Issue #11, Volume #2
No – But Be Prepared To Weather The Storm
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| Knowing what shares to add to your portfolio to build wealth is difficult… but in some ways, knowing when – and whether – to sell is an even bigger challenge… Fed says no to more cuts… China AI might be closing the gap… |
Knowing what shares to add to your portfolio to build wealth is difficult… but in some ways, knowing when – and whether – to sell is an even bigger challenge.
Porter & Co. Partner Pass member Fred A. recently asked a question that we’ve been hearing a lot lately… and it gets to the crux of one of the most difficult parts of investing: When – if ever – should you sell shares of a great company?
The answer – as with so much in investing – is deceptively simple.
Here’s Fred’s query, and my reply…
Porter, thank you for your invaluable insights and analysis over the past two decades. You’ve helped many ordinary folks like myself achieve a level of success in investing we would not have achieved otherwise. You have literally changed our lives.
However, in two recent issues of your Daily Journal, where you say stocks will not increase in value for the next decade, and when you explain that Warren Buffett almost retired from investing, leave me concerned and confused. You have taught us how to identify and value the best, capital efficient companies and to purchase their stocks at reasonable prices. We also have Porter Stansberry’s Permanent Portfolio.
You have clearly advised that these types of stocks, purchased at reasonable valuations, are not to be sold or traded in and out of – unless some serious, material change to the operation, management, profitability, or future market for its product or service has occurred.
I agree that stocks of these wonderful companies purchased at today’s rich valuations will not produce excellent returns over the next decade. So, as you state, “Unless you know for certain that you can hold your investments, without fail, for the next decade at least, it’s time to sell…”
But can you please clarify further? What about your loyal subscribers who purchased these wonderful capital efficient companies like McDonald’s, Coca-Cola, Hershey, Domino’s, Apple, NVR, Google, Starbucks, Berkshire Hathaway, and American Express, and they were purchased five to 10 years ago at reasonable valuations?
These folks will have a far lower cost basis on these companies than an individual who purchases them today. They will have many years of compounding and growth that have allowed these stocks to gain 75% or 150% or 250% over the years.
What if they are a retiree and don’t know if they have another 10 to 15 years to live, and need the income from their portfolio? Do you still recommend selling these wonderful companies and going to cash now?
Please clarify your stance on selling your holdings unless you know for certain you can hold your investments for the next decade? Are there exceptions for investments purchased a decade ago at far lower valuations? Are there exceptions for folks aged 75+ who don’t know for certain they have another 10 years?
Again, thank you for all you provide on our behalf. I don’t say this lightly… you are my hero.
Fred –
I appreciate your kind words, and your long support of me and my business.
But, honestly, I struggle to understand your dilemma. I didn’t tell you – or anyone else – to sell any great business. I told you that stock prices, as measured by a multiple of their earnings, are very likely to fall over the next several years and so, if you can’t hold them, then you should build cash now.
Obviously, if you hold great businesses and if you’re prepared to hold them for the long term, then there’s nothing to worry about. And I specifically explained that my warnings were primarily about overpriced tech businesses, not the kind of companies you’re asking about.
And not everything in the market is absurdly expensive. In broad terms, energy still seems reasonably priced. And there are many high-quality, stable businesses, like Hershey (HSY), for example, that are still reasonable investments.
Do you need to know how expensive stocks are (in general) if you’ve owned McDonald’s (MCD) for a decade? Probably not – as long as you’re truly prepared to hold. Likewise Hershey. Or Coca-Cola (KO). In fact, I specifically used McDonald’s as an example of a stock that Warren Buffett sold in 1999 and that he recognized shouldn’t have been sold!
Likewise, I believe exceptionally well-managed energy-centric businesses that are trading at reasonable valuations, like EQT (EQT), will continue to do well.
In summary: stocks go up. Stocks go down. But as long as your investments continue to compound and increase their dividends, who cares?
That’s why I’ve spent most of the last 20 years urging investors to build their portfolios around these kinds of long-term compounding businesses, especially high-quality property & casualty (P&C) insurers. It sounds like you’ve done so. Congrats! You did it! I’m thrilled that you’ve learned to mitigate the risks of Mr. Market by being a long-term holder of the world’s best businesses!
Meanwhile, how many of our subscribers are loaded to the gills with things like AppLovin (APP), a mobile advertising app for small businesses? Or Dogecoin? Or simply own 100% of their savings in the S&P 500 Index – which, by the way, has been virtually impossible to beat over the past 10 years?
The answer: lots and lots of people. For those folks fully invested in the S&P 500 Index, if they’re prepared to hold for a decade, then they too will be fine. But most simply will not have the emotional fortitude to weather the storm.
For these folks, understanding the long-term CAPE ratio is important – CAPE is the Cyclically Adjusted Price-to-Earnings ratio of the S&P 500… it compares the market value of every stock in the S&P 500 to the net income of those businesses, on average, and adjusted for inflation, over the previous 10 years. CAPE on the S&P 500 is, I hope, very enlightening. Because it signals that they’re about to get wiped out. Like they did in 2000. Like they did in 2008. And like they did in February 2020.
Like it or not, stocks are now so expensive (relative to earnings) it’s virtually certain that equity returns – on the S&P 500 – will not be very attractive for the next decade. Most likely returns will average less than 4% a year, before inflation. In real terms, I expect the losses to be substantial, something like 50% cumulatively.
Likewise, because of how incredibly concentrated the market has become in only five very expensive stocks, it’s virtually certain that at some point in the next 36 months that there will be some kind of financial “accident.” It is impossible to predict what “pin” will prick investors’ confidence, but such an event will definitely occur. (We’ll see if DeepSeek, the Chinese AI that triggered a 3.1% fall in the Nasdaq on Monday is that…)
People always conflate the causes of a market crash with events because of proximity. It isn’t the rising interest rates that causes the crash: it was the enormous inflation that preceded it that was the real culprit.
Rarely in all of recorded financial history have we seen anything like the inflation of the last five years. The government printed $7 trillion and then spent another $8 trillion that it didn’t collect in taxes. That’s why stocks are trading at 37x on a CAPE basis. But they won’t for long. They never do.
Maybe, with my warnings, a few people will be prepared, financially and emotionally, to weather the coming storm. That’s why I think it’s important that I offer my perspective on the markets overall and share what I believe are very serious risks to most investors.
But, again, I am very happy that you’ve built a financial fortress.
Bravo!
Three Things You Need to Know Before We Go…
1. The Fed pauses. This afternoon, the Federal Reserve kept short-term interest rates unchanged within a range of 4.25% to 4.50% as expected. In his post-meeting press conference, Chair Jerome Powell said the Fed is now firmly in “wait and see” mode regarding the future path of interest rates. However, given the stickiness of consumer inflation measures – and the possibility of additional inflationary pressures from White House tariffs – we continue to believe the Fed’s recent rate-cut cycle may already be over, despite growing pressure from President Donald Trump to cut rates even further.
2. Cracks in the U.S. jobs market. On the surface, the December jobs reports appeared strong – the U.S. economy added 256,000 jobs and the unemployment rate fell from 4.2% to 4.1%. However, a deeper look reveals trouble: full-time jobs declined by 350,000 in December and more people are staying unemployed for longer – higher than any point prior to the Great Financial Crisis. The evidence is mounting: the labor market is weakening, and employer demand is softening.
3. China unleashes another AI blockbuster. Yesterday, Chinese e-commerce giant Alibaba (BABA) released startling performance metrics for its latest artificial-intelligence (“AI”) models. The performance exceeds comparable models from OpenAI’s GTP-4.0, Anthropic’s Claude, and Meta’s Llama. This follows a similar breakout performance from China’s DeepSeek model (we explored it on Monday), which achieved similar performance with substantially fewer computing resources than those of its U.S. counterparts – sending shares of giant chipmaker Nvidia (NVDA) tumbling 17%. These developments show China is quickly closing the gap in the AI arms race, and they also throw into question the more-than $10 billion of investments Microsoft has made into OpenAI. When Microsoft reports earnings after the close today, we’ll be watching for whether the company hints at reconsidering the scope of its investment into AI and chips.
And one more thing…
Porter’s Permanent Portfolio is a way that makes it difficult – essentially impossible – to lose money, no matter what happens to the economy, or to individual stocks.
I know that sounds kind of crazy… especially in these days of nose-bleed valuations and enormous market volatility.
Porter’s Permanent Portfolio is modeled on the ideas of one of my investment idols, Harry Browne… who said in short, you own stocks… you hedge them with bonds… and you hedge both of them with gold.
Sounds simple, right? Browne’s principles have for years been applied with great success by Ray Dalio at his investment firm Bridgewater Associates – which helped it become the world’s largest hedge fund.
And at Porter & Co., we’ve built on Browne… to put together an investment approach that generates higher returns without increasing risk… and tweaks the model in a way that I’m personally really proud of. The results since we launched the Porter’s Permanent Portfolio in September have been fantastic. I don’t know of a better way to invest.
Access to Porter’s Permanent Portfolio is one of the benefits of subscribing to The Big Secret on Wall Street. If you’re a subscriber, to see the portfolio, go here. If you don’t currently subscribe to The Big Secret, click here to learn more.
Today’s Poll…
Let me know what you think by sending comments to [email protected]
Good investing,
Porter Stansberry
Stevenson, MD
P.S. Let me tell you about the new podcast we launched yesterday…
Yesterday I kicked off the first episode of Porter & Co.’s Financial Face Off – a podcast where “perspectives clash and insights thrive.”
My first guest for this new podcast is leading economist Peter St Onge… Peter is one of the very few, credible economists – he works as a fellow at the Heritage Foundation – who is willing to speak on the record about the real problems going on in the world… And to say what he really believes.
And with the new Trump administration shaking things up like we have never seen before, we had much to discuss…
We fight it out (sort of) over the future of the American dollar, why Elon Musk’s Department of Government Efficiency (“DOGE”) won’t work, how Marlboro cigarettes destroyed Russia, and the surprising downside of gold… Watch it now.
