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Why 95% of Traders Fail

Rock Concerts, and How to Find On-Sale Stocks to Fuel a Rock-Star Retirement

Portfolio / Investing 2014 Jul 10, 2014 - 07:02 PM GMT

By: Don_Miller

Portfolio

Have you ever wondered what really happens behind the scenes at a rock concert? My good friend Stew is a top audio engineer—you know, the guy who wears thousand-dollar headphones and stands below the stage manning dials at rock concerts the world over. I shadowed him backstage a handful of times, and the scene was not what I thought it would be. Sure, they all dressed the rocker part, but I was blown away by everyone’s professionalism.


Today Chris Wood and I are taking you backstage at a much more conservative venue—but one that could make your retirement a whole lot richer. Chris is the managing senior analyst at Casey Research; his responsibilities include recruiting and training new analysts in “The Casey Way,” and heading up research for the entire technology team. He also teams up with our chief analyst Andrey Dashkov and me to manage the Money Forever portfolio.

When I started Miller’s Money Forever, I already subscribed to Casey’s contrarian mantra: Look where nobody else is looking. The most successful investors take invaluable nuggets of information uncovered by world-class analysts and watch their investments grow long before the mainstream catches on. This is the game for my colleagues on the metals and mining, energy, and technology teams, as well as my own squad.

When we applied this philosophy to a highly diversified, high-yield portfolio designed to enrich retirees and conservative investors alike—all while guarding their nest eggs against catastrophic loss and the silent killer, inflation—I imagined our portfolio would hold many household names. Turns out, it does: 5 or 6, I’d say, out of our 20 current holdings. Whether we’re recommending a company whose products you likely have in your cupboard or an international, high-yield energy play, our approach stays the same.

The take-home message is that this approach works. At our most recent publication date, the stock portion of our portfolio, which is designed to make up 50% of a retirement portfolio under our Bulletproof Income Strategy, showed gains of 23.6%—without taking on more risk than befits a low-stress retirement.

On that note, let’s talk to Chris about how we’re making that happen and how our method can make your retirement a rich one.

Dennis Miller: Welcome. Thanks for taking the time to chat, Chris. Please tell our readers a bit about your background.

Chris Wood: My pleasure, Dennis. My background is really in valuation. I double majored in economics and finance in college, then spent several years as a commercial appraiser and valuation consultant where I appraised a huge variety of commercial properties and private businesses.

Then I returned to graduate school, and a few months after I received my MBA with a finance concentration, I started at Casey Research.

When I arrived at Casey, the learning curve was much steeper than I’d expected. I mean, I had an MBA and a lot of real-world experience valuing companies. What could I have to learn? Turns out a lot.

For most of my appraisal and business valuation jobs, I’d used discounted cash flow and sales comparison analyses to determine a business’ or property’s market value. There were subtleties I won’t get into here, but the basic idea was to calculate the most probable price at which the subject would trade in a competitive and open market at a given point in time.

Publicly traded equities are a different beast because that figure is already available. It’s the stock price, or in the case of a whole business it’s the market capitalization (i.e., the stock price multiplied by the number of shares outstanding).

So, the job of analysts at Casey Research boils down to determining if the prevailing market price of a stock is cheap, fair, or expensive.

Our goal is to find stocks that are “on sale.” Now, that can mean a couple of things. They might just be out of favor with Wall Street and have a stock price that doesn’t reflect their true value based on their current operation. It can also mean understanding and believing in their business plan and profiting as they add value to their bottom line.

In the world of publicly traded equities, investors should never pay fair value. You want to buy the stock at a discount and think about selling it when it reaches fair value.

Dennis: I want to make sure our readers caught that. You’re saying we never want to pay fair value for a stock; that’s when we want to sell it?

Chris: Exactly. Of course, you already knew that. Consider Hess, which you and your analyst team recommended back in August 2012.

The stock was out of favor with Wall Street, but Hess is operating in one of the world’s top oil areas—the Bakken Shale—and its valuation ratios were very attractive. It had also begun to realign its business focus in a way that made sense to us.

We made the call ahead of others, and as the market realized what we already knew, the stock price increased. We determined that the stock was trading at a discount—trading below fair value—and when the market caught on, the stock price came to meet us.

As a result, we realized a 78.3% gain on Hess, including stock appreciation, dividends, and income from the covered call options we wrote on the company.

Dennis: Subscribers ask me what it means to “look where no one else is looking.” When a new analyst asks you that question, how do you answer?

Chris: Well, it’s an underpinning of a contrarian approach to investing, but it translates into different specifics for our various teams. For the metals team, it’s quite literal. They trek all over the world visiting early-stage, under-the-radar miners on the verge of making a big strike. For the technology team, it often means digging into the science of an undiscovered small biotech outfit that could have a blockbuster cancer drug on its hands. At Money Forever, you and your analysts apply that same approach to a wide variety of sectors.

Dennis: Our publication focuses on retirement money, not speculating on the next hot technology trend or company trying to get the next miracle cure through the FDA. How do you teach our analysts to apply those principles to less-speculative investments?

Chris: Well, let’s look at what your goals are. You want a safe portfolio that beats inflation and throws off enough income so your subscribers can retire rich. Buying a bunch of utility stocks and holding a few mutual funds won’t cut it.

Your subscribers need income and appreciation. That means we look well past charts and dig into companies—much deeper than just reading the annual reports. Then we validate the data. We train our analysts to go beyond the 10-Ks and 10-Qs—to contact the company and ask tough questions; to independently verify as much as possible; and to take every answer from management with a grain of salt.

The average S&P 500 company is paying a 1.83% dividend. While a company might be performing well and increasing dividends, it could take a decade or more before dividend increases surpass inflation and allow you to take some money out to live on. That’s why we hunt for stock with real potential to appreciate on top of dividends.

Lots of companies are considered out of favor by Wall Street—many for good reason. We uncover why they’re out of favor and what they’re doing to turn things around. There are plenty of opportunities out there; we train our analysts where to look and what to look for.

Dennis: I imagine finding qualified analysts is challenging. Can you expand on the skills and qualities they need?

Chris: Of course. In addition to being strong analysts and writers, they have to be self-motivated, passionate about what we do, and able to come up with good investment ideas and defensible conclusions. All the spreadsheets and number-crunching in the world is of no value in this business if you can’t say, “I recommend XYZ because of this, this, and this” and defend your conclusion.

The recommendations we make affect our subscribers’ livelihoods, and we take that seriously. Our analysts would never recommend a company in which they wouldn’t invest their own money. And we do invest in many of the stocks we recommend—after our subscribers get their chance, of course.

Dennis: During a recent meeting, you said that part of the analyst’s job is to filter out the noise. Can you explain to our readers what you meant?

Chris: Nearly every public company has a marketing team with a hand in its press releases. Management wants the company and the stock presented in the best, most favorable light regardless of whether it’s delivering good, bad, or neutral news. Though technically accurate, what pundits say about a company on MSNBC in a quick sound bite or a press release is often an incomplete story and sometimes misleading. These snippets of information are not a sound basis for investing your money. We do our own due diligence—and a lot of it—to filter through the doublespeak and spin. No matter where we pull information from, we look for what’s left unsaid and why.

There’s noise about anything from tulips to technology, from Amazon to Zillow. We teach our analysts to drown out that hype and consider what’s left out: facts uncovered by our own independent research.

Dennis: Any final thoughts?

Chris: I want to tell your readers about your role in the process. Money Forever crosses all sectors, and since you’ve literally worked with hundreds of businesses and industries, you’ve really helped me train the analysts.

I’m going to tell a story about you if that’s OK.

Dennis: Sure, go ahead—as long as it has a happy ending.

Chris: Our team was discussing one of our current holdings, and one of our analysts mentioned new programs it was implementing to streamline its operation. We quickly learned you had worked with hundreds of different distributors all over the world. You immediately jumped on the new initiative, took the company’s profit and loss statement, and showed us what a significant impact it will have on its bottom line.

You helped us cross the bridge from raw information to understanding the financial impact on our portfolio candidates. That’s the final step in the process: understanding what the financial impact will be of a company’s current initiatives and then investing before the MSNBC sound bite comes out.

Dennis: Chris, thank you so much for taking the time to help our subscribers understand what takes place behind the curtain. I’m proud to be associated with such a group of dedicated and free-thinking professionals.

Chris: Thank you. My pleasure, Dennis; thank you for inviting me.

We’re proud that Casey’s contrarian investment philosophy is working just as well for our highly diversified retirement portfolio as it has for speculators across all sectors, and I’m gunning to share more financial know-how with you.

It just takes one easy step: sign up for Miller’s Money Weekly, our free weekly missive that educates seniors and savers about timely investment strategies. You’ll receive ahead-of-the-curve financial insight and commentary right in your inbox every Thursday. Start down your own path to a rich retirement by signing up today.

The article Rock Concerts, and How to Find On-Sale Stocks to Fuel a Rock-Star Retirement was originally published at millersmoney.com.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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