Be Honest With Yourself

The market is full of uncertainty… Don’t try to ‘play’ the trade war… Think about your sense of conviction… Be honest with yourself…

‘There’s no telling what President Donald Trump will do next… And there’s no telling how the market will react to it…’

I (Dan Ferris) have heard that sentiment a lot this week.

But we’ve never known those things. Investors are only remarking on it now because they don’t like what the market is doing.

As investor and author Howard Marks pointed out in his latest memo, “Nobody Knows (Yet Again),” there are no experts in the field of predicting the outcome of Trump’s trade war:

There have been no large-scale trade wars in the modern era; thus, the theories are untested. Investors, businesspeople, academics, and government leaders will all give advice, but none of them is much more likely to be right than the average intelligent observer. The things on which everyone will agree are obvious, such as the likelihood of higher prices. The less obvious truths will be harder to discern.

Our only choice is to accept the backdrop against which we’re investing right now. Accept the uncertainty… and follow your own investing convictions. That will determine how your portfolio fares over the coming weeks and months.

Marks notes that the best time to buy is when you absolutely don’t want to. Marks is a debt investor, and interest rates have been generally higher for three years.

But U.S. stocks are still in bubble territory. The cyclically adjusted price-to-earnings (“CAPE”) ratio is at 32.55 today. That’s within spitting distance of its third- highest peak of 37.58, reached in January. (It’s also worth noting that each of these peaks have occurred since November 1999.)

I suspect that this mega-bubble will eventually end like all the previous ones – with a huge rout in the stock market. I would have preferred to have that rout in 2022 and 2023. Then we’d be past the peak. The excesses would have been washed out of the stock market by now, and I could have changed the tenor of my weekly Digests from avoiding the mistakes people make near the top of bubbles to the mistakes they make by not buying after those bubbles have crashed, burned, and been washed away by a steep bear market.

As it is, I’m stuck having to be skeptical about the S&P 500 Index delivering decent returns over the next decade.

Maybe that’s why Mike Barrett and I have had an easier time finding short-sale recommendations for Extreme Valuesubscribers recently…

Of course, the market gyrated so hard in both directions over the past few days that it almost didn’t matter if you were long or short. But we only short when we believe a company is being abandoned by investors, is obviously deteriorating financially, and has little to no chance of a turnaround. So we don’t care about the Trump tariff gyrations. The companies we’re betting against are “dead companies walking.”

So to be clear… I’m not saying selling short is a means of “playing the trade war.”

When folks ask how to “play” the trade war, the only real answer is not to do so. If you try to play it, you’re just gambling.

In Extreme Value, we’re sticking with our long-term strategy, even though the trade war has brought markets down. We recommend buying good businesses for the long term and selling short dead companies walking. The “tariff tantrum” hasn’t changed that.

So as long as you’re using a sound investing strategy (like buying great businesses and holding for the long term), you shouldn’t do anything different. You should be no more willing to make changes to your portfolio than at any other time. Stay on course.

But I do recognize the human need for action in the face of anxiety.

So think about your sense of conviction…

My colleague Corey McLaughlin and I recently interviewed investor Chris Mayer of Woodlock House Family Capital for an upcoming episode of the Stansberry Investor Hour podcast (look for that out soon).

Chris is a long-term investor who uses a stock-picking system he created called CODE, an acronym for “cheap, ownership, disclosures, and excellent financial condition.” In other words, he buys cheap stocks of companies run by operators with significant ownership stakes, which provide good financial disclosures and are in excellentfinancial condition.

Chris is very good at holding great businesses during tough times. For example, he told us that he has owned insurance broker Brown & Brown (BRO) since the inception of his fund nearly seven years ago – and that he’s still holding it, despite three bear markets.

Chris gets his conviction by buying shares of companies in which management owns a big stake. In other words, he likes when management teams’ incentives are aligned with other shareholders. If these teams simply do what is good for the value of their own shares, they’re doing exactly what you want them to do for you.

I understand exactly what Chris means. My two highest conviction stocks in Extreme Value are the only two recommendations with management teams I’ve known personally for many years. I also get a lot of conviction from being in the right industry.

For example, one of our biggest winners in Extreme Value was Constellation Brands (STZ). The stock rose more than 600% over a period of about five and a half years. But we wouldn’t have seen that gain if we hadn’t held on to shares after they fell around 25% within the first two months of our initial June 2011 recommendation. The stock dropped nearly as much a few years later after a merger was scuttled by regulators.

Mike and I liked the business of selling branded alcoholic beverages. We knew folks tend to stick with their favorite brands and that they also tend to drink at regular intervals (like once a week or a few times a month). And we felt that folks’ love of Constellation’s beer and other brands would see it through. We were right.

We’re still holding payroll processor Automatic Data Processing (ADP) in Extreme Value, nearly 17 years after our initial recommendation in October 2008 (during the depths of the financial crisis). I’ve always believed ADP would be a consistent cash-gusher. Plus, it holds employee funds overnight in interest-bearing accounts before disbursing them, so it can potentially earn billions of dollars straight to the bottom line when interest rates go up.

That revenue, called “interest on funds held for clients,” rose roughly 144%, from $422.4 million in 2021 to $1.03 billion in 2024. And the stock is up more than 1,000% since our initial recommendation. Anything can happen, but it’s one of the highest conviction stocks we’ve ever recommended in Extreme Value.

I’m telling you all this because you need to know what your investment convictions and risk tolerances are. If you don’t know, times like the present will teach you, and the lesson could be painful.

Think about if you owned a farm instead of a stock portfolio…

Market fluctuations would mean less to you. Thinking about what your farm is worth every minute of the day would be pointless.

Economist John Maynard Keynes underscored this point by imagining a farmer behaving like a skittish stock investor in Chapter 12 (an absolute must-read for investors) of his 1936 classic The General Theory of Employment, Interest, and Money:

In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual… to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week. But the daily revaluations of the Stock Exchange… inevitably exert a decisive influence on the rate of current investment.

That’s the mistake many folks make.

I suspect the uncertainty of the past several days have led many investors to reevaluate their long-term investment holdings based on the belief that tariffs will prevail indefinitely, or otherwise permanently impair the value of the businesses they own. Many likely cited tariffs as a reason to sell. In reality, their actions were based on fear and uncertainty, not knowledge of the future of global trade.

Be honest with yourself. At times like these, when you’re watching your stock portfolio lose 5% or so in a day or two, do you know where your emotions end and your rational thoughts begin?

If you’re selling stocks because you believe you understand Trump’s tariff policy, you’re probably making a mistake. I don’t know that he even has a tariff policy, except to play chicken with other countries in his belief that the U.S. economy is stronger and can take a lot more pain than other countries can.

So don’t obsess about stock prices…

Legendary investor Warren Buffett sounded a bit like Keynes when he commented on the folly of paying too much attention to stock price movements:

If you bought a farm or an apartment house, you wouldn’t get a quote on it every day or every week or every month… So it’s a terrible mistake to think of stocks as something that bob up and down and that you should pay attention to those bobs up and down.

Buffett didn’t explicitly say don’t look at prices at all… but he came darn close to it.

You’ll never have the conviction to hold on to your investments through tough times by studying price action.

The best traders get their conviction from their long-term strategies and using risk controls (stop losses and position sizes). That’s very similar to what the best long-term investors do. As long as your strategy is sound, a little volatility in the market is no reason to abandon it.

If you want to obsess about something…

Focus on understanding the businesses you own. Understand their revenues, earnings, cash flows, margins, balance sheets, investment policies, and returns on capital.

That will help you get to know yourself as an investor.

Even if, like many Stansberry Research readers, you’re an old hand who has been in the market for decades, you’re still only human. Everyone with capital at risk in the stock market will feel an undeniable pull on their emotions as the market continues to fluctuate.

But as long as you’re pursuing an effective long-term strategy – like holding great businesses for long-term compounding – there’s no need to take any new actions just because the prices are moving around a bit.

So know your sense of conviction… and lean on it as this uncertainty plays out. That’ll prevent you from making the all-too-common mistakes others make in turbulent times.

New 52-week highs (as of 4/10/25): Agnico Eagle Mines (AEM), Alamos Gold (AGI), VanEck Gold Miners Fund (GDX), VanEck Junior Gold Miners Fund (GDXJ), SPDR Gold Shares (GLD), Kinross Gold (KGC), Sprott Physical Gold Trust (PHYS), Royal Gold (RGLD), Torex Gold Resources (TORXF), and ProShares Ultra Gold (UGL).

In today’s mailbag, feedback on – what else? – tariffs and the wild market movement this week… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“Looking on as a foreigner I am amazed. I thought that the rules in a democracy were made by the people. What I see is your president doing whatever he wants… All my worth is in U.S. stocks, chosen not just for their earnings but because of your administration, an important safety net that sadly I can no longer trust.” – Subscriber Simon K.

“I think we will end up with a deal with China. Soybeans, natural gas & oil… we can more than likely work something out. However, what about coal? They use coal and we have a lot of it. Maybe a very large offsetting purchase of coal might work.” – Subscriber Mark N.

“Hi Corey, I believe [Wednesday’s] Digest was one of the best I’ve ever read, and I’ve been a reader for a long time. The exploration and explanation of why the bond market is jittery was so interesting… Thank you ALL at Stansberry for your expertise. I learn so much, all the time, and make some good money decisions some of the time, as a result.” – Subscriber Arthur G.

Good investing,

Dan Ferris
Medford, Oregon
April 11, 2025