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Steve's note: I believe we still have incredible upside ahead in stocks. But even if you think I'm wrong, you can profit from the "Melt Up" today... while preparing for the "Melt Down" tomorrow. This week, my colleague Dan Ferris has detailed what could be next for the markets... Today, he shares exactly what he's doing to prepare.
One last thing – our offices will be closed on New Year's Day. Look for your next issue of DailyWealth on Tuesday after the Weekend Edition.
You Don't Need to Predict a Market Crash... Here's WhyBy
Friday, December 29, 2017
I've only done it three times in my career.
But all three times, it worked out well...
In the April 2008 issue of Extreme Value, I told readers the housing crisis wasn't half over and to stay away from leveraged companies in banking and homebuilding. I recommended selling short Lehman Brothers, the only big firm not bailed out by the government.
Readers made 82% in five months on that advice. In 2008-2009, about 165 banks failed, including behemoths like mega savings and loan company Washington Mutual. Housing prices plummeted and didn't bottom out until 2012.
It was a good time to get cautious.
I got cautious again in May 2011, when I wrote one issue of the Stansberry Digest, two updates to my Extreme Value subscribers, and nearly an entire monthly issue about the importance and value of holding cash. It turned out that was right at the top of the market, before we saw a major 20% plunge in stock prices that lasted until October.
And in November 2015, I wrote an entire issue telling readers why it was so great to hold cash. That was two months before the 10% plunge that kicked off 2016.
I wasn't predicting market crashes any of these times. And I'm not predicting one today. The point is, you don't need to predict what'll happen in the stock market.
You only need to prepare...
Today, you need to prepare for poor returns and lower prices of financial assets.
Returns are low right now across all of the major asset classes. Cash yields 0%-1%. Triple A-rated corporate bonds yield about 3.6%. Stock dividends (as measured by the S&P 500) yield 1.8%. Those are lousy long-term returns, and taxes and inflation will only make them worse.
It has been this way for the last couple of years. That's why we've focused on not buying too many stocks in Extreme Value since early 2015, when the vast majority were prohibitively expensive.
Thanks to this strategy, we've been able to avoid too many bad bets – even ones that could have seemed like good deals – right before sudden, unforeseen downturns...
For example, in July 2015, we published four lists of some of the cheapest stocks in the U.S. We looked at the cheapest stocks based on price-to-book ratio... the ones with the cheapest cash flows... and the worst-performing stocks of the prior one- and three-year periods.
Nearly all of these companies were value traps. We didn't recommend buying a single one. On average, the best-performing stocks of the four lists fell nearly 12% over the next year or so. The worst-performing stocks fell nearly 50% on average.
Instead, we recommended buying just one stock and selling 16 before the market took a 10% dive from May to August. And all in all, we told investors to avoid more than 100 stocks and to sell 20 of them... in what turned out to be the worst year for the market since 2008.
The market treated readers who took our advice a lot better than it treated most investors.
Of course, we aren't perfect. I have no doubt we'll tell investors to sell and/or avoid stocks sometimes only to watch the market rise. But we don't waste time predicting how stock prices will move in the short term. Neither should you. It's a fool's errand.
We didn't predict that the market would drop. We didn't need to, because the data in front of us indicated that stocks weren't a great bet. That's true today, too. Stocks are expensive... And if the market goes up more from here, they will become an even worse, more expensive bet.
This year, we've consistently sought out the highest-quality companies trading at reasonable valuations, and shorted deteriorating businesses... Our short sale on restaurant owner Brinker International (EAT) generated a quick 23% profit in less than five months. Our other two shorts are also performing well. And we cut losses quickly on the one lower-quality business we hoped was cheap enough (but turned out not to be).
Believe me, telling investors to hold plenty of cash and avoid most stocks isn't winning me any friends. But it's virtually impossible to call yourself a value investor these days without doing exactly that.
We continue to recommend three actions for investors right now...
That's all. It's easy to figure out what to do, but hard for most investors to do it: Avoid most stocks. Hold cash and gold. Don't predict. Prepare.
Good investing,
Dan Ferris
Further Reading:
This week, Dan has outlined why a value-oriented investing strategy could soon be a better bet than we've seen in years. Check out the rest of his series right here:
Market NotesMILITARY NEEDS ARE DRIVING DEFENSE STOCKS HIGHER Today, we look at another booming defense contractor...
In the past, we've noted that the U.S. spends so much money on foreign conflicts that defense contractors could just as easily be called "offense" contractors. Global tensions have been strained this year. And recently, President Donald Trump signed a $700 billion military budget into law. The business of war is still going strong...
For more proof, we'll look at Boeing (BA), one of the world's largest defense contractors. The company does produce commercial airplanes, but it's also known for its fighter jets, transport aircraft, missiles, and surveillance technology. In the third quarter, Boeing booked $6 billion in new orders, including an initial contract award for the Ground Based Strategic Deterrent program. And recently – in a move that often signals financial health – the company raised its share-buyback program from $14 million to $18 million.
As you can see in the chart below, the stock is staging a powerful rally. So far this year, shares are up nearly 90%... And they recently hit all-time highs. Watch for this defense titan to keep thriving as military demand increases...
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