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The Only Sure Way to Get Rich in Stocks

Stocks likely have more downside ahead. But as Porter Stansberry notes, times like these can also lead to opportunities. Today’s essay is a reminder that when assets are trading at good prices, you want to have a wish list of stocks to own “forever.


By Porter Stansberry, founder, Stansberry Research

Most people think Warren Buffett became the richest investor in history – and one of the richest men in the world – because he bought the right “cheap” stocks.

Legions of professional investors tell their clients they’re “Dodd and Graham value investors… just like Warren Buffett.”

The truth of the matter is entirely different.

Until 1969, Buffett was a value investor, in the style of David Dodd and Benjamin Graham. That is, he bought stocks whose stock market capitalization was a fraction of their net assets. Buffett figured buying $1 bills for a quarter wasn’t a bad business. And it’s not.

I’ve written at length about buying stocks at “no risk” prices. But as Buffett learned, this is still only part of the equation.

It’s just as important to invest in safe stocks that can compound their earnings… for decades. Then you must do the truly hard thing – and never sell…


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Take beverage giant Coca-Cola (KO), for example.

Buffett bought his Coke stake between 1987 and 1989. It was a huge investment for him at the time, taking up about 60% of his portfolio. How could Buffett have known Coke would be a safe stock… and that it would turn into a great investment?

Well, like Einstein said famously about God, Buffett doesn’t roll dice. He only buys sure things.

Coke is a simple business. It made soda 100 years ago. It makes soda today. And it will be making soda in another 100 years. That’s the perfect setup for a business that can keep growing sales and profits… without growing its expenditures.

And judging by Coke’s previous marketing results and its expansion into new markets, its sales would also continue growing. As Buffett would tell you, it wasn’t that hard to figure out.

After he bought, other investors would bid up the shares to stupid levels. Coke was trading for more than 50 times earnings by 1998, for example. But Buffett never sold. It didn’t matter to him how overvalued the shares became, as long as the company kept raising the dividend.

In 2019, Coke paid out $1.60 in dividends per share. Adjusted for splits and dividends already paid, Buffett paid about $2 per share for his stock in 1988.

Thus, Coke’s annual dividend, 32 years later, now equals 80% of his total purchase price. Each year, he’s earning 80% of that investment – whether the stock goes up, or down.


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In his 1993 letter, Buffett wrote about his Coke investment and his approach – buying stable, capital-efficient companies with the intention of holding them forever so their compounding returns would make a fortune…

At Berkshire, we have no view of the future that dictates what businesses or industries we will enter. Indeed, we think it’s usually poison for a corporate giant’s shareholders if it embarks upon new ventures pursuant to some grand vision. We prefer instead to focus on the economic characteristics of businesses that we wish to own…

Is it really so difficult to conclude that Coca-Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market.

Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power… The might of their brand names, the attributes of their products, and the strength of their distribution systems give them an enormous competitive advantage, setting up a protective moat around their economic castles.

Buffett is looking for companies that produce high annual returns when measured against the company’s asset base and require little additional capital. He is looking for a kind of financial magic – companies that can earn excess returns without requiring excess capital. He’s looking for companies that seem to grow richer every year without demanding continuing investment.

In short, the secret to Buffett’s approach is buying companies that produce huge returns on tangible assets without large annual capital expenditures. He calls this attribute “economic goodwill.” I call it “capital efficiency.”

These kinds of returns shouldn’t be possible in a rational, free market. Fortunately, people are not rational. They frequently pay absurdly high retail prices for products and services they love. Buffett explained how another of his holdings, See’s Candies, earned such high rates of return on its capital in his 1983 annual letter. In explaining See’s ability to consistently earn a high return on its assets (25% annually at the time, without any leverage), Buffett wrote…

It was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.

Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price…

That’s the whole magic. When a company can maintain its prices and profit margins – because of the value placed on its product by the purchaser, rather than its production cost – that business can produce excess returns… returns that aren’t explainable by rational economics.


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Those, my friend, are exactly the kinds of companies you want to own.

Now… if it were that simple, we’d all be rich. Buying these kinds of stocks is actually extremely difficult because you rarely get the opportunity to buy them at a reasonable price, let alone a no-risk price.

That’s why I urge you to make a list of these kinds of companies… to determine the prices at which you can buy them on a no-risk basis… and then wait for your opportunity. Strive to buy the companies whose products and services you believe are most loved and most likely to be extremely long-lived. Try to acquire assets that your children’s children will never want to sell.

Set your family’s wealth on the path of compounding. In time, you can join the Rockefellers – but only if you never sell.

How to Buy the Most Capital-Efficient Stocks, Safely

Stocks have further to fall before we see a bottom. But soon, the time will come to invest in great companies at fantastic values. In today’s essay, Porter Stansberry covers the exact steps you can take to buy stocks at “no risk” prices…

By Porter Stansberry, founder, Stansberry Research


Make sure you save a copy of this letter.

It’s a step-by-step, paint-by-numbers guide to making a fortune in stocks. No, I can’t promise that your investments will pan out as well as a few of mine have over the last few years. But I believe anyone is capable of becoming a world-class investor. You only need to know three things.

These are the things I know work – no matter what else is happening in the world or in the markets. Let me explain…


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Investing is a simple game.

The goal is to get the most in return for having given the least in exchange. Any serious study of this process will reveal just a few variables control the outcome.

First, the amount of capital employed is important. Thus, the cardinal rule is: Don’t lose money. Money lost cannot be invested. Money lost will not compound.

Second, time matters. The duration an investment may be held continuously with dividends reinvested is critical.


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And the third important factor is the rate of compound growth.

What’s funny about this list is how simple the game really is… and how few people pay any attention to the most basic rules. I doubt many subscribers consider these variables before they buy a stock. What most people consider is simply, “Will this stock go up? By how much? And when should I sell?”

The questions they should be asking are almost the complete opposite.

They should try to figure out…

  1. How fast are these shares likely to compound, assuming I reinvest all of the dividends?
  1. How long will I be able to hold this company safely?
  1. And most important, what’s the most I can safely pay for this stock?

I share these ideas with a large amount of trepidation. These are not ideas that sell newsletters. You, gentle reader, may expect me to deliver the name of a stock that will surely double in the next month, then double again next year. Believe me, if it were that easy, I’d oblige. But the truth is a bit more complicated…

There’s one exception… one sure way to get rich. And that is to buy capital-efficient businesses that have long-lived products and are capable of increasing payouts year after year.

This approach is, without question, the best way to invest. It’s exactly the approach master investor Warren Buffett uses. But it’s difficult to explain. Worst of all… once you understand how it works, it’s just too simple.


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All you have to do is buy the kind of companies that require very little capital to operate and grow their businesses and therefore produce excess capital that they return to their owners (the shareholders). Then you reinvest that capital into more shares. Rinse and repeat. It’s not much harder than washing your hair.

And that means it’s boring. But the truth is, using this kind of a strategy over time will produce returns that dwarf the gains you’re likely to make speculating, even if you’re a great speculator.

Best of all, my approach, which is based on capital efficiency, is totally safe and requires almost zero effort. The whole trick lies in understanding which companies are capital-efficient and have good long-term prospects.

Once you know that… you only buy when you can get the shares at such a low price that they essentially carry no risk.

So how much should you pay for a stock like this, or any other long-term investment? This ends up being the most important variable, because the first rule of investing is “don’t lose money.” Remember… money you lose doesn’t compound.

Here’s an easy rule of thumb to use when trying to figure out a safe price to pay for a stock… Just figure out how much money it would take to buy back every share at the current market price and add in the total net debt of the company.

The number you’ll end up with is called “enterprise value.” That’s the figure it would cost (in theory) for the company to buy itself.

Next, just figure out if there’s any realistic way the company could afford to buy itself. Few companies actually go private this way… But bear with me. Imagine a company with an enterprise value of $15 billion. For the company to borrow this much money, it would have to afford roughly $1 billion a year in interest payments (assuming 7% interest).

If that’s more than its operating income… it can’t currently afford to buy itself. But if its operating income covers that amount, you’ve got yourself a winner. And your chances are better when shares are cheaper, of course – because this pushes down the enterprise value.

Doing this kind of analysis shows whether a company could realistically repay all of its debts and all of its shares. Assuming it can afford to do both, there’s no fundamental difference between the risk of its stock and the risk in its bonds – because all the bonds and shares could be repurchased.

And that means on a fundamental basis, you’re getting all the upside of the shares – all the upside of being an owner – with the same low risk of being a creditor.

I call this buying at a “no-risk” price. There’s no additional risk to buying the equity compared with the debt.

This is the best analysis to consider before you buy any stock – but especially one you’re buying to hold for the long term. You have to make sure you will be comfortable enough to wait for the payoff.

And the only way to do that is to buy capital-efficient companies… at good, safe prices.

What the Biggest Drop Since 1987 Could Mean for U.S. Stocks

By Chris Igou, analyst, True Wealth


It was the worst day for the markets since 1987…

On Monday, March 16, the S&P 500 Index fell 12%. And while that kind of one-day drop might feel normal after the last few weeks, it’s actually incredibly rare.

The S&P 500 has only fallen more than 10% in a day three other times in history… once in 1987, and twice during the market collapse of 1929.

We are living through historic times. And the big question is… what happens next?

To answer that question, I studied every daily fall of 5% or more going back to 1950. It turns out these daily collapses tend to precede fantastic buying opportunities.

Now, it’s important to note that the trend is obviously down. So I’m not recommending you go out and buy today. But history shows that if you have a long-term horizon, the opportunity in stocks is strong… And an 18% rally is possible in the S&P 500 over the next year.

Let me explain…


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Markets hate uncertainty. So when uncertainty arrives, big downward swings become the norm.

I’m not talking about a 1% or 2% fall, though. Those may feel like big drops during normal times. But in the larger scope, they aren’t as rare as you’d expect.

So to look at the truly extreme daily price falls, I examined every time the S&P 500 fell 5% or more in a day. This is a very rare occurrence…

Since 1950, it had only happened 23 times before this year. Surprisingly, we’ve seen four of these days happen in the past month. You can see the rapid fall in the S&P 500 below…

The drop-off has been fast… And we’ve seen several 5%-plus daily falls along the way. Those days are painful for all investors, but they aren’t the long-term negative sign you might expect.

Buying after similar daily swings has been a good idea throughout history…

Since 1950, it has led to a winning trade over the next year 83% of the time. And it can lead to real outperformance along the way. Take a look…

The market has returned roughly 7% a year since 1950. But buying after huge down days leads to even better performance.

Similar cases have led to 5% gains in six months and an 18% gain over the next year. That crushes a typical buy-and-hold strategy. And it’s a small but significant positive in today’s hugely bearish market action.

Of course, the current trend is against us. Despite a few up days, the S&P 500 is still struggling through its worst rut since the financial crisis of 2008. And I don’t recommend fighting that trend today. That’s a foolish bet.

Still, today’s rare volatility points to major outperformance in U.S. stocks when the uptrend returns. We’re not there yet. But be ready… An opportunity is likely right around the corner.

The Hidden ‘Sweet Spot’ of Bear Market Buys

We’ve seen big moves in stocks lately. The new coronavirus has sent investors panicking… then running back in relief as economic measures roll out. Stocks likely haven’t hit bottom yet. But while you don’t want to “catch a falling knife,” now is a good time to be building your wish list of profitable, lifelong investments…

By Austin Root, American Moonshots Portfolio


The idea that you ought to buy and hold stocks – even though you know a bear market is approaching or intensifying – will seem like nonsense to a lot of investors.

So don’t misunderstand me. You must be cautious in today’s wild market… using all the safety measures we recommend, such as position sizing, asset allocation, hedges, and trailing stops.

But the recent fall in stocks has a silver lining. It means we’ll soon get the chance to pick up cheap shares of the market’s most profitable, most resilient companies.

And while you might not want to hear it… we’re offering this advice because it’s what we’d want you to tell us if our roles were reversed.

Today, I’ll review one key characteristic of stocks that we look for in good times – that becomes especially important in bad times…


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Here’s a simple question: Do you think you could name any of the 20 best-performing stocks in the benchmark S&P 500 Index between 1957 and 2007?

Wharton economist Jeremy Siegel wanted to answer this question thoroughly. It’s not as easy to figure out as you might think. The composition of the S&P 500 changes frequently. Siegel had to go back and get the actual list of stocks from 1957… and then follow each one to see how much they paid out in dividends, spinoffs, mergers, and liquidations.

So… what were the 20 best-performing stocks over that 50-year period?

Almost without exception, these companies sell high-margin products in stable industries that are dominated by a handful of well-known brand names.

Look at the top 10 names on this list – all of which produced 15%-plus annual returns. Our bet is that most of you have a number of these companies’ products in your house right now.

Crane probably stands out as an exception, along with a couple of others. So what is it that Crane (a maker of high-margin industrial parts) has in common with these other companies?

It’s extraordinarily capital-efficient.

Because of the 165-year-old company’s excellent reputation, the unique, proprietary nature of its products, and the stable, long-term nature of its business, it doesn’t have to spend a fortune on advertising… or on building new manufacturing plants to come up with new products every few years.

This means that as sales grow, the company doesn’t need to reinvest more and more capital into its business. Over the past 10 years (2009 to 2019), Crane has earned gross profits of $10 billion… and spent just $478 million on capital investments.

That’s only 4.8% in expenses – a percentage that has remained stable during this period. And that means the company has more profits to distribute to shareholders. That’s the whole secret of capital efficiency.


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One of the reasons we’ve found it’s safe to buy capital-efficient companies during bear markets is that they can support their share prices…

Longtime Stansberry readers know we’ve recommended shares of Berkshire Hathaway (BRK-B) in the past as a great bear market stock. That’s largely because we know Berkshire will begin to buy back its own stock when its valuation falls… for instance, in times of economic hardship.

Capital-efficient companies can do the same, because they’re producing so much cash. In fact, a great test of any capital-efficient company is whether it’s producing enough cash to buy back all its outstanding shares.

This test combines the stability of that company’s cash flows (which is necessary for a high credit rating and access to cheap capital) with its cash-earnings power and a low share price. These are the three most critical factors for a successful bear market investment.

And here’s another hallmark of capital-efficient companies: They almost always return more money to shareholders each year than they spend in capital investments. They wait to buy back stock (or make wise acquisitions) when prices are low.

How can you do the same? How do you know when the right time is to buy these stocks, which almost always trade at rich premiums to the average S&P 500 stock?

To find the most capital-efficient companies, we look for the following criteria:

  • Companies that have reasonably large market capitalizations.
  • Companies with high returns on assets.
  • Companies that produce large amounts of free cash flow (“FCF”) in relation to the revenue they generate. FCF is the amount of cash left over after all operating expenses and business investments.
  • Companies that consistently reward shareholders with dividends and stock repurchases.
  • Companies that consistently grow their revenues, year after year.

During a bear market, you should focus on buying capital-efficient stocks with these five traits. We at Stansberry Research have analyzed, recommended, and respected many of them for – in some cases – years.

In short, the recent fall in stocks has been painful. But it could soon give us a chance to invest in the market’s top performers… the kind of stocks you want to buy and hold forever.

The Investment Pros Hit a Fear Extreme

By Chris Igou, analyst, True Wealth


Fear is driving the market today. But don’t turn to the investment pros for help.

Normally, that’s exactly what you’d want to do… look to the pros for guidance during a panic. It’s human nature. If we don’t understand something and need answers, we go to someone who has them.

That could lead you astray in the financial markets right now, though… if you’re looking to hedge-fund and mutual-fund managers, at least.

It’s not just mom-and-pop investors that are scared. These investment pros are also in fear mode. In fact, fund managers are the most bearish they’ve been since 2011.

If you follow their lead today, you could be making a big mistake. While it’s not safe to buy just yet, their fear is another sign that big gains could be on the way over the next year.

Let me explain…


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Humans constantly look for reassurance. And when someone up the chain of command agrees with your idea, you’ll likely dig in deeper.

But as I mentioned, history says looking to the investment pros could be a big mistake today. To see this, we can look at the National Association of Active Investment Managers (“NAAIM”).

The NAAIM Exposure Index is a weekly survey that helps us get a feel for what professional money managers are thinking. It’s a great indicator of how bullish or bearish those folks are at any given moment.

Essentially, the survey asks what percent of their portfolios are in stocks. A zero indicates that they don’t own any stocks. And a reading of 100 means they are fully invested.

Today, these fund managers have gone from almost completely invested to holding nearly no stocks at all. They’re the most bearish on stocks that they’ve been in four years. Check it out…

These folks were heavily invested just a few weeks ago – and rightly so. Stocks were at all-time highs. But that story quickly changed…

As of the most recent results last Wednesday, fund managers’ level of exposure to stocks is now at 11%. That’s the lowest level since 2011 – and it’s a powerful contrarian signal…

We’ve seen seven other cases where the investment pros have turned fearful since 2010. And each case ended up being a great buying opportunity.

Even more, most of the last seven cases led to roughly 20% gains or more over the next year. Check it out…

Fund managers are the most bearish they’ve been on U.S. stocks since 2011. And based on the table above, it looks like a great buying opportunity.

Now, the market is still in a downtrend. We never recommend trying to “catch a falling knife.” Longtime readers know we want to see the trend turn back in our favor before buying.

Still, today’s fear is setting up a major buying opportunity. We’re not there just yet… But once the trend reverses, expect big returns in the stock market.