Justin’s note: Today, we’re breaking away from our usual fare and featuring a new essay from one of the best value investors in our business, Bonner & Partners analyst Chris Mayer. Over a 10-year span, Chris outperformed not only the S&P 500, but also legendary investors like Warren Buffett and Carl Icahn.
In short, it pays to listen to him. And with today’s unpredictable market, it’s now more important than ever to hear his advice…
By Chris Mayer, editor, Bonner Private Portfolio
Welcome to 2018. Pull up a chair and stay awhile.
We all have the same questions: What awaits us in 2018? What dangers lie ahead? What opportunities? What to do now?
Before we get to our answers, I have a parable to share. It will help get you in the right frame of mind.
I first read it in a book by Alan Watts (1915–1973), who was a popular speaker and writer mainly on Eastern wisdom as found in Zen, Buddhism, Taoism, etc. Below is my rendition of the story.
The parable is about a farmer. One day, he forgets to latch the barn door and his horse escapes.
“That’s bad news,” his neighbors tell him.
But the farmer is more circumspect. “Maybe,” he says.
The next day, the horse returns… with several other wild horses as well.
“Wow, that’s great,” the neighbors say.
“Maybe,” says the farmer.
The next day, the farmer’s son breaks his leg after being thrown by one of the new horses.
“That’s rotten luck,” the neighbors say.
“Maybe,” says the farmer.
The next day, there is a war. Men come to the village to draft soldiers. The farmer’s son does not have to go.
“What good luck,” the neighbors say.
“Maybe,” says the farmer.
You get the point of the story. You can never really be sure how things will turn out. Bad news may, in fact, lead to a good outcome down the road. And vice versa.
I agree with the author Kurt Vonnegut, who said, “The truth is, we know so little about life, we don’t really know what the good news is and what the bad news is.”
The market provides abundant examples of the parable in action.
I remember a point early last year when one of the recommendations in Bonner Private Portfolio, Rolls-Royce (RYCEY), fell 9% in one day after a “bad” earnings report. More than one reader wrote to me with worried thoughts.
We said buy. The stock is up nearly 50% since.
Or consider a counterexample: U.S. stocks, by and large, had a very good year in 2017. The S&P 500—a broad index of large U.S. companies—delivered a 22% return.
Well, maybe not.
For one thing, it is very hard to find bargains in the U.S. stock market today. Prices look rich for many stocks. The risk of buying something expensive and suffering poor returns or losses is higher now. Time will tell if the generous gains of 2017 stick or whether they merely set the stage for a difficult 2018.
Thus, the parable nudges you to take the happenings of life with equanimity. You never really know.
A Mountain of Dishes
I had been reading Watts over the holiday break and I shared bits here and there with my family. I would like to share one other story from Watts you may find helpful as you think about the road ahead.
Watts writes about the frustration or dread you may feel upon realizing you have a large or repetitive task ahead of you. He likens it to having a pile of dishes to clean. Here is Watts in his own words, from Eastern Wisdom, Modern Life:
You begin to think as you wash them that you’ve washed dishes for years, and you’re probably going to have to wash dishes for the rest of your life, and then in your mind’s eye you see this prodigious pile of dishes piling up as high as the Empire State Building… and you are appalled and oppressed.
But dispelling this dread isn’t a matter of trying to forget about washing dishes, it is realizing in actual fact you have only one dish to wash, ever: this one; only one step to take, ever: this one.
I told this story to my 15-year-old daughter. She remembered it, because a couple of days later, after dinner, I complained about not wanting to do the pile of dishes. (True story.) My daughter gleefully pointed out, “But Dad, you only have to do one!”
Well, she’s right.
The Right Frame of Mind
What awaits us in 2018? What dangers lie ahead? What opportunities? What to do now?
We answer these questions with a question: Remember Watts and his story with the dishes? We will deal with the year as it unfolds day by day. Better to live in the present. There is no future. There is no past. Only the present is “real.”
We think most people spend too much time and energy trying to predict things they can’t predict (such as the stock market). They worry incessantly over imagined problems.
We’ve preached a different message in my Bonner Private Portfolio newsletter: Focus on the businesses you own and how they can create wealth over time.
A business is like an organism, or perhaps a machine. You can understand how it works. And you can use this understanding to gain a real edge over the market. This is what we focus on.
For now, we reiterate what we said earlier: Keep a good amount of cash in your portfolio. I suggest having 30% in cash. There will be times to put that cash to work. 2017 was a strange year in that it was the only one on record in which the S&P 500 recorded a gain every single month. It is unlikely to repeat, hence the value of dry powder.
Thanks for reading, and here’s to a prosperous 2018!
Editor, Bonner Private Portfolio
P.S. On Thursday, February 8, I’ll be joining Bonner & Partners chairman Bill Bonner and Casey Research founder Doug Casey for the first-ever Legends of Finance Summit.
During the summit, I’ll show you how I’m applying my investing strategy to Bill’s “Trade of the Century” concept.
Be sure not to miss it. You can sign up for this free event right here.
Justin’s note: I recently showed you why the dollar is about to fall from here. Today, master trader Jeff Clark offers further proof by looking at this trend from a more technical perspective…
By Jeff Clark, editor, Market Minute
The U.S. Dollar Index has been in a strong downtrend for over a year. It’s fallen over 5% in just the past two months.
When we looked at the dollar earlier this month, we noted the index was headed toward its September low at about 91 (the second horizontal red line on the chart below). And we cautioned that, if that level did not hold as support, then there was a lot more room to fall before the dollar reached its next support level.
Well… look out below.
After a couple of days of trying to gain some footing, the U.S. Dollar Index turned lower again yesterday. It’s oversold. And investor sentiment (a contrary indicator) is quite bearish on the buck.
That might be enough to cause a short-term bounce. But I don’t think so.
To me, it looks like the dollar is on the verge of a “flush-out” move.
A flush-out is that final, dramatic decline that occurs at the end of a prolonged downtrend. Investor sentiment is usually quite bearish. Technical conditions are almost always oversold. Yet, in spite of all that, the asset still can’t manage to bounce.
That’s when the last of the holdouts finally throw in the towel. They’re exhausted from holding on to a position that does nothing but fall. So, they finally hit the “sell” button.
I expect that’s what will cause the next big drop in the dollar—which should bring the U.S. Dollar Index to its next support line, about 3% lower from here.
In turn, that action is likely to spark another nice move higher in gold.
Justin’s note: Before I start my trading day, I always check my inbox at 7:30 a.m. ET for Jeff Clark’s Market Minute.
Each day, Jeff has new market insights that improve my trading performance… like which charts to watch during the week ahead… which technical indicators to use… or just some tried-and-true strategies from his 30-plus years as an option trader.
I asked Jeff if I could share his newsletter with Dispatch readers. And he set up this link you can use to subscribe to the Market Minute. It’s completely free and should give you the same trading edge I get from reading the Market Minute every day. Click here to get started.
Today, two readers share their thoughts on the crypto mania:
I just love all of the crypto skeptics. They are living proof of why this trend will take a while to unfold. I am amazed that more people don’t try to understand what is going on instead of dismissing it out of hand. Their comments reveal a complete dearth of understanding. Time will tell.
Good for the skeptics. The rest of us are "laughing all the way to the bank."
And another is taking advantage of the huge opportunity in marijuana stocks today:
The mailbag posted a response of mine on the war on drugs. Thanks! But a big million-dollar thanks on helping me and my partner find an ETF in the international market that was a sleeper at 3% for the last three years and last year, had gains of over 40%. If you can read between the lines, it’s because it is now doing extensive research in developing drugs that are plant-based. Hello, they are not going to say what plant!
If you have any questions or suggestions for the Dispatch, send them to us right here.
Doug Casey recently revealed his biggest speculation today…
This is only the second time in 41 years as an investor that he’s said, "If I could call your broker and place this trade for you myself, I would." Details here…