The Weekend Edition is pulled from the daily Stansberry Digest.
Today, I would like to update you on two markets you need to be cautious about...
And I'm going to discuss one market that's offering investors a great opportunity to make a fortune.
Your first and most important job as an investor is to avoid risk. Great investors tend to prioritize reducing risk and avoiding loss over making money.
First, though, we must examine two enormous sources of risk that you need to avoid today...
The first is the overall stock market...
I spent years trying to figure out how to tell whether the stock market was cheap, expensive, or somewhere in between. I pored over price-to-earnings, price-to-book, and a host of other metrics... until I realized I was focused on the wrong things entirely.
All you really need to know is whether the stock market is near historically extreme lows or highs. If it's not, you can safely ignore it. If it is, you need to pay attention and behave accordingly.
Unfortunately, the U.S. stock market recently hit the most overvalued moment in stock market history, according to the five numbers that matter. Economist John Hussman of Hussman Funds tracks and regularly updates them. Two track the S&P 500's price-to-earnings (one to forward estimates, the other to historical earnings). The others compare the S&P 500's price to various measures of revenues. As Hussman said in a recent research note...
[During the week ended August 31,] the stock market recorded the most offensive valuation extreme in history, on the basis of measures best correlated with actual subsequent returns across a century of market cycles. The advance brought the S&P 500 Index about 1% above its previous January 26 record. The current extreme eclipses both the 1929 peak, and the 2000 bubble peak.
When the overall stock market hits its "most offensive valuation extreme in history," prepare for the poorest equity returns in history for the next five to 10 years. He says historical data suggest a "run-of-the-mill, baseline expectation" where the S&P 500 loses about two-thirds of its peak value. That's worse than the roughly 58% decline we saw during the last bear market, when everybody thought the world was ending.
Examples of true craziness in equity markets aren't hard to find today...
On September 19, Tilray (TLRY), a Canadian medical marijuana company, rose more than 50% in a single trading session. At one point, its shares had more than doubled in just a few days. It's currently valued at roughly 500 times sales, about 300 times book value, and around 800 times its negative earnings before interest, taxes, depreciation, and amortization ("EBITDA"). It has a market cap of roughly $14 billion and sales of less than $21 million. No business anywhere is worth such valuations.
Tilray's obscene valuation is part of the wider bubble in marijuana-related stocks. The number of cannabis news stories recently overtook the number of cryptocurrency news stories, according to data compiled by Bloomberg.
Pot is officially the new crypto.
The second source of massive risk I hinted about earlier is the bond market...
At last year's Stansberry Conference, I got on stage in Las Vegas and told the crowd that bonds were the biggest bubble in the world. I noted that many European government bonds were trading at negative yields to maturity – meaning anyone who bought them and held to maturity was guaranteed to lose money.
Sovereign debt is supposed to be one of the safest assets in the world... But it has been turned into toxic waste. It reminds me of how Wall Street turned mortgages into toxic waste prior to the financial crisis. They're supposed to represent risk-free return, but now they offer only return-free risk.
Since then, the Swiss 10-year bond has fallen. It's a few ticks above the lows it hit in May, but it still has a long way to go and remains a terrible investment today.
Even the benchmark 10-year U.S. Treasury note hasn't been immune since my warning last September.
It's hard to find a bond that hasn't fallen in value since then. All the bond indexes, from investment-grade corporates to low-rated "junk," have fallen in that span... And yet, they're still priced at expensive spreads, historically speaking.
Right now, there's a record short position in bonds in the futures market...
Everybody on Wall Street wants to short bonds. Popular trades are usually wrong, so it wouldn't surprise me if interest rates fall and bond prices rise in the near term.
But interest rates are still not far above all-time lows, and few bonds are priced for good long-term returns. Eventually, the carnage will return. (When it does, I expect readers of my colleague Mike DiBiase's excellent Stansberry's Credit Opportunities newsletter will do extremely well.)
Once you've avoided risk and loss, your next task is to identify the risk nobody wants to take today, which should lead you to fortune...
The risk you're likely scared of today is one of the most important opportunities of my lifetime. If you don't take advantage of it, I'm certain you'll kick yourself one day.
I'm talking about the mining industry.
For the most part, mining is a truly awful business that investors should avoid. These companies have zero control over the price of the products they sell. Mines require hundreds of millions (or even billions) of dollars of investment before they can generate a single penny of revenue. It takes decades to explore, find, develop, and build a new mine.
Many countries are hostile toward mining, which is considered environmentally unfriendly. That's why many mines wind up in political hellholes like the banana republics throughout Latin America and Africa. The process of getting permits and approvals can scuttle a mine, possibly rendering millions in capital investment totally worthless.
It's a tough business, which is why you should avoid it most of the time.
But, like the overall stock market, it pays to know when mining stocks are near all-time lows...
That tends to happen when the overall market is super expensive. Back in 1999 and 2000, the numbers that matter showed that U.S. stocks were almost as overvalued as they are today. Gold – a decent proxy for the investment prospects of the overall mining industry – fell below $300 an ounce after a bear market that lasted two decades.
We're at a similar moment right now.
U.S. stocks are at their most offensive valuations in history (higher than in 2000 and 1929). And gold is around $1,200 an ounce today, well below its all-time high of about $1,900 an ounce in 2011, and still near its 2015 bottom of around $1,050 an ounce.
Investors have left precious metals for dead. They couldn't be less interested. And therein lies our opportunity...
In my Extreme Value newsletter, I've found what I believe are the world's two best businesses in the mining industry today...
Neither is a mining company.
They don't require huge upfront capital investment to make their businesses work. They both feature royalty or royalty-like businesses at their cores. Both have world-class management teams and multiple sources of massive upside and little downside at current valuations.
Whether you're young or old, have a portfolio of $10,000 or $10 million, I believe every investor should own these two stocks today. I expect these stocks to rise five to 20 times their current value within the next five to 10 years, dramatically outperforming many overvalued stocks today.
Together, these two stocks constitute the single greatest equity opportunity of my 56-year lifetime. If you don't buy them right now, I can almost guarantee you'll be kicking yourself in five or 10 years. For any serious investor, the returns I expect would pay for a lifetime Stansberry Alliance membership, let alone a subscription to Extreme Value.
Of course, we've found a lot more than just two stocks...
Another recent Extreme Value recommendation is a true "World Dominator" business. It's trading at a valuation priced for zero revenue growth for the next four years – an absurdity for one of the greatest businesses on Earth.
And the stock we recommended in the September issue of Extreme Value is a one-of-a-kind collection of assets with revenues that have remained stable through good times and bad. It currently yields almost 5%, a number we believe is likely to double in the next three or four years in relation to today's share values.
Even with most U.S. stocks way too expensive, we're still able to find excellent value, with greater upside potential and smaller downside risk than the stuff most people are buying right now. You just have to know where to look... And you have to be a lot more careful than normal, given what's happening in the overall market.
Most people will buy super-risky micro-cap mining stocks trying to make a quick fortune...
But most are garbage and will go to zero.
We won't touch stocks like that. Our mining-related picks are cash-gushing businesses with major competitive advantages. They're among the best businesses in the world, and we intend to hold on to them long enough for readers to maximize their full profit potential. (Our average holding period is more than three years, an eternity in the newsletter world.)
Most of the time, these businesses are priced for poor returns and too much risk. Today, they're dirt-cheap and should easily outperform the so-called "FANG" stocks over the next several years.
Markets rise and fall, but market cycles are marked by valuation and sentiment, not time...
Markets are expensive – priced to lose you money – when everybody loves them and believes they're totally safe (like U.S. stocks and most bonds today). Markets are cheap – priced to make you rich – when most investors hate them and believe they're too risky and guaranteed to fall forever (like mining and other cyclical industries today).
Great investors respect the cyclicality of markets. Warren Buffett is famous for saying, "You only find out who is swimming naked when the tide goes out." Investor and author Howard Marks has written two brilliant, must-read chapters on cycles in his book, The Most Important Thing. As he concludes...
There are a few things of which we can be sure, and this is one: Extreme market behavior will reverse. Those who believe that the pendulum will move in one direction forever – or reside at an extreme forever – eventually will lose huge sums. Those who understand the pendulum's behavior can benefit enormously.
(As a side note, if Marks' newest book, Mastering the Market Cycle, out this week, is anything like The Most Important Thing, it'll be a must-read for any serious investor.)
Extreme behaviors in the stock and bond markets are going to lose a lot of people a lot of money in the next few years, and maybe sooner. It's impossible to say when such losses are imminent, but it's easy to know the conditions under which they become inevitable. Those conditions are present today in stocks and bonds... and the opposite conditions are present in the mining industry.
I'm not saying stocks and bonds won't rise for a while longer. I'm not saying gold and other mining stocks won't fall for a while longer. I don't make those kinds of predictions.
Remember, my No. 1 job is to identify risk. The risk is high and the upside potential is low in most stocks and bonds right now. The risk is relatively low and the upside potential is much higher in select high-quality mining-related stocks today.
You can learn the names of these stocks with a subscription to Extreme Value by clicking here. (This won't take you to a long promotional video.)
Editor's note: Dan believes he has found one mining-related company that could become the first 20-bagger in Stansberry Research history, turning every $5,000 into $104,750. Even if almost nothing goes right, this stock could still double or triple from here. Dan recently put together a presentation to explain all the details. Watch it here.