Down to My Last $268

Down to my last $268... The biggest part of my problem... Following Ben Graham's classic advice... Investing vs. speculating... Understanding, recognizing, and controlling risk... Downplay predictions as much as possible... These three companies make me want to scream... Why I'm still so bearish today... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Down to my last $268... The biggest part of my problem... Following Ben Graham's classic advice... Investing vs. speculating... Understanding, recognizing, and controlling risk... Downplay predictions as much as possible... These three companies make me want to scream... Why I'm still so bearish today... --------------------------------------------------------------- Back in the '90s, I (Dan Ferris) lost $1,732 on a bunch of bad predictions... It wasn't long after I started out as an investor. I was trying to predict commodity prices, stock prices, and interest rates. And I thought I had the secret to success all figured out. So I put $2,000 into a commodity-trading account... and lost all but $268. Three decades later, that number – $268 – is still burned into my brain. If you've read the Digest for at least a few years, you've likely heard all about this painful lesson before. Obviously, I did something wrong. It cost me a lot of money. And yet, I still didn't fully understand my problem... I thought investing was all about predicting prices and nothing else. Of course, I'm not the only novice investor to make that mistake... I've talked with hundreds – probably even thousands – of other investors in my career. Many of them started out just like me. At first, they thought investing was all about predicting the stock market. Fortunately, I soon figured out the biggest part of my problem... Predicting prices and the market's direction isn't investing at all. It's speculating. In the late 1990s, I learned about investment and speculation by reading legendary investor Ben Graham's books. Specifically, his classic, 725-page 1934 tome Security Analysis (which is now in its sixth edition) contains the following passage... An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting those criteria are speculative. Graham knew there were intelligent ways to speculate. And he didn't condemn the practice. He just wanted to keep investing and speculating separate. In Graham's heyday, most people preferred to invest in bonds. They speculated with stocks. And using investment principles to buy stocks like Graham did wasn't a common practice. The key ideas in Graham's definition are "safety of principal" and "a satisfactory return"... If you've ever invested in bonds, you likely recognize these ideas. The amount you invest in a bond is the principal. And the interest rate and capital gains (if any) are the return. To achieve safety of principal and a satisfactory return requires understanding the cash flows of a business... Stock investors usually think of investment returns in terms of capital gains. But they don't often consider the source of those gains – the cash flows of the underlying business. After reading Graham's books, I learned to think of investing as buying a stream of future cash flows. That's true for stocks, bonds, real estate, and any other investment. The amount of cash you can get out of them over the life of the investment determines their value. When the markets go haywire and prices crash or soar, it might not always seem that way. But over the long term, it's all about the cash flows. If you're buying because you think (or predict) the price will go up, you're speculating. If you're buying because the business is selling for an attractive valuation based on its underlying cash flows and you plan to hold for the long term, you're investing. Two people can put the same amount of money into the same stock at the same moment, but one of them could be investing and the other could be speculating. Graham's books helped me realize all of that. And eventually, I solved my problem... That's why I'm now an investor, not a speculator. For the past couple decades, I've been primarily concerned with how to value a business. That's more important than where I thought its stock price might go over a short period. Over the years, I spent a lot of time looking at the financials of publicly traded companies. Eventually, I learned to look at the cash flows – and decide if a business was cheap or expensive relative to them. That strategy has worked well. Our many triple-digit winners in Extreme Value are proof. And I still do it that way today (with a lot of help from valuation-guru Mike Barrett). About 12 to 15 years ago – after I had learned about speculation, investing, and cash flows – it occurred to me that... Whether you're an investor or a speculator, all the data you study to make decisions comes from the past... That might not seem earth-shattering. But remember, I started my investing journey by failing miserably at predicting stock, bond, and commodity price movements... I was already highly skeptical of anyone's ability to predict the future. Once I realized that all my data was in the past and all my returns were in the future, I feared that I could still be making the same mistake I had always made. But instead of trying to predict future prices, I was trying to predict future cash flows that I hoped would one day be reflected in a higher stock price. Indeed, the normal method of valuing the cash flows of a business requires plugging in the cash flows you believe it will earn in the future. That's an exercise in pure prediction. Argh, I was making the same mistake! At this point, you might be thinking something like... Wait a minute. What about all the options traders at Stansberry Research? Aren't they good at predicting the future? Whether you're talking about Dr. David "Doc" Eifrig, Greg Diamond, or Chris Igou... the answer is no. Doc, Greg, and Chris are all great at what they do. But none of them are fundamentally in the business of predicting the future. In fact, they all do the same thing I do... They put risk on a pedestal and spend most of their time thinking about it. Then, they craft a strategy that they believe will achieve the best risk-adjusted returns for their subscribers. You're not paying them for their ability to predict. You're paying them for their ability to help you understand, recognize, and (especially) control risk. That's why they all have great track records. And it's why they've collectively helped thousands of subscribers grow their wealth over the long term. Whether you're selling options (like Doc or Chris), buying them (like Greg), or buying stocks based on learning their intrinsic value (like me), it's all about risk assessment – not prediction. It's also what I do when I look for the best businesses, figure out what they're worth, and determine at what valuation they're priced for an adequate return. Unfortunately, I keep meeting people who prefer to predict and speculate – often under the guise of investing. Instead of caring about assessing risk, they ask me questions like, "Where do you think the market is going?" The fact that I often talk about where I think it's likely to go probably confuses the matter a lot. But I promise you... I'm not predicting. I'm identifying and assessing risk. The next breakthrough occurred to me about a decade ago... That's when I read a book called Expectations Investing by Alfred Rappaport and Michael Mauboussin. I highly recommend the book. Put simply, it taught me to stop trying to predict future cash flows when calculating the current intrinsic value of a business. Now, Mike and I start with the current price. We figure out what cash flows are necessary to establish that value. Then, we decide whether the market is too optimistic, too pessimistic, or somewhere in between. If it's too pessimistic, we might have a good investment on our hands. Otherwise, we wait. That was a revolutionary development in my investing journey... I finally got the whole notion of predictions out of my approach for good. Now, Mike and I just look at what's happening in the market and decide if it seems too pessimistic or not. I realize you might think anything in the future involves a prediction. But there's an important distinction... We can't invest without considering the future. However, since no one can accurately predict the future, our strategy can't depend on that. We need to focus on what we do know. Your head might be spinning with all these ideas, but it all boils down to a few key points... - Investing is about "safety of principal" and "a satisfactory return." - Speculation can be intelligent, but a lot of it isn't. - Investing returns come from the cash flows of a business. - To find long-term success, replace predictions with risk assessment. - All your data is in the past and all your returns are in the future. - Craft a strategy that downplays prediction as much as possible. That probably seems like a list of random ideas – or at best, a loosely connected structure. Maybe it is. But I don't feel the need to draw any clearer lines between these ideas. And I don't think you should insist on doing so, either. The connections will come to you over time. For now, consider printing out the list and sticking it next to your computer. Then, every so often, look at it – especially when you want to put your money to work in the market. And relatedly, I'll now show you why these ideas make me want to scream when I look at situations like WeWork (WE), AMC Entertainment (AMC), or Bed Bath & Beyond (BBBYQ)... One of these companies is already bankrupt – and the other two shouldn't be around anymore, either... [As I pointed out last Friday]( AMC is an obvious zero of a business. But the movie-theater operator is still trying to push its worthless common stock on its unsuspecting "ape" shareholders. Bed Bath & Beyond conspired with a hedge fund to do the same thing. The hedge fund made money, but the home-goods retailer still went bankrupt back in April. And any shareholders who hung on until the end lost all the money they put into the stock. Both companies would've destroyed a lot less capital if they had just declared bankruptcy a year or so ago. But of course, that wouldn't have been as exciting for all the speculators. That brings us to WeWork... The coworking-space provider's stock surged roughly 100% from Monday through Wednesday. That sounds good, right? Unfortunately for speculators, it's only good if you bought shares at the perfect moment – and then sold them at the perfect moment. The stock touched those gains during the day on Wednesday. But it closed about 15% below its intraday peak. It fell another 12% yesterday. And through midday trading today, it was down another 7%. As we go to press, WeWork's stock is still up around 37% from where it closed Monday. I'm not predicting anything. But it's only a matter of time before the stock falls even further. WeWork completed a 1-for-40 reverse stock split on September 1. It made that move out of desperation... The company needed to take its price from just pennies on the dollar so it could keep its listing on the New York Stock Exchange. It acknowledged that point in its official filing... The reverse stock split was effected to enable the Company to regain compliance with the $1.00 per share minimum closing price required to maintain continued listing on the New York Stock Exchange. The Company does not expect the reverse stock split to impact its current or future business operations. But like AMC and Bed Bath & Beyond, there's no way WeWork should still be trading... The company should've gone out of business a while ago. It doesn't generate cash flows. It just takes money from investors, gives some to the people who run the business, and lights the rest on fire. It has never made money – and never will. To me, it was always a borderline scam. WeWork's revenue has been pretty much flat since 2019. The company has produced negative cash flow from operations every quarter of its existence. And as of its latest quarter, the company had roughly $19 billion in total liabilities. All that debt isn't doing anything for the company. It has just financed a bunch of property that doesn't generate positive cash flow. And according to Bloomberg, WeWork's bonds currently trade between 10% and 52% of their par value (the amount borrowed). Clearly, the market doesn't think the principal is safe. If Ben Graham were alive today, he probably wouldn't call the bonds an investment. He would likely say they're highly speculative. When I say a company's stock is worthless, I'm not predicting that it'll go to zero... I'm saying that right now – based on all the evidence in front of us – the stock has no value. And related to that, things will need to change dramatically for it to not be worth zero. What about the overall market? Doesn't my ongoing bearishness violate the idea that investing is based on cash flows, not predictions? Aren't I just speculating about the future? Maybe. But again, when I'm bearish on the overall market like today, I never say, "It will fall XYZ% in the next five days." That's dangerous. It's a speculation-filled prediction. Instead, I talk about how the market trades at an expensive price. And I sometimes talk about interest rates – the benchmarks used to calculate the intrinsic value of a business. When I say the stock market is risky, I'm really saying... The stock market is made up of securities tied to real businesses. And those businesses have value (or not) that's based entirely on their ability to generate cash flows that exceed all their expenses, taxes, and capital investments. I use two proxies for cash flow-based value when thinking about the overall stock market... - Cyclically adjusted price-to-earnings ("CAPE") ratio - Price to sales (P/S) Historically, when stock prices have been high by either metric, they've performed poorly. And when they've been low by either metric, they've performed well. Despite the bear market in stocks in 2022 and the bear market in bonds that started in 2020 (and continues to this day), stocks are still near extremely expensive levels compared with the two metrics that are highly correlated with ensuing market performance in the past. In fact, the CAPE ratio is currently about where it was at the stock market's peak in 1929. That was one of the three most overvalued moments in history (besides late 2021 and March 2000). By this metric, the dot-com peak was the most overvalued moment in history – at a CAPE ratio of about 44. The P/S ratio of the S&P 500 Index is about 2.4. By this metric, the most expensive moment in history was late 2021 (3.2). But notably, today's level is still higher than the peak P/S ratio of the dot-com era (2.3). Notice that I'm not making a prediction. I'm just looking at what's happening today and comparing that with what has happened in similar situations in the past. Now, let's add one more key variable – interest rates... Business value is based on cash flows and the interest rate you use as a reference point. A low rate will give you a high business value. And a high rate will give you a low value. This principle generally applies to the whole stock market, too. Higher rates generally mean a lower present value. Over the long term, valuation functions like the force of gravity. If the market gets really expensive, investment returns will be lower. And if it gets really cheap, returns will be higher. The zero-interest-rate regime we've lived through over the past decade and a half has steered folks down the wrong path. A lot of investors now believe that they can pay exorbitant valuations and still make money. And yet, the reality is much different... This period was a huge exception in market history. Rates were never so low. And in late 2021 and early 2022, valuations were never so high (based on some metrics). But in the long term, if you pay too much, your returns will be poor (and maybe negative)... even if you were right about the ability of a business to generate future cash flows. The bear market that started in late 2021 hasn't changed any of that. Since 2008, interest rates have spent most of their time at the lowest levels in all recorded history. For most of that time, the Federal Reserve held short-term rates at zero. That's 15 years. So for most of a generation, investors have learned to believe that the cash flows of a business are worth a lot more than they ever were in all recorded history. Or maybe they just stopped trying to think about fundamental values relative to interest rates altogether. Where does that leave us today? We're now trying to invest after a decade and a half in which the market used a horribly distorted interest-rate benchmark to place exorbitant valuations on the cash flows of businesses. In many cases, the cash flows have been nonexistent. Instead, it has just been assumed that they would arrive at some distant time in the future. That sounds more like speculating to me. Remember, nobody can predict the future. So placing an exorbitant value on cash flows for a business that's currently lighting cash on fire is probably a worse idea than ever. In the end, I hope you'll take this lesson away from today's Digest... The market might go up, down, or sideways from here. I have no idea. Neither do you. And neither does your financial adviser. It's pointless to even try to predict what will happen. No one knows the future. But I do know that stock prices are still at extremely high levels compared with the fundamentals of the underlying businesses and historical valuation levels as measured by two of the most reliable metrics. That means returns will be low over the next several years. It gets worse... Extremely low interest rates were one of the stock market's biggest supports under its exorbitant valuations over the past several years. And now... that support is gone. Invest (or speculate) accordingly. --------------------------------------------------------------- Recommended Links: [Can Kevin Kisner Collect $4,000 in 60 Seconds?]( Today, we're airing a Real Money Demo. A professional athlete will attempt to collect $4,000 in 60 seconds by selling put options. Will he succeed? Or will he lose money? Watch his transaction on Costco Wholesale (COST) and find out. [Plus, learn how to begin using this strategy yourself](. --------------------------------------------------------------- [The No. 1 AI Stock of 2023 (Not Nvidia)]( It's not Nvidia, Meta Platforms, Alphabet, or Amazon. But thanks to a recent major deal, an under-the-radar stock could become the No. 1 winner of the 2023 artificial-intelligence boom. "This company just teamed up with one of the biggest power players in the AI industry, yet you can still buy it for just one-twelfth the price of Nvidia. The time to buy is NOW," says Marc Chaikin. [Click here for the name and ticker](. --------------------------------------------------------------- New 52-week highs (as of 9/14/23): Array Technologies (ARRY), Berkshire Hathaway (BRK-B), Cameco (CCJ), Cintas (CTAS), CyberArk Software (CYBR), Denison Mines (DNN), Comfort Systems USA (FIX), Alphabet (GOOGL), Liberty Energy (LBRT), Omega Healthcare Investors (OHI), Construction Partners (ROAD), Shell (SHEL), Sprott Physical Uranium Trust (U-U.TO), Global X Uranium Fund (URA), Sprott Uranium Miners Fund (URNM), U.S. Commodity Index Fund (USCI), Energy Fuels (UUUU), Verisk Analytics (VRSK), and Walmart (WMT). In today's mailbag, a Stansberry Alliance member writes in about [yesterday's Digest]( which featured a few bullish arguments. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "The 5-year chart on the S&P 500 indicates that we're at the same level as where we were in August 2021. I'll go with Dan on his analysis." – Stansberry Alliance member Paul H. Good investing (and speculating), Dan Ferris Eagle Point, Oregon September 15, 2023 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,216.3% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,065.4% Stansberry's Investment Advisory Porter ADP Automatic Data Processing 10/09/08 891.1% Extreme Value Ferris wstETH Wrapped Staked Ethereum 02/21/20 683.4% Stansberry Innovations Report Wade WRB W.R. Berkley 03/16/12 571.9% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 555.1% Retirement Millionaire Doc HSY Hershey 12/07/07 513.7% Stansberry's Investment Advisory Porter AFG American Financial 10/12/12 392.8% Stansberry's Investment Advisory Porter TTD The Trade Desk 10/17/19 344.0% Stansberry Innovations Report Engel ALS-T Altius Minerals 02/16/09 314.6% Extreme Value Ferris Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 2 Extreme Value Ferris 2 Retirement Millionaire Doc 2 Stansberry Innovations Report Engel/Wade --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 1,572.4% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,040.9% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,024.7% Crypto Capital Wade MATIC/USD Polygon 02/25/21 759.9% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 606.3% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. 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