We are living through a massive financial transition.
Most DailyWealth readers have seen my End of America video, where I detail how Western governments have made incredible promises to their citizens – promises that cannot possibly be met… not with sound, honest money. This unsustainable situation will bring about multiple currency crises and, ultimately, impoverish millions of people.
I believe if you are able to simply keep what you have earned, you will come out far ahead. These are not simple times. And I’m afraid we are going to see a lot more trouble in the months and years to come.[ad#Google Adsense 336×280-IA]One of the most important steps you can take to protect yourself is to keep your eye out for opportunities to acquire a portfolio of high-quality common stocks at safe, cheap prices. Over the long run, this is the best and most surefire way of protecting and building wealth.
It should be easy to do… And yet… most people will find themselves completely unable to master it. Today, I’ll show you how to take the first steps…
Now… I can imagine you’re saying to yourself, “Wait a minute… Porter says the U.S. dollar is in jeopardy of a collapse, that the Western world is broke, that it’s all going to hell… And now he’s telling us to buy stocks?!”
Remember… my advice is to acquire a portfolio of high-quality common stocks at prices that are safe and cheap.
“High-quality common stocks” represent businesses that are protected from competition and technology and can produce tremendous rates of return for their owners. Look for companies that routinely earn more than 10% a year on their unleveraged assets. That’s difficult to accomplish, and it is a strong indication of a great business. But you must use your own common sense to evaluate how protected they are from future competition and technology.
“Safe and cheap” means the company has enough earnings and cash flow to realistically take itself private at current interest rates. That is, the company’s shares trade at a price low enough that the company could afford to buy back all of its shares. You don’t need to perform this buyout analysis. A simple rule of thumb is, we don’t want to pay more than about 10 times a company’s cash earnings.
Then… and this is the most important part… make sure you only buy extremely “capital efficient” companies to hold for the long term.
Most public companies – even the ones with great products and profits – only return a fraction of their profits back to their owners. Instead, the capital is destroyed through absurd investments, mergers, and criminal amounts of executive compensation.
I measure capital efficiency by looking to see how much of the company’s gross profits end up being paid out to shareholders in the form of dividends or share buybacks.
Who ends up with the profits? Management? Bankers (in the form of interest payments)? The company itself, due to heavy capital investment? Or investors?
The importance of capital efficiency is not well-understood by most investors, but it is absolutely critical. Businesses that don’t require much capital will, as they get bigger, return higher and higher percentages of their gross profits to shareholders.
Think about it this way: Does Coke have to invest billions of dollars in new technology every year to maintain the quality of its beverages? Do you think Hershey spends a fortune every year coming up with new brands and new kinds of chocolate bars? Nope.
Companies with these special qualities are able to return more and more capital to shareholders every year, year after year, because it simply doesn’t cost them much to grow. And they are able to maintain their prices and profit margins because of the value placed on the product by the purchaser rather than its production cost.
As inflation hits, prices rise, and common stock profits grow, these kinds of companies will provide an excellent hedge against inflation – even better than gold.
The trick is, you must develop the discipline to buy them when they are safe and cheap…
It’s difficult to buy stocks like these at a great price because there is almost always plenty of investor demand for these shares. With the exception of a company in the midst of an accounting scandal or some other kind of unusual internal event, you will only have the opportunity to buy high-quality common stocks at prices that are safe and cheap during periods of market panic.
That’s why it’s important to remain open to buying certain kinds of equities even now, when we’re expecting a long period of economic turmoil.
Master investor Warren Buffett, for example, purchased his gigantic stake in Coca-Cola – perhaps his single greatest investment of all time – following the crash of 1987.
I’m sure I’m going to take all kinds of flak from some of our subscribers who are permanently bearish. They won’t ever buy a stock again because they believe the financial crisis we face will mean the end of the world.
They’re making a huge mistake.
I know how much trouble our country is in. And while it might not be easy for the next several years, we will get through it. The people who will get through it the best are the folks who keep their eyes open for opportunities during the worst parts of the crisis.
I hope that will be you.
— Porter Stansberry
P.S. If you haven’t seen it yet, I urge you to watch the video I’ve made about the problems facing investors right now. I caution you, it will take up over a half-hour of your time. There’s still time to protect yourself from the crises I see coming, but not much. You have to educate yourself as soon as possible. And you have to take action. Watch the video here.[ad#jack p.s.]
Source: Daily Wealth