By E.B. Tucker
Justin’s note: If you’ve been reading the Dispatch, you know I’ve been writing a lot about “basics” stocks lately. These are companies that sell stuff people can’t live without. Think bread, toilet paper, and shampoo.
But I have to make a confession…
E.B. Tucker, editor of The Casey Report, was actually the one who tipped me off to this idea. He understands the subject better than anyone I know. And today we're featuring a special essay from him. Below, E.B. explains why it’s never been more important to own these types of companies.
It was the most important investing lesson I’ve ever learned…
I was just a kid at the time. I was working at my grandfather's small furniture store.
The store was always busy.
But I couldn’t understand why my grandfather’s store was downtown and not in one of the newly developed shopping malls outside of town. So one day, I asked him…
I’ll never forget his answer.
He said, “Son, what you want to do is sell to the masses…and dine with the classes.”
You see, my grandfather didn’t sell luxury sofas. He sold durable furniture at the lowest price possible. He knew that selling a truckload of basic sofas to people who need something to sit on was more profitable than selling one custom-made, hand-stitched sofa.
The people who buy $10,000 sofas probably have a lot of furniture. They might even have rooms in their house that they never visit. They're likely to complain, make changes, or even refuse delivery altogether. That never happens with basic goods.
Now, my grandfather wasn’t just a great businessman. He was also a great investor. To this day, he’s one of the best stock pickers I’ve ever known.
He knew that fads come and go. People’s tastes and preferences change.
But some things never go out of style.
That’s why he sold basic sofas to the common man instead of custom sofas to “high-end” customers.
He knew that everyday people would still buy sofas even if the economy fell apart. That’s what made his store such a great business.
I bring up this story today because there is an extremely valuable lesson here…one that will help you become a significantly better investor.
In The Casey Report, our goal is to help everyday investors build fortunes that can last lifetimes. One way we do that is by recommending companies that can make money in any environment.
This might seem like common sense.
But most investors do the exact opposite. They buy whatever’s “hot.” More often than not, this strategy backfires.
Just look at what happened to Fitbit Inc. (FIT)…
This company makes a bracelet that counts how many hours you sleep…how many steps you take…and how many calories you burn.
It’s supposed to make you healthier. But people don’t need a bracelet to stay healthy. If they want to work out, they just get up and do it.
In short, Fitbit doesn’t make you healthier. It only makes you feel like you’re getting healthier.
And yet, Fitbit had an incredibly successful initial public offering (IPO) in 2015. It raised $732 million. It was one of the biggest and most talked-about IPOs of the year.
A month later, the discount store Ollie’s Bargain Outlet (OLLI) went public. It raised $143 million.
And guess what? People couldn’t care less.
This is because Ollie’s business is boring. It sells “good stuff for cheap”…like frozen pizzas, laundry detergent, and dish soap.
There’s nothing sexy about it. But it stands a much better chance of surviving than Fitbit.
Just look at this chart.
You can see Ollie’s stock has quietly climbed 97% since it went public in July 2015. Fitbit, on the other hand, has plunged 88% over the same period.
It’s now only a matter of time before you see Fitbits in the discount bin at your local Ollie’s or Dollar General.
Now, I didn’t write this essay to pick on Fitbit. I wrote it because I think it’s more important than ever to own companies that sell things people need.
As I’m sure you know, the Federal Reserve began a radical monetary experiment after the dot-com bubble popped.
It dropped interest rates to the lowest level in decades.
The unprecedented stimulus measure flooded the economy with hot money. It blew a housing bubble of epic proportions.
When that bubble popped, the Fed doubled down on the same bad policies. Only this time it dropped its key interest rate to nearly zero and pumped trillions of dollars into the financial system.
Many people credit the Fed for saving the financial system. But they shouldn’t.
All the Fed’s easy-money experiment has really done is blow a huge bubble in stocks and bonds.
At this point, many investors have lost sight of what investing is all about.
They’re more interested in Uber’s flying car project than quality earnings.
They’d rather buy “flavor of the month” stocks like Fitbit, Snap, and Lending Club than a discount store with 10% net profit margins.
These people are setting themselves up for huge losses…and missing out on a huge opportunity.
Remember, most investors don’t care about basic companies right now. But that will change in a heartbeat when the next crisis arrives.
When the tide turns, investors are going to realize that they own the wrong companies. They’re going to take shelter in “basics” stocks…like the ones we own in The Casey Report.
In summary, if you build a list of overlooked, profitable companies that make basic items, the market will give you a chance to buy them at a great price over time.
When you do, you'll sleep well at night knowing that you're building long-term wealth with world-class companies that will never go out of style.
Editor, The Casey Report
P.S. Right now, I have four “basics” stocks in The Casey Report portfolio. But this isn’t the only way that I’m making money for my subscribers. I’ve also handpicked six world-class companies that should deliver huge returns under President Trump. You can learn more about this opportunity by watching this urgent presentation that my team and I put together. Click here to watch.