less), your stocks would have performed terribly, barely returning more than 1% after one year. Ouch!
When you tighten the data up to more recent times – since 1985 – the results become even more extreme. Take a look…
Unemployment Rate
One-Year Return
Less than 4.5%
All periods
Greater than 6.5%
You would have lost 3.7% one year after the economy looked as great as it does today.
And when the economy looked bad, you would have earned 13.2% in stocks over the following year.
I'm not suggesting that you use the unemployment rate as a stock market timing indicator… I just want you to be careful when you hear a politician crowing about the economy…
A good economy is not actually a great thing for investors, looking ahead.
As an investor, you want to load up on an investment when times look particularly bleak. And you want to get ready to sell when times look particularly rosy.
Why does this happen? Typically, when the economy starts overheating, the Federal Reserve steps in and raises interest rates to slow it down again. The Fed has already started down this road today.
My friend, we are having fun and making money here in the "Melt Up"… And I do expect these Melt Up gains to continue this year.
But looking ahead, be aware – the Fed is raising interest rates, and we are getting much closer to "rosy" than "bleak" times in the economy.
Trade accordingly…
Good investing,

Source: DailyWealth

This 'Easy' Decision Could Sink Your Portfolio

When you buy a stock, how do you decide how many shares you'll buy?
Most people don't have a clue how to do this. But it's something you have to get right – it's crucial to your investing performance…
So seriously, what's your process for determining how much of a stock you'll buy?
Do you say something like this?
Well, the stock is trading for around $5 a share, and I want around $5,000 of it, so I'll buy 1,000 shares.
Or are you more like this?
I want EXACTLY $5,000 invested in this stock, just like when I buy all my other stocks – so I just divide $5,000 by the current stock price. In this case, I have to buy 987 shares.
If either of these is your "process," then how did you decide on $5,000 for the position?
What makes $5,000 the "right" amount?
You have a reason, I'm sure… For example, maybe you have $100,000, and with 20 stocks in your portfolio, you divide it up equally.
That's a fine answer… But why do you divide it up equally?
Is that the best way?
Have you ever sat down and thought about this?
For example, should you have the same $5,000 in gold stocks as you do in a boring bond fund?
If you did this in the second half of 2016, your portfolio would have been crushed.
Investing $5,000 in each position sounds like a plan… But it's actually just "winging it." And the results can be disastrous.
So what is "right"?
This is THE important question… We've touched on it before. But it's too big a question to fully answer here in a short DailyWealth essay.
However, I talked in-depth about one of the best answers we've found during a special webinar last week…
I met up with my colleagues Porter Stansberry and Dave Eifrig – and we discussed a unique service we've set up to help you master this process. It's called Stansberry Portfolio Solutions. And it's designed to help you start investing like a pro… because you'll know the exact number of shares you should buy for every recommendation.
You'll maximize your opportunity. You'll allocate appropriately. You'll follow a stop-loss discipline. You'll finally learn how to "get there" with your investments.
If you missed our discussion last week, click here to watch the video replay now.
Good investing,
Editor's note: Smart asset allocation is one of the most important steps to building wealth. But our Stansberry Portfolio Solutions service goes even further…
It collects the investing ideas that Steve, Porter, and Dave agree could help you safely make the biggest profits in 2018. You'll receive nearly all their most successful research – at a huge discount. And with three model portfolios to choose from (including the one that beat the market last year), it's your best chance to take your investing strategy to the next level. Click here for more details.

Source: DailyWealth

The Biggest Winners From Trump's New Tax Law

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 The surge continues for banks and financial stocks…
Since President Donald Trump's election in November 2016, the financial sector – as tracked by the Financial Select Sector SPDR Fund (XLF) – has crushed the overall market. As you can see in the following chart, financials have gained almost 50%, compared with a little more than 30% in the S&P 500 Index…
These companies have benefited from an improving regulatory environment and rising interest rates. This trend likely has further to run… But you may not realize it by recent headlines in the financial media. You see, many of these firms reported big profit declines this month as fourth-quarter earnings season kicked off…
For example, JPMorgan Chase (JPM) reported earnings of $4.2 billion, compared with $6.7 billion in the fourth quarter of 2016. Bank of America (BAC) said earnings were nearly cut in half, from $4.5 billion to $2.4 billion. Goldman Sachs (GS) lost $1.9 billion, compared with a net profit of $2.3 billion. And Citigroup (C) suffered a massive $18.3 billion loss – one of its largest quarterly losses in history – versus earnings of $3.6 billion last year.
All told, the financial sector reported a $29.2 billion quarterly decline in net profit, according to market-data firm FactSet Research Systems (FDS). And it was the only sector in the S&P 500 to suffer a year-over-year decline in earnings last quarter.
 What's going on here?
It has to do with Congress' new tax law. First is something called "deferred tax assets."
During the financial crisis, banks suffered massive losses from bad bets on mortgages and other debt instruments. While these losses were terrible for shareholders at the time, there was a "silver lining" of sorts… Under U.S. tax law, the banks could convert those losses into credits to offset gains and lower their taxes in the future.
As we've discussed, the new law slashed the corporate tax rate from 35% to just 21%. This is good news for most U.S. companies, including financials. But it has an unusual consequence for these firms…
Because the top corporate rate is now significantly lower, the value of those tax credits is now lower, too. According to generally accepted accounting principles, these firms are required to write down the value of these credits, creating a "loss" in the process. As Bloomberg columnist Matt Levine explained last week…
Oh sure if you look at Citi's financial statements, you will see $23 billion of taxes, but it is not like Citi wrote a check to the Internal Revenue Service for $23 billion in December.
Instead, most of that number came from an abstract adjustment to an abstract accounting notion: Citi lost a bunch of money in the past, and it can use those losses to offset its taxable income in the future, and it treats those future offsets as an asset (a "deferred tax asset") on its balance sheet, and when the recent Tax Cuts and Jobs Act reduced the corporate tax rate, the value of those offsets went down, and so Citi had to write down that asset. Even though Citi's future taxes will actually go down, not up.
The tax bill will give Citi more money, but Citi has to account for it as a loss. It is a pure accounting oddity, a set of conventions that produce, in this particular case, a result that is at odds with economic reality.

Some of the big banks are also taking charge-offs related to cash held overseas. That's because the law also includes a one-time 15.5% tax rate on the repatriation of foreign earnings. This money can then be used to boost capital spending or be returned to shareholders.
In short, despite these one-time paper losses, the new law should be another big bullish tailwind for banks.
 Of course, banks aren't the only companies that stand to benefit from the new tax law…
Any firm with a big pile of overseas cash could be among the biggest winners, too. And at least one – iPhone maker Apple (AAPL) – is already taking advantage. As the Wall Street Journal recently reported…
Apple said it would pay a one-time tax of $38 billion on its overseas cash holdings and ramp up spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China…
Apple's $38 billion tax commitment is the largest such sum announced in response to the major overhaul of the U.S. tax code that President Donald Trump signed into law late last year. That law included an incentive for U.S. companies to bring home offshore holdings, with companies required to pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets…
U.S. companies have long pushed for such a change to enable them to repatriate overseas cash without what they considered an excessive tax hit. Apple on Wednesday cited the tax changes as the reason for its $38 billion payment. It didn't say how much of its $252.3 billion in overseas cash holdings it plans to bring home, though it will be the vast majority, Chief Executive Tim Cook told ABC News in an interview.

 Our colleague Dr. David "Doc" Eifrig has been following this trend closely…
And he expects this "repatriation holiday" to drive a wave of cash back to U.S. investors. As he explained in a recent special report for his Retirement Millionaire subscribers…
Many firms pay out a portion of their earnings as a regular stream of dividends to shareholders. However, they can also authorize special, one-time dividends whenever they'd like.
When $2.6 trillion flows back to our shores, we expect the special dividends paid by companies to spike. Some will pay out millions to lucky shareholders.
You see, it's the duty of a company, its management, and board of directors to maximize the value of each dollar it holds for shareholders. If it can't find a good project to invest in, it often just sends investors a check.
This happened before. In 2004, the U.S. held a smaller repatriation holiday. Studies of the results show that 90% of the repatriated profits went to buyback, dividends, and executive compensation.

 Doc singled out nine other companies besides Apple set to reward shareholders the most from this one-time event…

Of course, he and his team started by identifying those companies with the largest offshore cash piles. But that was just the beginning. More from the report…
Then, we compiled a library of research that determines what an extra dollar in cash is worth to a company. After all, some companies have plenty of cash on hand already, so adding $1 in cash only adds $1 in value. But a firm in need of cash means that an influx improves their prospects, so $1 could be worth $1.20 or even $1.50.
We found that cash levels and the amount of debt had big effects on just what a dollar was worth. We focused on companies that had the most to gain from getting an extra dollar from overseas.
Finally, we ran the companies through our own formulas that determine businesses with the highest-quality earnings, the best finances, and the best prices in the market today.

That left Doc and his team with a diverse group of stocks among technology, health care, and other sectors. These are mostly large, well-established companies – as well as a few smaller names – whose share prices could surge higher virtually overnight.
Learn more about this opportunity – and how to gain instant access to Doc's favorite repatriation opportunities – right here.
Justin Brill
Editor's note: For the first time in more than a decade, a one-time cash event will put billions of dollars directly in the hands of ordinary Americans… virtually overnight. Doc recently released a video presentation to explain how to get your share of this money. Get all of the details here.

Source: DailyWealth

How to Get Past the Missing Piece of the Investing Puzzle

"I was at this bar," my roommate Jeff told me back in college. "Next thing you know, the most beautiful girl in the place agreed to go out with me."
The next-thing-you-know phrase appeared again after college, when Jeff and I were stockbrokers together in the mid-1990s. "I talked to this potential client today," he said. "Next thing you know, he's sending in a million dollars."
I love – and hate – Jeff's "next thing you know" stories…
It's not Jeff's success that bothers me – you can't not love the guy. Instead, it's the "next thing you know" part…
Whenever Jeff used "next thing you know" (and he did, often – that rascal), I got frustrated… He was leaving out a key step – a secret to success. And I needed to know what that secret was.
If I didn't get to the bottom of "next thing you know," then I couldn't follow in his footsteps to succeed.
I tell you this because most of us are missing a serious missing piece of the financial puzzle… a secret… a "next thing you know" that we need to get to the bottom of.
Today, I will share a solution to finding that crucial secret. Let me explain…
Here's what most ordinary folks think about investing:

If you're reading DailyWealth, you're more sophisticated than most people…
You know that proper investing takes time – and that the "next thing you know" doesn't happen overnight.
You know that you need to diversify… to put some money into stocks, and some into other investments. That's part of the path to investment success.
But this still isn't enough information. These are just guidelines. The "next thing you know" is still missing.
So what is this missing piece?
It is knowing EXACTLY what to do with your money. It is knowing EXACTLY how to allocate it safely, down to the penny.
If you've followed our writing, you should be doing pretty well.
But… if you haven't taken the time to get organized… if you don't take a whole-portfolio approach… if you inevitably put too much capital in the wrong stocks, and not enough in the right ones… then you are still just guessing.
To get past the "next thing you know," we have an answer for you…
It's a way for you to start investing like a pro. By doing this, you'll maximize your opportunity. You'll allocate appropriately. You can follow your stop-loss discipline. You can finally "get there." And you can do it all in about an hour a month.
I can't share all the details with you here… The best thing for you to do is to listen in on our recent webinar, where we discussed our most unique service yet, Stansberry Portfolio Solutions.
It broadcast on Wednesday night… But if you missed it, you can watch it now by clicking below.
If you do, you'll learn the secret behind the "next thing you know." And as my friend and colleague Porter Stansberry says, it's "so easy that the average sixth-grader could do it."
Good investing,
Editor's note: If you've ever wished you knew EXACTLY what to do in the markets, right down to how many shares you should buy… Stansberry Portfolio Solutions is the answer. Steve, Porter, and Dave Eifrig designed this service to do the hard work for you – and give you the best opportunities to profit safely in 2018. Our recent webinar recording covers all the details… Click here to see it now.

Source: DailyWealth

The Most Hated Asset Right Now

Everything's up!
Heck, everything is up a bit too much lately, right? People are starting to feel good about their investments again…
Is there any sector or asset that hasn't soared?
Actually, yes…
While stocks have soared seemingly nonstop for years, this major investment class has performed downright terribly. Take a look:
In six of the last seven calendar years, this investment has lost money.
And in 2014 – the one year that it managed a positive gain – it only went up 2.6%.
While stocks have absolutely soared, this investment has lost nearly half its value since its 2011 peak.
What is this asset class? It's agricultural commodities…
Specifically, those are the returns for the PowerShares DB Agriculture Fund (DBA).
It holds a broadly diversified portfolio of agricultural commodity futures. Here's the latest breakdown of its top holdings:
Live cattle
You might imagine – after seven years of bad returns – that investors have given up on these commodities. You would be right…
Jason Goepfert of does excellent work analyzing investor sentiment. And these days, basically all these agricultural commodities are at the bottom of his scale.
Nobody likes them… And that gets me interested!
I love to buy what's cheap and hated. It's incredibly challenging these days to find an asset class that fits both.
But after a severe seven-year bear market, agricultural commodities might just be the most hated asset class.
They are cheap. They are hated. They are just missing the final piece before I'll pull the trigger… We don't have a real "uptrend" in sight – yet.
Everyone has given up.
This is the position where big gains start.
I'm not bold enough – yet – to be a buyer. But I will be a buyer when we finally see an uptrend.
If you're looking for a hated asset that can rise whether stocks are going up or down, then you'd better put agricultural commodities on your watch list.
Shares of DBA are the easiest way to play it, once the uptrend finally returns…
Good investing,

Source: DailyWealth

The Best, Safest, and Surest Way to Get Rich in Stocks

Steve's note: Yesterday, my friend and colleague Porter Stansberry discussed a potential threat to stocks. Regular readers know I still see plenty of upside ahead… But we both agree that no matter when this bull market ends, you can set yourself up to profit with less risk. Today, he explains three things that all investors should do – right now – to improve their performance.
And afterwards, read on for details about a special event tonight…
If you read yesterday's essay, then you know I've done my best to show you the macro framework as I see it…
I hope you understand why it's particularly important this year. But honestly, it really shouldn't matter all that much to your investment strategy.
Why not?
Because you can't know if I will be right and a bear market will develop soon. And even if I'm 100% right, you could still easily make your biggest gains of this cycle in the final few months of the bull market.
In other words, even if there is a bear market, and even if the markets as a whole end up down for the year, you could still make a lot of money by simply following your trailing stop losses and hanging on as long as you can.
So while I think you should be aware of these macro risks… and while I believe they're even more important this year than they have been in more than a decade… it's far more important that you simply follow sound investing principles, rather than try to time the market.
Here are the three things you should do this year (and every year)…
No. 1: Make sure you truly understand how much risk you're taking.
I'm frequently astounded (and terrified) when I talk to individual investors and they start describing their strategies. A portly gentleman wearing overalls told me proudly at a Casey Research meeting about six years ago that he'd mortgaged his house to buy junior mining stocks. He wasn't worried about the pullback (which became a grinding, four-year bear market and probably wiped him out) because he was diversified across more than 30 different tiny companies.
The best way, by far, to understand how much risk you're taking in your equity portfolio is to use Yes, we're investors in that business. If you subscribe to that software platform, I will probably make a small amount of money from the fees you pay. But I don't know of any other software system anywhere that allows you to easily (and automatically) enter your brokerage information and quickly receive an accurate assessment of the volatility of your actual portfolio.
TradeStops can tell you exactly how much risk you're taking, both with your portfolio as a whole and across all of your individual positions.
My bet? If you're managing your own portfolio, you're probably taking at least twice as much risk as the S&P 500 Index. That is, if a bear market strikes and stocks fall 20%, your portfolio will most likely fall more than 40%.
If you don't know how much risk you're taking, you're much less likely to guard against those losses. But if you do know how much risk you're taking and which positions are the riskiest of all, you can do a much, much better job of running your portfolio safely.
By the way, if you use a broker or an asset manager, it's even more important for you to have this tool and this information. Why? Because you'll have a much better sense for whether or not he's doing a good job… or just taking a lot of risk in a bull market. (Telling him where he's taking too much risk will also let him know you're not a knob.)
If you don't have TradeStops or you won't buy it, you can "spitball" this risk assessment by simply measuring the weighted average of the "beta" of your individual positions. A beta of "1" means that a stock has the same volatility as the market as a whole. A beta of "0.5" means a stock is half as volatile as the market. And a beta of "2" means it's twice as volatile as the market.
You can generally find the beta on any security by using widely available databases, like Yahoo Finance. (Careful, though… sometimes the data are glitchy. So if you see a number that doesn't make sense, check it using another source. Or… even better… just use TradeStops.)
Once you understand how much risk you're taking, I suggest rebalancing your portfolio so that you take less risk than the S&P 500. Remember… you want to be cautious when others are greedy.
You can lower your risk by selling down risky positions and building cash in your portfolio. You can also lower your risk by adding hedges that have a negative correlation to the stock market, like short selling positions.
No. 2: Out of all the studies I've read about portfolio risk-management strategies, no tool is more powerful than risk-based position sizing.
In other words, whether you followed hard stops, trailing stops, or "smart" trailing stops (which are based on a stock's individual volatility profile)… the biggest improvement to portfolio performance came from using a position-sizing strategy that equalized the capital at risk in each position.
This year, give yourself the best chance at success. Rebalance your portfolio so that you're risking the same amount of capital in each position. Again, you can do this with the click of a button by using TradeStops. You just link the software to your brokerage account, import your portfolio, then use the risk rebalancer to learn exactly how many shares of each position you should own. That way, you end up with the exact same amount of risk in each position.
This allows you to use wider stops on your riskier positions, because they will be far smaller positions than your safer stocks. And it lets you speculate in high-growth equities without taking on too much risk.
Again, if you don't have TradeStops or aren't willing to use it, you can approximate this approach by using each stock's beta to adjust your position size. If a stock has a beta that's less than one, then increase your position size until multiplying its beta by that factor will equal one. And do the inverse for stocks with betas that are greater than one. Doing so will give you a risk profile that's equal to the markets. If you want less risk, then standardize to a beta of 0.99 or less, depending on how much risk you want to take.
The important thing is to make sure that you're taking the same amount of risk in each position. Nothing else you can do this year is more likely to increase your portfolio's return.
And yet… I'm certain that more than 90% of readers will completely ignore this advice. So before you read on, ask yourself: are you really trying to become a better investor? Why not at least do the easiest thing, the thing that's most likely to help you, first?
No. 3: Build your portfolio around high-quality, capital-efficient investments.
While these "safe and boring" businesses may not excite you or make you a killing in the short term, they are the best way to build real wealth in the stock market. Over time, nothing beats this approach. And I can give you an important example of how powerful this idea is…
The very worst time to buy stocks in my lifetime was November 2007.
That was the month when stocks hit their last high before the crisis of 2008. That was just before the S&P 500 went on to decline by nearly 50% over about 18 months. It was during that month – virtually the worst time in history to buy stocks – that I was researching a company that I knew would become the best recommendation I would ever make in my career.
And I said so at the time.
On December 7, 2007, I sent the following to the subscribers of my Stansberry's Investment Advisory newsletter, under the headline "Our Best 'No Risk' Opportunity Ever"…

I have come to believe evaluating capital efficiency gives us a permanent edge in the market, as almost everyone else ignores this crucial variable… Few people even understand the concept.

And as my British friend Tom Dyson would say, "I am quite pleased" to tell you that we have an opportunity right now to buy one of the greatest consumer franchises of all time at a no-risk price. As you will see, this business is the utter picture of capital efficiency. Or in terms [Warren] Buffett would recognize, this company has among the highest returns on net tangible assets in the world, uses very little leverage, and has a balance sheet where economic goodwill dwarfs all of its other assets…

The longer you hold this stock, the more rapidly your wealth will compound, and you'll never have to sell – ever.

I've referenced that famous issue many times over the years… But today is an important milestone.
It has now been a little more than 10 years since I made that recommendation – which was to invest in chocolate maker Hershey (HSY). The company is one of the best examples in the world of a dominant, capital-efficient, noncyclical, consumer-franchise business. It rarely trades at an attractive price, but at the time, Wall Street was convinced that Hershey wouldn't be able to compete effectively in the global markets against Cadbury, and so all was lost.
We took advantage of this temporary dip in sentiment to establish a world-class, long-term investment. I begged my subscribers to put a meaningful amount of wealth into the company.
Of course, it's easy to promise that long-term capital appreciation is certain. It's much harder to deliver.
In this case, I forecast the total return would be around 15% annually for 10 years. I was wrong. The total return (assuming you reinvested your dividends at the time they were issued) was "only" 13.2% per year, or about 250% over the 10-year period. My apologies…
If you took my advice, you can console yourself with this: Compared with Hershey, the S&P 500 has grown 8.5% a year over the same period – and been about twice as volatile.
Assuming you put $100,000 into the shares when I first recommended them, you'd own 3,173 shares. The total value of your shares would now be just a little under $350,000. And here's the best part: Hershey would have paid you more than $77,000 in dividends during the last 10 years.
I want to make three points about our Hershey recommendation…
First, even though we recommended the stock at virtually the worst possible time in the history of the stock market, we've still done great. And we never stopped out of the stock. Why? Because we bought at the right price, and we bought a high-quality, simple business that we could easily understand and evaluate.
Most investors, especially at this stage in the market cycle, only pay attention to stuff that's promising to change the world. Those investments are always difficult. They're extremely volatile. And very, very few of them will produce returns in excess of Hershey's over the long term. Thus, if you're simply willing to be patient, you don't have to be daring to get rich in stocks.
Second, it took the stock almost five years to really deliver any capital gains. As late as 2011, Hershey's shares had hardly budged – up less than 20% from our original purchase.
My point is that when you buy a great, long-term investment, it shouldn't matter much whether you buy shares today or next week or next month. And that's good: Great long-term investments always offer you plenty of opportunity to buy more shares. Don't doubt your analysis as long as the company continues to deliver on its model. Just buy more. And wait.
Third, it's virtually impossible for other kinds of businesses to beat capital-efficient companies in the long term. If you don't understand why, let this be the year you finally uncover this secret fully. It will change your life forever.
Hershey doesn't have to spend much (hardly anything at all) to maintain its plants and grow. It's been making the same basic product for more than 100 years – a chocolate bar. There's no radical research and development required, and no new massive factory build every five years. Thus, as sales expand, more and more of the profits can be distributed to shareholders via dividends and share buybacks. Over time, this advantage compounds and becomes almost unbeatable.
In the letter where I recommended Hershey, I also criticized the corporate governance at Oracle (ORCL), which was (and still is) a popular technology company. Oracle makes some of the best corporate database software in the world. It has very good products that are high margin and "sexy." But I had no doubt that Hershey investors would make far more money over time. And I was right. Oracle – the sexy tech darling – is up about 150% in the period, or 100 percentage points less than Hershey's total return.
So remember: When you make long-term investments in high-quality businesses, don't let the macro factors scare you out of your position. As long as the company continues to execute according to its model, stick with the position.
That's the best, safest, and surest way to get rich in stocks.
Let 2018 be the year you begin to make only high-quality, capital-efficient, long-term investments.
In about 10 years, you'll think it's the best decision you've ever made.
Porter Stansberry
Editor's note: Tonight at 8 p.m. Eastern time, join us as Porter, Steve, and Dave Eifrig discuss their most powerful investing product yet…
It takes the "guesswork" out of investing – with three completely built-out portfolios to choose from, allocated down to the exact number of shares. One has beaten the S&P 500 soundly since its February launch… returning nearly 28% annualized. All told, it's one of the easiest ways to manage risk, build wealth in world-class companies, and finally "get there" with your investments.
Don't miss tonight's free event… Click here to reserve your spot.

Source: DailyWealth

A Huge Rally and an Even Bigger Collapse

Steve's note: I expect the "Melt Up" in stocks to continue higher – potentially for as long as two years. But even though my friend and colleague Porter Stansberry takes a more bearish stance, we both agree one key indicator will start the clock ticking. This week, we're sharing his two-part series on how to prepare for the "Melt Down."
And if you're looking to take the "guesswork" out of your investing, we've put our heads together to launch the perfect service for you. Read on to learn more…
I believe that 2018 will be a truly historic year in the markets.
I think it's likely that we'll see a huge "blow off" top in equity prices… and then a big reversal.
I'll explain why in detail today. Whether you agree with me or not isn't that important. What is important is that you understand some powerful underlying forces are moving the market right now. They will play a huge role this year.
I'm sharing these ideas with you because I think they're important – especially this year. But quite honestly, these "macro" thoughts aren't especially relevant to the decisions I make as an investor.
In my experience, most investors dramatically "overweigh" the importance of macro forces and dramatically undervalue the skills, knowledge, and strategies that can actually deliver reliable (and safe) returns.
So… in addition to telling you what I think will happen in the markets as a whole this year (and why)… I'm also going to beg you to do three things that you've probably never done before…
These three strategies will make a much more powerful and lasting impact on your ability to increase your wealth than any of the macro ideas I could give you. And I'll show you exactly why.
But no matter what I do… I'm almost certain two things will happen:
1.   You'll pay far too much attention to my macro forecast, especially if it matches your existing bias.
2.   You'll completely ignore the three things that I know every investor should do this year (and every year) to improve his investment performance.
So… why do I bother?
Well, it's simple. By supporting Stansberry Research, you've given me and the almost 200 other people who work here the greatest job in the world. As Warren Buffett says, "I skip to work every day."
In return, I and the other equity partners and longtime employees at Stansberry Research have dedicated our lives to helping our subscribers make better investment decisions and achieve better investment results.
My primary job is to make sure that we continue to publish the information I'd want if our roles were reversed.
So that's how I'm starting out the year…
I'm going to do my very best to help you succeed in the financial markets, just like I have every day for the past 19 years. Thank you for giving me this opportunity.
Let's start here… with what I believe will be the major factor driving the financial markets this year…
How quickly we forget…
It was less than 10 years ago, in the closing months of 2008, when our monetary masters – led by stuttering Federal Reserve Chair Ben Bernanke – began an enormous monetary experiment. The Fed started printing new money, out of thin air. These new dollars were used to buy financial assets – mostly newly issued federal bonds, but also mortgages of dubious quality.
The result was a multiyear "one way" bet on interest rates that powered the earnings of banks, hedge funds, and traders. It also led to the largest increase in corporate and private debt ever and larger total debts than our economy had ever seen before.
The government, its private bank, and its pocket economists proved they could stop a debt crisis… by creating stupendous amounts of new debt. It was as though they'd worked a miracle.
Meanwhile, the balance sheet of the central bank in the U.S. grew from $800 billion to more than $4 trillion…
Again, this didn't just happen in America. The central bank of Japan printed more than anyone else and ended up becoming the largest shareholder in virtually every Japanese business. The Swiss central bank ended up earning more in dividends, coupon payments, and currency appreciations than any other private business in the world, about $55 billion.
And like squirrels watching a bank robbery, none of the economists and precious few investors noticed anything important happening…
Nobody noticed any inflation (because they ignored the huge rise in financial asset prices). Nobody noticed the collapse in certain commodity prices (like oil) and the resulting bankruptcies, where far too much capital had been borrowed and lent.
But eventually… like the pressure rising in a kettle, turning to steam, and blowing out with a whistle… things started going a little haywire in the global economy. By late 2016, negative interest rates threatened to destroy the global banking system. Shares of Deutsche Bank (DB), one of the world's largest banks, dove down past $10 – a critical threshold.
At the time, even junk bonds in Europe were trading with negative interest rates. European banks were paying mortgage holders to live in their houses, instead of the other way around. Commodity prices fell so far that it was cheaper for many American energy producers to burn off natural gas instead of pushing it down a pipeline. It was as though the financial world had been turned inside out and upside down. Stranger Things wasn't just a TV show: It was our financial reality.
And then, what I believe was the final and ultimate warning sign of this big inflationary bubble – cryptocurrencies
Last year, the bubble reached a whole new kind of level, something we hadn't seen since the days of the South Sea Bubble. Digital "tokens" – backed by nothing, yielding nothing, and conveying nothing – began to soar in value, merely because they, unlike paper currency, couldn't be manipulated by central bankers. By North Korean hackers? Maybe. But not central bankers.
The greatest monetary experiment in modern history is drawing toward a close…
The crytpo bubble must have finally been too much to ignore. Even squirrels could tell something was wrong with our money. And so… the tide has begun to head out.
Most investors don't know anything about this… But the Fed is quietly reversing course. It's draining the system of reserves. On October 1, the Fed began to allow its balance sheet to "run off" by $10 billion a month. That is, as the bonds it holds mature, it won't "roll" the assets into new securities. And so, for the last three months, the Fed has seen its balance sheet shrink by $6 billion a month in U.S. Treasury securities and $4 billion a month in mortgage securities.
You can see for yourself what this is doing to the prices of short-term U.S. bonds. They've gone down in basically a straight line since the policy change was announced in September 2017.
It took the speculative bubble a long time to reach negative interest rates on junk bonds and $20,000 cryptocurrencies. It will likewise take a while (but not as long) for this fundamental change in the financial markets to hurt sentiment and securities prices.
But make no mistake, the tide is going out… And the tide is going to get more powerful as it moves.
I don't mean that rhetorically or as some kind of metaphysical prediction. I mean the size of the Fed's reserve decreases will accelerate for all of 2018. Specifically, the amount of securities the Fed will no longer roll forward will increase at $10 billion per month for all of 2018. Doing the math, that's a $420 billion decrease in the size of the Fed's balance sheet in one year. That's a sizeable reduction in demand for both mortgages and U.S. Treasury securities.
And just as speculators enjoyed a one-way bet on the way up, they now have a one-way bet on the way down.
The link between the Fed's purchases (and sales) of securities and the other markets isn't direct…
The Fed's actions will primarily impact interest rates (and bond prices) at the short end of the curve – that's bonds and mortgages with durations of five years or less.
Far more important to equity prices and the sentiment of the bond market are the prices and yields on longer-duration mortgages and the 10-year U.S. Treasury bond. You can think of the yield of the 10-year Treasury bond as a kind of gas pedal for the price of global financial assets. The lower it goes, the more gas is being sent into financial markets. But as the pedal rises, those carburetors are getting less and less fuel… and the motor is going to slow.
As you can see in the chart below, the price of longer-term bonds is also moving in the wrong direction in a pretty linear fashion.
Again, the resulting impact on financial markets won't be immediate. It isn't direct. But it is, like gravity, irresistible. The Fed's actions and the resulting higher interest rates are going to eventually put a "pin" in the global financial bubble. The clock is ticking.
Let me give you one example of how this macro force impacts the real economy…
Most banks and all mortgage-finance companies borrow money at a short-term rate, like two years. They then lend out this capital at the higher, long-term rate, like 10 years. As long as short-term capital costs less to borrow than long-term capital (and it should), then the banks and mortgage companies have a great, capital-efficient business. They're using other people's money to make a fortune.
The trouble is… sometimes unusual things happen… unusual things like a central bank selling off hundreds and hundreds of billions in short-term mortgages and Treasury debt into a market that knows that billions and billions more are coming.
In these unusual periods, short-term rates can rise to match, or even exceed, long-term rates. When that happens, the banks and mortgage companies can't earn more (or anything) from lending. They can quickly get into big financial trouble because they can't finance their outstanding loan packages at a profitable rate.
Because of the Fed's actions, it's highly likely that 2018 will see one of these rare "inversions" between short- and long-term rates. This so-called "inverted yield curve" would be the final "get out of the pool" warning before the storm.
As you can see in the chart below, the spread between two- and 10-year interest rates has been narrowing since 2014. It's now approaching a critical level – half a percentage point. As the spread gets closer and closer to zero, it will become progressively more difficult for banks and mortgage companies to access capital, which will reduce the market's liquidity substantially.
Let's make a safe prediction: 2018 will see some big financial fireworks…
Amid the backdrop of tightening financial conditions and the Fed's decision to remove hundreds of billions in liquidity from the financial markets, you have one of the longest-running bull markets in history, a record-high level of bullish sentiment, and a fading crypto mania that was the single-greatest speculative event in our lifetimes.
My bet is that we'll see a number of additional record highs in the equity markets, as this amount of investor euphoria will not die easily. Watch for something: At some point, you'll see a new "lower low." That is, at some point over the next six months or so, you'll see a real dip in the markets. You'll see the indexes fall below previous lows.
You'll see some kind of important financial weakness. It might be a rise in bad loans (like subprime autos). Or it might be in bank earnings, thanks to a much tighter or even inverted yield curve. Something in the character of the market, something fundamental will change. Most investors won't notice. But you will.
And you'll know what's coming.
Great bear markets don't start when people are worried and the markets are quiet. They began in periods of incredible excitement and financial euphoria. They begin with markets at all-time highs, when speculation is rampant.
In summary… let me paraphrase Warren Buffett…
Your success as an investor can be predicted in a few simple ways, but I don't believe any indicator is more important than your ability to be cautious when others are greedy and to be greedy when others are afraid.
Many of you weren't subscribers back in 2009 and 2012, when we were "pounding" the table for investors to buy stocks. Both Steve and myself made the largest equity investments in our lives back in late 2008 and early 2009.
Today, I'm telling you the opposite. Yes, stocks may still run higher. But this market is running on fumes. We will see it all fall apart this year.
Still, as I said earlier, none of this should matter very much to your investing approach…
So tomorrow, I'll review three of the most important and fundamental investment strategies that we know will work, no matter what kind of market we see develop in 2018.
Porter Stansberry
Editor's note: Tomorrow at 8 p.m. Eastern time, Porter will join forces with Steve and Dave Eifrig for a special free event.
Not only will they share their latest investment predictions… but most important, you'll hear the details on their most groundbreaking product yet. It features three complete portfolios, so you can choose your ideal strategy – and much more. One portfolio has already beaten the S&P 500, returning nearly 28% annualized since it launched last February.
This event is absolutely free to attend. Click here to sign up.

Source: DailyWealth

Negative 4.6% a Year – the Likely Seven-Year Real Return on Stocks

I gave a speech at the New York Stock Exchange last week… And attendees there were calling me "Mr. Melt Up."
I took it as a sign of respect…
I've been a big cheerleader for this bull market since its start in 2009. In 2015, I started using the term "Melt Up" to describe the biggest push higher in stocks. Now, everyone's using it.
So what I'm about to say might surprise you…
While I expect more gains over the short term (one to two years), my outlook for the long run (five to 10 years) is pretty darn glum.
The basic reason is simple:
In the short term, trends matter.
In the long term, valuations matter.
Let me explain…
I have not talked a lot about valuations… mostly because valuations alone don't kill bull markets.
But the long-term outlook for this market – based on valuations – is terrible.
Legendary investor Jeremy Grantham agrees…
He recently published a paper called "Bracing Yourself for a Possible Near-Term Melt-Up." In it, he said a Melt Up or end-phase of a bubble is likely within the next six months to two years. And if that happens, he says, the odds of a subsequent big decline are "very, very high."
Meanwhile, his investment firm's forecast for large-cap U.S. stocks is a total return of NEGATIVE 4.6% a year over the next seven years. (That's not counting inflation.)
Now, Rob Arnott of Research Affiliates – another highly respected analyst and firm – has recently released a paper about valuations… with a similarly glum conclusion.
Arnott's research suggests a 10-year real return on stocks of just 0.4% a year.
That low real-return number is because we are starting from such high valuations today.
"No matter what adjustments we make, the U.S. market is expensive," Arnott says. "The CAPE (cyclically adjusted P/E) ratio is not a useful timing signal for market turning points, but is a powerful predictor of long-term market returns."
I agree with both of these guys.
Here's what I believe: In the short run, valuation is not a good timing indicator of the top.
I expect the Melt Up to continue higher, for potentially as long as two years.
Afterward, I expect stocks to perform terribly… We should see a multiyear period in which valuations revert to the mean.
In short, markets will go up (and UP!!!)… And then, they'll go down…
So don't get too enamored with stocks during the Melt Up. Know in the back of your mind that the other side – the "Melt Down" – could be ugly for a while…
Good investing,

Source: DailyWealth

The Warning Signs Are Mounting… A Correction Is Inevitable

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 The market is getting "stretched"…
The large-cap S&P 500 Index and small-cap Russell 2000 Index burst out of the gates to new highs to start 2018. In the first week of the new year, the Dow Jones Industrial Average broke 25,000 for the first time ever, less than a month after hitting 24,000.
That was the fastest 1,000-point move for the Dow in history. But it didn't last long… The index surged to more than 26,000 this week – seven trading days after it hit 25,000.
And it's not just in the U.S… Stocks around the world are soaring, too.
Germany's DAX Index is trading close to record levels, while Japan's Nikkei 225 Index recently hit its highest level since 1991. Even Russia and emerging markets like China, South Korea, and Taiwan are seeing massive breakouts in their stock markets.
 Of course, as we like to say, markets are like runners…
They can't sprint all-out for miles on end. They need to take a "breather" occasionally. And right now, we're seeing signs that the market needs to catch its breath…
First, we look at the relative strength index (or "RSI") of the S&P 500. The RSI is a trusted momentum indicator, with values ranging from zero to 100.
When an asset quickly falls, it can enter "oversold" territory with an RSI below 30. This signals that the asset may be due for a rally. But the opposite is true, too. When an asset rises faster than normal, it can become "overbought," with an RSI above 70. This is usually a time for caution… and a signal that a correction may be around the corner.
Today, the S&P 500's monthly RSI is sitting above 80. As you can see in the following chart, it hasn't been this high since the dot-com bubble of the late 1990s…
 A second warning sign comes from the S&P 500's 200-day moving average ("DMA")…
This metric is considered a rough gauge of the market's long-term trend.
During bull markets, stocks tend to spend most of their time above the 200-DMA. During bear markets, they spend most of their time below it. And perhaps most important, stocks rarely stray too far from this line in either direction before returning to it.
The following chart of the S&P 500 shows how it works.
As you can see, since stocks moved back above this trendline following the financial crisis in 2009, they have rarely traded below it.
You'll also notice that whenever stocks have rallied significantly above this line, they have eventually come back to "test" it – touching it, or even moving below it briefly – before continuing higher…
Right now, the S&P 500 is more than 10% above the 200-DMA. And it hasn't tested it in more than a year.
This is unusual… In fact, the market has only been this stretched above the 200-DMA three other times since the bull market began. And each of those cases preceded a sharp correction over the next several months.
 A final reason for caution comes from the American Association of Individual Investors ("AAII").
Its monthly Asset Allocation Survey shows how individual investors are currently positioned across stocks, bonds, and cash.
December's reading showed that investors are now holding 72% of their portfolios in stocks. This is the highest allocation since the dot-com bubble. And it's three percentage points higher than November's reading – the biggest one-month jump in four years.
In short, investors are suddenly pouring more money into stocks than they have in nearly two decades.
 To be clear, these warning signs are NOT a reason to panic…
As Steve Sjuggerud has explained, several other indicators continue to give the "green light" today. This suggests the next market decline is likely to be a buying opportunity in the ongoing "Melt Up," rather than the start of a true bear market.
More important, as Stansberry Research founder Porter Stansberry noted in the January 12 Digest, even if he's correct and a bear market is approaching, selling your stocks now could be a terrible mistake…
Now… I've done my best to show you the macro framework as I see it… I hope you understand why it's particularly important this year. But honestly, it really shouldn't matter all that much to your investment strategy.
Why not? Because you can't know if I will be right and a bear market will develop soon. And even if I'm 100% right, you could still easily make your biggest gains of this cycle in the final few months of the bull market.
In other words, even if there is a bear market and even if the markets as a whole end up down for the year, you could still make a lot of money by simply following your trailing stop losses and hanging on as long as you can.
So while I think you should be aware of these macro risks… and while I believe they're even more important this year than they have been in more than a decade… I think it's far more important that you simply follow sound investing principles, rather than try to time the market.

 No matter what happens next, we're here for you…
If you're looking for more help preparing your portfolio, be sure to join us Wednesday night for a special discussion about our Stansberry Portfolio Solutions product. The presentation will begin promptly at 8 p.m. Eastern time.
We launched this product last February to take all the guesswork out of creating and managing a "bulletproof" portfolio. The results and feedback from last year's members have been even better than we could've hoped… And we'll be opening these portfolios to new members for a short time soon.
This event is absolutely free to attend. Click here to learn more and reserve your spot now.
Justin Brill
Editor's note: On Wednesday at 8 p.m. Eastern time, Porter will team up with Dr. Steve Sjuggerud and Dr. David Eifrig to host a special free event. In it, they'll reveal their 2018 market predictions… explain what you should do if you're nervous about a correction… show you a "bulletproof" portfolio… and much, much more. Reserve your spot right here.

Source: DailyWealth