How to Buy the Most Capital-Efficient Stocks, Safely

Editor's note: You'd have to go out of your way to be in the financial newsletter world and not have come across Porter Stansberry's name... He's the founder of our corporate affiliate Stansberry Research, and he's well known for making big predictions that often come to pass. For example, in June 2008, Porter warned that […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily Weekend] Editor's note: You'd have to go out of your way to be in the financial newsletter world and not have come across Porter Stansberry's name... He's the founder of our corporate affiliate Stansberry Research, and he's well known for making big predictions that often come to pass. For example, in June 2008, Porter warned that Fannie Mae and Freddie Mac were holding hundreds of billions worth of subprime liabilities and said that both would soon be bankrupt. In 2010, he predicted a decade of riots, government lockdowns, and rampant inflation in his "End of America" video presentation. With more than 100 million views, you may have seen it yourself. Most important, Porter has a great track record for finding opportunities in the financial markets and targeting some of the world's best stocks. In today's essay, he explains what makes for his favorite kind of stock... --------------------------------------------------------------- How to Buy the Most Capital-Efficient Stocks, Safely By Porter Stansberry --------------------------------------------------------------- ['Slowly, Then All at Once... This Is How Trust in Government – And Your Life Savings – Disappears']( On October 26, Porter Stansberry returns after three years with a big warning about 2023’s historic bond market meltdown... and what's coming next. [Click here for details](. --------------------------------------------------------------- Make sure you save a copy of this essay... It's a step-by-step, paint-by-numbers guide to making a fortune in stocks. No, I can't promise that your investments will pan out as well as a few of mine have over the last few years. But I believe anyone is capable of becoming a world-class investor. You only need to know three things. These are the things I know work – no matter what else is happening in the world or in the markets. Let me explain... Investing is a simple game. The goal is to get the most in return for having given the least in exchange. Any serious study of this process will reveal just a few variables control the outcome. First, the amount of capital employed is important. Thus, the cardinal rule is: Don't lose money. Money lost cannot be invested. Money lost will not compound. Second, time matters. The duration an investment may be held continuously with dividends reinvested is critical. And the third important factor is the rate of compound growth. What's funny about this list is how simple the game really is... and how few people pay any attention to the most basic rules. I doubt many subscribers consider these variables before they buy a stock. What most people consider is simply, "Will this stock go up? By how much? And when should I sell?" The questions they should be asking are almost the complete opposite... They should try to figure out... - How fast are these shares likely to compound, assuming I reinvest all of the dividends? - How long will I be able to hold this company safely? - And most important, what's the most I can safely pay for this stock? I share these ideas with a large amount of trepidation. These are not ideas that sell newsletters. You, gentle reader, may expect me to deliver the name of a stock that will surely double in the next month, then double again next year. Believe me, if it were that easy, I'd oblige. But the truth is a bit more complicated... --------------------------------------------------------------- Recommended Link: [Warning: Massive supply crisis ahead... ACT NOW]( Even as inflation continues to cripple investors, and the economy heads into a recession... demand for one critical element is set to soar. In fact, some countries have already begun stockpiling it to get ahead of the curve. The last time supply and demand of this key element got slightly imbalanced, savvy investors could've made 30x their money in less than six years. Before you buy a single share of stock to take advantage of this event, [see what's causing this massive shift right here](. --------------------------------------------------------------- There's one exception... one sure way to get rich... And that is to buy capital-efficient businesses that have long-lived products and are capable of increasing payouts year after year. This approach is, without question, the best way to invest. It's exactly the approach master investor Warren Buffett uses. But it's difficult to explain. Worst of all... once you understand how it works, it's just too simple. All you have to do is buy the kind of companies that require very little capital to operate and grow their businesses and therefore produce excess capital that they return to their owners (the shareholders). Then you reinvest that capital into more shares. Rinse and repeat. It's not much harder than washing your hair. And that means it's boring. But the truth is, using this kind of a strategy over time will produce returns that dwarf the gains you're likely to make speculating, even if you're a great speculator. Best of all, my approach, which is based on capital efficiency, is totally safe and requires almost zero effort... The whole trick lies in understanding which companies are capital-efficient and have good long-term prospects. Once you know that... you only buy when you can get the shares at such a low price that they essentially carry no risk. So how much should you pay for a stock like this, or any other long-term investment? This ends up being the most important variable, because the first rule of investing is "don't lose money." Remember... money you lose doesn't compound. Here's an easy rule of thumb to use when trying to figure out a safe price to pay for a stock... Just figure out how much money it would take to buy back every share at the current market price and add in the total net debt of the company. The number you'll end up with is called "enterprise value." That's the figure it would cost (in theory) for the company to buy itself. Next, just figure out if there's any realistic way the company could afford to buy itself. Few companies actually go private this way... But bear with me. Imagine a company with an enterprise value of $15 billion. For the company to borrow this much money, it would have to afford roughly $1 billion a year in interest payments (assuming 7% interest). If that's more than its operating income... it can't currently afford to buy itself. But if its operating income covers that amount, you've got yourself a winner. And your chances are better when shares are cheaper, of course – because this pushes down the enterprise value. Doing this kind of analysis shows whether a company could realistically repay all of its debts and all of its shares. Assuming it can afford to do both, there's no fundamental difference between the risk of its stock and the risk in its bonds – because all the bonds and shares could be repurchased. And that means on a fundamental basis, you're getting all the upside of the shares – all the upside of being an owner – with the same low risk of being a creditor... I call this buying at a "no risk" price. There's no additional risk to buying the equity compared with the debt. This is the best analysis to consider before you buy any stock – but especially one you're buying to hold for the long term. You have to make sure you will be comfortable enough to wait for the payoff. And the only way to do that is to buy capital-efficient companies... at good, safe prices. Regards, Porter Stansberry Editor's note: Porter is back with his latest big call... On October 26, he's stepping out of retirement with a warning about 2023's historic bond market meltdown... and what it means for your money. He'll also reveal – on camera – what he's doing with his own money right now to prepare for the coming aftershocks. Reserve your spot for this free event [right here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. Charles Street, Baltimore, Maryland 21201 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](