Porter's Journal

How To Survive A 10-Year Bear Market?

Issue #6, Volume #2

Liquidate, Slowly

This is Porter & Co.’s free e-letter, the Daily Journal. Paid-up members can access their subscriber materials, including our latest recommendations and our “3 Best Buys” for our different portfolios, by going here. For paid-up subscribers to The Big Secret on Wall Street (including Partner Pass members), we released a brand-new recommendation yesterday… you can read all about it here.

Three Things You Need To Know Now:

1. Economic data surprises to the upside. U.S. industrial production increased by 0.9% month over month (“MOM”) in December, well ahead of the expected 0.3% increase. Meanwhile, U.S. housing starts rose by 15.8% MOM in December, to 1.49 million units, marking the highest level in 10 months. This follows a recent string of improving manufacturing data, including a better-than-expected reading from the Philadelphia manufacturing index, which rose in January to the highest level since April 2021. Manufacturing in the manufacturing has been stuck in a recession for much of the past two years – and a few data points doesn’t signify a recovery. 

2. Gold’s historic rally. Gold has soared nearly 35% over the past year to more than $2,700 an ounce. The precious metal typically trades inversely to the U.S. dollar and long-term rates. Yet this rally has occurred alongside a 6% rally in the U.S. Dollar Index and a 22% rise in the U.S. 10-year Treasury yield over the same period. Gold’s defiance of this trend suggests the risk of a full-blown U.S. debt crisis is surging (see below).

3. A record-breaking level of indebtedness… again. The U.S. federal deficit clocked in at $2 trillion for 2024, up $248 billion over 2023 – or 6.9% of GDP versus 6.4% in 2023… a level over GDP previously not hit outside of economic crises, wars, or banana republics. For the first three months of the U.S. government’s fiscal year (that is, the last three months of 2024), the deficit clocked in at $711 billion – up 39% from the same period the year before. At the current trajectory it’s not going to end well for America. Or for investors.

And one more thing…

On Monday, Donald Trump will be inaugurated as the 47th president of the United States. The financial media has been awash with commentary about what sectors will benefit, and not, from the new administration. 

However… we’ve followed the money, and put together a report about six stocks that are poised to rise thanks to special connections that these companies have to the Trump administration. (They’re not the obvious ones that might come to mind… you’ve likely never heard of these stocks before.) Big Secret subscribers can see the report here… if you don’t have access, learn more here.


Poll Results… Inflation Will Rise, But Not By Much

In Monday’s Daily Journal, we asked readers: “What do you think the inflation rate (CPI) in the U.S. will be for 2025 (vs. 2.9% in 2024)?” The majority of those who took the survey believe inflation will rise this year, with 46% seeing a small increase over 2024, selecting the option “3%-6%,” and 22% expecting a big increase, to 6%-12%. Just under one-third of survey takers think that inflation will be at or below current levels. And only 2% are expecting runaway inflation of more than 12%.


How To Survive A 10-Year Bear Market?

Liquidate, Slowly

In 1952, Ben Graham – Warren Buffett’s mentor – made a terrible investment.

He bought shares of the Philadelphia and Reading Coal and Iron Corporation (P&R). The company had an illustrious past as one of America’s leading producers of anthracite coal, which for much of America’s history was the country’s dominant source of energy for heating homes.

The trouble was, starting just after World War I, new cheaper fuel sources (oil, propane, and most of all, electricity) emerged, leaving the company’s hard-to-mine anthracite production without a market. The company went bankrupt during the Great Depression and, even after emerging from bankruptcy, couldn’t earn anything like a suitable return on its asset base.

As a result, by 1952, its stock was one of the cheapest in the U.S. market, with an enterprise value that was a fraction of the company’s net asset value. And, according to Graham’s investment theory, that made the stock a buy. He bought thousands of shares at $18 per share.

In a situation that will sound familiar to many “value” investors, what looked like an already very cheap stock… got much, much cheaper. By 1954, the stock was trading below $10. And Graham thought it best to sell and take a huge loss. 

But Micky Newman, the son of Graham’s partner, Jerome Newman, talked him out of it. Micky wanted to gain control of the business and slowly liquidate it, using its earnings and its assets to invest in better, higher-margin businesses. He realized that, in an odd way, the company’s big losses could become an asset: tax losses, that would shield the company from income taxes for many years, if its asset base could be transformed. Buffett liked the plan and started buying stock below $10 per share.

Meanwhile, Ben Graham decided to retire from the money management business. He wound down his investment firm – but kept buying shares of P&R. Soon he had enough stock to take control of the firm and, on January 1, 1956, Graham became chairman. He named Micky Newman as company president. And Micky got to work transforming the company.

First, he bought Union Underwear, which was the country’s largest manufacturer of men’s underwear, using the Fruit of the Loom trademark. This was a huge acquisition — $15 million in cash, which amounted to 35% of P&R assets. And, he didn’t stop there. Next he bought Acme Boots for $3.2 million.

And he financed these acquisitions at cheap prices (around 4x earnings) by using notes that paid off based on the acquired company’s future earnings. This was a unique form of seller-financing that encouraged the management teams to remain with the business and to continue growing it.

Micky proved to be a genius at transforming P&R, one good deal at a time. After years of losses, P&R earned $7.06 per share in 1956. By this point, as an outside investor, Buffett had nearly made back in earnings what he had paid for the stock only two years earlier in 1954!

Soon, P&R was out of the coal business altogether, selling its last mine in 1961. And, in 1965, Buffett helped Micky acquire a steel maker, Lone Star Steel, for $64 million. Once again, this was a huge investment, equal to 44% of P&R’s assets. But, again, it was a good deal and the earnings grew.

Finally, in 1968 Micky sold the entire business to another conglomerate, Northwest Industries, for $200 per share. Over 14 years, Buffett made more than 20x on the deal.

And – you may have guessed the transformation of the Philadelphia and Reading Coal and Iron Corporation became Buffett’s playbook for Berkshire Hathaway. Acquire the asset at a large discount to net asset value. Borrow against those assets to acquire profitable businesses. Use the losses from the legacy business to offset the gains from the new acquisitions. Slowly liquidate the legacy business. Profit massively as the new company grows and the market begins to assign a premium to the asset base, instead of a huge discount. Terrible loser turns into a massive winner – slowly. 

I asked our research team to see which stocks today are cheap enough versus their net asset value to become similar targets for activist investors, who might buy them cheap to gain control of large pools of capital and then transform them into a modern version of P&R or Berkshire.

Doing so now might be a good strategy, as stocks in general are extremely expensive. That’s exactly what Buffett did at Berkshire, which he slowly liquidated from 1970 until 1985, a 15-year period that coincided with stocks becoming extremely cheap. 

We searched all of the publicly traded companies in the U.S., looking for the largest disparity between enterprise value (what it would cost to buy the entire company, including all outstanding debt) and the business’s net assets. 

You’ll never guess which company was tops on the list: Berkshire Hathaway! 

Its enterprise value is $473 billion. And it has net assets of $631 billion. Total excess capital: $158 billion.

The best part? It’s already being run by the world’s best investor. If you’re looking for somewhere to “hide” from the coming long bear market in stocks, you’ll have a hard time finding a better investment than Berkshire Hathaway (BRK).

(Hat tip to author Brett Gardner whose Buffett’s Early Investments: A New Investigation Into The Decades When Warren Buffett Earned His Best Returns is the single most thoroughly researched investment book I’ve ever read. It is an astounding book and an absolute must read for every active investor.)

Let me know what you think by sending comments to [email protected]

Good investing,

Porter Stansberry
Stevenson, MD


Mailbag

I received a flurry of emails about my essay in Wednesday’s Daily Journal that was critical of President-elect Donald Trump’s plan to create an External Revenue Service and rely on tariffs to finance government operations. Most people who wrote in generally saw eye to eye with me (with a few exceptions!). 

Here are just a few of the letters I received. 

I don’t always agree with your politics (BTW do you still not vote?), but you are dead on about Trump’s supposed tariffs and the global economy. A first-year economics major could understand why tariffs on our global economic partners are a terrible idea, especially today. It makes no sense. Trump’s tough-guy approach may have worked in his personal business (including filing bankruptcy for many of his corporate entities to screw small businesses), but it’s a stupid way to deal with our economic partners globally. They’re not stupid. 

Danny D.

All I can add to your commentary is “well f&$@ing said!” It’s amazing how so many in government lack basic economic knowledge. What I hadn’t thought about prior to your commentary is the current setup of our gasoline refineries for heavier crude processing. Now if you want to get under peoples skin, just raise their gasoline prices for no good reason.

Don R.

I do think you are looking at Trump tariff’s the wrong way. Trump does not want to hurt the lowest-income earners among us. He is using tariffs to scare, punish, and manipulate every other government to treat America more fairly. 

Paul M.

Trump wants the 1930s back again.

Brodie N.

You are an ass hole.

Jim K.

I had a fantasy while reading this Daily Journal. Sir, would you mind if I write you in as a candidate for U.S. president next election? Assuming our nation survives the next four years. 

Sincerely, Judy F.

I offer that the “First Pointless And Unwinnable War Against Human Nature” was Prohibition but I’m just quibbling about an excellent article. I laughed out loud at the part which ended saying, “You’re a moron.” 

Thank you, Rod W.

Hi Porter, I’m Canadian and we have been saying exactly the same as you when it comes to tariffs between our two countries: these tariffs, if implemented, will create havoc and ill will amongst us.

Doug J

You are correct in your analysis. Why would we think Trump would think any differently about tariffs if his business philosophy is “I win you lose”? He’s done that for years and hasn’t learned a thing about economics. 

Patrick H.

I couldn’t agree more with you on tariffs – it makes no sense – and I am flabbergasted that more Americans aren’t making a very loud and heated stink about it to the president-elect. I have truly been dismayed at the seeming lack of political and influential people in business and finance that have not taken any steps or made any comments about this situation.

I have only one request… Get a much bigger megaphone!

Tom D

Truer words have never been spoken. I agree with you 100%. I hope that this opinion piece by Porter will be sent and read by the Trump Team.  

George A.

As always, please share your thoughts, whether you agree with me or disagree: [email protected].




P.S. Along with owning a boat and hitting the slot machines (and putting a match to bales of cash), buying options are a great way to incinerate capital. 

Decades of capital markets research shows that the vast majority of options expire worthless. That’s good news if you’re selling options (because you earn the premium). But it’s bad news if you’re buying options (because the money you spend goes straight into the pocket, or account, of the seller).

That’s why I’ve only ever recommended selling options. Until…

… now. 

I’ve known Keith Kaplan, the CEO of TradeSmith (which the company now called MarketWise purchased years ago, when I was heading it up), for years. I have a huge amount of confidence in what Keith and his team have developed. I use the investing tools he and his team have developed, like TradeStops – and Porter & Co. uses it to compute portfolio returns. 

And Keith and team have put together a way to buy options that actually works.

Let me say that again… a way of buying options that makes you money, consistently. I’m not kidding. It’s the “rainbow-colored unicorn that poops gold” of the investing world.

I didn’t believe it at first. So I sat down with Keith to ask him the tough questions – the ones I wanted to ask before I told my own readers about it. 

Check out our conversation here… it’s worth you time. It certainly was worth mine.