Editor's note: After more than three years, our founder Porter Stansberry is back... with an important message about the markets. And it could be one of the most important warnings of his career. So today, we're taking a break from our usual fare to touch on some of his classic investment advice. In this piece – originally published in a 2015 Stansberry Digest – he discusses what really matters when you set out to grow your wealth.
He shares the three things you need most to be successful... whatever the market is doing. And, finally, make sure you read to the end – so you can hear more about his critical announcement.
Let's start here... in the desert...
Imagine you had to walk across the Rub' al Khali – the "Empty Quarter" – of the Arabian Peninsula.
This 250,000-square-mile desert is the largest sand desert in the world. Sand dunes there reach as high as 800 feet. It rains less than 2 inches a year. The surface temperatures reach 125 degrees.
Think about the three most important pieces of equipment you'd need, beyond the most basic stuff like shoes, clothes, food, water, etc.
This isn't hypothetical. Three guys decided to try and walk across this desert... In 2013, South Africans Dave Joyce, Marco Broccardo, and Alex Harris became the first humans to walk completely unassisted through the Empty Quarter.
They plotted a 1,000-kilometer course from Salalah, Oman to Dubai. Their story is completely nuts... but fascinating.
The most obvious piece of advanced equipment you'd need? A GPS, right? Nope. What they needed most wasn't a GPS... or even a map. What they had to have to make it across 1,000 kilometers of desert in 40 days (after which they would have quickly starved to death) was Google Earth.
They needed to know their precise position in the desert relative to the giant sand dunes, which you can only see using Google Earth's satellite photos. Before the advent of publicly available satellite photos, walking across this desert would have been impossible. GPS alone wouldn't have been enough.
The second item Joyce, Broccardo, and Harris needed was a strong, lightweight, easy-to-pull cart, so they could carry enough water for the journey. Obviously, they needed food, too. But the water was far more critical and heavy to carry. (You can survive for up to three weeks without food. But most people would only make it three days without water.)
They spent about three years testing various designs for carrying enough water. The key to success was using mountain-bike tires on their cart, rather than wide full tires, which were too difficult to pull through the sand.
And finally... to make sure they had continuous access to Google Earth, they needed to use a solar-based charger to power up a satellite phone. They lost the charger on the 10th day of the trip. So one of them had to turn around and follow their tracks for 25 kilometers to find the charger before it got dark. Without it, they probably would have died.
Imagine trying to find that charger... before dark... in the desert... by yourself... knowing that if you couldn't find it, you and your friends would probably die.
So what the heck do three crazy South Africans hiking across a giant desert have to do with investing? It's obvious (to me).
For most individual investors, the process of trying to manage their savings in the stock market is a lot like trying to cross the Rub' al Khali desert on foot. You have few landmarks to guide your way. And there are lots of ways to die. Most people don't make it.
Learning the story about the guys crossing the desert, I started thinking about the most important things investors need to understand if they're going to be successful in the stock market.
I'm not talking about the obvious stuff... like the way dividends compound returns or the time-value-money formula (which explains that your returns will be driven by how much time your investments have to compound and how much money you save).
I'm not talking about the more advanced, but still simple, concepts like position sizing, trailing stop losses, and avoiding taxes (where possible).
It's not that these things are unnecessary. They're critical. But they're like shoes, hats, and sunglasses when you're crossing a desert. Nobody would go without them, and they really don't require much foresight or wisdom. Instead, I wanted to answer two more difficult questions...
What are the three things every investor in common stocks must know to succeed, but that you believe most people don't know how to do? Where is the greatest gap between the value of knowledge and the inexperience of most individual investors?
I'm guided by a simple principle: I do my best to tell you what I'd most want to know, if our roles were reversed.
With that in mind, let me share my list of the three most crucial things you should know...
No. 1. The most important thing for investors to understand about investing in stocks is simply what kind of businesses make for great investments and how to properly value these kinds of businesses.
You can think of this knowledge as your personal Google Earth for crossing "the desert" of investing. Knowing how to recognize great businesses and what they're worth is like knowing where the sand dunes are and how to get past them.
Here's an example of what I mean: Do you think coffee giant Starbucks (SBUX) is an expensive stock today? Why or why not?
If you can answer this question within 30 seconds by looking at a few key statistics, you're ready to cross the desert. If you can't... you're not ready. You have to power up your satellite phone and spend more time studying your maps.
If you have no idea whether Starbucks is expensive or cheap, don't worry. You're not alone. Judging by my experiences with wealthy and business-savvy subscribers, I estimate that fewer than 10% of our readers really understand these concepts.
Without this knowledge, you can't be successful as an investor. Not for long, at least.
No. 2. The second thing I know you must have to "cross the desert" successfully is a strategy that will continue to make you money even when you're wrong about the big picture.
When we grow worried about a serious crash in stocks, we close some of our long positions. And we hedge our exposure to the market by selling short (betting against) some stocks.
But we don't sell everything. And we don't move to a 100% short portfolio. (In other words, we aren't "all in" on betting that the market will fall.) As a result, we'll do well even when the market defies our expectations.
The lesson is... you don't ever want to bet the farm on any particular outlook (or any particular investment recommendation). That's a hard idea for most investors to understand and implement...
When events in the world spook individual investors, they tend to pull out of stocks completely. They generally do so at the worst possible time. You have to learn how to make money even when you're wrong about the market as a whole. And you have to follow your strategy... even when it's scary.
No. 3. The last thing I think most individual investors either never learn or only learn the hard way after several big beatings is to never, ever chase what's "hot."
Investment "mirages" will cost you almost every time. It takes a lot of discipline to stick with great businesses that you can personally understand. It takes discipline to buy them when you can get them at a reasonable price. It takes discipline to follow your position-size limits.
When a great new business comes along – like online auctioneer eBay (EBAY) in the early 2000s – learn to be patient. Follow it for years, and buy it when it comes into your range.
If you had bought eBay back in December 2004, you'd have done great – and sure, eBay was and is a great business with a huge "moat." Nevertheless, investors who chased after eBay while it was "hot" saw their investments decline as much as 80% by early 2009. It was far better to have bought it for less than $5 a share once it was trading for a reasonable price.
So again, I believe there are three things every investor in common stocks must know to succeed. If you can follow these ideas, you'll be well on your way to crossing the desert...
- Know what kind of businesses make for great investments and how to properly value these kinds of businesses.
- Use strategies that will continue to make you money even when you're wrong about the big picture.
- Never, ever chase what's "hot."
Editor's note: Porter has made a series of impressive market calls over his career... including his warning, just before the Great Recession, that the world's largest mortgage brokers were on a destructive path toward bankruptcy.
Now, he's returning (for the first time in years) to expose a new threat to the American financial system... And while it's setting investors up for a great deal of pain in the short term, what happens in the wake of the crisis could surprise you.
If you have any money in the stock market today, don't miss Porter's critical revelation on October 26. It's free to tune in, but you must save your spot in advance. RSVP for this online announcement here.