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Steve's note: If you haven't heard yet, my publisher Stansberry Research has made a special deal with investment-newsletter legend Jim Grant – someone who Porter Stansberry says "has changed my life." In today's DailyWealth, we're sharing one of our favorite pieces of Jim's writing. And at the end of today's essay, we'll explain this incredible limited-time offer...
'Never Stand in Line to Buy Anything,' and Other Contrarian Investing LessonsBy
Wednesday, September 27, 2017
I've published more than 800 issues of Grant's Interest Rate Observer to date... That's more than 4 million words of market analysis.
I've made some good calls in that time (and yes, some bad ones). I've even gained some fame – at least in certain circles – for my more accurate predictions.
But more importantly, I like to think that I've become a knowledgeable student of "Mr. Market." I've lived through and analyzed manias and crashes. I've seen interest rates fall from 20% to zero – and below... I've seen the stock market sawed in half, and I've seen stocks rise far above any sane measure of valuation.
And through it all, every two weeks, I've shared my thoughts with a select group of readers. Many of them have been with Grant's since day one.
With that in mind, here are the 10 most important lessons I've learned in finance...
The most popular investment of the day is rarely the best investment. If you want to know what's popular, look no further than the front page of your favored business journal... Or just tune in at your next cocktail party. At Grant's, we seek profits where no one else is looking. We're happy to wait for the consensus to come to us. We've been contrarian since the beginning. In our minds, there's no better lens through which to view the market.
Because, in general, humans aren't good with money. We buy high and sell low because it's what comes naturally. It's difficult to control emotions. It's more difficult when money is involved. But with detailed security analysis and an expert understanding of market cycles, you can minimize emotions when it comes to your portfolio.
... including prices, valuations, and enthusiasms. And this will never change. The greatest investors develop a sense of when markets have reached euphoric levels – and when fear is crippling reason. Where do you think we stand on that scale today?
You can, however, see how the crowd is handicapping the future. Observing the odds, you can make better choices. You can recognize the rhythms of market cycles. And with enough practice, you can profit from those cycles – or at least avoid disaster – as when we warned Grant's readers in our September 8, 2006 issue about a bubble in subprime mortgage debt... 11 months before the crisis began. And three years later, when we advised going long bank stocks before they rallied 250%.
Exchange-traded funds (ETFs) were a great idea. They allowed investors diversified exposure to a number of markets for minimal fees. Today, ETFs account for more than 23% of all U.S. trading volume with a total market value of more than $3 trillion. And the global ETF market is forecasted to hit $25 trillion by 2025.
Yes, ETFs allow investors to diversify into lots of markets for a little bit of money. But ETFs allocate money without consideration of value. And what happens when everyone rushes for the exits?
This is because the people who operate them aren't perfectly reasonable. The debate over efficient markets has raged since the birth of public markets. Grant's comes down on the side of inefficiencies – of lucrative inefficiencies. There will always be value in active management. It keeps the market honest. Active managers bid for companies that have been punished unjustifiably... And they apply selling pressure on egregiously overvalued, fraudulent, and dying companies. It's these inefficiencies – and Grant's longtime, historical understanding of them – that give our readers special perspective.
If markets were so all-fired efficient, why did the Nasdaq reach the sky in 2000? Or banks and junk bonds, the depths, in 2009?
Charlie Munger, Warren Buffett's longtime partner in Berkshire Hathaway, explained the importance of patience this way:
Let us only say that the point survives the exaggeration.
Here I have a confession to make. In January 1980, at the peak of the Great Inflation of the Jimmy Carter era, a line snaked out of the doors of a lower Manhattan coin dealer. The people in that queue were waiting to buy gold at what proved to be a generational high, $850 an ounce. I was in that queue. I've made plenty of mistakes since then. But that particular mistake I've subsequently avoided. Believe me, once was enough.
Markets will always correct. They corrected after the Dutch tulip mania in 1630s. And they corrected after the subprime mortgage debacle in 2007. What do corrections correct? They correct the errors of a boom. And when markets correct, they cause the most amount of financial pain to the greatest possible number of people.
You'll never know exactly when these corrections are coming. But if the creditors aren't calling your assets on the way down, you will live to fight another day. And if you happen to have cash on hand, you can make the greatest profits of your investing career.
These final three items, which I've included as a single lesson, are in quotation marks because I borrowed them from the late Bernard M. Baruch – one of the greatest investors who ever lived. I know he won't mind (after a brilliant career in Wall Street and Washington, Mr. Baruch died in 1965, at the ripe old age of 94).
I came to know the great investor in the course of writing his biography. If you read enough, you, too, can assemble a circle of friends from the past as well as the present.
Regards,
Jim Grant
Further Reading:
"Meetings like this – with incredibly powerful investors – are rare," Porter writes. In our Weekend Edition, he reveals all the details of how you can get in on Jim's exclusive conference. If you missed it, you can read it here: The Most Unusual Gift We've Ever Offered.
In a recent essay, Steve shared another piece of wisdom from Jim that has crucial significance today. This will change the way you think about one kind of investment... Read more here: 'Return-Free Risk'... Should You Invest in This Popular Trade?
Market NotesA NEW LEADER IN PET PRODUCTS Today's chart highlights one of our favorite strategies at work... buying companies that sell simple products.
You don't need to sell flashy or innovative products to have a successful business. "Boring" products like cigarettes, soda, coffee, Twinkies, and laundry detergent are always in demand. These staples are the cornerstones of steady, profitable businesses that generate good cash flows for investors. For proof, we'll look at a pet-food company...
Blue Buffalo Pet Products (BUFF) is the fastest-growing major pet-food company in the U.S. It makes its dog- and cat-food products with whole meats, fruits and vegetables, and other high-quality natural ingredients. Unlike many of its competitors, the company doesn't use chicken by-product meal, corn, wheat, or soy ingredients. And it looks like this improvement is popular with consumers...
Last quarter, Blue Buffalo announced it will launch one of its pet-food formulas in four leading mass retailers – including Target (TGT). As you can see, shares of BUFF have spiked on the news. They're up nearly 30% from their August lows. If sales are successful at these new retailers, this rally could just be getting started...
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