Junk food, and my favourite 10-bagger
Once in a while, I like a good burger. And as it’s ‘once in a while’ I’ll go all out. I’ll opt for the extra second patty. Bacon? Yup. Cheese? Load> READ MORE
Once in a while, I like a good burger. And as it’s ‘once in a while’ I’ll go all out. I’ll opt for the extra second patty. Bacon? Yup. Cheese? Load> READ MORE
“You miss 100 percent of the shots you don't take,” says hockey great Wayne Gretzky. A lot of people don’t take that shot when it comes to launching their> READ MORE
I’m a terrible golfer. I’m the kind of golfer who gets his money’s worth because I spend so much time on the course taking so many hits (and in golf, a lot> READ MORE
Who is responsible for your wealth? How you answer this simple question could be the difference between success and financial failure. In this article, Mark Ford> READ MORE
Unit Trusts (a.k.a. mutual funds), bonds and treasury products. These are just some investing options banks and other institutional investors offer their clients.> READ MORE
What do successful people have in common? Talent is important, but that’s just the beginning. This week, Mark Ford shows us how even the best can get better,> READ MORE
Few people – especially those who read investment newsletters – like being part of the “crowd”. But, difficult as it is to stomach, “they” are often…> READ MORE
Earlier this week, the latest U.S. Consumer Confidence index figure was released, showing that consumers are the most confident they’ve been in 16> READ MORE
Once in a while, I like a good burger. And as it’s ‘once in a while’ I’ll go all out. I’ll opt for the extra second patty. Bacon? Yup. Cheese? Load it on. And then finish it off with some red onion, maybe a jalapeño pepper or two, a slice of tomato and a piece of lettuce for colour, with fries on the side… and a Diet Coke, because you know… gotta watch those calories.
When it comes to what you eat, I don’t see anything wrong with the occasional guilty pleasure. And I think the same is true when it comes to investing. Similar to how your diet should be healthy 95 percent of the time, so too should your approach to investing.
But it’s the other 5 percent, the guilty pleasures, that I’m talking about today.
My “guilty pleasure” investment isn’t really an investment at all – it’s pure and unabashed speculation.
What’s the difference? You could argue the semantics of investment versus speculation all day long.
The godfather of value investing Benjamin Graham says, “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”.
As for me, I view speculation as a high-risk buying strategy with an expectation that future events will drive more investors/speculators into the asset in the near future.
In reality, I’m just talking here about taking a big shameless swing of the bat. I’m hunting for a homerun. I’m looking for a 100 percent return, minimum… and fast.
Where do you find these opportunities?
Well, it’s a heck of a lot more complicated than a trip to Burger King. In my personal experience, the most valuable speculations have come from what you’d call ‘tips’.
To be clear, I’m not talking about trawling penny stock blogs or nosing around pump-and-dump online chat groups. And of course, I’m not talking about inside information. I’m talking about the ‘tips’ that emerge from a trusted network of folks.
Peter Churchouse – who you sometimes hear from here, and who writes The Churchouse Letter – knows a lot of these people. He’s been in Hong Kong working real estate and finance about as long as I’ve been alive. He has an extraordinarily deep and knowledgeable network, the insights of which you won’t read about in the press.
For example… in late 2011, I sat at my desk at JP Morgan – probably trying to structure the next great derivative product that nobody needed – when Peter called. He told me to pull up a little Singapore-listed stock on my Bloomberg terminal.
I’d never heard of it. It had a market capitalisation of less than US$60 million. The company wasn’t making much money. But when I checked out the news on the company, I saw that a new CEO had been appointed that morning. Both Peter and I knew him – I’ll call him John – well.
John was a proper master-of-the-universe big-swinging investment banker of impeccable pedigree. So the question was: Why was he taking the helm of this small-cap Singapore stock?
I knew two things: firstly, John wouldn’t take this job unless he was very confident in the company and its prospects. And secondly, this was a small-cap highly illiquid stock. This is advantageous to us as individual investors. Small-cap stocks are off the radar of institutional ‘smart’ money. They can’t accumulate a big enough position without bidding the stock up. So for the time being, the opportunity was just open to small fish like me.
This was a seriously greasy bacon-double-cheeseburger of a trade. It was speculation of the highest degree. (Although I’m not sure how much my friend John would appreciate me labelling it that!)
In this case, the CEO’s buy-in (that is, that he accepted the job) was all the research I needed. If John was in, I was in.
I got the necessary approval from my bank (then, and now, buying a stock if you work for a bank entails asking permission) and started buying. The stock was so illiquid – that is, so few shares were traded – that I was personally responsible for over half the day’s trading myself. But my position was small. It was only what I could afford to lose.
And then, over the course of the next 18 months, the stock returned nearly 1000 percent.
Always learn something – win or lose
Regardless of whether the trade ends up a 10-bagger or a donut (i.e., it falls to zero … I’ve had a couple of those in my time), I always learn something new when I take on these kinds of speculations. In this case, I ended up learning about an Asian country I knew very little about. I jumped on a plane to go and stay with the CEO, and spent some time at the company headquarters in a country I’d never been to. Peter did the same. (The CEO has since left the firm, and I’ve long since sold the stock.)
“You miss 100 percent of the shots you don’t take,” says hockey great Wayne Gretzky. A lot of people don’t take that shot when it comes to launching their own business. Should you ignore those doubts echoing in your head? Mark Ford suggests that perhaps you should listen to them… and act accordingly.
By Mark Ford
When business writers talk about why so few people become entrepreneurs, they cite “fear of failure” as the number one challenge.
I agree. Fear of failing is a real factor. But to overcome it, you need to figure out what it means in more specific terms.
When I feel trepidation about starting a venture, I’m not worried about something as abstract as “failure.”
I worry mainly about three things…
I sometimes worry I don’t have the knowledge or skill to make the idea successful. I worry I might lose all the time and money I’m about to invest in the idea. And I worry if word gets out that I didn’t succeed, business people will think I’m a fool. Especially those people who doubted my idea in the first place.
Best-selling author Seth Godin talks about that first fear. He says, quite correctly, that most people who buy books on entrepreneurship never get beyond the dreaming stage because “deep down inside they don’t think they have what it takes to succeed.”
I don’t know if that is the most common fear of starting a business. I wish it were. But I’m afraid too many entrepreneurs have the opposite problem.
They don’t realize they don’t have what they need to succeed.
How to overcome your fear
If you have that fear, you should respect it, because nine times out of ten, it is valid.
My number one rule of wealth building is to invest only in what you know. If you think you might not know enough or have the right resources, then you probably don’t.
The solution to that fear is to put your plan on hold and acquire the experience to know what you need to know.
If your fear is being shamed by a failure, you can and should move forward. You can overcome this kind of fear by doing what I’ve talked about previously: Imagine the worst possible outcome and visualize being emotionally okay with that.
Another thing you can do is be a bit humble when you are announcing your venture.
Rather than bragging about all the money you will be making, keep the claims small and try a little self-deprecating humor: “This is probably a terrible idea, but I’m going to try it.”
Small (but essential) steps to success
If your fear is losing your time and money, then you need to follow the protocol I outline below before you launch a new venture:
Fear is a good and useful emotion. Successful entrepreneurs don’t deny it. They overcome it sensibly and cautiously, by taking baby steps and proving the optimal selling strategy before going big.
If you feel you have what it takes, then don’t let either the fear of embarrassment or the fear of losing time and money get in your way. Keep your risk low and your dreams high.
I’m a terrible golfer. I’m the kind of golfer who gets his money’s worth because I spend so much time on the course taking so many hits (and in golf, a lot of hits is a bad thing). As much as I love the game, I’m no good at it. (I’d love the opportunity to play more, but sadly I’m not the president of the United States.)
I recently came across a piece of advice on how I can easily and quickly reduce my handicap. In other words, I learned a simple way to get through the course with fewer strokes.
What’s more, it doesn’t involve buying a bigger driver, taking a bigger swing, hitting the ball harder, splurging money on new golf balls or more golf gear I don’t need.
It doesn’t even need a trip to the golf range.
To improve your golf game, do this
All I need to do is practice one thing, putts from inside three feet. That’s it.
It’s incredibly simple, straightforward and makes perfect sense. There’s an old adage that “golf is a game of putting”. Short putts are the key to reducing your stroke count.
I never realized this… I’d always thought about hitting it long and straight (although I do neither).
But no. I did some research to check it out. It turns out that golfing legend Phil Mickelson was once challenged by 1956 Masters and PGA Champion Jackie Burke to start practicing one hundred 3-foot putts at each practice session.
Since Phil adopted Jackie’s 3-foot drill, he’s won five majors. He calls these three-footers the “foundation” of his entire short game.
This “3-foot drill” serves a great reminder that it’s often the simplest advice that’s the most effective.
Golf… applied to your portfolio
And it’s no different when it comes to finance.
If you invest like I play golf, I’d recommend getting back to basics. Forget about taking wild speculative swings at the market. Focus on your three-footers.
I don’t mean start doing this the next time you buy a stock. I mean do it now. Just begin by giving your portfolio a quick overhaul.
It takes no time at all to login to an online brokerage account, and clear out those losers that you’ve been dreading to face up to. I’m talking about the ones that are down 40 percent or more… the ones you’ve held on to in the hope they’ll more than double and get you back to even.
Rebalance your positions if you need to. And do a quick sanity check on how diversified you are.
That’s it. That’s your “3-foot drill”. It could be worth thousands or tens of thousands of dollars to you in the months and years ahead.
Who is responsible for your wealth? How you answer this simple question could be the difference between success and financial failure. In this article, Mark Ford reminds us that it’s not where you come from that matters.
By Mark Ford
The average Nicaraguan is born in a shack with a dirt floor and earns roughly $90 per month.
“E”, my handyman/gardener in Nicaragua, does better than that. He makes about $150 per month in salary and another $50 in tips and side jobs. In the U.S., E could earn in a few days as much as he makes in a month.
I don’t believe I’m personally responsible for this “inequality” of wealth. Nor do I believe that any government-sponsored effort to redistribute wealth would work.
And yet, despite any good reason, I want to pay E more.
Why is that?
I don’t believe that making more money will make him happier.
When I observe E’s daily life — how much he laughs, how often he seems to be comfortable, etc. — it seems as if he’s doing as well as most much wealthier Americans.
Yes, E would be very “happy” if I doubled or tripled his salary. But that wouldn’t make me happy. It wouldn’t make him any more capable of earning more from anyone else. It would simply make him feel entitled to being paid more for the same work.
So instead, I gave E the opportunity to do extra work around the house. I told him I’d pay him $5 per hour — quadruple his hourly rate — for any “extra” work he did.
He rose to the challenge. He began by learning to paint walls and windows. Then, he learned how to change the filters on the air conditioners and do a bit of plumbing and even some electrical work.
Eventually, we switched him from hourly pay to job-related pay. This gave E the chance to learn how to estimate his time, write up bills, keep receipts, and even negotiate (with me!)
Today, he has the house I would have liked to give him, but he got it with his own efforts. It wasn’t a gift, and he knows it.
He used some of the money he made to build and stock a little store that sits in front of his house. His wife works there. It provides his family with a second income.
In his transformation from pool boy to entrepreneur, E faced an obstacle that is greater than his lack of skills.
E went to grammar school (the only school they had) during the Sandinista (communist) years. This taught him two very dumb ideas about wealth:
These ideas move quickly into thoughts like:
In the old days, I sometimes saw ideas like these flickering in the back of E’s mind. Back then, when he wanted something — a concrete floor for his house or money for his daughter’s birthday party — he assumed he could ask me for it and I would give it to him.
I soon realized that by giving him money when he asked for it, I was giving him a very bad idea: that the path to wealth led to me, his patron. He didn’t want to have more money like me. He wanted to have my money.
He saw money, then, as a never-ending supply, he could just get from someone else. Since I was the only wealthy guy he knew then, it made sense that he based his strategy for growing rich on “101 ways to talk Mark Ford into giving me money.”
I’m proud to say that E now has another idea about how to get money: by offering his professional services and charging as much for them as the market will bear. I’m still his biggest client, but he has done fix-it jobs for other homeowners in our community, and he has his store for extra income.
All this said wrongheaded ideas about wealth are not unique to communist countries. They exist in every country of the world, including the U.S.:
None of those ideas will make you wealthy. Rather, they will make it harder. Every minute you spend wanting money you didn’t earn is a minute wasted and a bad habit reinforced.
The lesson here is about the opportunity. In Nicaragua, E has elevated himself well above abject poverty by changing his mindset about how he acquires wealth.
E learned the first step on the path to wealth begins by recognizing that all wealth must be earned. E could well have bemoaned his financial fate. It wasn’t his fault that he was born poor in Nicaragua. But he didn’t. He got to work.
E also learned he needed to acquire financially valuable skills. By learning painting and carpentry, etc., he was able to quadruple his compensation and start his own business on the side.
How are you doing? Have you achieved all of your financial goals? Or, like millions of people around the world, are you struggling through?
If you need more money, follow E. Begin by taking personal responsibility for your financial future and then developing one or more financially valuable skills.
And then you can build on that by acquiring marketing and selling skills. These skills will make you a more valuable employee. They will also form a solid base on which to build your own second or third stream of income.
Unit Trusts (a.k.a. mutual funds), bonds and treasury products. These are just some investing options banks and other institutional investors offer their clients. But before you buy into any of these, let’s look closely into the bank’s offer.
“Traders and salesmen would boast about ‘ripping the face off’ their clients — structuring and selling complicated deals that clients did not understand but that generated huge profits for the bank that was brokering the trade.”
13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, by Simon Johnson & James Kwak.
When I log into my online banking account these days, I can get a lot done from my dashboard. I can transfer money locally and globally. I can settle utility bills, pay my taxes and even pay parking fines. I can take out insurance, apply for loans or credit cards.
It’s very convenient. I appreciate anything that helps me avoid having to go to a bank branch in person.
But it’s not just the day-to-day conveniences that online banking offers me. My bank also helpfully offers me an increasing array of ways for me to “invest” my money.
In the screenshot below, you’ll see the Investments tab of my online banking dashboard.
You might see this and think of words like ‘choice’, ‘variety’… or even ‘convenience’.
But I think you should treat this section, especially the parts I’ve highlighted in red, a bit like a museum. First, because that’s where a lot of the stuff on offer here belongs. Second, because you should look, but not touch. And third, because if you do touch what you see here, it’s likely to be very expensive for you. (You’re probably better off buying cheap markets.)
Below, I’ll tell you why one particular relic here is so toxic to your financial health.
Unit trusts (or investing in mutual funds)
The ever-so-helpful Q&A provided by my bank on unit trusts says the following [my comments added in red]:
Q: What are unit trusts? How can I benefit from unit trusts investment?
A: Unit trusts (or mutual funds) give investors the opportunity to diversify even a small investment in securities, bonds, currencies and commodities in markets around the world. [So do ETFs, at a fraction of the cost.] This is achieved by combining the resources of many investors into one large fund which can be spread over a number of different investments and over a wide geographical area. [This sentence is nonsensical financial jargon gibberish, it makes no sense.]
Unit trusts have a number of benefits:
So far, so good. We’ve been briefed on all the ‘benefits’ of unit trusts. But surely there must be some risks?
Q: What are the risks of investing in unit trusts?In general, investors are exposed to the following risks when investing in unit trusts and investors should refer to the individual product offering document for further details and risks involved.
Now that you’ve read the Q&A, you understand that a mutual fund is not a time deposit. And you realise that liquidity is both a benefit and risk. So let’s get on with choosing a unit trust.
You’re keen on some simple broad Asian equity exposure, so you browse the list of mutual funds and you come across the [BANK NAME REMOVED] Asia Ex Japan Equity Fund.
It sounds pretty straightforward.
You take a look at the fund factsheet and notice that the fund was launched on the 1st of April 1993.
You disregard the fact that this US$288 million fund opened for business on April Fool’s day, and instead recall that “fund managers spend their working lives researching and managing investments”.
This fund has been running since ’93 so it must be a winner.
And with over a quarter of a billion dollars under management, it’s time to see how those ‘economies of scale’ are working out in terms of ‘lower fees’. You glance at the fact sheet again, shown below..
Hmmm… So, the bank/fund manager takes over 5 percent of your money for the privilege of managing your money (the ‘Initial charge’ or ‘Front load’).
Then they take another 1.5 percent of your money to ‘manage’ it for you. But don’t worry, “with a unit trust, their expertise is working for you,” just like a car mechanic.
You do the maths and realise the fund needs to rise by 6.75 percent in the next 12 months just for you to break even.
Perhaps you console yourself in the knowledge that at least you have liquidity, given that “you can buy and sell unit trusts on any dealing day”.
But sadly your consolation is short-lived when you realise that although you just bought the fund for US$56.04 the best ‘bid’ you have is US$53.10.
This is 5.4 percent below what you just paid for it, as you can see in the figure below.
If you are unclear on what it means to ‘have your face ripped off’, it’s getting sold an investment product like this.
These products are still marketed, a growing list of mutual funds still sit there being advertised by my bank. The logical conclusion therefore is that there are still people out there buying this junk.
Please, don’t be one of them.
The fund I looked at today is just one of hundreds. And it ‘manages’ over a quarter billion dollars of individual investors hard earned wealth.
P.S. At Stansberry Churchouse Research, our goal is to help you make your own investment decisions… and learn to avoid financial garbage like Unit Trusts. If you want recommendations that can make you money, rather than squander it, click here to learn more about The Churchouse Letter.
What do successful people have in common? Talent is important, but that’s just the beginning. This week, Mark Ford shows us how even the best can get better, and shares his own recipe for success.
By Mark Ford
It was awkward.
A colleague had asked me to revise a sales letter he’d commissioned. He called it “run of the mill.” He wanted me to “bring it to life.”
It was rather ordinary copy, and bringing it to life required changing nearly 30 percent of the text. But the problem wasn’t the work. It was the fact that the writer, a successful copywriter, was a friend of mine.
I worried that Sarah (not her real name) would be upset I had changed it so much. And that because she was upset, she would “veto” my recommendations.
Happily, she didn’t. After reviewing my changes (not knowing who had made them), she sent a letter to my colleague acknowledging that the revision was better. She promised to learn from it and “write at that level next time.”
I remember seeing that response and thinking: “Sarah is going to be really, really good.”
Pride… and a slice of humble pie
This story has two morals:
The first is about pride, and its opposite: Humility. If you want to accomplish great things and/or learn complex skills, some amount of pride is necessary to push yourself forward. But false or overreaching pride (Aristotle’s term was hubris) is a major obstacle.
Sarah, as I said, was an accomplished copywriter. If I had to rank her against her peers I’d say she was, at that time, in the top 20 percent. She’d earned the right to argue with my changes, but she didn’t. The pride she had in herself had brought her so far as a writer already. In this case, at least, she wasn’t going to let false pride halt her progress.
False pride is a very common problem among copywriters — well, among every sort of writer. It’s when writers believe — or desperately want to believe — that their writing is above reproach. So they damage their careers because they can no longer benefit from learning from others.
This is equally true for musicians, tennis players, salsa dancers, sumo wrestlers, and CEOs. Those who are willing to say, “I am good, but I can learn to do better,” do better. Those who say, “I am the greatest. Nobody knows more than I” are sure to take a serious tumble.
Ego. Selflessness. Pride. Humility. Confidence. Fear. There are so many emotions that play a part in personal development. What you want in your career is the confidence that follows accomplishment, not the pride that precedes a fall.
Or, to put it differently: No matter how good you are at what you do, there’s someone out there who can teach you something.
Think about your strongest skill — the talent or capability that is most important to the achievement of your main goal. Now ask: “Am I willing to acknowledge that there are people in my universe who are better at this than I am?”
If you can accept the possibility that there are others better than you, then you can learn from them. If you extend this perspective, you’ll realize that you can learn specific things from people who don’t have your overall mastery.
Practice makes perfect
And now we come to the second moral of this story: The only good way to improve a skill is to practice it. Reading about it is certainly helpful. Talking about it with people who are experts may work too. But no amount of reading and talking will do nearly as much as regular, focused practice.
Human beings are designed to get better through practice. Everything we ever learn to do — from walking to talking to writing concertos — gets better through practice. Practice makes our fingers move faster, our hearts beat stronger, our brains think faster.
Or think of it this way: Nothing in nature stays the same. If you’re not getting better, you’re only getting worse.
And that’s what Sarah should know about her future as a copywriter. If she continues to practice her craft — while taking advantage of everything she can learn from more experienced and skillful copywriters — the likelihood that she will be great one day is better than 99 percent.
With practice and a willingness to keep learning, Sarah will one day be among the very best copywriters in the business.
The recipe for success
So here are the four main ingredients for greatness:
Few people – especially those who read investment newsletters – like being part of the “crowd”. But, difficult as it is to stomach, “they” are often… right.
What “they” think – whether it’s the financial media, or talking heads on TV, or the “conventional wisdom” – is mainstream. It’s boring and vanilla. And from an investment perspective, it’s like soggy breakfast cereal.
After all, we’re told, great fortunes are made by people who go against the grain. Warren Buffett has enough folksy quotations about this – like, “Be fearful when others are greedy, and greedy when others are fearful. ” – to fill a graveyard full of tombstones.
Then there’s the 18th-century British nobleman Baron Rothschild, who is believed to have said something like, “The time to buy is when there’s blood in the streets,” which is what contrarians tattoo on their foreheads.
Buy when things are bad, bad, bad – right?
At its core, defying the conventional wisdom – the know-it-all on CNBC, the taxi driver who passes on his hot stock tip – is what contrarian investing is all about. It’s defying everyone else and conquering your gut instinct, which is telling you to run in the opposite direction.
And in particular, it’s the belief that when everything seems pitch-black, blood-red bad, when everyone else is selling… that’s the time to buy, because things can’t get any worse. And then they get just a bit better, and the brave investor makes a killing.
But some investors take contrarian investing to an extreme. They interpret any bad news, or market correction, or stock decline, or literal blood on the streets, as good news in disguise.
That kind of attitude – knee-jerk contrarianism – is a great way to lose a lot of money, because sometimes – and maybe even most of the time – the boring, plain, they’re-all-saying-it conventional wisdom is, in fact, correct.
Take Ukraine (please)
In April 2014, I visited Ukraine to look at potential investment opportunities. Just weeks before, Russia had invaded and annexed Crimea, a Ukrainian territory. Fear of what might come next was almost palpable. Would the Ukrainian capital, Kiev, be next on the Russian agenda?
“When I’m traveling out of the country, I tell my wife to keep a bag packed,” one senior business executive I met with in Kiev told me. “And if there’s any sign of trouble, I told her, she needs to get in the car and just drive west.”
What’s more, Ukraine was a corrupt mess and its greedy politicians had squandered two decades of post-Soviet freedom. At that time, in the years after the 1991 collapse of the Soviet Union – Ukraine had been one of the Soviet states – Poland’s GDP had grown six times bigger, Russia’s had grown nearly four-fold… and Ukraine’s economic output had just doubled.
This was all the stuff that contrarian dreams are made of. And I met plenty of dreamers at an investment conference in Kiev while I was in town – packed even though it was just weeks after Russia kicked in Ukraine’s door.
At the time, I believed that it was too early to buy anything in Ukraine. At the time I wrote “… sentiment and valuations are only going to get worse in the near term. So we’ll stay on the sidelines for now”.
Two of the three stocks that I flagged as potentially interesting (but not then) subsequently fell 27 and 39 percent over the next six months… and were down 69 and 49 percent over the next year. (The other stock I mentioned fell only 7 percent over the next year and was flat over the following six months.) Ukraine was a terrible contrarian bet then.
Today’s contrarian trap
Today, it’s happening again, this time in Venezuela.
The South American country has the world’s largest oil reserves (though it’s inaccessible, low-grade oil) – twice as much as Iraq and almost seven times as much as the U.S. And in gross domestic product (GDP) per capita terms, it’s about as rich as Poland… and nearly 50 percent richer than people in China.
But Venezuela is a catastrophic mess. “Crisis upon crisis in Venezuela,” headlined an editorial in the New York Times yesterday, citing how “precipitously” the country’s standing has fallen. Riots, hyperinflation, and rampant chaos are the order of the day. News reports say that the country’s hospitals have less than 5 percent of the medicines they need. The only thing where Venezuela leads is in its murder rate.
Could things get any worse? Of course… because they have been getting worse. I visited Venezuela a bit more than two years ago, and it was a mess then. The official exchange rate was 6.3 bolivars to the dollar – but the black-market exchange rate was around 125 bolivars (and now it’s about 3,000). Drugstore shelves were full – but of only the handful of products that were allowed into the country (so if you wanted Colgate toothpaste, you were in luck; if you wanted shampoo, tough luck – there was none). And if you were stuck in dusk rush-hour traffic, it was a very good idea to turn off your phone (or any other electronics) because the glimmer could catch the eye of one of the motorcycle-riding thieves who paused at cars paralyzed in traffic – and rapped on the window with a gun, demanding whatever they wanted.
I wrote at the time, “When I look at a country or a market that’s in trouble, I always look for a catalyst for change… But in Venezuela’s case, I don’t see a catalyst. If anything, things are going to get worse… Even if Venezuela’s pressing political and macroeconomic problems were somehow solved tomorrow, the country still faces more structural challenges than most countries will experience over the course of a few generations.”
The only real way to invest in a traded Venezuelan asset is to buy the country’s sovereign bonds (which is difficult and expensive to do if you’re not an institutional investor).
After I was in Venezuela an index of the country’s sovereign bonds fell about 30 percent. But since reaching a low in early 2015, they’ve more than doubled, as shown below.
What happened? Nothing improved in Venezuela. In fact, as I said, things have only gotten worse. The country is the definition of a failed state.
This is what happened: Contrarian investors. How much worse could things get? they say to each other. So they buy. And then others follow them, ignoring the real chance that the government may default, or that the country may fall even deeper into chaos.
So far, they’ve been right. But the real problem is this: What if all the contrarians are lining up together? Then there’s no one else to sell to. And eventually, reality takes over.
I don’t know if this will happen in Venezuela tomorrow, or next month, or next year. Or perhaps the situation will actually improve, and these investors will be vindicated.
But there are contrarian traps everywhere. Be sure you don’t fall into one, by assuming that what “they” say – the conventional wisdom – is automatically wrong.
Earlier this week, the latest U.S. Consumer Confidence index figure was released, showing that consumers are the most confident they’ve been in 16 years.
This might sound great but as they say, the higher you are the farther you fall.
Let me explain.
The Consumer Confidence index is created from a monthly survey of 5,000 U.S. households. The questions and the way they’re collected are largely unchanged since 1967. This means that it’s one of the longest running, and most consistent, indicators of the direction of the American economy.
The survey asks respondents to comment on business and employment conditions today, and their expectations of where they’ll be in six months. People who answer the survey are also asked about their expectations of family income in six months. The U.S. consumer is a huge financial force. It’s the largest component of domestic GDP. And U.S. consumers – though they account for just under 5 percent of the global population – are responsible for around a quarter of the US$43 trillion that households all around the world spend every year. (We’ve written about how the Chinese consumer will be one of the most important forces in the global economy… in the meantime, the American consumer still sits on that throne, though.)
So the Consumer Confidence figure is an extremely important and closely-watched indicator – both for the American economy and for the global economy. It’s a gauge of optimism about the overall state of the economy and the consumer’s personal financial decisions. If consumers are happy and optimistic, they’ll tend to spend more and save less.
Over time, we see clear trends and cycles in consumer confidence. Take a look at the chart below showing the index all the way back to its inception in 1967.
The first thing you’ll notice is the index isn’t above 125 (its current level) very often. In the past 50 years, it only hit that level in two cycles.
And more telling, with the exception of 1997 to 2000, when the index is at or near the level it is now, we often see a sharp reversal soon thereafter.
Consumer confidence and the stock market are also closely linked. If we look back at the last three bull markets in U.S. stocks, we see a close correlation with the consumer confidence index (see chart below). That means that consumer confidence and the U.S. stock market tend to move together.
This makes sense. Consumers are confident when they have jobs, and feel a sense of stability – and they then feel more inclined to spend than save. And given the huge importance of the U.S. consumer to the economy, consumer spending means profits and economic growth.
So, with confidence at a 16-year high, should you be rushing out and buying stocks?
A strong consumer confidence figure is good for the economy. But it’s a lagging indicator, not a leading one. That means that consumer confidence tells you about the state of where the economy is, not necessarily where it’s heading. It’s a lagging indicator because economic growth takes time to filter through to consumers in the form of employment and wages, which are primary drivers of how the index is determined.
But over the next few months, strong U.S. consumer confidence is positive for;
The U.S. dollar – Higher consumer demand suggests that prices will rise faster. As a result, the Federal Reserve may lean towards raising interest rates faster – which makes the dollar a more attractive asset.
Consumer discretionary stocks – In periods of weaker economic growth and lower consumer confidence, consumer staple stocks (like Kraft Heinz, Colgate-Palmolive, and Proctor & Gamble) tend to outperform. These companies sell your everyday necessity items. But when the person in the street has a little extra cash in his pocket and feel good about their prospects, they’re more likely to upgrade their phone, take a vacation or splurge a little extra cash on something nice.
Asian exporters – China is by far the biggest exporter to the U.S. All those TV’s, phones, and iPads are made in China. And coupled with a stronger dollar, these imports are even more attractive to the U.S .consumer (because they’ll be cheaper for American buyers with the stronger U.S. dollar). South Korea and Japan are other large U.S. export markets.
In the medium term, U.S. stocks are still expensive by historical standards. The S&P 500 trades at a forward price-to-earnings ratio of around 18 times. That compares to an average of about 16 times since 1990.
We’ve written about how the so-called Trump Rally is going to end soon. So far, it hasn’t, and the S&P 500 is up 5.3 percent in 2017 so far. But such a high Consumer Confidence figure suggests that – if history holds – U.S. stocks are getting very close to their high for this market cycle.
Caution is preferable to exuberance.
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