Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19
Silver Is Cheap – And Getting Cheaper - 7th Oct 19
Stock Market Back to Neutral - 7th Oct 19
Free Market Capitalism: Laughably Predictable - 7th Oct 19
Four Fundamental Reasons to Buy Gold and Silver - 7th Oct 19
Gold and Silver Taking a Breather - 7th Oct 19
Check Engine Warning Light ECU Dealer Diagnostic Cost - Land Rover Discovery Sport - 6th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Stock Market Investors Avoid the "Herd" Like the Plague

InvestorEducation / Learning to Invest Jun 26, 2015 - 09:07 PM GMT

By: DailyWealth

InvestorEducation

Porter Stansberry writes: If you've been following my series this week, you know we're working our way through the desert – the Rub' al Khali.

That's the "Empty Quarter," the vast sand desert that lies in the heart of the Arabian Peninsula. Lose your way here, and you're dead within hours. It's the perfect metaphor for the world's financial markets. There are very few trustworthy landmarks. There's no easy way to cross the desert. And the "sands" are constantly shifting; making what was true or profitable last year a dead end this year.

I was inspired by the story of three men who were struggling with addiction and decided the way for them to overcome it was to do the hardest thing they could imagine – walk unassisted across the Rub' al Khali. No one had ever done it before. The biggest problem with trying to walk across this desert wasn't only carrying enough water, it was the giant sand dunes, some 800 feet tall. These enormous obstacles were constantly shifting, making maps almost instantly worthless.
 
As I see things... three main "sand dunes" catch most investors unaware.
 
First and foremost, most investors simply don't understand what kinds of businesses make for good, long-term investments. I introduced a four-part test to help you identify great businesses. The next most important "desert crossing" skill to learn is how to make money even when you're dead wrong about the market overall.
 
The final skill you'll need to cross the desert is to learn how to avoid the "herd" like the plague.
 
 
Most of the time, avoiding the herd is easy. I don't think many of my Investment Advisory subscribers are tempted to invest in the kind of stocks you'll find on our "Black List" – companies whose shares are valued at more than $10 billion and trade at more than 10 times their annual revenues.
 
There are only a handful of businesses created every decade that are worth this kind of valuation. And even if they're worth it, it's almost dead certain that, sooner or later, you'll have the opportunity to buy in at a much more reasonable price.
 
As a current example of what usually happens to these kinds of stocks, I'd point to the social-media service Twitter (TWTR) and online review site Yelp (YELP). Twitter is currently on our list, trading at $24 billion in market cap and 14 times sales. Yelp is a former Black Lister and currently trades at $3 billion in market cap and eight times sales.
 
Both of these companies have serious business problems, but have been hyped by promoters and have caught the public's eye. Meanwhile, they're both down big over the past two years, and both suffered falls of more than 50% from their peaks. Out of the two companies, I think Twitter has a much better future ahead of it, but at current prices, I wouldn't touch either stock.
 

At other times, though, the passions of the crowd aren't as easy to see. Take our recent recommendation of Coach (COH), the legendary handbag maker. The main reason we bought the stock is that this is a great business, with a great brand. We believe it's almost inevitable that in five, 10, and 30 years, Coach will be selling many more handbags and earning far higher profits than it does today.
 
Many subscribers, though, criticized our recommendation. They argued that new brands, like Michael Kors, were going to wipe out Coach. Fashion is an area of the market where you should always "fade" the crowd. There are few permanent fashion brands. We doubted Michael Kors would become one. So to us, buying a well-proven, 50-plus-year leader in handbags made a lot more sense, especially considering the stock's low price (relative to cash earnings). Here's what has happened over the last year between Coach and Michael Kors...
 

One final point about avoiding the crowd... If you plan to invest in commodities or commodity-type businesses, you must avoid the crowd at all costs. Commodity-type businesses have no way to protect their profit margins from competition, which means it's only a matter of time before these companies suffer a serious collapse in profits. It may take years for enough competitors to go out of business, allowing the cycle to repeat.
 
Buying a commodity or a commodity-type business after a 100% or 200% rally is likely to be financial suicide. It takes a long time for cycles to turn – usually about twice as long as anyone expects.
 
Take uranium, for example. Back in the mid-2000s, uranium was the hottest commodity around. My friend Rick Rule organized several large investment funds to buy uranium back in the late 1990s as he correctly judged a severe mismatch between current supplies, current prices, and the known demand of the global market. He was right, and investors in his funds did incredibly well. They made more money than I can imagine.
 

At the investment conferences I attended as a speaker in 2006 and 2007, everyone wanted to know my opinion about uranium. That was odd because I'm not a commodity or a resource expert and don't claim to be one.
 
Rick Rule, a bona fide resource expert, couldn't even hold off the crowd in the bathroom. I'm not kidding. At the New Orleans Investment Conference in 2006, I saw attendees crowding around Rick while he was in the men's room. They all wanted to know what uranium stock to buy. I looked at Rick (who, at 6'4" I could easily see above the crowd) and quietly reminded him that it's awfully hard to be a contrarian when you're popular. He knew exactly what I meant.
 
In my presentation that year, I showed a chart of uranium and called it a bubble. I was roundly booed. I responded to the boos by making an observation. I told the crowd how ironic it was that this group of supposedly sophisticated and "contrarian" investors could have looked at the 2000-era bubble in Nasdaq stocks and seen the obvious bubble... But looking at a nearly identical bubble in uranium, they saw nothing.
 
It is particularly ironic because at least some of the Nasdaq stocks were high-margin, high-growth companies destined to be very successful, while the uranium bubble was made up of nothing but low-margin, highly leveraged commodity producers – none of which were destined for success. The uranium bubble burst, of course. And I wasn't invited back the next year... of course.
 
If you've read all four of my essays this week, I hope you've learned something valuable and helpful. There is a golden thread you'll find running through all of these messages...
 
If you can learn to stick with investing in good businesses trading at reasonable prices, you will greatly increase your investment results. That's true whether it's a bear market or a bull market. Learning this discipline requires as much emotional control as it does mental prowess. And that's the hard part. That's the part I can't teach. That's the part you'll have to learn on your own. And sadly, you will almost surely learn it the hard way. I wish you luck. And I pray your tuition doesn't cost too much.
 
Regards,
 
Porter Stansberry

Further Reading:

"When everyone is doing the same thing, there's hardly any chance of doing something exceptional," Steve Sjuggerud writes. Learn why Steve says it's OK to NOT listen to what everyone else is doing right here.
 
For years, Steve has used the idea of judging investor sentiment to help make huge, safe returns for his subscribers. You can learn more about judging investor sentiment in this interview with Steve.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2013 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules