The Weekend Edition is pulled from the daily Stansberry Digest.
I will never forget what transpired on August 31, 1998...
It was a year or so before Porter founded Stansberry Research.
As we did most days back then, Steve, Porter, and I left our desks at our office on St. Paul Street in Baltimore around noon for lunch... We walked half a block or so up Preston Street to our usual spot, the One World Café.
Although it was a typical hot, sunny, late-summer day in the city, it was far from ordinary. As the three of us headed outside to have lunch, terror was gripping the stock market...
Over the previous six weeks, the S&P 500 had been thrown into turmoil. The benchmark index was 13% off its July 17 peak. And while we took our lunch break, the wheels were coming off... It eventually fell another 6.8% that day, wiping out its year-to-date gains.
You see, on that day, an emerging markets collapse was scaring the daylights out of investors...
Most famously, perhaps, it was causing the collapse of the Long-Term Capital Management ("LTCM") hedge fund.
Without getting mired in the details, LTCM blew up in August 1998. And by the time the fund was shuttered in October of that year, it was worth less than half its March 1994 value (according to Roger Lowenstein's classic account of the episode, When Genius Failed).
That brings me back to the One World Café on the final day of August 1998.
While other investors were panicking, Steve wasn't worried at all about what was happening...
I vividly remember the moment we stood at the corner of St. Paul and Preston streets, waiting to cross. Steve matter-of-factly told Porter and me that he believed the Federal Reserve would bail LTCM out... and that the bull market still had more room to run.
Steve was exactly right...
The Fed bailed out LTCM to the tune of nearly $4 billion. (August 1998 sounds a lot like the first half of 2020.) The S&P 500 bottomed the same day that we stood on the corner and Steve told us not to worry. The Nasdaq Composite Index bottomed about a month later. And the S&P 500 finished the year up around 27%, while the Nasdaq ended the year up about 40%.
At its peak of 5,048 in March 2000, the Nasdaq had soared 256% above its close on August 31, 1998. The S&P 500 had risen 59% from that same date. It would retain the title of the single most overvalued moment in stock market history for nearly two decades.
So, what if the COVID-19 bear market was the rough equivalent of the LTCM-induced panic?
During the COVID-19 bear market earlier this year, the Nasdaq fell about 30%. The LTCM correction in the summer and fall of 1998 featured a drop of around 30% in the Nasdaq.
So maybe we should party like it's 1998 again... Maybe we should expect another blistering Melt Up rally to unfold over the next 12 to 18 months before the ultimate top like in 2000.
I wouldn't bet against Steve... He nailed the 1998 setup and ensuing Melt Up. And he's betting that the same situation is in place again today.
But I wouldn't be doing my due diligence if I didn't share a couple of little problems that I see with this 1998 idea, in particular, and the more general idea that past episodes can help you understand present ones...
First, folks have said the same thing about 1998 many times over the past few years...
Bloomberg said it last November... Barron's said it last September... And a contributor on financial website Investopedia said it about a year ago.
Who knew there was so much 1998-ness floating around?
And of course, the story is much the same today... Plenty of people want to tell you how the current situation is or isn't just like the Great Depression.
Yes, I've said that studying the era from the Great Depression to World War II would be helpful...
But I've also made it clear that I'm not predicting a repeat of that episode. Instead, I believe that it's worth studying that era for useful insights, no matter how the next several years play out.
Perhaps the biggest lesson today is to always remember that comparing current events to the past is a dependable source of stories for storytellers.
But don't be too hard on the storytellers (said the storyteller)... They're only human, and there's a deeper issue here – an issue with the value of studying history at all.
What we can learn from history is limited...
Shane Parrish of the popular Farnam Street website said, "Our documented history can blind us." It can blind us to the potential range of outcomes that lies ahead.
And since range of outcomes equals risk, the markets are riskier than we can imagine.
"OK, Dan, wow... so you want me to study history. But studying history can blind me, perhaps as much as – or more than – it prepares me? Does that about cover it?"
Sort of... but not quite.
For example, I'd certainly hate to see you jump to conclusions at this point and resign yourself to the opposite end of the spectrum. That's something that we can see represented by a quote from Cormac McCarthy's 2006 post-apocalyptic novel, The Road...
People were always getting ready for tomorrow. I didn't believe in that. Tomorrow wasn't getting ready for them. It didn't even know they were there.
Don't go there... You can and should believe in getting ready for tomorrow. As late physicist and author Stephen Hawking once said, "While there's life, there is hope."
But at the same time, there's wisdom in understanding that the future isn't getting ready for you and doesn't even know you're there.
In fact... the impossibility of knowing the future is why you must prepare for it.
Though I don't know if today is more like 1929, 1998, or any other date... I remain confident that studying history will help you navigate the present and future. I can't imagine not studying history at all.
The good news for investors is that you can study the period from 1929 to 1945, 1998, and any other period... imagine something worse (or better)... and still build a portfolio with excellent odds of seeing you through the future with better-than-average performance.
I feel like I've spent my entire career preparing for the current moment...
It's why I continue to harp on maintaining a simple four-asset portfolio as the backbone of a truly diversified investment position. As I've said before, I believe you should own...
- Stocks purchased at discounts to intrinsic value
- Gold and silver bullion (or proxies, like publicly traded trusts we've covered in my Extreme Value newsletter)
- A sizeable cash position (somewhere around 20% to 25%)
- A little bitcoin (just 1% could have a huge positive effect, with tiny downside exposure)
That isn't intended as an exhaustive list, either.
Some folks like to buy fine wine and art as a store of value. They're both fairly portable... and well-chosen wine and art can hold – and even grow – its value over time.
Real estate is another category you might want to explore... I've heard of land that was seized by enemy combatants during wartime, but due to long-held systems of land entitlement, it was eventually returned to the rightful owner after the war ended.
Yes, I'm still personally buying stocks today – and recommending that my subscribers do, too...
In the May issue of Extreme Value, we identified what’s likely the single best margin-of-safety setup of the past 24 years.... on a single stock that could make you 16.5 times your money.
Unlike other businesses, like meat packers and metal refiners, this company can keep functioning at full capacity during the pandemic. In fact, it has a proven track record of generating strong returns for investors in the wake of past crises.
For example, coming out of the dot-com crash, this same stock surged nearly 700%. And since the financial crisis of 2008, it has gone up more than 470%.
My point is, you can still find good values in a volatile market... while not knowing what the future holds. But that's also exactly why you must always diversify your assets.
I see prudent investors of all types preaching increased diversification today...
My friend and author Vitaliy Katsenelson is a classic, bottom-up, fundamental-focused, value investor. And he called me up last fall to talk about ways to buy gold. This is the same guy who used to treat my desire to own gold as if it were a character flaw (like many diehard value investors).
Likewise, my friend and macro investor Cullen Roche told me in early July on the Stansberry Investor Hour podcast that the stock and bond markets right now "look about as bleak as I can ever remember."
Wow. But his solution, as you may have already guessed, is simple...
Diversification, which he nuances with this sage observation: "Patience is the ultimate diversifier. It is the thing that differentiates good investors from bad investors."
Famous hedge-fund mogul Ray Dalio has been studying the economic history of the past 500 years. And he's also preaching diversification today. As he explained in his online series, The Changing World Order, last year (emphasis added)...
Please keep in mind that even with all of this, I have been wrong more times than I can remember, which is why I value diversification of my bets above all else. So, whenever I provide you with what I think, as I'm doing in this study, please realize that I'm just doing the best I can to openly convey to you my thinking.
If you think that diversification is the last refuge of a scared investor, you're probably right in a way...
But the folks I've named are no slouches. They're some of the smartest and most successful investors I know and follow. And while our styles may differ, we've all studied some history and looked at the present from our different perspectives and arrived at the same place...
Right or not, many folks say the No. 1 rule in real estate is "location, location, location." And in the same vein, your No. 1 rule for allocating your hard-earned capital today is simple...
Diversify, diversify, diversify.
Good investing,
Dan Ferris
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