Here is another interesting post by Porter Stansberry, the finance and investing guru and founder of Stansberry Research, independent financial advisory. For the last 20 years Porter is predicting the growth and crush of the not only financial market but whole world economy system.
The Single Most Amazing Thing I’ve Ever Learned
By Porter Stansberry, founder, Stansberry Research
What I’m going to tell you about today could make you more money, over time, than any other advice you’ll ever receive from me or anyone else.
But that will only happen if you’re willing to read carefully and genuinely think about the concept I’m writing about.
I believe today’s recommendation will make you more money than anything else I’ve ever recommended before. And I’m 100% certain that the overwhelming majority of you will never do it.
It’s simple. It’s incredibly safe. And it will make you truly huge amounts of money. But I know you won’t do it…
What if I told you that there’s a way to instantly turn terrible investors into good investors? What if I told you that there’s a way to turn good investors into great investors overnight? What if I told you that this has nothing to do with what stocks you buy? What if I told you that this has nothing to do with trailing stops?
This idea is the single most amazing thing I’ve ever learned about finance.
It’s also the hottest area of financial research among academics and top quantitative hedge-fund managers right now.
Most people would never share this idea with anyone because it’s incredibly valuable. It’s a secret that transforms losing investment portfolios into winners. It has nothing to do with what stocks you buy. And it has nothing to do with what stocks you sell… or when you sell them.
I’m talking about using risk-adjusted position sizing. Let me explain what that is and why it works so well to improve actual investor results.
For many years, I’ve seen in our portfolios that almost all of our best-performing investments are low-risk. That means these were investments in big, dominant, slower-growing businesses with good balance sheets and brands.
These stocks have a few standout quantitative traits aside from these qualitative basics that can help you identify them in advance. First, they pay good dividends and have a long history of growing those payouts over time. And second (and this is far less understood by most investors), their share prices aren’t volatile. Their stock prices tend to move around a lot less than the market as a whole. That’s because they have a stable cohort of investors who own the company – investors who are unlikely to sell.
Academics measure this advantage by comparing the daily volatility of a company’s share price with the volatility of the S&P 500 Index, which is made up of the 500 largest publicly traded companies in America. (This is called “beta.”) Stocks with a volatility equal to the S&P 500’s average are awarded a volatility score of “1.”
That is, the volatility of these stocks is perfectly correlated with the market as a whole. Stocks that move around more have higher betas. So a company that is 50% more volatile than the S&P 500 would have a beta of 1.5. A company that is two times more volatile than the S&P 500 would have a beta of 2, and so on.
Don’t let the math or the Greek letter (beta) intimidate you. There’s nothing hard to understand about the idea that high-quality, dividend-paying businesses, which are more likely to do well over the long term, are more likely to have dedicated investors who aren’t constantly trading in and out of stocks. As a result, the share prices of these businesses will tend to move around a bit less – or even a lot less – than the average large company in America.
Sure, you can sometimes find a few – a precious few – big winners, like Steve Sjuggerud’s original recommendation of Seabridge Gold. But over roughly the last 20 years, the overwhelming majority of our best recommendations have always been low-risk (and low-volatility) stocks.
Most of these stocks have betas that are much lower than the market as a whole. Hershey, for example, has a beta that is roughly half the market’s average (0.59). Likewise, McDonald’s (0.79), Automatic Data Processing (0.85), and Altria (0.92) are extremely low-volatility stocks. This is numerical proof of the steady nature of their businesses and the “wise hands” that own the shares. These are the folks you want to invest alongside.