Welcome to the Friday mailbag edition of The Daily Cut.
Our mission is to spot market megatrends early on, so you can profit from them ahead of the crowd.
We do that by plugging you into the latest big ideas from Teeka Tiwari, Nick Giambruno, Dave Forest… and the rest of the Legacy Research team.
But we’re not here just to help you make life-changing gains.
We also want to help protect your wealth from threats we see on the horizon…
Today, we’ll share why a flexible asset allocation plan is key to generating wealth and protecting yourself from financial disasters.
We’ll also hear from Legacy’s tech expert, Jeff Brown, on why there’s more to stop-losses than meets the eye.
First, globetrotting gold investor Tom Dyson replies to a reader’s fears that the feds are manipulating the gold price…
Reader question: I’m highly suspicious and concerned that central banks are suppressing the price of gold to create the illusion that inflation is not a problem and that everything is under control. It seems to me, despite the markets hitting new highs, gold should be considerably higher.
Don’t people realize how insane the world is right now? Perhaps I’ve answered my own question. I’d appreciate your thoughts.
Tom’s response: I don’t think gold should be “considerably higher”… yet. Gold is a safe haven… a chaos hedge. It rises most when investors are panicking and the train seems to be coming off the rails.
Right now, there’s no chaos. No one wants a safe haven. They want GameStop and bitcoin and the Nasdaq and vacation homes.
As for central banks suppressing the gold price… I don’t think the government actively invests in suppressing it.
It’s just a hunch. But even if I’m wrong, and the government is actively suppressing it, I wouldn’t care. In the end, the real price always reveals itself.
I just think gold’s time to shine hasn’t arrived yet. That’ll happen when the credit bubble bursts and the Fed isn’t allowed to keep intervening in the market. And that still could be some ways off into the future…
As longtime readers know, we’re big fans of gold here at the Cut.
It’s a scarce asset that’s long been a coveted store of wealth… especially when government printing presses are running hot.
But one reader wants to know what other assets he should consider in his portfolio…
Reader question: I think gold will still perform. So if my allocation to gold is 10%, what about the other 90%?
– Fredrik H.
Chris’ response: Thanks for your question, Fredrik. It’s our view here at the Cut that gold and bitcoin (BTC) have a role in any sensible long-term wealth-building plan.
For the rest of your portfolio, I recommend you place a strong emphasis on diversification. The more diversified you are, the less any single event – like a stock market crash – can hurt you.
Academic studies have shown that your asset allocation decisions – not the stocks you pick – account for more than 90% of a portfolio’s long-term returns.
It’s why I’ve spilled so much ink on why you need to put asset allocation front and center on your radar.
But getting back to your specific question, there are different ways to split up your “eggs ”…
The mainstream version is to divide your portfolio 60/40 between stocks and bonds.
But as colleague, former hedge fund manager, and Palm Beach Letter editor Teeka Tiwari has shown in these pages, that model is now outdated.
He says it’s wise to include a wider range of assets in your portfolio. Here’s the recommended model he and his team put together for our Palm Beach Letter folks…
Teeka includes nine different allocations: equities (stocks), fixed income (bonds), real estate, private markets, bitcoin, other cryptos, precious metals, collectibles, and cash.
He says it’s the reason for the success of The Palm Beach Letter model portfolio.
Since he took over at The Palm Beach Letter in 2016, the model portfolio has posted average annual returns of 343%.
Over that same time, the average annual return for the S&P 500 has been 19.9%.
That means you would have done more than 17 times better with Teeka’s diversified approach.
You’ll notice that Teeka’s suggested allocations don’t add up to 100%…
That’s because everyone is different. Exactly how you split your wealth is up to you.
If you’re a younger investor, with a higher appetite for risk… you might want to max out your stock and private market allocations. If you’re more conservative, you might opt for more real estate, cash, and bonds.
What’s most important is that you follow an asset allocation plan of some sort.
For more insight into portfolio management, we turn to Legacy’s tech expert, Jeff Brown.
A subscriber to Jeff’s Early Stage Trader advisory wants to know more about stop-losses. These are the instructions you can give a broker to buy or sell a stock as soon as it reaches a certain price.
Sometimes, stop-losses can do more harm than good in your portfolio…
Reader question: Hello, Jeff. When I looked at my holdings on Friday, I almost fell out of my chair. [An Early Stage Trader portfolio company] was up over 50% from earlier in the week!
I’d started buying that stock back in early December at about $14. After joining Early Stage Trader in March and seeing it on your buy list, I set a low limit buy for $17 and picked up some more in May.
Your report provided the incentive to purchase more shares and was right on. Thank you. Toward the end of the day on Friday, I set a trailing stop at 25%.
Call me paranoid, but I wanted to protect my gains to some extent, at least for a few days. But I am wondering how to proceed from here on out and would value your opinion on that.
Should I remove the trailing stop, or monitor daily and adjust as necessary? Another strategy I’m considering is removing the trailing stop from half my holdings and watching and waiting on the rest.
I know you’ve been recommending holding without stops as a general rule, but do you still consider this the way to go with this stock?
– John H.
Jeff’s response: Hi, John. Thanks for writing in and for being a subscriber. You’re correct that we don’t officially use stop-losses in any of my research services right now.
That’s a change that came about last year during the COVID-19 market crash. The uncertainty of what was going on led everyone to race for the exit at once. But fear and panic are rarely good foundations for decision-making.
I saw the selling as an extreme overreaction… And it provided a good entry point for buying great technology companies.
I understood that the crash was artificial in the sense that it was not a reflection of any underlying weakness in the economy.
I also understood the virus and knew the economy could continue to function. Therefore, my belief at the time was that the pullback would be short-lived.
The other interesting dynamic was that large institutional money and hedge funds were the main culprits taking the market down. We would have been selling into their panic, only to have them turn around and buy the market right back up to where it was trading.
Rather than locking in losses, subscribers who followed my recommendations rode the rebound, bought more high-quality companies, and profited greatly.
As for going forward… Ultimately, we’ve decided to maintain our policy of no official stop-losses. This way, our positions can’t fall to any other kind of artificial market manipulation.
After all, if large funds know where we set our stop-loss, they can pull the stock down, trigger the stop, and buy back in – at our expense. I don’t want that to happen to any of my subscribers.
The key determinant for closing out a position is whether our investment thesis has completely played out or has changed. If it has, it’s time to take profits and move on. If not, it’s worth holding the position longer.
I’m constantly monitoring our portfolio companies with the help of my team of analysts… And we’ll always alert subscribers if one of our investment theses changes and leads us to sell.
As long as we still have confidence in a company’s prospects and plans for growth, we don’t want unrelated market action or volatility to shake us out of positions that would otherwise go on to deliver big wins.
I encourage readers to use my research in ways that work for them. If you find it helpful to use stop-losses to limit losses or protect gains, that’s a personal decision.
John, you’re asking the right questions. It’s smart to find a strategy that works for you and fits your own risk tolerance. I can’t give personalized advice, but I will never dissuade readers from taking a proactive and thoughtful approach to their investments.
My role is to offer guidance so readers can make their own educated decisions based on their preferences and financial goals.
I will say that different asset classes – with different levels of volatility – warrant different investment strategies.
Another critical point for anyone using stop-losses… I recommend using a spreadsheet or alerts through TradeStops or Yahoo! Finance.
Please do not enter any stops as orders with your online broker.
When you place a stop-loss order with an online broker, market makers can see it. Market makers are companies that provide quotes on buy and sell prices for stocks. They provide liquidity in stock markets, but they don’t act in investors’ best interests. They’re here to make a profit any way they can.
They’ll see the stop-loss, open the stock when the stock market opens (or pull it down momentarily), stop out the investor, buy those shares at a price grossly discounted from the real market value, then pull the market price back up to normal trading levels.
It should be illegal, but it isn’t. I had this happen to me a long time ago. It was a painful lesson, and there was nothing I could do about it. So if you do choose to use stop-losses, please don’t fall for this trap.
If you follow Jeff, you’ll know he’s fascinated by space…
In fact, he got a B.S. in aeronautical and astronautical engineering – otherwise known as rocket science – from Purdue University. It’s the program 25 astronauts have attended before heading into space.
Jeff dreamed of becoming an astronaut. But following a football injury, he changed course and began a career as a high-technology executive.
He still maintains a keen interest in space. Lately he’s been covering the race into space among billionaires Richard Branson, Jeff Bezos, and Elon Musk.
Last week, I asked you which of these billionaires you’d most trust to fly you to space. Here are some of the responses we got…
Elon Musk, of course. Space experience needs huge investment, and improved high space technology expertise. SpaceX has it now.
– Alexandre M.
Richard Branson. He has experience in air travel. And he’s nicer to his employees than the other two!
– William O.
The correct answer is [businessman and billionaire] Andrew Beal. Here’s why…
Branson’s Virgin Galactic only takes you to the top of Earth’s atmosphere.
Bezos’ Blue Origin only covers the range of his low-Earth orbit satellites.
Musk’s SpaceX is the only one of the three that takes you all the way up.
It’s the reincarnation of Beal Aerospace. SpaceX uses Beal’s McGregor test site. And it benefits from Beal’s expensive lessons.
Andrew Beal is an unsung hero.
– Edward W.
That’s all for this week’s mailbag.
Remember, if you have a question for anyone on the Legacy team, be sure to send it to [email protected].
Have a great weekend.
Regards,
 |
Chris Lowe
July 16, 2021
Barcelona, Spain