Mea culpa… The long arc of history… ‘A premium on promises’… The market’s reprieve… The three most important words… ‘It’s not certain that all is uncertain’…

I (Dan Ferris) can admit when I’m wrong…

I’ve recently challenged the idea that “buying the dip” any time U.S. stocks fall is a guaranteed way to make money. In my May 2 Digest and in the latest issue of The Ferris Report, I couldn’t resist citing a recent Wall Street Journal article about it…

By one measure, it has been the worst year for the “buy the dip” strategy in almost a century. Investors who have stepped in to buy shares on sale have instead been stuck with bigger losses. The S&P 500 has dropped 1.3% on average this year in the week after a one-day loss of at least 1%, according to Dow Jones Market Data. That would be the biggest such decline on record, in data going back to the 1920s.

In the May 2 Digest, I concluded that, “Investors bought the dip with abandon at the worst time for buying dips in 100 years.”

Turns out there was nothing to worry about at all. If you ignored my warning and bought, you must be celebrating right now. The S&P 500 Index has erased all of the “Trump tariff tantrum” losses that began on April 2 and bottomed on April 8.

Bloomberg reported on the market’s impressive 17% rebound off the April 8 low in a recent article titled “Buying the Dip Still Works – Even in This New World.”

The words “New World” sound like “New Era” to me – something everybody says at market tops. But this week, I’m humble before the mighty market and don’t feel like bragging.

Truth is, I have no excuse for getting this wrong…

I should have said, “I don’t care what the Wall Street Journal says, folks will buy the dip and the market will come roaring back.” I already had all the insight I would have needed to make that call, too. Regular readers are familiar by now with the following chart, published most recently in my April 4 Digest…

Note the second to last line… While financial institutions used to move the markets in recent decades, that has shifted to individual “retail” traders.

As if to remind me of what I had said, Bloomberg recently noted that retail investors “have become an increasingly powerful force in markets.” As Bloomberg continues…

At the end of 2024, they collectively held $35 trillion in US stocks – 38% of the market… They came into the year accounting for about 19.5% of US equity-trading volume… up from 17% a year prior and well above pre-pandemic levels. While this is below the 24% peak reached during the meme-stock frenzy at the beginning of 2021, commission-free trading has created a sustainably higher level of retail engagement.

I guess folks buying stocks on Robinhood and posting the social media hashtag “#notleaving” really meant it. They’re not leaving. As long as they’re employed, they’ll keep plowing disposable income into stocks. The bigger the dip, the more enthusiastically they buy.

The long arc of market history suggests that will work until it doesn’t. Recent history suggests it’s still a no-brainer…

I keep worrying aloud about the risk of a steep bear market… or even worse, a bear market followed by a decadeslong sideways market. The market continues to mock me. The more I worry, the more resilient the market seems to become.

And yes, we’re talking about a couple of very short-term moves here. When my chart of inverted market trends says that “buy the dip” will give way to “sell the rally,” it doesn’t mean you can never buy stocks again. It means you can’t buy them mindlessly, in anticipation of the market rising forever no matter the valuation or macro backdrop.

It’s easy to forget the market’s bleak periods. For example, the sideways market from 1966 to 1982 featured several brutal drawdowns. Every time investors thought the coast was clear, the market smacked them back down. And the drawdowns weren’t just 5% here and 10% there… but multiple drops between 26% and 45%.

By the time the bottom was truly in, nobody wanted to buy stocks. BusinessWeek had declared “The Death of Equities” three years prior, and they were still looking quite dead in 1982.

As famed short seller James Chanos said in a recent CNBC interview:

In bull markets, investors tend to put a premium on promises. In a bear market, they put a discount on reality.

By the time the sideways market ended in 1982, folks were heavily discounting reality. The S&P 500 traded at a cyclically adjusted price-to-earnings (“CAPE”) ratio of less than 10 from 1978 through 1983. Stocks have never been that cheap since.

With the S&P 500 trading at a CAPE of 36, investors today are very clearly putting a substantial premium on promises…

To turn Chanos’ statement from a warning to advice, invert it… When a bull market gets to exorbitant valuations, discount the promises. When a bear market gets long in the tooth, research how the reality of many businesses is far better than what the market is discounting.

The main promise you should discount today is that restructuring global trade won’t require a painful adjustment. As I explained last Friday…

Reordering global trade will also reorder global investments. Right now, dollars flow from the U.S. to countries that produce low-cost goods… and then they flow back into U.S. investments. Fewer dollars going abroad will mean fewer foreign investors buying U.S. stocks and bonds.

That’s a simplification, but it’s accurate enough to make the point: U.S. stocks could become less popular with many foreign investors. If Trump is successful in his bid to reorder trade, expect more investment dollars to flow out of U.S. stocks and into foreign stocks.

The latest figures show that foreign investors hold nearly $17 trillion in U.S. stocks and nearly $13 trillion in U.S. debt securities…

I won’t guess at how much will flow in or out of the U.S. or any of its trading partners… But I will point out that $17 trillion is 29% of the $58 trillion U.S. stock market. That’s a big chunk that’ll potentially see increased outflows in the next few years.

The reckoning might begin sooner than you’d ever guess…

In a recent interview for next week’s episode of the Stansberry Investor Hourpodcast, co-host Corey McLaughlin and I spoke with our friend and colleague Garrett Baldwin. Garrett has a deep knowledge of macro trends and expertly trades them with his own proprietary system.

Garrett doesn’t like the market’s exorbitant valuations any more than we do, but he said that’s just the way it is and that he’ll “trade it until it breaks.”

He did note that the S&P 500 had already reached an overbought condition when we spoke with him earlier this week. I’m no technical trader, but I wouldn’t bet against Garrett.

Of course, if he’s right and the market turns down again, he’ll very likely buy the dip once his signals flash green… as I continue to wonder if the epic bear market I’ve been worrying about for a few years now has finally arrived.

Garrett had some great advice for folks right now…

He essentially said that if you’re still holding onto speculative garbage, congratulations, the market has given you a reprieve, but you had better dump it while markets are accommodating. As Garrett said, “Markets are for selling,” and now is the time to sell speculative stocks and focus only on quality.

Without Garrett’s expertise, I honestly don’t know how you could justify any strategy but preparation. In other words, hold some Treasury bills and gold… And stick to buying the highest-quality stocks when they trade at reasonable valuations, then holding them for long-term compounding.

If you want to find more certainty and get control of risk in your portfolio, I also encourage you to, as Warren Buffett might say, “stay inside your circle of competence” when contemplating new investments.

“Inside the circle” is where you’ll get your best investment results and where you’ll sleep most soundly at night, no matter what is happening in the world.

I’ve sung this song so many times, you’re probably hearing it in your sleep by now. But I’ll keep doing so as long as it seems the prudent path.

Last week, I pointed out that successful investors like Paul Tudor Jones and Howard Marks had recently been in the news, giving advice on how to handle the tariff-induced uncertainty in the market…

I sided with Howard Marks, whose most recent memo is titled “Nobody Knows.” In the same vein, I’ll now share a 2021 essay from Tim Price – an author, investor, and founder of Price Value Partners – titled “The Three Most Important Words in Investing.”

Tim has appeared on the Stansberry Investor Hour and I know he’s a value investor… So at first, I thought he might be referring to the opening paragraph of Chapter 20 of Benjamin Graham’s classic, The Intelligent Investor, which reads…

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.

As a value investor, I would have loved for Tim’s three words to be “margin of safety.” I’d probably have spent the rest of this Digest talking about the marvelous power of acquiring a margin of safety in every investment you make. But I was both wrong and delighted when Tim instead concluded his note:

Nature cannot be fooled. And neither can the markets, not forever. Rather than rely on the spurious precision and fundamental overconfidence of economists, central bankers and market strategists, there are three words we should voice as we navigate these treacherous waters. Sometimes:

We don’t know.

So we don’t attach too much significance to subjective macro forecasts that might be wildly misguided – or plain wrong. We simply look at the opportunity set on a bottom-up basis, crunch the numbers, avoid the obvious overvaluation risks… and wait for the magic of mean reversion to do the rest.

I’m constantly harping about all that we don’t know as investors. That’s because a natural foible of the human condition is that folks want answers, as Price notes earlier in the essay…

This is in the attitude of mind of the populace, that they have to have an answer and that a man who gives an answer is better than a man who gives no answer, when the real fact of the matter is, in most cases, it is the other way around.

He’s right. And right now, it is definitely the other way around: Folks who claim to know what comes next don’t know anything valuable… And those who know something valuable admit they don’t know what comes next.

Admitting you can’t possibly know where the government’s trade policy will go next is a simple acknowledgement of reality. Chanos might say that, by admitting you can’t predict the future, you’re neither putting a premium on promises nor discounting reality.

Promises are embedded in the very existence of any business…

The way things are today, most management teams promise they’ll maximize shareholder value. The extent to which they do that over the long term is the extent to which they help you compound your capital at satisfactory rates.

That’s the kind of promise that folks can keep: to do their best for you, including responding to the substantial incentives in place – like stock options and other compensation.

But nobody can keep a promise about the market or the economy. Nor can anyone promise you that a certain economic trend will definitely result in a certain stock price trend. This is another way of pointing out why at Stansberry Research, we overwhelmingly focus on bottom-up analysis of individual businesses and eschew making global macro forecasts.

For example, even though Garrett understands the macro environment well, if his market-based signals don’t say trade, he doesn’t trade. I’ve met bottom-up value investors who do the same thing. They have a good understanding of the macro situation… but they don’t trade it. They stay focused on what works over the long term: understanding business valuation and identifying attractive opportunities to exploit that knowledge for profit.

If you have trouble seizing upon opportunities these days, nobody could blame you. Perhaps a phrase from French philosopher Blaise Pascal’s classic Penséescould help bolster your resolve:

It is not certain that all is uncertain…

In a way, all of us at Stansberry are constantly saying, “We don’t know.” We don’t know where the market will head next week or next month… And we don’t know what Trump will say or do next.

But we do know a great business when we see one. And we do know a great opportunity to invest in that business when the market coughs one up.

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A quiet mailbag today… What’s on your mind? Do you have a comment or question for us? As always, e-mail us at feedback@stansberryresearch.com.

Good investing,

Dan Ferris
Medford, Oregon
May 16, 2025