On the heels of last week's special bear market presentation comes the perfect guest for today's episode: Investor Hour veteran, software architect, and CEO of portfolio-tracking service TradeSmith Keith Kaplan.
As the threat of a recession looms, hunting for "forever businesses" while pruning portfolio losers at the right moment becomes critical for individual investors. The process can be overwhelming on your own. But TradeSmith's elegantly built trading software – the backbone of a product suite that offers everything from portfolio creation to management – distills all that complicated information into a simple, intuitive system. It's similar to what the professionals use, but it's engineered for the retail investor.
In this week's interview, Keith explains how his company's proprietary technology strives to make investing less daunting, using easy-to-understand "stoplight system" volatility indicators and smart trailing stop alerts. After all...
As human beings, we always do the opposite of what we should be doing. We're always buying when we should be selling – when the stock has gone down. And we're selling when the stock has gone up... That's the time to lock yourself in and ride that wave to make as much profit as possible.
Keith uses the company's software during the episode to give a rundown of the best and worst sectors to be in right now, as well as several market big dogs. He also shares the No. 1 metric that investors should home in on when researching recession-proof companies.
And he regales Dan with tales of how much hate mail TradeSmith received when it warned subscribers early of the major market slumps in 2020 and 2022 (which, of course, came true).
CEO of TradeSmith
Keith Kaplan, the CEO of TradeSmith, is a veteran software architect with 25 years of trading and investing experience. He is recognized for his work in financial technology bringing easy to use software platforms to the general public to gain an edge on investing institutions.
Keith speaks frequently to large groups of investors nationwide focusing on the psychology of investing and how our behaviors are the #1 factor in our investing success. He has set out on a personal mission to provide the tools and education that anyone can use to make smarter, potentially more profitable investing decisions.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today we'll talk with my good friend, Keith Kaplan. He runs the show at TradeStops, where they make incredible tools for managing your portfolio and picking stocks. Very cool, can't wait to talk with him. In the mailbag today, bitcoin, leveraged ETFs, gold, and a lot more. It's a great mailbag this week. And remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week: What now? That and more right now on the Stansberry Investor Hour.
"What now?" What does that mean? Well, you know what I've been talking about for the past two years. I said it was my mission at this point in my career to help people get through what I believed would be a really nasty bear market. And to get them across the bottom of it whenever that eventually happens, and help them to find the courage to start investing again, and buying stocks after the market just beats it out of them, which I think is still going to happen.
Here we are, we've had this drawdown in the S&P 500, and the Nasdaq, especially the Nasdaq was down almost 30% from high to low. And by closing prices, that's how I'm measuring these things. And I don't think it really matters... you go intraday, closing prices, whatever – that's all approximate anyway. I'm looking at all this, and I'm thinking about previous episodes. And I don't want to use specific numbers because people anchor on specific numbers and that's not the thing to do here. It's just a human tendency.
If I say all bear market rallies are between 12.5% and 32.1%, then you'll be thinking that this one's got to be like that, but it doesn't. But you do want to note general tendencies. And when I answered the question, what now? I'm thinking, I've been telling you for a few weeks now there's a bear market rally around here somewhere, it appears maybe it has started. And what can we expect? Well, just looking back at the most recent episodes, the financial crisis from – remember, was October 2007, bottom was March 2009.
And then the dot-com-bust top was March 2000, bottom was October 2002? September, October 2002? What happened then, and generally speaking, I'm just going to tell you the general tendency of what I think it's reasonable to expect. In the beginning, it seems like nobody, or at least not enough people truly believe whoa, this is it. It's over, this is the bear market, the bull is over the bear is here. And that initial drawdown, it can be whatever, 20%, 30% whatever.
And then the initial bump back up is actually from what I've looked at in those other episodes... It tends to be just about the smallest, or one of the smaller rallies... which is funny because like I said, it feels to me like people they're looking for the "V" bottom, they're looking for a reason to buy, they think everything is cheap. And I think that's crazy by the way. And they don't really, truly believe that the bear is here, hibernate for the winter, it's going to be tough for the next, whatever it is, however long the bear lasts – six months, a year, two years, three years, I don't know.
But probably not more than three years. If history means anything – I mean it rhymes, history rhymes, but it doesn't repeat. That's why I'm trying to stay away from specific numbers here. OK, what now, what I expect now is, I was looking this morning and I have all these put options that I've been talking about now and then, and I put on a couple of at-the-money call option positions. And this is like a speculative account... it can go to zero and my wife – and my life – does not change.
OK, let's get that clear. These are tiny positions, the money can evaporate. And I will smile and have another cup of coffee and not give a crap. In that account is where I'm doing all my active trading, and I was just looking this morning and I thought, well, I bought these at-the-money calls last week. And what's reasonable to expect? I'm just looking maybe up 10%, up between 10% and 15%, somewhere in that ballpark. That's as specific as I want to get.
But generally speaking, I think this rally, if it follows the historical example, this century... basically, if it follows the historic example from this century, it will be kind of a shallow-ish rally. And then we'll get the 30%, 40%, 50% screechers closer to the ultimate bottom... whether it arrives in six months, two years, whatever. That's what now, that's what I'm looking for if you're talking about trading and making little guesses about market direction with small positions that you can afford to lose. That's what I'm doing otherwise.
In my Extreme Value newsletter that Mike Barrett writes with me, we're "steady as she goes, man." We just recommended what we thought was a really great business – very defensive, should be somewhat recession-proof. There's no such thing as recession-proof but resistant, "robust through the recession," "should pick up market share through the recession," and "should continue to increase earnings as it's done for like every year for 30 years."
I mean, just plow through all the previous crises a great business, so we're looking for those. And of course, now they're more attractively priced than they were five, six, seven months ago. The top in the Nasdaq was November, the top in the S&P was in January. During that general time frame to now things have gotten cheaper. It's steady as she goes in the regular portfolio. I haven't done a thing, I haven't even looked at my don't touch them just forget about them stocks in the 401(k) and others.
I don't even know what it's worth right at this moment, or my wife's, it just sits there. That's most of the money, that's almost all of our liquid assets. But this other little account if you're interested, that's what I'm doing. Today I put in good-till-canceled sell orders on these little at-the-money call positions because I figure well, if I'm expecting 10% to 15% and it goes up 9% or 10%, I'm not going to stick around for the extra 5% or 6%. Because I don't know if this could be it, the rally could be over right as we speak, or it could go on for another four, six, 10 months.
I don't know. I'm just telling you what I'm doing. And for anybody who wants to know, but I would really tell most people is, if you're not a highly confident trader, or not highly confident that you can afford to lose absolutely every single penny of the money in your speculative trading account. Don't do it, it's not worth it. Nobody knows where this thing is going. Nobody can predict from week to week. When I make these bets from week to week, it's a bet. It's like maybe I think, perhaps, maybe, and if it goes to zero, who cares? Life doesn't change, you get it?
I hope you do. I think I'm going to leave you right there. I believe this is a bear market that we are in. I believe a bear market rally has begun. I don't know how high it's going to go. Who knows? Maybe the markets make new highs. Maybe this is it, I don't know. But I think that's what's happening now. I think there's a bear market rally, I think there's far more downside to come, as I've said in previous podcasts. Now if you want to know what to really do, it'd be very specific. Let's talk with somebody who has a great tool for exactly just that. His name is Keith Kaplan. Let's talk with him right now.
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Dan Ferris: Keith, welcome back to the show. Good to see you again.
Keith Kaplan: Great to see you, Dan, thank you so much.
Dan Ferris: Yeah. I had to have you back. Well, I'm having a lot of people back because obviously, this year has not turned out like many of the previous 12 or 13 years, we look to me like we're in a bear market. And I noticed some of your daily e-mails, even weeks ago had these bearish headlines, there was one about the housing market in serious trouble and a few others.
I was like, well, I know the tools that Keith uses. I've got to get him on the show and tell me what he's seeing that requires him to put out these bearish headlines. Maybe you could just do that for us and tell us what are you seeing, why am I reading these bearish headlines from you?
Keith Kaplan: Yeah, great question. I'll take you back to September. I remember standing on a stage doing a presentation in September. And I told the crowd that this was not the top of the market, even though the S&P had dropped about 4% or 5% in September, it was one of the worst months since the pandemic led up back in, I'd say around April, May of 2020. And the reason I was saying that was because I saw in our indicators that the underlying markets, the components that make up every index were super healthy at the time.
But fear was at an extreme level. What I typically do is – and it's all technical – is I'm looking from a top-down approach where I dive into each market, each sector. And when I say market, I'm saying indexes like S&P 500, Dow 30, Nasdaq, and we tracked 12 different global indexes around the world. I'm then looking at the sectors, I'm looking at their health and their components within... same thing with commodities.
When I say components, I'm looking at things like the S&P 500, it tracks 500 large-cap companies, there's 504 stocks in there. And I'm watching their trends of each stock, and then how that looks like for the entire market. What I typically look at, are momentum type of indicators on each of these components. And then I'm watching how that changes over time. Are we going from good to great, are we going from great to good, those are two totally different scenarios?
And in September I saw that we were getting even healthier, when I felt like we couldn't get any healthier. But starting in about November, December, I started to see these components breaking down. Our system has a really easy-to-use stoplight system where green means you're good to go, buy that stock. Red means it's time to sell, yellow is just a cautionary state. I start to see this breaking down in December.
And I start to warn people about the Nasdaq. It's the first thing that started to really break down for us all the tech-heavy, growth-heavy stocks, especially the ones that weren't turning a profit. All those pandemic winners from people working at home, loving where they live, getting Peloton bikes, and those sorts of things. And I started to see this breakdown, and it only got worse and worse. And in February, we sounded the bear market alarm for the Nasdaq.
And as you could guess, people were still pretty bullish, this was before the Russia-Ukraine war. People were still very bullish, and they hated us for putting that out. Same exact thing happened in February of 2020, when we were warning that a bear market was coming. We weren't that far off the top in February 2020, and same thing with February of 2022. We're probably about 12% off the top for the Nasdaq, when we issued this morning. We got so much hate mail, a couple appreciative pieces of mail, but so much hate mail that I knew we were right.
Dan Ferris: That's right. That's how you can tell, when they hate you for calling the top, the top is in, when enough of them hate you, when it's just like a flood. Because it's a flood of people wanting to get in at the top. I mean, that's something I've been talking about in the Stansberry Digest lately, and I covered it with the ARK fund in particular... you could see the flows all in just before the top.
And then that Bloomberg report in November. Back in November, they said people put money into the stock market in 2021 than in the previous 19 years combined. And then Keith comes out and says the top is in I'm like, OK, well this is it. It's short. Where are we now though? Because we're down quite a bit here. I mean, is there more downside to come? There's got to be a face-ripping rally around here somewhere, doesn't there?
Keith Kaplan: Yeah, I mean looking at all of our indicators, we're seeing these little what I call micro rallies, but I can't tell you if I feel like the bottom is in or not. We haven't seen the bullish signal start to hit our system for the big indexes. Of course, energy and utilities are doing fantastic. And our system loves energy and utilities right now, but it certainly doesn't love real estate, which is one of my biggest warnings.
I put out this beginning of March, where I was saying with inflation, the consumers are going to hurt more. With what's happened in the housing market, the behaviors that we have all emotionally had that push the housing market super high. Over the past couple of years, the average American is paying 36% more, than they were a year earlier. I have these articles to back this up, they're paying 36% more on our homes, and rates hadn't started to go up.
And we knew to quell inflation, rates had to go up. What's happening here is you've got these houses that are super overvalued, these mortgage companies are lending everybody office money, sight-unseen appraisals, which is just crazy to me that you're appraising a house without walking into it and actually seeing what it looks like.
Dan Ferris: Oh, have we not seen this before?
Keith Kaplan: I mean, we've seen this before. Yes, but this feels way more extreme. And I feel like the market has a lot more recession, heavy type of influence coming its way. I'd be shocked if anybody's calling the bottom yet. But certainly, there's probably some great rallies on the way to the bottom that you can take advantage of. But you got to be careful out there. This is the time to be buying a whole bunch of speculative stocks that have no free cash flow, that are debt heavy and not making money.
Dan Ferris: I totally agree. Sell your garbage, dump your garbage for God's sake no matter how far down it is, you're not going to get a rally just dump it. I totally agree. All right. But a more recent headline of yours was about housing in particular.
And I'll actually be writing about that for this week's Friday Stansberry Digest because I'm really concerned, you get a double whammy with stocks down and with housing down. And we all know about the wealth effect, your house goes way up in value, your equity portfolio goes way up in value, you feel wealthier, and what do you do?
You spend more, and you tend to borrow more. And then what happens? It all goes away, and you're left with the debt that you have to pay, and maybe you even got a raise before, but maybe you lose your job now. To me, this is really concerning, and it's one of the reasons why I too, am not truly looking for a bottom. Face-ripping bear market rally, sure. But a bottom? No, I don't think so.
Keith Kaplan: Yeah. Think about what happened in earnings recently, both Target and Walmart got clobbered. Don't quote me on this, but I think Walmart had its worst single day in 40 years, even worse percent drop in one day than they had in '87 crash. I can't quite remember if that was right, but I'm close if not right on that. And what I heard in our earnings reports, both of them, was that it's costing them a lot more to get their goods to the consumer, and it's causing them a lot more to get the goods to the warehouses.
And that's just because of inflation. It's because of worker shortage, the gas prices, all that sort of stuff. If Walmart and Target are not making money as well as they were prior, what are they going to do? They're going to start cutting their staff, they're going to start cutting corners, they might even close a couple stores that are underperforming. This is the type of stuff that just fuels the recession, it fuels unemployment, and we could see a pretty big reversal here in economic data overnight.
Dan Ferris: Right? Goes without saying the market seems really sensitive to these reports now. You get inflation report or even like Fed minutes publishing or almost anything. It's the old adage in a bull market: all news is good news no matter how bad it is. And in a bear market, all news is bad news, no matter how good it is. And I feel like that's where we are now. There's this constant feeling of waiting for the other shoe to drop, with economic data at any rate.
Keith Kaplan: Yeah. I mean, by the way when you think of Walmart and Target, still two of the best businesses in the world, and they're going to survive a recession. That's what's really cool about them. You can't say the same for a company like Peloton, especially with a recession. A lot of people probably tune into these things to say, well, what do I do now? And you already said it a couple minutes ago Dan, you said kill all the losers, yes, get rid of all the losers in your portfolio.
Look for the best businesses that are going to survive a recession, that hopefully are trading at great discounts right now. And can only go down so far as we correct with price to earnings and all of that, buy into those businesses, be a real investor. Think about you're putting money into a real business and you're trying to grow wealth for the long term. That's the thing we should be looking at.
And just because Walmart and Target have fallen so far, and by the way, they're red in our system which means the momentum has gone against us. We want to wait till they're green to buy in. But it's still not a terrible time to be owning some of the world's best businesses that are trading at lows that are a couple years in the past. They've given up all the gains that they've made in the past couple of years, they're still just as great of a business, if not better. They have nice economic moats, great brands – these are types of companies we want to own.
Dan Ferris: And in fact, I would go one step further than that. And say that these kinds of businesses that we're talking about, Walmart, Target, and there's a slew of others we've recommended several of them in Extreme Value. I guess I've mentioned, I've mentioned waste management, I've mentioned Starbucks, I think I mentioned Home Depot. Not only are they great businesses that gush free cash flow and continue to grow, actually.
But during a recession, they will very likely become even better, more robust businesses, because their smaller competitors will struggle, some of the smallest ones will disappear. And at the end of a recession, or whatever it is that's starting to happen here, they will be an even better business. And my favorite old example of this is Procter & Gamble during the Great Depression.
They kept advertising, radio had taken over, and they just advertised and then when they got to the end of the Depression, they were much stronger. And they taught the world how to do that, how to be a great brand and use a recession to strengthen your brand and strengthen your business. Yeah, I agree, there's worse things you could do, aren't there Keith, than to hang on to your Walmart through a recession right?
Keith Kaplan: Absolutely. I love that you brought up free cash flow because people don't realize how important that is, right now. The companies with the most free cash flow, Apple's at the top of the list, Google is there it goes by alphabet, Microsoft, ExxonMobil, Pfizer, Chevron, I'm looking at a list right now. And what's really cool about that is that they can do a bunch of things with that free cash flow, they can buy back stock, they can cash a dividend.
But the really cool thing that they can do that is really important, especially in a recession, is inorganic growth. When you're acquiring a company to make your company better, it is really expensive at the height of a bull market, but it gets super cheap to do so. Your free cash flow goes a lot further, when you're business-like Walmart, Target, Apple, whoever it might be, in times like this. And it sucks to think about smaller businesses getting gobbled up.
But at the same time, this is where we're trying to put our money, is into these businesses that are the best businesses in the world, gush free cash flow. And can make these types of decisions to make their business even better because of a recession.
Dan Ferris: Yeah, they're essentially self-financing. They don't have to go out into the market to keep themselves alive like all the cash burners do. The cash burners have to raise money by selling stock, and when your stock goes from like $150 to $3, that gets a little bit harder, doesn't it? Yeah, lots of financial flexibility in all those stocks. And we continue to find names that we like, we're not focused on momentum the way you are in my newsletter, but we continue to find names that I consider really defensive.
One of them was an auto parts maker recently. And what happens well, if people stopped buying cars, the National Auto Fleet is already at a record age, it's like average 12 years in some months. And it's going to get older and people are going to keep needing more and more parts. That leads me to wonder what you like, you mentioned how strong utilities and energy are in your system right now. Is there anything else that has that kind of strength?
Keith Kaplan: Yeah, great question, let me see here. I have a couple screenshots I took, don't have anything on mining care, I do not. But I will tell you that gold in our system... and silver and nickel and even aluminum are already in our system. And that's just measuring the trends, when I look at the sectors in our system materials is in what we call the green zone, but their underlying components are a bit mixed. Energy is in the green zone, and all stocks that lead up to the energy sector.
It's like 95% are in the green zone, and it's only been trending better and better as inflation is hit. And same thing with utilities. Health care it's a mix, it's got some health in the individual components that make up the health care sector, and health care is sort of green in our system right now. Right now in our system, if I ranked them, it would go energy, utilities, materials, and health care. On the extreme opposite in, communication services is red. And it's like dead in our system.
Consumer discretionary is getting there, it's red and it's headed towards death. Same thing with real estate, information technology is red. Industrials is in a sort of holding pattern in our system. Financials is kind of in a holding pattern as well.
Dan Ferris: Keith, I wonder if you could just give me a name or two in communication services, just to let the listener know what kind of stocks are in that sector?
Keith Kaplan: Oh, absolutely. Facebook or Meta platforms is in there, Verizon, even Disney one of my favorite stocks ever is in communication services. And it's also red, AT&T, Electronic Arts, Netflix, and a bunch of others.
Dan Ferris: OK, well, I'm actually I'm not surprised by that. But like you said, there's a few great businesses in there they're just not great buys right now. When you get these like deep red, all the way on the other side of the spectrum from green, do you use them in short signals? Or is it more of a stock to avoid type of a thing?
Keith Kaplan: Yeah, it's actually both. The first thing is when you get a red signal, that's the perfect time to sell. And as human beings, we always do the opposite of what we should be doing. We are always buying when we should be selling when a stock is going down. And we're selling when a stock has gone up. And that's the time to lock yourself in and ride that wave and make as much profit as possible.
The first thing we're doing is we're alerting customers because we have alerts on all of the signals in our system, you can follow anything you want. We alert customers when something turns red, and that's the signal to get out of that stock. And it's also a great time for you to look at it and assess whether or not you want to short it, by a put on that stock, whatever it might be. And one of the best things I can say though is that when you have the best businesses in the world, please don't short them.
You want to short the crappy businesses, the ones that go red first. Peloton is such a great example, the moment that turned red in our system. I mean, it's probably fallen another 80% since it turned red. And that should say something to you about those types of signals, that companies that could beat up the most in a downturn are the ones that have no business being a company.
Typically, they're spending all this money that they don't have, they have no free cash flow and they basically get crippled when people stop buying their goods and Peloton is just such a great example of that. Most expensive bike, most expensive subscription... and it's got a cult following. The cult following does not make up for its debt position today. And that's why the company has been doing so terrible. That's a great example of something I would short. I would never short Disney, I love Disney. I would just sell the stock wait for it to return to an uptrend and rebuy.
Dan Ferris: Yeah, that makes good sense. And even at Peloton, I just got so shy about shorting because you saw when the upside the way those things just soared straight up. I mean, huge multibagger gains in like a year, 18 months, a couple of years. And stocks like, I wanted to short Tesla because I thought there's no way it's worth more than the next 12 mostly profitable car companies combined, who collectively make 50 or more times as many cars as it does or something like that.
And I thought, this thing has got to crack and it is going to be brutal. But it just goes straight up like a rocket ship, and it gets dangerous to short it because most you can make money short right is 100%. And you can lose a lot more than that. If Peloton had just screamed to the moon to 2,500 bucks, it could have been really painful. I'm curious now that I'm asking you about Tesla, if you've got a signal formula now and now it's got to be read at this point, right? Got to be.
Keith Kaplan: Alright, let's see, OK all right. Tesla's actually in what we call the yellow zone. And the reason it's in the yellow zone is because we measure from its high, I think its most recent high was back in January 3rd of 2022, it was trading right around $1,200. And it has in our system what's called a volatility quotient, we're measuring the volatility over time to see if a signal is the right signal to make. And its volatility number in our system is 54%.
We're actually not far from it stopping out it's trading at around 660 as we're recording this, and it's yellow in our system. What that means is just be chill, don't do anything. It's sort of a cautionary hold state. But it's pretty close to stopping out. And I can't tell you how many times I've told somebody, Tesla's pretty close to stopping out and then it goes to make a new high and that's why we just sort of trust the math, and we be patient and when once it turns red, we sell it, once it turns green, we buy.
Dan Ferris: The volatility quotient then is essentially, that's where the stop is at?
Keith Kaplan: Correct. And because it's such a volatile stock that 54% is actually sky-high risk, it means you've got to suffer a pretty big drawdown from a top to figure out is this the drawdown to exit? And when you know that about a stock when you have that number, and then you see Walmart is more than half of that, Walmart's in the low 20s. From a volatility perspective, from a risk perspective, it means you buy much less of Tesla than you would buy of Walmart to keep your portfolio safe.
If you put too much money in these sky-high volatility stocks, you're creating yourself a situation where you can have an unmanageable loss in your portfolio. And we do not want that, or bear market, we don't want that.
Dan Ferris: No, don't want those catastrophic losses. Just avoiding those can make you rich, people don't get that. The emphasis most practitioners put on avoiding risk and avoiding loss, cutting losses early and short, it doesn't feel right to most especially more novice type investors, because all they think about is what's going to go up real fast and make me a lot of money. And turns out that the stuff that goes up real fast could go down real fast too. Those VQs tend to be higher.
Keith, I'm asking about these individual things. But if I step back a little bit, do you have an overall strategy for what you're doing right at this moment? Or is it pretty much just, hey, trust the signal and go to the beach.
Keith Kaplan: It's actually a combination. When I look at our signals, they're technical in nature, when I look at something like what you do Dan, it's very fundamental in nature, and maybe you're looking at the technicals too, but you're judging the business for the business whereas the signals are just judging the action that's happening. And I'd like to actually combine that, in a situation like coming out of the pandemic back in mid-2020, I was buying all those high-flying growth tech stocks that had no business a lot of times even being on a stock market.
That weren't gushing free cash flow just because there was a lot of speculation, there's a lot of brand-new money coming into the markets, we all saw the writing on the wall. And we followed what we call the dumb money at that point, and I'm buying a bunch of those and making really quick gains, this is not the time to be speculative. Not at all. In fact, you want to be the total opposite. What I try to do is, is I try to use a philosophy right now.
And this is what we preach to our subscribers, finding those types of businesses that are forever businesses, this is the perfect time to buy recession-proof businesses, forever businesses, once it's gushing a ton of free cash flow. These are the best businesses in the world. And when they're green in our system, now we've got multiple factors pointing to success. I don't care what people think about ExxonMobil, but that business in our system is one of the best businesses you can buy right now.
Because it follows all the fundamental data that we care about as investors. It's a great company from an investment perspective. And by the way, it's in energy, energy's up. Exxon is up, they're hitting all-time highs. And it's just a great business to own. But I'm definitely not going to be speculative right now, I'm not going to be putting a ton of money into Peloton, Tesla, Zoom – any of those businesses. My focus right now is on the best businesses in the world that are also healthy in our system.
Dan Ferris: I did some work on ExxonMobil, I know the name fairly well. And one thing about that company is that like the really smarter value analysts will say, no, you can't own that thing because it's shrinking. You have to be short if you're doing anything, and I'm like, well, but ExxonMobil is smarter than that. The reserves weren't shrinking per share, because they were prodigious share repurchases, and they were gushing. I mean, for years and years and years, they were just gushing free cash flow.
And they know what to do with it because they understand what kind of a business they're in. And now it's funny because lots of oil companies, I just saw another I think it was a Bloomberg or Wall Street Journal article. I think it was Bloomberg, about all these energy companies that don't want to dig holes in the ground. They just want to pay dividends and buy back shares.
We've talked about this with Hugh Hendry on the show and maybe one or two other folks, because for various reasons, political reasons, people they're afraid that they're going to be attacked as a fossil fuel producer so they don't want to go spending a lot of money if they're under political attack. Here we are, energy is like green all day long in your system, and there's no end in sight to it because the conditions are not changing. It's like the perfect storm for them.
And I agree ExxonMobil's pretty great name. You make it sound really easy. Is it really that easy? I mean, come on.
Keith Kaplan: I mean, I think it is. The cool thing for anybody listening is that Dan is interviewing a software guy, not a guy with a PhD in finance, not somebody who's been on Wall Street, I'm in my mid-40s. I'm a software guy. And I fell in love with the research at Stansberry Research. And actually, it was my first job in the financial world. And I learned so much about fundamentals. And I was then able to take them and create a whole bunch of indicators and different products over at TradeSmith, where I'm a CEO right now.
To basically help people just like me, take control of their finances. And using our system it's like, you can just look at a glance at any sector that's doing really well, and then find really healthy stocks in that sector. And from there, you can look up all of the fundamental data, and you can find stocks that are backed by great businesses that have a lot of money, low debt, healthy P/E ratio, that are green in our system, that are in green sectors, and that's a perfect place to put your money.
And the moment you get an alert that it's red, you sell it. It always sounds easy when I talk about it, but it truly is. And it doesn't take you much time at all to research. To prepare for this, I looked up the 10 businesses that had the highest free cash flow. And then I just went in our system. I took five minutes to do this research to figure out what stocks would I buy if I had a bunch of money that I wanted to put to work right now.
It's Apple, Google, Microsoft, Exxon, Pfizer, Chevron, Facebook, Amazon, AbbVie, J&J, UnitedHealth Group, and Walmart. These are the top 10 businesses that gush the most cash, but the only ones that are green in our system are Exxon, Chevron, J&J, and UnitedHealth Group. What this does, is it gives you these multiple layers of conviction. And it helps you understand that if you want to buy some of the best businesses in the world, here are the ones that are trending up in our system.
Despite the bear market that we are in, or the recession that we're heading towards. And that's the best place to put your money, are in businesses that are great businesses that are doing really well right now. We cannot throw a dart at a dartboard and get lucky like we could two years ago.
Dan Ferris: Oh, well put. Yeah, I feel that as – that fellow what's his name? Jensen from Bridgewater, I saw this in Bloomberg recently. He says there's still too much optimism, I think there's still too much dart throwing, people are looking for bottoms and like all the stocks that are in the ARK Innovation Fund, and they're looking for bottoms in whatever, Peloton or something, and it really is not the time to do that.
But I feel like a whole generation of people just got so used to easy money really quickly after the pandemic, and disabusing them of that notion is going to involve some brutal pain, especially like the Apes... the GameStop and AMC. I mean, what's it going to take to get those people to let those stocks go? I mean, God.
Keith Kaplan: I have no idea. But it's funny you bring up ARK and pick on ARK. Cathie Wood was hailed as one of the best investors of our time. It was like she could do 95% of the things right. And then she just sticks to her guns and digs their heels in, on stocks that are going to zero. And we actually stopped out on her fund around $115. I think it made a high of around $150 something. And this is over a year ago. It's down to about $40, so it's down probably 60% to 70%.
Since we stopped out, the individual components in her fun the squares of the world, the Tesla's I mean, they're down so much. And some of them we stopped out on, she would have stopped out even earlier, just using our technical momentum indicators. And look, do we always win? Absolutely not. But we get confirmed tops and confirmed bottoms. And that's when our signals trigger.
And it's just shows you that just using a little bit of the math, you can perform so much better than even somebody running a hedge fund that is supposed to be one of the best investors in the world.
Dan Ferris: One day before that fund topped out in the Stansberry Digest, I called her the Gerald Tsai of today because Gerald Tsai was during the go-go '60s era, he was hailed as the top guy, and he did fantastically well right up until the top and then for the next seven years, his fund was absolutely the single worst-performing piece of garbage in the entire mutual fund industry and I'm afraid that ARK might be headed that way.
And Cathie seems so earnest. She doesn't seem like a charlatan to me. But it's funny because when you're dug in, like you say she's dug in. And I think maybe she won't go to jail or anything, but I don't think she's going to be in business for forever. It's a sad thing.
Keith Kaplan: Yeah, I agree.
Dan Ferris: All right, Keith. I love talking to you because you make it all sound so simple. And we're talking about people who are trusting Cathie Wood, and they trust in AMC and GameStop. And it's totally misdirected. But you have a deep trust in the system that you're using. And it sounds like it's really crushing it lately. I mean, getting into energy and utilities like wow, maybe it's time, once again, as it has it always is eventually, for my final question.
I'm really curious how you are going to answer this question at this time, you especially. And the final question is if you could leave our listener with one thought today, what would it be?
Keith Kaplan: Yeah, for today, kill everything in your portfolio that is down significantly and hasn't bottomed by the healthiest businesses in the world that are steady or in an uptrend, that are recession-proof and gush lots of cash, this is where we want to be, and you want to buy these companies in proportion to how each of them are behaving. What I mean by that is, like I said earlier, you don't want to put too much money in a high-risk company.
And I hope you use the system, whether it's ours or somebody else's, that is identifying trends in individual stocks, and helping you to assemble a portfolio that is very balanced from a risk-based position-sizing aspect, but also diversified into the healthiest parts of the market. That way, if something, let's say energy turns, if you put all of your money into energy and it turns, you can have a significant loss overnight or very quickly, because you focus too much there.
You want to diversify across the market. And it's never bad to go to cash. But we have to wonder how our cash is behaving today with inflation and so forth. And try to find the best investable companies out there. That way we can put our cash somewhere that can grow over time.
Dan Ferris: Awesome, great answer. All right, Keith. Well, it's always a pleasure to speak with you. And who knows, maybe we'll even find ourselves in the same actual room someday soon again.
Keith Kaplan: I'd love that. I'm excited to be back. Thank you so much, Dan.
Dan Ferris: Always great to talk to my friend, Keith Kaplan. And one of the reasons why is because he has a very specific tool that he relies upon, to do a lot of the work for him. It's a tool with which of course, he is very intimate. Nobody else is going to be as intimate with that tool as he is. But the reason I always like talking with him is because that actually is a really good example of good investor behavior. You decide what kind of investor you are, Keith has obviously made that decision for himself.
And you stick with your plan. You always stick with your plan. And you notice that his comments about anything else inflation or buying high-quality businesses or whatever it is, it always comes back to his primary strategy, that TradeStops tool that he uses to pick stocks and manage his portfolio. I think this is a great lesson. Everybody should do it. You must do this, if you want to have success over the long term, you're probably not going to find success if you can't decide on a strategy.
If you're always six months down the road, and maybe the performance isn't quite what you expected. Oh, well, I got to get out of this and get into something that's performing well, every strategy underperforms at some point and often over short periods of time. If you can't stick with a strategy, you're not going to make any money in the market. And I think for me, that's like the number one lesson from talking with a guy like Keith. All right, let's check out the mailbag. Let's do it right now.
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A way to type in any of 4,000 different ticker symbols and see exactly where the stock is most likely to go next. And in any type of market, simply go to TryPowerGauge.com for your free look. Again, that's TryPowerGauge.com. In the mailbag each week you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as time allows and I respond to as many as possible.
Or you can call our listener feedback line at 800-381-2357, tell us what's on your mind, and hear your voice on the show. Lots of good stuff this week. Let's dive right in with D.T. And D.T. I'm reading this only because I'm human and I have an ego just like everybody else. He says, "Hi, Dan. Before the market began the long slide, I e-mailed you about the best ways to short the market. I had made a lot of money on options after the collapse on the ride back up and wanted to protect it.
You responded on the air and gave me some insight and general ideas. I spent some time doing my own due diligence and research and went short, buying calls on SQQQ, selling puts on VXX and the actual stock of HUV, which looks like a Canadian name I think over and over again, as the market bobbed up and down. I was careful and never lost any money on any trade of any significance as I bought and sold short positions repeatedly, only to wait for more corrective opportunities, then buy and sell again.
After a brief period of two months, I was able to earn $2.3 million in U.S. and Canadian to hedge all of my long-term dividend investments I have owned for 15 years, primarily in Toronto real estate holdings that I will not sell as I have nothing into them now in my return as well. Infinite decimal and classified as a return to capital, blah. I wanted to thank you for your advice, Dan, but mostly your encouragement although you did not tell me what to buy.
You confirmed my direction was the right one. I know what to do now and this is just the beginning of the big slide and much more earning shorting, it will be an up-and-down market as you have pointed out but lots of opportunities. Thank you again for your support, Dan. Best, D.T." D.T, 2.3 million... that is all you baby. Well done, awesome. Love to hear it. Next up is Greg, and he says, "Hi, Dan. Love your show. I'm a fan, question, it boggles my mind sometimes that huge and long-lived companies show very low book value.
I'm looking at AON, the big insurance broker. I'm looking at AON just now and see book as $6 a share for a company 40-plus years in the making, 50,000 employees and $55 billion market cap and the stock down to $270. Buffett is an investor also. I can't think of other examples at the moment, but from time to time I see a company that I would expect would have more value built up, and I wonder what I'm missing. Where does the accumulated equity go? Thanks, Greg."
Greg, I'm glad you asked. The answer is very simple. If you look at the balance sheet, I'm just looking back to 2013 and just looking at this through Bloomberg. Short- and long-term debt, $4.8 billion... last 12 months, $11.2, billion – $4.8 to $11.2. We're heading toward a three-bagger on the debt. Meanwhile, current shares outstanding 2013? Little over 301 million. Current... 212 million... nearly one-third, more than double the amount of debt almost three times.
And then a little less than one-third reduction in the share count. That is where the equity has gone. Because both of those things reduce equity, don't they? You buy back shares, you reduce equity, you use debt to do it you reduce it even more, because the debt builds up. But it's a good question and I'm glad you asked, it's a very simple thing that a lot of folks ought to be looking at. Next comes Alan W.
And just in case it's not clear, the reason you should be looking at it is, if you have a fantastic business, you want to see them. I don't know if you want to see them cranking up the debt so much, but you do want to see them buying back their shares when it makes sense to do so and reducing their share count over time. And Buffett's a fan of that too. It doesn't surprise me that he owns the stock.
Next comes Alan W and he says, "My question is why you sold bitcoin in the Extreme Value portfolio, if you still believe that bitcoin, Ethereum, and probably a few others, will provide the financial functions intended outside of the traditional government dominated and controlled central banks. I know you said you sold because the price action was too closely linked with the tech sector.
But then again, some of our best investments over time have been and are still in the tech sector. Why shouldn't the credible cryptos be good bets as well to survive and do well over time? Thanks for your thoughts in regards, Alan W." Alan, I'm only comparing price action when I compare technology and bitcoin, but they're totally different. And that's another reason I sold because it's not a company, it doesn't generate free cash flow. Valuing it is a non-starter, there is no intrinsic value that you can establish. It's just whatever the market says.
My point in going long was it would make sense to me as the market said it was worth a lot more. Because obviously, this was early 2020 after the COVID crisis had begun, actually, I think it was right around the bottom of the COVID crisis. And it was clear that a lot of money was going to have to be printed. And people in markets, they get concerned about that. And they buy things like cryptos and gold or whatever.
And with a huge rally. Also, if everything's going to rally, maybe bitcoin rallies with it. And the fundamentals, the scarcity and the fact that there's no bank counterparty in it. There's no banks intervening. However, it has been recently pointed out to me that it's false to say that it's a no-trust model, because you do you have to trust the network. If the network somehow crashes and stops working, bitcoin becomes worthless and meaningless and useless.
It's not as good as gold in that regard. Not at all. Gold has no counterparty, it's no one's liability, like fiat currency. And it doesn't rely on computer networks like bitcoin. There's no counterparty and it is an inert metal. Warren Buffett complains that gold sits there and does nothing, you put an ounce of gold in a drawer, wait 300 years, you still got an ounce of gold in the drawer. He talks about it, like it's a bad thing. But it's a very good thing.
And it's how gold holds its value over long periods of time. Yeah, that's my answer. I hope that's clear. I do think bitcoin and all these things are going to crash horribly. I mean, there's a target at $21,000, Michael Saylor put a target at $21,000. And if bitcoin gets down near there, people are going to start shorting the daylights out of it. He's going to have to pledge more collateral eventually, I think he'll wind up selling some. And who knows?
It could go down to, what, 12... 15... is one area that looked interesting to me and below that, who the hell knows? I don't know. I hope all that's clear, that's my answer. Good question. I'm glad you asked. Next comes to Alan D. And Alan D. says, "Hello staff." That's for everybody. "In the Investor Hour or your other publications, why do you not discuss or recommend leverage inverse ETFs on the four major stock indexes, as a way to make fantastic returns in a declining market? Here are the results on the performance of the 3X-leveraged ETFs on the four major stock indexes between January 3rd 2022 and May 23rd, 2022."
And he's got four of the leveraged ETFs... 35%, 94%, 51%, 65%, yeah, they did great. "These have outperformed many of your recommendations in 2022 here to date, except for some put options, Alan D." Alan, I can't speak for anyone but myself. I don't recommend leveraged ETFs ever of any kind for any reason, under any circumstances.
They're for short-term trades only. And I generally don't trust them because I don't trust leverage. Leverage can go wrong in a number of ways. And I don't like it. But hey, if it's working for you, who am I to tell you what works for you? Nobody. Next is our faithful listener and longtime frequent correspondent, Lodewijk H., he says, "Hi, Dan, what do you think about gold? I hear people saying it will go down and those things... $3,000 an ounce is more likely. What is your take and why? Regards, Lodewijk H."
My take is what I said it for one of the previous questions. Gold is no one's liability, there is no counterparty you need to worry about, it is an inert metal that has been used to preserve wealth for 5,000-plus years. I'm going to say that bitcoin's not ever going to replace it. And I think a lot of the money that just freaks out and leaves bitcoin over the next couple of years is probably going to go into gold.
Because everybody will figure out, gold can be stolen but only if you get your hands on it. You got to get through me and my shotgun first or, into a vault somewhere. I just like it better as a way to get out of the financial system. I don't think you're really, well with bitcoin you're out of the financial system for sure. But you are in the network, the network has to function. And I'm not saying it's likely that it won't function well.
But you can't ignore the fact that there's a network there and the network is something in the nature of a counterparty though. If you're recoiling it, that statement I understand it because it's not a counterparty. But in general, a counterparty is this other thing that has to go well for you to realize value. And if that other thing doesn't go well, your asset is not an asset anymore. But with gold, that's just not going to happen.
Next comes Alan K. He says, "My question concerns trailing stops, Stansberry has repeatedly burned into my brain the importance of honoring your stops. To that end, I use TradeStops to help me manage my stops. But what should I do if TradeStops tells me to stop this hit but the editor hasn't put out a sell message? I have many in the Stansberry portfolios. My guess is we are using different trailing stops, I use the VQ trailing stop and TradeSmith.
Should I just ensure I match whatever stop the editor is using, or just go with TradeStops' advice. I really do want to honor my stops. But I hate to sell before you and the other Stansberry editors telling me to, some generic advice here on how to think about this would be most helpful. Thanks for all you do, Alan K." Alan K., excellent question. And it's a wonderful opportunity for me to give one of my really horribly unsatisfying answers.
Because as you point out, it can only be generic advice. It can't tell you what to do with your money specifically, can't tell you what to buy and sell. Except when I would make recommendations in the newsletter, but I can't give individual financial advice is really what we can't do. But I can say this, the decision whether or not to use the VQ trailing stop, wait for an editor's sell recommendation, or some other exit plan is solely yours.
I hate to do that to you, but it really is true. There's no other way to figure this out. You have to look at your portfolio. Look at these VQ trailing stops, maybe take a look at editors' stops and think to yourself, "What's the difference, and what do I think and what do I want to do based on this?" That's the best I could do Alan, I hope that helps. And finally, this week we get to Larry B.
And Larry B. says, "Dan, this is potentially a comment/idea that is more for Stansberry in general, rather than your podcast specifically," OK, that's cool Larry, but I'm going to read it anyway. "As this possible bear market proceeds in indiscriminately reduces prices of world-class businesses, it would be ideal if Stansberry had a simple shopping list across all its publications. This could be something akin to the Forever top 40 list but larger, covering each editor's favorite long-term, lifetime holds with some recommended entry points.
It needs 100, approximately 100-plus incredible businesses across company sizes, income/growth, and industries. Ideally, it would be positioned such that picking up these companies of bargains and holding them forever would create lifetime annuities that could even be passed on to the next generation. I think this could be something like Portfolio Solutions since it spans across publications.
But I wouldn't recommend this be tracked as a portfolio since it's simply a shopping list, for people adding stocks for very long-term holding. Since there are no exit points specified and infrequent ongoing list maintenance, because there are worthless businesses, the product seems simpler to manage than a more traditional publication, Larry B." Larry, we do this in Extreme Value. I don't think we've ever published the whole list. And other publications do it.
We actually do publish these monitors. There's like the well, the oil-and-gas monitor. And there's the, I think it's called the magic formula monitor. I was looking around and I couldn't find them on the Stansberry website. But I think if you just type "monitors," maybe you could find them, I couldn't find them. But yeah, we do publish monitors, that monitor lists of stocks, lists of capital-efficient businesses, that's one of them. And I think maybe there might be a list of forever businesses.
And as you point out, we do have The Forever Portfolio in one of our Portfolio Solutions products. We have The Total Portfolio, Income Portfolio, Defensive Portfolio, and Capital Portfolio, which are plucked from all across all Stansberry publications, and they're updated each quarter. Each quarter, we give you an idea of stuff you could buy at that time and just kind of hang onto. But yeah, look for the monitors at StansberryResearch.com.
That's really the closest thing we have to that. And like I said, the capital-efficient monitors, probably the thing you're looking for. And then there's the insurance monitor, that's the other one, and you can buy and hold that when you get those cheap. You can buy and hold them for a long time. Great question, glad you asked. I think while Stansberry doesn't do exactly one thing to conform to your request, I think we cover it pretty well with the monitors and the portfolio solutions.
All right, well, that's another mailbag. And that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode – just go to InvestorHour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode or know anybody who might like it, tell them to check it out on their podcast app, or at InvestorHour.com.
Do me a favor... subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there help us grow with a rate and review. Follow us on Facebook and Instagram. Our handle is @Investor Hour. O Twitter, our handle is at Investor underscore Hour. Have a guest you want me to interview? Drop us a note at [email protected] or call the listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. Till next week, I'm Dan Ferris. Thanks for listening.
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