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Make the right choice… stocks, bonds, gold, or commodities

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From Porter Stansberry:

Here’s a question I (Porter) bet you’ve never asked yourself…

“Why am I buying stocks?”

If you’re an individual investor, chances are good that most of your liquid wealth is allocated to common stocks.

You’re also probably diversified, in at least some way, into derivatives of common stocks, too. Most investors own derivatives like exchange-traded funds (ETFs), mutual funds, or pension funds that invest in stocks. These “helpers,” as legendary investor Warren Buffett calls them, give investors peace of mind… for a fee. What they almost never do is increase actual returns in excess of the fees and taxes they incur.

But let’s not quibble about whether or not investing in stocks directly or through ETFs and funds is best. Let’s ask the much bigger question… the question that virtually everyone takes for granted…

Should you invest in stocks at all?

If not, what should you buy instead? What could possibly offer you stock-like returns (or better) and still be completely passive and relatively safe?

First, let me admit a bias…

I don’t believe it’s possible to make better and safer passive investment returns than through buying the highest-quality capital-efficient businesses and holding them for the long term.

The steady dividend increases that these investments will produce over several decades are virtually impossible to beat through any other investment system or strategy. Earning 12%-15% a year in these kinds of businesses… for 20 or 30 years… while reinvesting your dividends… will generate significant amounts of wealth. There’s probably no better, surer, or safer way to become wealthy. That’s why at least some of your portfolio should always be invested in common stocks.

But probably not as much as you think.

There’s a big catch to stock investing…

Few companies will perform as well as they should for the long term. Most public companies are poorly run. They’re the opposite of capital-efficient, with management teams that destroy capital, reduce dividends, and render billions in losses to investors.

Investors in General Electric (GE), for example, might have thought they owned one of the world’s greatest businesses. (We warned them to the contrary.) But GE’s investors have lost almost $500 billion since the early 2000s. And that’s just the most notorious example. Most public companies are woefully managed and will ultimately fail.

It’s not easy to sort the best from the rest. Owning just one of these big failures for a long time can wipe out all of your other gains. That’s one excellent reason to avoid buying stocks altogether: they are extremely volatile.

What could you buy instead? Well, let’s look at the numbers…

We recently completed a thorough study of investment returns and volatility from 1991 through today. We picked the time period at random – it’s as far back as we have reliable data for one of our indexes.

Personally, I think looking back at the last 27 years is an important “lens.” This fairly modern period has seen the impact of global central banking and radical changes to both global trade and technology.

Obviously, the future could be a heck of a lot different than the last 27 years, but this period is far more applicable to understanding current financial trends than studying what happened under the gold reserve system that existed from the end of World War II until 1971.

Undoubtedly, stocks, as measured by an S&P 500 index fund, have been great for investors…

Since 1991, stocks have earned investors about 8% a year. But those returns have come at the “expense” of extreme volatility (16.2%). Even the most conservative investors (like Buffett) have seen portfolio declines of 50% or more multiple times in the last 27 years. It’s difficult (or even impossible) for retired investors or folks with relatively small incomes to face this kind of volatility.

Stocks are simply not a good financial tool for most people. They’re risky. They’re hard to understand. And you can lose a fortune if you buy the wrong ones or if you panic and sell them at the wrong time.

If you haven’t done well with stocks and these problems sound familiar, don’t worry…

You could have made a worse choice: gold.

Gold has generated about half the return of stocks (4.4%) but has almost the same amount of volatility (15.6%). If you don’t want to make any money and you enjoy seeing your portfolio balance collapse on a regular basis, gold is the right choice for you.

Buying gold is a lot like going to a bar and asking for a beer. When the bartender says, “All we have left is a stale, flat keg… But at least it’s warm,” the gold bug replies, “Better make it a double.”

Now… here’s the real irony. I’ve been buying gold bullion for almost 20 years. And I’ve never sold a single coin. I don’t care what the price of gold is – I care about how many coins I own. And I’d like to own more, not less.

My point is, there are a lot of good reasons to buy gold that go far beyond portfolio management. I own gold as a crisis hedge and as the ultimate form of savings. But as you’ll see… gold also should play an important role in your portfolio, too, despite its poor overall performance.

So if you aren’t going to own stocks (because they’re extremely volatile) and you aren’t going to own gold (because it’s extremely volatile and offers low returns), then I suppose you should buy bonds… right?

That’s exactly right. Since 1991, bonds have gone up almost 7% per year and have experienced extraordinarily low volatility. Bonds have about 75% less volatility than stocks and trail their annual returns only by about 1.5 percentage points. In short, if you’re willing to give up a small amount of annual returns (roughly what your investment managers are probably charging you), you can do well by investing in safe bonds.

In fact, the ‘real life’ returns for bond investors are likely much better than these numbers suggest…

You see, to measure the long-term returns of the U.S. corporate-bond market, we’re using a Merrill Lynch total return index that measures returns from investment-grade bonds.

We’ve proven in my Stansberry’s Credit Opportunities service that buying non-investment-grade bonds at a discount can deliver annual returns of 20% or more. (Right now, the average annual return on our 15 closed positions is 33%.) Even though there isn’t a good long-term index that shows what the returns would have been for wisely allocating between investment-grade and non-investment-grade bonds, achieving better results than stocks is easily possible, with less than half the risk.

That’s why I tell our subscribers that most individual investors shouldn’t buy stocks at all. They should only buy bonds. (I’ll make an exception for our highest-quality, capital-efficient stock recommendations.)

Well, that’s it then… We have our answer, don’t we?

Forget about stocks. Just read Stansberry’s Credit Opportunities and keep a sensible mix between investment-grade and non-investment-grade positions. Over time, you’ll beat the stock market’s returns. And you’ll take a lot less risk.

That has certainly been true. And it might be true going forward. But the bond market has been in the biggest bull market of all time since the early 1980s. During this study’s measurement period, the average interest rate on investment-grade debt dropped from more than 10% to less than 4%. As bond yields fell, bond prices soared. It’s hard to imagine that the next 25 or 30 years will see anything like these kinds of returns in bonds again. It’s almost impossible, in fact, because of the zero-boundary for interest rates.

And that puts a big wrinkle in our conclusion.

But what if there was a safer way to own bonds? Or what if there was an investment allocation you could make that was even better in some ways than bonds… and stocks… and gold?

Well, there is…

The portfolio allocation choice we haven’t mentioned yet is commodities…

Commodities are more or less a dirty word for most investors today because stocks have trounced them for so many years in a row. And of course, most of the time, stocks outperform commodities by a wide margin. That has been especially true over the last several decades as technology has played a big role in both reducing the cost of producing commodities and increasing commodity production.

Yes, all of that is true… And it’s likely to be true for years to come. But there’s still a reliable way to make money in commodities. It’s called “backwardation.” It’s a foundational principle of economics that people are willing to pay more for something today than they will to get it tomorrow. Buying commodities for delivery in the future usually costs less than buying them today in the “spot” market. The difference in today’s price and tomorrow’s price can be locked in with futures contracts, yielding a reasonable profit.

Commodity-hedging firms make their living doing this… And now, there’s a reasonable way for you to do it, too. (More about that in a minute.)

The other well-established way to make money in commodities is through simply following trends…

You might not want to own grains or metals or pork bellies for the long term, but owning them in the early stages of a supply disruption can quickly make you a fortune.

What if, for more than 25 years, you had followed these two proven strategies in commodities? You took half your portfolio and bought the seven (out of 27) major commodity futures contracts that had gone up the most over the previous 12 months, and you bought the seven other contracts that offered you the largest monthly return based on backwardation?

An index tracks this specific commodity investment strategy. It’s called the SummerHaven Dynamic Commodity Index (or “SDCI,” for short). An ETF now follows this specific strategy, too – the U.S. Commodity Index Fund (USCI), so it’s possible for individual investors to follow this strategy. Over the period of our study, the SDCI earned investors a lot more than stocks (more than 10% a year) but had less volatility.

The table below summarizes our research…

If you’re only going to own either stocks, bonds, gold, or commodities, there’s a clear winner: commodities. Of course, that’s only if you’re investing in them in the right way, by maximizing the returns available through backwardation and following the biggest trends. Buying and holding commodities doesn’t work.

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Looking at the data, it occurred to me that owning a 100% commodity portfolio would still be too volatile for most investors. Even though the returns are higher, the volatility in commodities (as measured by SDCI) was still almost as high as stocks. And knowing that bonds are less volatile, I figured that adding in some bonds would reduce the portfolio volatility. But looking forward, I’m worried that bonds won’t perform well. What do I think is going to perform well during the next bear market in stocks? Gold.

I asked our staff to look at building a ‘dumb’ portfolio…

It would have a 50% allocation to commodities (via SDCI) and a 50% allocation to either bonds or bonds and gold, depending on whether gold was trending higher. (We defined a gold uptrend as any period where the 90-day moving average was higher than the 300-day moving average.)

Thus, this portfolio would either be 50% commodities and 50% bonds… or 50% commodities, 25% bonds, and 25% gold.

The results were terrific.

Gold is a great hedge against the bond market, if you only own it when it’s trending higher. This portfolio – made up of commodities, bonds, and gold – generated annual returns greater than stocks (9%), with a volatility that was about half of stocks (8.7%). It generated returns that were 50% higher than bonds alone, too, which more than compensates you for the increase in volatility.

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What’s interesting to me about this research is that our subscribers almost universally own stocks and avoid commodities. And yet, it turns out that this portfolio, which excludes stocks and is heavily allocated to commodities offers vastly better risk-adjusted returns.

One of my personal goals in this business is to convince as many people as I can that there’s a better way to invest…

Yes, stocks can be part of that solution – provided that you’re willing to be conservative and to adopt at least some of our risk-management tools. But the next level is to think about what (beyond stocks) can help you achieve your investment goals with the least amount of risk.

In that regard, I’m certain that adding bonds, commodities, and gold to your portfolio – and in the right way – can be incredibly helpful. I hope you’ll consider doing so.

Of course, we now offer research to help you do this on your own. And I’m certain that our research products can help you produce returns that are better than the indexes. Just look at the track records of Stansberry’s Credit Opportunities and Stansberry Gold & Silver Investor

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Going forward, I expect the same kind of results for Steve Sjuggerud’s latest project, True Wealth Opportunities: Commodities. (You can learn how to become a charter member at a steep discount to what it will eventually retail for by clicking here

But whether you follow our advice or you buy ETFs and index funds for your allocations, you should definitely consider this approach to wealth management… And you should make these changes right now. Stocks won’t trounce gold and commodities forever.

Regards,

Porter


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Stocks

Gilead and Celgene’s stocks may have more room to run

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CNBC’s Jim Cramer was somewhat surprised to see the biotechnology sector bounce back in 2018 after months of weakness.

“At a time when President Trump keeps slamming the pharmaceutical industry over excessive drug pricing, … you might think that the biotech stocks should be getting slaughtered,” the “Mad Money” host said on Tuesday.

“But you know what? After spending a long time in the doghouse, biotech as a whole is actually having a pretty darned good year, with the Nasdaq Biotechnology ETF, the IBB, up 17 percent for 2018,” he continued.

To make sense of the biotech stocks’ new leadership role, Cramer brought in technician Bob Lang, the founder of ExplosiveOptions.net and part of TheStreet.com’s Trifecta Stocks newsletter team.

Lang, who uses technical tools to track the action in particular stocks, decided to look at the group’s most recent leaders and laggards, beginning with the daily chart of Gilead Sciences.

Since Gilead went out of style on Wall Street in 2015 for curing Hepatitis C — a feat that, somewhat ironically, investors figured would lead to less recurrent business for Gilead — its stock has been pummeled.

But Lang noted that in the last few months, particularly after Gilead’s $11.9 billion acquisition of cancer immunotherapy play Kite Therapeutics, its stock has been bouncing, logging higher highs and higher lows.

Gilead’s stock has managed to break through its 50- and 200-day moving averages as well as its former ceiling of resistance, and key momentum indicators like the Relative Strength Index have surged into positive territory, Lang said.

Better yet, Gilead’s moving average convergence-divergence indicator, which technicians use to predict changes in a stock’s trajectory, recently made a very bullish crossover, telling Lang that the stock could be prime for a rally.

“The stock is overbought right here and the next ceiling comes in at around $82, up $5 bucks from these levels, but given everything else he sees in the chart, Lang believes Gilead can keep climbing,” Cramer said. “In fact, it’s his favorite name in the group and he wouldn’t be surprised if it starts challenging its old highs of around $110 by the end of the year.”

Next, Lang turned to the daily chart of Celgene, a biopharmaceutical giant with a focus on treating cancer and inflammatory disorders.

Shares of Celgene are down 20 percent for 2018 because of concerns about its leading drug, Revlimid, and the rest of its pipeline. But, like Gilead, the stock has been making a comeback in recent weeks.

Lang started by inspecting Celgene’s Chaikin Money Flow, which measures levels of buying and selling pressure in a stock. Not long ago, this indicator turned green, indicating to Lang that institutional buyers were warming up to the stock. He added that the stock has made a “W” formation of late — another bullish signal.

“Right now, the stock’s at $86. [Lang] thinks it could make a move to the 200-day moving average, … currently around $97 bucks, in the coming weeks,” Cramer said. “He may be right given the recent rotation into biotech. Without the rotation, though, I’m less sanguine.”

Lang also threw a third name into the mix — Illumina, a biotech-oriented medical technology company that builds machines for DNA analysis with one of the best-performing big-cap health-care stocks since 2017.

“As far as Lang’s concerned, the chart is a thing of beauty,” Cramer said, noting the stock’s steady climb, “robust” Chaikin Money Flow and “insanely strong” moving average convergence-divergence indicator.

The only issue seemed to be that the stock was overbought, but that didn’t shake Cramer or Lang.

“This thing, though, has been overbought very frequently since 2017. Now, that has never been a reason to sell the stock,” the “Mad Money” host said. “Instead, you’ve done much better if you simply wait for the next pullback — and we get those all the time — and use that weakness to do some buying.”

Lang’s analysis echoed that point, recommending that investors use weakness in Illumina’s stock to buy and strength to sell.

“The biotechs and the biomed techs have finally started showing some signs of life and the charts, as interpreted by Bob Lang, suggest that Gilead, Celgene and Illumina have more room to run,” Cramer said. “My view? Look, if you believe the economy is going to stay strong, then maybe this rally does peter out, but you’ve got my blessing to put on some exposure on any one of these or all of them, as I think Lang is going to be dead right.”



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The greatest obstacle to investing success is… you

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From Richard Smith, Founder, TradeStops:

If you’re like the average investor, you’d say it’s easy to feel overwhelmed at times by confusion in the markets – and sometimes even by fear.

But why should it have to be this way?

Investing is a noble pursuit. Generating wealth for a comfortable retirement means creating the financial freedom to live well in the golden years… while providing support to loved ones… enjoying the finer things in life… and possibly making a real difference in the world.

Those are all good things. The pursuit of good things should not be a stressed-out experience! But for too many investors, that’s exactly what it is. Their market journey is a series of obstacles and worries.

There is bad news and good news here.

First the bad news: Your greatest obstacle to investing success is… you.

And the good news: The solution to overcoming your “greatest obstacle” is within reach.

What does that mean, to say the greatest obstacle to investing success is you?

It means that when it comes to investing successfully, finding great stocks is not the hardest thing. And dealing with volatility is not the hardest thing.

The hardest thing for any investor  and this includes everyone from Warren Buffett on down  is overcoming the natural pitfalls and challenges within their own brains.

Walt Kelly, the artist who drew “Pogo,” had a caption on his most famous cartoon that read: “We have met the enemy, and he is us.”

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That statement could have been tailor-made for investors. Your biggest challenge as an investor will be overcoming your natural behavioral shortfalls and biases  learning to do the right thing and overcoming your built-in bad behaviors in the process.

(And again, this isn’t just “you” specifically. It’s also true for me, and Warren Buffett, and everyone else.)

This really goes back to the essential mission of TradeStops. We want to help as many investors as possible find a path to comfortable retirement. (We’ve helped 25,000 so far, but that number should expand 1,000-fold.)

A key goal of TradeStops is to remove anxiety from the investment process, and in doing so, help investors rediscover the joy of investing as they build long-term wealth.

How do we do this? By combining science, technology, and proven principles of behavior modification.

To get rid of bad investing habits, you can’t conduct brain surgery on yourself (and you wouldn’t want someone else to try).

But you can use software as a tool in the investment decision-making process… which in turn serves as a form of painless behavior modification… which puts you on the path to anxiety-free investment success.

Again, this is what TradeStops is all about: Helping investors overcome their greatest obstacle to investing success… so they can meet their long-term wealth-building goals… and have a positive impact on everyone around them.

Here’s something else funny about the brain: Knowledge makes behavior modification easier.

The better and deeper the brain understands the “why” behind something, the easier it becomes to make a positive behavior change around that thing. And sometimes the “why” is even more important than the rules.

The importance of the “why” was once vividly demonstrated by Ed Seykota, a famous trend follower who made countless millions in the commodity futures markets.

Seykota was one of the earliest adopters of mechanical trend-following techniques. In the 1970s he was a pioneer in the use of exponential moving average crossover systems. (They were so new and exotic at the time, people called them “expedential” moving averages.)

At one point, Seykota decided to teach a classroom course on trend following. For the curious who signed up  remember, trend following was totally new at this point  Seykota spent something like 10 percent of the classroom time explaining the very simple rules of his trend-following system  and the other 90 percent explaining the “why” behind the importance of sticking with the rules!

We’ve realized a similar idea applies to TradeStops software.

No matter how good our software is  and you continue to give us rave reviews, for which we are deeply grateful – it feels like there is always more opportunity to help you, our customers and fellow investors, to get more out of TradeStopsby better understanding the “why” behind certain basic principles.

To that end, we are excited to start something new: An “education series” of editorials, designed to help you become a better investor by sharing the “why” behind some very important concepts.

Our game plan with the education series is to start with the following concepts, exploring each one over a period of weeks or months:

  • Cognitive Biases
  • Probability
  • Investor Psychology

We’re confident the insight you gain from this series can help make you a better investor, even if you aren’t currently using TradeStops. (Though of course, if you haven’t yet experienced the power of TradeStops, we suggest rectifying that immediately!)

Another one of our goals for 2018 is to accelerate the development of TradeSmith University, our ongoing effort to enhance your education as an investor. It goes back to the same set of goals: Giving you more of the “why” behind the principles of investing… so you can make better use of the TradeStops software… in order to reach your wealth-building retirement goals.

It’s an exciting project. We’ve got some great material to draw from, and we’re confident you’ll learn a lot.

If you have any questions, comments, or just something you’ve always wanted to know about cognitive biases, probability, or investor psychology, let us know!

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Richard

Crux note: Richard’s TradeStops philosophy is to cut your losses and let your winners ride… And the results speak for themselves.

You can discover why one satisfied investor called TradeStops his “safety net” right here.


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Two things the World Cup can teach you about investing

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From Jason Bodner, Editor, Palm Beach Trader:

Last week, my phone had a temper tantrum. It just wouldn’t work and was so slow that I couldn’t take it. I took it to the phone store to see my upgrade options.

I brought my three sons. While I waited to get a new phone, they watched the World Cup game in the store.

I wasn’t paying attention, but my seven-year-old Liam proudly proclaimed that Belgium was playing Japan.

This was big deal. (And in a moment, I’ll tell you how it all relates to investing.)

You see, my wife was born and raised in a small city in Belgium. My kids all have dual citizenship. I’m the only one in the family who has just a U.S. passport.

When we left the store, the score was 0-0 at halftime. We were still confident our team would win. There was talk of how Belgium could go all the way. We seemed a sure bet against Japan. (Belgium lost to France in the semifinals on Tuesday.)

About 20 minutes later in the car, I asked Sacha, my middle son, to tell me the score…

Belgium was down by two goals and still hadn’t scored. It was quickly turning into one of the biggest upsets in World Cup history.

Sacha was bummed, but being an optimist said, “You never know… We can come back. It’s not over yet!”

I saw his face was mixed with disappointment and hope. I replied with a weak moment of adult realism: “I don’t know Sach, it seems doubtful. Sorry dude.”

I felt bad the way a dad does when he’s gotta break bleak reality to his kid.

Five minutes later, he said “Oh yeah, Daddy? Look now!” I nearly crashed the car when I saw on his phone that the score was now 2-2. I was screaming with glee with the windows open. It must have looked strange to anyone standing on the street.

When I got home, we ran into the house to watch the final minutes of the game. Belgium scored an injury-time goal to win 3-2.

My sons and I started jumping around. Belgium turned what would have been the biggest upset in the World Cup into the biggest comeback.

Aside from being a fantastic game, there is a point to this story…

You see, I was ready to throw in the towel on Belgium. Psychologically, I had given up.

There was plenty of time for a comeback – improbable as it was. But my mind had written off that possibility and given in to despair.

Sure enough, I was dead wrong. And that’s the point…

Emotion is the true enemy of investors. It can lead to despair and fear. And that can cause you to make drastically wrong decisions.

If Belgium were a stock, emotion would have told me, “I can’t take it anymore!”

I would have sold at the exact bottom.

It took me a long time to learn how to overcome emotion as an investor. Ultimately, the most important thing I had to master was my own mind.

Like most people, I have a knack for doing the wrong thing at the worst moment when I act based on emotion. That’s why I built a stock investing system to take guesswork and emotion out of it.

Your stock positions will move up and down, day-to-day, and week-to-week. The market itself will get bumpy from time to time. We all know this… Yet we still act on our feelings when it happens.

The key to overcoming emotion is to stay rational – especially when things get bumpy.

There are two ways I do this:

  • Stay patient. I need to remind myself that investing in stocks is a long-term game. I need to stick to my system and not sell out of fear.
  • Stay focused. When I feel overwhelmed by emotion, I find it helpful to take a walk or do something to focus my attention on something other than what’s bothering me. For me, listening to music or walking my dogs calms me down and helps me refocus.

Emotions cause us to react. Logic dictates that we stay disciplined. Patience and focus will get us to where we want to be.

Talk soon,

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Jason

Crux note: In case you missed it…

Palm Beach‘s crypto expert Teeka Tiwari is teaming up with political commentator and radio host Glenn Beck to create a one-off special extended broadcast live from his studio in Dallas: The Great Cryptocurrency Conspiracy of 2018.

Tune in July 19 at 8 p.m. Eastern time to discover the secret behind making money with cryptos like bitcoin – something both Wall Street and Washington would like to keep hidden from you…

Click here to register for this free event.


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