And one of my favorite professional investors – Murray Stahl of Horizon Kinetics Asset Management – just made a really big contrarian call.

Stahl is pounding the table on the oil and gas sector.

He just called it “one of the few ‘once-in-a-lifetime’ investment opportunities that one can be fortunate enough to actually come across in a lifetime.”

Being bullish on oil and gas is not a mainstream view…

Far from it. Investors have been dumping shares of oil and gas companies for years.

Since the price of oil last peaked in June 2014, the S&P 500 has risen almost 75%.

The energy sector, meanwhile, has declined by almost as much. It’s down 70% over that same time period.

An investor who put $10,000 into an S&P 500 index fund on June 30, 2014, would have $17,500 today.

A similar investment in the Energy Select Sector SPDR ETF (NYSE: XLE) would have declined to just $2,900.

The energy sector has been nothing short of a disaster in recent years…

The consensus view is that prospects aren’t getting better for oil and gas companies going forward. Instead, investors expect the future for these companies to only get worse.

The 800-pound gorilla that has everyone scared to own oil and gas companies is the global plan (especially in the U.S. under a Biden presidency) to get off fossil fuels and adopt green energy initiatives.

Multiple sources suggest that fossil fuel use will be almost nonexistent by 2035.

If that happens, oil and gas companies will be worthless – so investors today aren’t willing to touch them with a 10-foot pole.

Murray Stahl believes this view is wrong…

A Collapse or a Shock?

Murray Stahl sees a looming oil supply shortage causing an oil price shock.

If he’s right, the opportunity is massive. These companies are trading at throwaway valuations.

Today, the energy sector represents just 2% of the weight of the S&P 500. That is just a tiny fraction of the 25% weighting that energy stocks had in the index in 1980.

While Big Tech companies today are priced for perfection in the stock market, the oil and gas sector is priced for failure.

But if optimism returns, there is a ton of upside in these stocks.

So what does Stahl see that others don’t?

A lot – and he lays it out in his 37-page quarterly letter to his investors…

1. Oil and gas companies across the globe have slashed investments in new wells at an incredible rate. Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), for example, will spend 70% less drilling wells in 2020 than they did in 2014.

   That reduced spending will take a toll on future production very soon.

2. Investors underestimate the amount of money required to build out the required renewable energy infrastructure across the globe.

   Stahl is convinced the transition will be much harder than almost everyone thinks.

3. Even in the most bullish cases for renewable energy growth, we still need a huge amount of oil and gas to help meet the world’s growing need for energy.

With merger and acquisition activity heating up in the sector, it seems that oil company executives see a lot of value. Oil and gas aren’t dead, but the stocks in the sector are priced as though they are.

Stay tuned. I’m going to take a deeper dive on this sector and report back on any clear bargains I find.

Good investing,

Jody

The post Why Oil and Gas May Be a Bargain for Today’s Investors appeared first on Investment U.

That sign was a job application from someone looking to join his Greenlight Capital hedge fund.

As Einhorn explained in his third quarter letter to Greenlight’s investors, the job application came in an email with the subject line, “I am young, but good at investments…”

It was sent by a 13-year-old boy who claimed to have quadrupled his money since February.

I recently told you how Joe Kennedy avoided the 1929 stock market crash after receiving a stock tip from a shoeshine boy.

Kennedy decided that when shoeshine boys start giving stock tips, it is time to get out of the market.

Einhorn’s story sounds similar…

When teenagers start crushing the market and applying for jobs at hedge funds, it may be time to sell.

The Warning Signs of a Tech Bubble

Like Einhorn, I’ve been warning about Big Tech names, special purpose acquisition companies (SPACs), electric vehicle companies and profitless momentum stocks recently.

And in his third quarter letter to Greenlight Capital investors, Einhorn lays out a list of new warning signs…

1. Initial public offering mania
2. High valuations and new metrics for valuation
3. Market concentration in a single sector and a few stocks
4. S&P 500-type market capitalizations for second-tier stocks that most people haven’t heard of
5. A situation where the more fanciful and distant the narrative, the better the stock performs
6. Outperformance of companies suspected of fraud based on the belief that there is no enforcement risk, without which “crime pays”
7. Outsized reaction to economically irrelevant stock splits
8. Increased participation of retail investors, who appear focused on the best-performing names
9. Incredible trading volumes in speculative instruments, like weekly call options and worthless common stocks
10. A parabolic ascent toward a top.

Like Einhorn, I have my eyes wide open to the risk that the bubbly areas of the market present.

We also know that opportunities exist in other areas of the market…

When You Hear From Me Next

I am an avid reader of the quarterly letters from the top investors like Einhorn. I watch what these super-smart folks are buying and selling.

After I read Einhorn’s third quarter letter, I read a letter from another elite investor who is sounding the same warning signal.

When these smart guys start cautioning the same things, we should pay attention.

This other investor, however, is also pounding the table on a sector of the market that he believes represents a generational buying opportunity.

As is often the case, risk in one area of the market opens up opportunity in another.

When you next hear from me, I’ll name that other investor and lay out exactly which sector he thinks is appealing and why.

Until then…

Good investing,

Jody

The post Beware These 10 Signs of a Market Top appeared first on Investment U.

I took the opportunity to remind my parents that they shouldn’t panic when the stock market sells off… they should root for it.

In fact, the further the market falls, the better it is for them.

Let me explain…

My parents have built a portfolio that is skewed toward term deposits and savings accounts. They’ve worked hard and saved religiously.

Their parents, who went through the Great Depression, taught them that term deposits and savings accounts were the most secure places to invest their cash.

They have some exposure to the stock market, but not much. Considering that term deposits and savings accounts pay an insulting amount of interest these days, this is a mistake.

While my parents saved diligently for decades and have lots of money invested in term deposits and savings accounts, they aren’t earning a meaningful amount of income from those investments.

The chart below shows what has happened to retirees like my parents…

You can see (and likely remember) that back in the ’90s, $100,000 stashed away in a savings account produced annual interest income of $4,500 to $6,000.

That is a 4.5% to 6% yield.

Compared with what savings accounts are paying today, those 1990s rates seem like absolute windfalls.

In 2020, $100,000 invested in a typical savings account produces a pathetic amount of interest: $220.

That is an annual return of 0.22%, which is around one-fifth of 1%. It is basically a rounding error away from zero.

Interest Rates Aren’t Getting Better Anytime Soon

At the end of the 1990s, a $100,000 savings account balance was able to generate a 6% annual rate of return, or $6,000 of interest income.

In 2020, if a retiree wanted to generate $6,000 from a savings account, they would need to start with $2.74 million.

That means a savings account needs to be 27.4 times larger ($2.74 million vs. $100,000) in 2020 to generate the same amount of interest.

For retirees like my parents who are in their golden years, it’s a harsh reality…

My parents based their retirement planning on expectations that were set in the 1980s and 1990s when they were in their peak saving years.

Instead, they now see that they needed to have saved 27.4 times more money than they expected in order to generate the retirement income they wanted.

This isn’t a new state of affairs. Interest-bearing accounts have yielded very little for the past decade. We haven’t seen interest rates this low in recorded history.

Unfortunately, the U.S. Federal Reserve has made it very clear that interest rates aren’t going higher anytime soon. It foresees interest rates staying at zero through at least the end of 2023.

This is why I have been telling my parents, who are sitting on savings and term deposits that are paying nothing, to cheer for stock market declines.

After all, as stock prices drop, dividend yields rise.

My parents currently have a very, very modest allocation to the stock market. They could and likely should have more.

And the further the stock market drops, the greater the opportunity they have to build out a diversified dividend-paying portfolio that provides some real yield.

Plus, it offers a chance to score some capital gains when the market eventually rebounds… as it always does.

Good investing,

Jody

The post How a Generation Got Deceived Into Low Yields appeared first on Investment U.

Little did he know it would be the best nickel he ever spent…

Without that shoeshine, there is a good chance we would have never heard of JFK.

As the shoeshine boy was finishing, he looked up at Joe Kennedy and offered him a stock tip: “Buy shares of Hindenburg.”

Joe Kennedy walked promptly back to his office and started to sell his stocks.

As Joe Kennedy later put it, “When the shoeshine boy starts handing out stock tips, you know it is time to get out of the market.”

Shortly thereafter, the stock market suffered a crash of epic proportions.

Had Joe Kennedy taken the shoeshine boy’s advice or stayed fully invested, he’d have lost everything.

Instead, he was loaded with cash and ready to capitalize on life-changing opportunities…

In 1929, Joe Kennedy’s fortune was estimated to be $4 million (equivalent to $59.6 million today). By 1935, his net worth was $180 million (equivalent to $3.36 billion today).

All thanks to an unsolicited tip…

Today, Shoeshine Boys Would Be Talking About SPACs

SPACs (special purpose acquisition companies) are the hottest thing in the market today. These investment vehicles are also known as “blank check companies.”

A SPAC is formed strictly for the purpose of raising cash through an initial public offering (IPO).

That means SPACs raise cash but have no actual operations.

Once it goes public, a SPAC has a limited amount of time to use its cash to purchase a business. Usually, the time period is 12 to 24 months. If no acquisition is made, the cash is returned to shareholders.

SPACs have been around for decades, but they’ve exploded in popularity this year.

In 2012, a grand total of seven SPACs came to market with IPOs. In 2020, there have already been 141!

To be clear, there is nothing wrong with SPACs. Some of them can be great investments.

The problem is that just like with anything that gets incredibly hot on Wall Street, the quality of SPACs is hitting rock bottom.

Believe it or not, we can’t trust that Wall Street’s investment bankers (who are motivated by their big fat banking fees) aren’t going to introduce some really poor-quality SPACs to the world.

In fact, we can count on Wall Street to do exactly that.

SPACs are launching fast and furious in 2020. I’ve seen a few that have made me raise my eyebrows…

• A $575 million SPAC led by Billy Beane, the U.S. baseball executive depicted by Brad Pitt in the film Moneyball. Beane is a baseball executive, not a successful investor or CEO.
• A $300 million SPAC launched by Paul Ryan, the former speaker of the U.S. House of Representatives. If you think I’m turning my money over to a career politician, you are going to be very disappointed!

My biggest concern with SPACs is that founders are heavily incentivized to make a deal – any deal, and not necessarily a good one.

While you and I have to use our hard-earned money to acquire shares in a SPAC, founders like Billy Beane and Paul Ryan are given their shares for a nominal amount.

That means that they are heavily incentivized to make a deal at any price.

That isn’t good. Investors want a good deal, not any deal…

To me, the bottom line is that while there will undoubtedly be some very good investments in the SPAC world, now is not the time to hunt there.

Anytime Wall Street starts pumping out this kind of volume and earning big fees, you know it is time to vacate the area.

Good investing,

Jody

The post Why Investors Should Be Wary of SPACs appeared first on Investment U.

And given his multidecade streak of outperformance, we would be foolish not to listen.

In fact, I’ve been pounding the table about many of these same signals here at Wealthy Retirement for several months now.

But not to worry…

While there’s risk, there’s also opportunity.

An Ominous Warning

In very few endeavors is experience more valuable than it is in investing.

While history never repeats, it often rhymes. Lessons learned in the past can be applied in the present to avoid trouble and seize opportunity.

And few people have more investing experience – or brainpower – than Howard Marks. For more than 40 years, Marks has demonstrated consistent excellence as a world-class investor.

His $2.1 billion net worth is a testament to that…

Marks founded investment firm Oaktree Capital Management in 1995. Each quarter, he issues a widely read memo to Oaktree investors to share his current market view.

Last week, Marks released his most recent quarterly letter. It is lengthy – almost 17 pages.

But the most important takeaway is one phrase…

When discussing stock market returns for investors putting new money to work today, Marks referred to “the lowest prospective returns in history.”

Wow…

Marks is saying that now is the worst time ever to be buying stocks – not just relative to any time in his 40-year career, but ever.

But if we dig deeper, there is much more to the story.

Not All Corners of the Market Are Expensive

In his recent memo, Marks discusses how incredibly expensive the dominant tech stocks of today have become.

You know the stocks I’m talking about – the FAANG group that includes Facebook (Nasdaq: FB), Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), Netflix (Nasdaq: NFLX) and Alphabet’s Google (Nasdaq: GOOG).

These great companies sport extremely rich stock market valuation multiples today.

Marks then pulls on his deep experience for a lesson on how buying great companies at extremely expensive valuations might end by comparing the FAANG stocks to the “Nifty Fifty.”

The Nifty Fifty was a group of dominant companies that became extremely popular with investors in the late 1960s. The group included the incredible technology companies of the day, like Xerox (NYSE: XRX), IBM (NYSE: IBM), Eastman Kodak (NYSE: KODK) and Polaroid.

The thinking back then was that the Nifty Fifty companies were so dominant and had such incredible business moats that no valuation was too rich to pay for their stocks.

The same argument is being made today for the FAANG stocks…

In the late 1960s, the Nifty Fifty companies looked every bit as bulletproof as Facebook, Apple, Amazon, Netflix and Google do today.

But for investors who purchased very expensive shares, that didn’t turn out to be true.

I’ll let Marks explain the Nifty Fifty because he actively invested through this period…

Fifty years ago, the Nifty Fifty appeared impregnable too; people were simply wrong.

If you invested in them in 1968, when I first arrived at First National City Bank for a summer job in the investment research department, and held them for five years, you lost almost all your money.

The market fell in half in the early 1970s, and the Nifty Fifty declined much more. Why? Because investors hadn’t been sufficiently price-conscious.

In fact, in the opinion of the banks (which did much of the institutional investing in those days) they were such good companies that there was “no price too high.”

Those last four words are, in my opinion, the essential component in – and the hallmark of – all bubbles.

Marks doesn’t know that the pricey FAANG stocks of today are going to end like the Nifty Fifty. But he seems to suspect that might be how this movie ends.

I’ve warned about Big Tech stock valuations repeatedly over the past six months. (You can revisit some of those articles here, here and here.)

While I’m not saying that I think these stocks are going to crash, I wouldn’t rule it out. I most certainly think that the upside in Big Tech names at current valuations is very limited.

But it isn’t all doom and gloom for investors…

While billions of dollars have been piling into FAANG stocks, other areas of the market have been forgotten – and now they represent excellent value.

In past months, we looked at some of those: homebuilders, emerging markets, banks, small caps and value stocks.

Opportunity is always out there. You just often have to look where everyone else isn’t looking.

Good investing,

Jody

The post Howard Marks’ Warning to Investors appeared first on Investment U.

After a year of training and five canceled races, I’m about to run a socially distanced ultramarathon.

This ultramarathon is called the “S3.” The “S” stands for “Sinister.” The course covers 66 kilometers and 9,000 feet of elevation in Rocky Mountain trails in Crowsnest Pass, Alberta.

But finishing the race won’t be the most important thing that happens to me on that day…

My wife, Stacey, and I will be celebrating our 20th wedding anniversary.

Unlike an ultramarathon, being married to her has been no challenge at all. I wish everyone could have a partner who wakes up happy every single day and makes life so much fun.

Seeing Stacey and my two kids at the finish line will be the best moment of my entire year.

Investing Is Like an Ultramarathon

Like in an ultramarathon (or relationship), when investing, it’s easy to go too hard early. Success requires patience.

Watching the share prices of Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC) languish after releasing third quarter earnings that I thought were pretty good reminded me of that…

I went into this earnings season expecting that a drop in loan-loss provisioning would be the catalyst that would move bank shares higher.

I was right about the big improvement in loss reserves.

Citigroup’s provision for credit losses dropped from $7.9 billion in the second quarter to just $2.26 billion in the third quarter.

Wells Fargo’s provisions fell from $8.4 billion to just $769 million. Bank of America’s provisions declined from $5.1 billion to only $1.4 billion.

These declines exceeded my optimistic expectations, yet they failed to light a fire under the stock prices of the banks. Instead, the share prices of these companies dropped.

Instead of feeling relief that the worst of loan-loss provisioning is now behind us, the market focused on the damper that low interest rates are putting on lending income.

It’s a legitimate concern…

And with the Fed signaling low rates for the foreseeable future, interest rates are going to be a headwind for banks’ earnings growth for a while.

While low rates aren’t helpful, when I look at the big banks, I see stocks that are historically cheap on traditional valuation metrics.

Citigroup and Wells Fargo especially, which are trading at just 50% of book value, are almost comically inexpensive.

Combine that with the fact that the balance sheets of the banks are also historically strong, and these rock-bottom valuations are even more appealing.

Given these valuations and the fact that shares could easily double, the downside is virtually nonexistent.

I hope this trade doesn’t test our patience as much as an ultramarathon. But if it does, the risk-reward offered here is worth it.

Good investing,

Jody

The post Why the Big Banks Are Worth the Wait appeared first on Investment U.

Yet I still have cause to celebrate autumn…

My favorite season is stock market earnings season.

Fortunately for me, that means my favorite season comes four times a year after each quarter end. And right now, third quarter earnings season is in full swing.

The reason I love earnings season so much is because it is where a huge percentage of all stock market returns are generated…

Earnings are the catalysts that move stock prices. A stock can move more in one day on an earnings announcement than it moved in the prior three full months.

Given that so much of the long-term returns that the stock market produces are generated around earnings, it is imperative that investors be in the game this time of the year.

Missing out on earnings season can mean that you miss out on fully building your wealth.

Let me show you exactly what I mean…

Why Missing Earnings Can Mean Missing a Fortune

Mutual fund giant Fidelity conducted a study to see how important it is for investors not to miss out on the biggest stock market days of the year.

(Remember, those big stock market moves usually happen during earnings season.)

In the study, Fidelity crunched the numbers on what would happen to a hypothetical $10,000 investment made in the S&P 500 from 1980 to 2020 if you missed out on the best stock market days over those 40 years.

The results were stunning…

An investor missing just the best five days over those 40 years would have had a 38% lower total return. Instead of receiving $697,421 from a $10,000 investment, that investor would receive $432,411.

That means $265,010 would have been left on the table because five days out of 14,600 – 0.03% – were missed.

The other numbers in the study are even more amazing…

• Miss the best 10 days? Miss out on 55% of the return.
• Miss the best 30 days? Miss out on 83% of the return.
• Miss the best 50 days? Miss out on 93% of the return.

While these numbers are truly mind-boggling, keep in mind that these are the numbers for the entire S&P 500. The S&P 500 is an index of 500 huge companies that have the least volatile stock prices.

For individual stocks, the consequences of missing the biggest days of the year are much, much larger. Individual stocks have much bigger moves on a daily basis than the S&P 500 does.

A big move up for the S&P 500 is 2% or 3%. A big move up for an individual stock on a percentage basis can easily be in the double digits.

The lesson for investors is very clear…

Sitting on the sidelines is a big mistake, especially during earnings season when most of these big stock market days happen.

Good investing,

Jody

The post Why You Have to Play This Earnings Season appeared first on Investment U.

Let me show you why…

Za-za-za-zoom!

Eaton Vance shares are up 84% in the past six months, with almost all of that increase coming in just one day.

The catalyst that created this huge share price jump was the announcement that Morgan Stanley (NYSE: MS) was acquiring Eaton Vance for nearly $60 per share.

That was a huge premium to the $36 share price that Eaton Vance was trading at the day prior.

After seeing their shares go nowhere for months, Eaton Vance shareholders were rewarded with several years’ worth of stock market returns in the blink of an eye.

Congratulations to them!

Let’s go get some of that for ourselves…

Eaton Vance Isn’t the Only Dirt-Cheap Asset Manager

This nice win for Eaton Vance shareholders is value investing at its finest. It involves a simple two-step process:

Step 1: Buy a stock that you think is trading for far less than the underlying business is actually worth.

Step 2: Wait for a catalyst to arrive that drives the stock up to an appropriate (and much higher) valuation.

Often, finding undervalued companies is the easier part of the process.

The waiting, on the other hand, can be very difficult.

That is because there is no guaranteed timeline for when the value-realizing catalyst will arrive, and sometimes a lot of patience is required.

I do not believe that Morgan Stanley’s purchase of Eaton Vance is going to be the only value-creating takeover in the asset management sector.

More are coming because there are several publicly traded asset managers trading for very low valuations.

These dirt-cheap asset managers are ripe for being taken over by larger competitors.

Consolidation in the asset management industry makes an enormous amount of sense right now. Companies are under pressure to lower fees because of pressure from passively managed index funds.

Further, bigger asset managers are able to cut expenses through economies of scale and their larger sales networks help bring in more assets to manage.

I am not the only one who thinks asset managers are cheap and that more consolidation is coming.

At the start of October, the activist hedge fund Trian Partners announced that it had taken big share positions in asset managers Janus Henderson (NYSE: JHG) and Invesco (NYSE: IVZ).

Trian’s stake in these companies should be music to these companies’ shareholders’ ears…

In 2019, Trian took a similar large position in the shares of asset manager Legg Mason. Less than a year later, Legg Mason was acquired by Franklin Resources (NYSE: BEN) at a 55% premium to Trian’s initial entry price.

Trian’s influence was key to driving that takeover.

Successful activist hedge fund managers like Trian use this strategy frequently.

They purchase shares of companies that they believe are undervalued. Then, they push those companies to be sold to competitors at a valuation that is much more appropriate – and higher than what the hedge fund paid.

We don’t have to speculate on whether Trian is hoping Janus and Invesco will sell to a competitor at a premium. Trian told the market that its exact intention was to push for value-creating takeovers.

We can see that in the 13D filings that Trian’s management is required to make with the Securities and Exchange Commission when it takes a large position in any stock…

Trian intends to engage in discussions with the board and/or management of the company regarding many topics including encouraging them to explore certain strategic combinations with one or more companies in the asset management industry.

Trian is essentially using the two-step value investing process that I laid out earlier. The only difference is that an activist hedge fund like Trian isn’t willing to patiently wait for a catalyst to arrive.

Instead, it creates the catalyst itself by pushing the company to sell itself at a higher price.

Shareholders of Invesco and Janus could soon be rewarded.

Good investing,

Jody

The post How Eaton Vance Shareholders Are Up 84% appeared first on Investment U.