February 8, 2021
At the end of the day, the only person who truly looks out for your finances is you.
And between the possibility of more lockdowns as new COVID-19 strains hit the country… the government’s “easy money” policies and stimulus measures… and seemingly constant political turmoil… it’s more important than ever to be in control of your own wealth.
That includes knowing everything about what you’re invested in – and why.
I (Trish Regan) first met Austin Root a few years ago at the Stansberry Research Alliance conference.
Before becoming Stansberry’s Director of Research, Austin had decades of investment expertise, including senior investment positions at SAC Capital Advisors and Soros Fund Management.
Today, Austin details the best way to maximize your gains over the long run. He’s going against the grain with this approach… But it could mean the difference between small gains and outsized winners in your portfolio.
(He also recently laid out a complete playbook for 2021 investing, which you can learn about here.)
Do This One Simple Thing to Be a Better Investor
Today, I want to make one simple yet incredibly important point about investing.
You may have heard the opposite argument made many times before, often by smart and experienced folks. So I could be facing an uphill battle here.
But I want to hammer home this idea because I believe that right now – more than ever – your commitment to it will be the best way to maximize investment gains for your nest egg over the long run.
So here it is…
For the vast majority of your capital, don’t buy mutual funds or exchange-traded funds (“ETFs”). Buy individual stocks.
To be clear, I’m making this argument with one qualification… time.
Yes, choosing to invest only in mutual funds or ETFs will save you time. So if that’s the most important factor for you, go with the funds. But if not, all investors should be invested primarily in individual stocks (especially now, with the spread of commission-free trading).
I can think of nearly a dozen reasons to put the majority of your money into individual stocks rather than plowing it all into funds. Today, I’ll take a look at four of the most important reasons, starting with the most controversial…
- Over the long run, individual stocks will outperform funds.
I know. You’ve probably heard about numerous studies showing the opposite… that over time, most professional investment managers who manage individual stocks (i.e., “actively managed mutual funds”) underperform the broader market index.
Anyone who prefers to invest in a “passive” index fund or ETF loves to point this out. But those studies have two main problems…
First, they’re typically an apples-to-oranges comparison in which the actively managed fund returns are after fees, while the index performance is before fees.
It’s true that management fees have come down over time. But industry-wide, they still chop off about 1% per year from average net returns. That may not seem like a lot, but over time, it really adds up.
Consider two investors, A and B…
Both start with $100,000. And Investor A generates 9% per year in gains (reinvested every year) for 30 years, while Investor B generates 10% per year. After 30 years, Investor A’s nest egg is worth $1.3 million. Investor B has more than $1.7 million.
In other words, Investor B’s 1% higher annual returns translate to 34% higher total gains given the power of compounding interest over time.
When you strip away the fees, actively managed funds perform much closer to the broader market. And they’ve often materially outperformed. So if you manage your own money – avoiding management fees – that gives you the clear advantage as a stock-picker.
There’s another key problem with studies that claim most professional investment managers underperform the broader market… They tend to measure against all mutual funds, not just the ones that are truly actively managed.
In other words, they include many managers that aren’t trying to beat the market at all, and instead own essentially all the same hundreds of stocks as the benchmark they’re competing with.
To eliminate those “closet indexers,” a newer analysis has been done on investment managers with high “active share.” These are managers that do not simply mimic some market index, but instead make more concentrated bets in fewer stocks that they truly believe in. And when looking just at these managers, the stock pickers generally do outperform.
One recent study by Invesco showed that since 1994, more than 60% of investment managers with high active share had outperformed their benchmarks… even after fees.
All of that is to say that if you avoid high fees, pick the right stocks, and concentrate on your best ideas, you should beat the market over time.
- When you know what you own and why, you’ll make better decisions.
I can’t tell you how many investors I speak with who have no idea what they own, let alone why. And this includes many professional investors who get paid to manage money on behalf of their clients!
Knowing what you own will help you out immensely when stocks are grinding higher. You’ll have courage in your convictions and be able to let your winners run when less-informed investors tend to sell.
But knowing what you own might be even more valuable when things go very badly for the market. And they will – that’s just what markets do. When that happens, knowing what you own will enable you to act more clearly and decisively.
If you hit trailing stops on certain positions, you’ll sell what you need to and take some risk off the table, building valuable “dry powder.” Then, when other investors are either frozen with fear or begin panic-selling near the market bottom, you will start your shopping spree… buying only things you know well. You’ll buy those world-class companies that you’re confident will ride out the downturn and recover with a vengeance, taking market share along the way.
Consider the brilliant thoughts that our founder Porter Stansberry shared during one of our webinars last March. Remember, this was immediately after the market crashed and left nearly every other investor in panic mode. As Porter said…
My hope is that you, our Stansberry Research subscribers, have followed your trailing stops as we’ve been advocating. You’ve done the right thing. You’ve built cash on the way down. Fantastic. Now… using trailing stops is smart, but only if you’re willing to get reinvested. So you sell and generate cash on the way down. Hopefully somewhere in the range of the bottom, you begin to reallocate.
Now, you’re not going to always know the exact day the market bottoms. Nobody’s that smart. But what you want to do is begin buying. You don’t want to buy all stocks. Focus intently on buying stocks that you can comfortably hold forever.
Right now is a chance for you to buy the highest-quality businesses in the world for the same price in terms of earnings multiples that we saw in 2008 and 2009. I thought that was gone forever. This is the opportunity that you’ve been waiting for. So why not take that chance? At least take half the cash you’ve built and put it to work.
Now, should stocks fall further from here, if you’ve bought the right businesses, you’ll still be fine. And you’ve got more cash – because you only used half so far – to buy even more at even better prices.
What I don’t want you to do is get so frozen that you won’t take any action.
So, we may not be at the bottom, but we’re really close. And I want you to get ready. I want you to have your names researched and lined up. I want you to know what you’re going to do with your cash, and I want you to make it automatic because you have a plan and you’re going to follow it.
Porter was spot-on…
Owning individual stocks will help you know what you own. That knowledge will give you confidence when everyone else is uncertain and agility when everyone else is frozen.
It will help you stick with your winners for longer on the way up… happily part with some of them when stops are triggered on the way back down… and then, when the crash is over, act decisively to buy world-class companies at fire-sale prices.
- Owning individual stocks will change your mindset and make you a better investor.
A few years ago, I wrote an essay about putting an end to just “renting” your stocks… In it, I described the importance of investing in stocks the way buyers of private businesses invest. In essence, to optimize your investing, you must think like an informed “whole-business owner” rather than a casual, careless renter. Here’s what I said…
Think about it… Owning requires more due diligence than renting. And that’s a great thing. As you repeat and refine this approach, magnificent things will happen to your investments.
When you rent something like an apartment or a car, you’re more likely to act on impulse and throw some money at something that catches your eye… After all, you’re only committed for a short time.
But if you’re buying that house or car… you’re likely to take a little more time to make sure it’s something you’ll be happy owning for a long time.
Lots of people trade stocks like they’re renting them. They impulsively buy whatever names are popular or catch their eye. That works OK in a raging bull market, when everything is moving up.
But now is the time to start buying stocks like you’re planning to commit to them… like you really want to own them.
When you do that, your portfolio will begin to fill up with businesses you understand.
You’ll own more businesses with high-quality operating models. And you’ll sleep better at night knowing you own businesses with franchises that will endure for the long haul… regardless of what happens to the market or the overall economy.
Owning individual stocks will absolutely change your investment mindset and make you a better investor.
It’s near impossible to really know all the companies you own through a mutual fund or ETF. They can hold literally hundreds of names… Investing in those funds is like trying to play poker without looking at your cards.
Recommended Reading: Prepare for a ‘Cash Panic’
We’re at the very beginning of a mass financial panic – but not the kind most people expect. The words “mania,” “euphoria,” and “frenzy” are all over the press… while fund managers are STAMPEDING out of cash at record levels – and pumping billions of dollars into a specific corner of the markets. A dramatic financial event over 20 years in the making has finally begun. Here’s what it means for YOUR money.
What’s more, owning stocks will improve the investment decisions you make even beyond that stock portfolio. Think about different investments you’ve considered in the past… These might include buying a rental property, purchasing life insurance or annuities, investing in a friend’s private business, or even paying down debt.
How did you arrive at your final decision? How did you determine whether these were better uses for your capital than your investments in public equities?
As an owner of world-class companies, you can easily compare and contrast…
Would you want to own, for instance, a stake in NVR (NVR), the world’s most profitable and capital-efficient homebuilder during a period when mortgage rates are at all-time lows, for-sale home inventories are depleted, and home prices are swiftly rising? Or would you prefer investing in Cousin Eddie’s “sure-thing” Hamburger Helper & More food truck idea?
As an owner of stocks, you already know the answer. You’re going to stick with owning a piece of the world’s best homebuilder because you know that’s a company with staying power over the long term.
But as a renter of ETFs or index funds, it can be a lot tougher to determine which is the “highest and best” use for your capital. You might reason that with Cousin Eddie, at least you know what you own… and be swayed to opt for his venture.
Don’t do that. Develop the whole-business-owner mentality that comes from investing in individual stocks. Your capital is precious and demands higher standards…
- Tax considerations vastly favor owning individual stocks… especially now.
At Stansberry Research, we do not provide individual investment advice. Instead, we provide our best possible investment ideas and recommendations for all investors. Then it’s up to you to take those ideas and apply them to your own specific situation.
It’s for this reason that we rarely talk about taxes, since each tax situation is so unique. (That, and we know eyes tend to glaze over when taxes are discussed!) But this is one of those rare occasions when even more general tax considerations are extremely valuable.
In almost all cases, owning individual stocks is more tax-beneficial than owning funds or ETFs. That’s because, over time, when you own a portfolio of individual stocks you will end up with more big winners and big losers among your holdings than if you owed just a couple diversified funds. And both those gains and losses are extremely valuable to anyone who wants to manage their tax bill from year to year.
Take the current situation in the U.S., for instance. Tax rates under the Biden administration are highly likely to go up, but probably not until 2022. That means that many investors may want to realize larger tax gains this year, while rates are still likely to be lower (for both income and capital gains). Then, next year if rates increase, it will make sense for many investors to sell positions that have a loss, thereby reducing their overall taxable income.
Combined, this approach of harvesting investment gains in lower tax rate years and losses during higher tax rates should lower your overall tax bill over time. Which will of course go to further enhance your overall returns from owning stocks over funds.
You should always do the homework on your own tax situation or consult with a tax expert to guide you. But in general, know that owning individual stocks will almost always provide you more flexibility and options for managing your tax bill.
Putting It All Together
In summary… You should own primarily individual stocks, and tell everyone you know and care about to do the same. If done properly, you’ll…
- Generate higher returns with stocks.
- Better know and understand what you own, which will lead to wiser decisions in both good times and bad.
- Change your mindset to act like an owner instead of a renter of your capital, enabling better decisions for all your investments.
- Almost certainly pay lower total taxes on your gains.
P.S. Austin sat down last week with American Consequences contributors Dr. Steve Sjuggerud and Dr. David “Doc” Eifrig to answer some of the most pressing questions about investing in 2021… and to detail exactly how you can maximize your gains with a goal-oriented portfolio.
If you missed the original broadcast, that’s OK… You can still hear all of their advice in the full replay. But you must act fast… It won’t be online forever. Get started right here.
Love us? Hate us? Let us know how we’re doing at [email protected].
Publisher, American Consequences
With Editorial Staff
February 8, 2021