Four More Big Keys to Your Long-Term Investment Success

In today's Masters Series, originally from the March 3, 2023 issue of the Empire Financial Daily e-letter from his former firm Empire Financial Research, Whitney shares four tactics you can use to enhance your long-term investing... details how you can apply those lessons to your portfolio immediately... and explains why it's critical for you to simplify your investment strategy... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Master Series] Editor's note: [Keeping things simple can give you an unparalleled edge](... Investors are searching for any way to get a leg up in today's chaotic market, as inflation, geopolitical conflict, and a looming recession weigh on the economy. But according to Whitney Tilson – editor of Stansberry's Investment Advisory – the best way to get ahead amid this heightened market uncertainty is to stick to a few basic guidelines... Whitney stresses investors must avoid overcomplicating their decision-making process in order to achieve long-term investment success as this market chaos drags on. In today's Masters Series, originally from the March 3, 2023 issue of the Empire Financial Daily e-letter from his former firm Empire Financial Research, Whitney shares four tactics you can use to enhance your long-term investing... details how you can apply those lessons to your portfolio immediately... and explains why it's critical for you to simplify your investment strategy... --------------------------------------------------------------- Four More Big Keys to Your Long-Term Investment Success By Whitney Tilson, editor, Stansberry's Investment Advisory [Last week]( I shared three important lessons that I've learned from more than two decades on Wall Street... These are: - Beware of speculating, avoid the hottest sectors, and think independently. - Let your winners run. - Tune out the noise and focus on fundamentals. And in today's essay, I'd like to share four more lessons you can use to start improving your investment results... Smart investors focus on free cash flow, not net income... As an old saying on Wall Street goes, "Net income is an opinion, but cash is a fact." Net income – the bottom line of the income statement – is the number that investors tend to focus on. How often have you read a headline along the lines of: "XYZ's stock is down today because the company missed earnings expectations"? Because it's the number investors focus on most, management teams often try their best to "manage" it. Usually, this doesn't entail outright fraud. Rather, net income can be manipulated by rushing products out the door at the end of each quarter (thereby boosting revenue) or reducing assumptions for uncollectable accounts, warranty costs, depreciation, and the like. But none of these shenanigans influence the cash-flow statement, which simply tracks the actual cash flowing in and out of a business. That's why I always cross-reference both the income and cash-flow statements. Occasionally, you'll find short-term divergences. For example, a company might be consuming cash to build inventory that will fuel future growth. But in general, the two statements should track each other over time. If operating cash flow consistently trails net income over time, look out! A great example is telecom-equipment maker Lucent, whose stock peaked in 1999 at $84 a share, giving it a $258 billion market cap. It was one of the most widely held stocks in America. The company had beaten analysts' estimates for 14 consecutive quarters through the third quarter of 1999. It was booking big sales and profits when it shipped its products, reporting $3.8 billion of net income in the first three quarters of 1999 compared with just $815 million in the same period in 1998. But the cash-flow statement told another story... Cash flow from operations was minus $1.3 billion in the first three quarters of 1999 versus plus $1.6 billion the previous year, a negative swing of $2.9 billion! It turns out that Lucent was selling to many dicey startup companies that were increasingly having difficulty raising capital. And without new cash, they couldn't pay for the equipment Lucent had delivered to them... Savvy investors who paid attention to the cash-flow statement and got out saved themselves from a bloodbath. The stock collapsed to around $2 a share. --------------------------------------------------------------- Recommended Links: [MUST-SEE BY TOMORROW...]( "This is how I'd invest $1 million today," says legendary investor Whitney Tilson, who just posted a new portfolio of stock picks. He isn't buying the Magnificent Seven... or putting an equal amount of cash into each. Instead, he's using the Monte Carlo method to see which of 4,817 stocks could double your money. [Click here to learn more, before it goes offline](. --------------------------------------------------------------- [Regime Change at the Federal Reserve?]( The Fed just began the rollout of a new technology that'll "shake the U.S. financial system." It'll likely go down in history as the biggest change to money since Western Union launched its "lightning lines" in the early days of the telegraph. [Here's everything you need to know (including three steps to take to profit)](. --------------------------------------------------------------- Rule No. 5 is to be wary of companies that are constantly making acquisitions... Various studies have shown that 70% to 90% of acquisitions fail. It's not hard to see why. Sellers have perfect information and generally only opt to sell when the company or industry is at a peak and valuation multiples are highest. What's more, buyers tend to have an overinflated sense of their management abilities and are often motivated by empire-building or other noneconomic factors. Plus, hiccups (or worse) are common when integrating two companies, which may have different cultures and systems. Lastly, it's easy to play games with the numbers when acquisitions occur, greatly increasing the chances of accounting fraud. For all of these reasons, it's generally best to view highly acquisitive companies with a skeptical eye. That said, this isn't a hard-and-fast rule because there are a few notable exceptions... For example, Warren Buffett's Berkshire Hathaway (BRK-B) has made dozens of acquisitions over the years, nearly all of which have worked out beautifully. In fact, Berkshire's acquisition of National Indemnity back in the 1960s provided the entire foundation for Buffett's more than $800 billion empire. We've also seen brilliant acquisitions from tech giant Alphabet (GOOGL), which bought video-streaming platform YouTube in 2006 for $1.7 billion... and Facebook parent Meta Platforms (META), which purchased Instagram in 2012 for $1 billion. Both of those acquisitions have added tremendous value to their respective companies over the years. In summary, be careful! When it comes to acquisitions, history has shown that more things go wrong than right. Rule No. 6 may surprise folks familiar with my work: Avoid shorting, but respect short sellers... During my nearly two decades of managing money, my primary focus was on buying and holding undervalued stocks. But I also shorted hundreds of stocks over the years. Shorting is a brutally difficult endeavor. Overall, I lost a lot of money doing it. So my advice to nearly all investors is simple: Don't do it! It's too hard and too risky. That said, you'd be well-served to learn about what short sellers look for. It will help you avoid "value traps" – stocks that appear attractive, but end up going nowhere (or worse, down a lot). To survive, short sellers have to be extremely intelligent and do outstanding in-depth research – far more so than traditional long-only investors. So if you're considering buying a stock with a high short interest, stop and do even more research. Here's a good rule of thumb: Any time you plan to go long a stock with a short interest of more than 5% of the shares outstanding, watch out. It means that a lot of sharp investors are betting against you, and you need to figure out what they're seeing. Sometimes, the short thesis is obvious, as more and more short sellers are putting their work out there publicly by releasing reports, publishing articles, and speaking at conferences. Other times, you have to do some digging. The vast majority of short sellers never reveal what they're doing or why. Though I'm cautious of companies with a high short interest, there are occasional exceptions. In fact, some of my best long ideas have come from stocks that are popular among the shorts because it reflects extreme negativity toward a stock. A good example of this is my trade on Netflix (NFLX). The stock had plummeted more than 80% and was trading at a split-adjusted $7.78 per share on October 1, 2012. That day, the short interest was a staggering 30%. But I wasn't dissuaded. I knew who was betting against it (and why)... and I was convinced they were wrong. So I pitched it at my investing conference... wrote about it... and appeared on CNBC telling folks it was going to be the next Amazon (AMZN). The company's market cap has since gone from $3 billion to around $245 billion, and it has been a popular short the entire way up. It has likely cost the short sellers billions of dollars – yet there's still a 2% short interest! I'd urge you to have tremendous respect for short sellers. Any who have survived the historic bull market had to have been good. They were swimming upstream against a powerful current for a decade! My last bit of advice when it comes to investing is to keep things simple... The best investment ideas can usually be explained in writing in one page or verbally in a couple of minutes. And their success is usually dependent on a few factors – sometimes only one – that need to be analyzed and evaluated. But it's easy to forget this with the Internet at your fingertips and round-the-clock coverage of the markets. Investors are being bombarded with so much information that it can be almost impossible to separate the signal from the noise. Doing so is critical to long-term investment success. Best regards, Whitney Tilson --------------------------------------------------------------- Editor's note: Sticking to these basic guidelines will be especially crucial as we navigate 2024. You see, Whitney recently sounded the alarm with an urgent new warning about where stocks are headed this year – and what to do with your cash moving forward... And he unveiled a powerful new investment strategy that will help you see which stocks will double your money – one that has been exclusive to all but the richest investors until now. [Catch up on the full details here](... 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}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberryresearch.com. 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