Safe, Debt-Free, and Rich!: High-Return, Low-Risk Investing Strategies to Grow Your Wealth

Safe, Debt-Free, and Rich!

High-Return, Low-Risk Investing Strategies to Grow Your Wealth

Andrew Packer

www.humanixbooks.com

Humanix Books

Safe, Debt-Free, and Rich: High-Return, Low-Risk Investing Strategies to Grow Your Wealth

Copyright © 2018 by Humanix Books

All rights reserved

Humanix Books, P.O. Box 20989, West Palm Beach, FL 33416, USA

www.humanixbooks.com | info@humanixbooks.com

Library of Congress Control Number: 2017947286

No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any other information storage and retrieval system, without written permission from the publisher.

Interior Design: Scribe Inc.

Humanix Books is a division of Humanix Publishing, LLC. Its trademark, consisting of the words Humanix is registered in the Patent and Trademark Office and in other countries.

Disclaimer: The information presented in this book is meant to be used for general resource purposes only; it is not intended as specific financial advice for any individual and should not substitute financial advice from a finance professional.

ISBN: 978-1-63006-078-7 (Paperback)

ISBN: 978-1-63006-079-4 (E-book)

To my mother, for her common sense, and to my father, for his investment acumen

No book is written in a vacuum. I’m grateful for the support of all my friends and family for tolerating me during the arduous writing process. Specifically:

At Newsmax: Christian Hill, Michael Berg, Stephanie Gallagher and Chris Ruddy.

At Humanix Books: Mary Glenn, Sherrie Slopianka, and the staff at Scribe.

Contents

Foreword: Why You Need This Guide

Bill Spetrino

Introduction: Investing Is about Reality, not Theory

A Week in the Life

Recap: Investing 101

Where Our Story Begins

Part I: Core Trades

1. Intel: Building Big Profits in Brick-and-Mortar Tech

2. As Exciting as Watching Paint Dry: Investing in JM Smucker

3. PacWest Bancorp: Fast Profits in an Unloved Sector

4. McDonald’s and the Power of Yield on Cost: The Overlooked Secret to Superior Income Investments

5. Investing in Insurance Companies: Safe, Consistent, and Boring Profits in This Heavily Regulated Industry

6. Seagate Limited: Turning a Big Market Overreaction into Big Profits

Part II: Commodity Trades

7. Silver: An Investment Start as Good as Gold

8. Catch the Boom, but Quit while You’re Ahead

9. Coal: When Everyone’s Saying an Industry Is Dead, It’s Time to Buy

10. Shipping: Always Make Money No Matter What Markets Are Doing

11. Gold: Betting on a Counterrally in Oversold Commodities

Part III: Short Trades

12. Beating the Bear: Making Profits as the S&P 500 Index Drops

13. Using Options to Profit from Falling Commodity Prices

14. The Most Volatile—but Profitable—Trades I’ve Ever Made

Part IV: Complex Opportunities

15. Herbalife: Sneaking in Profits during a Battle of the Billionaires

16. Staying Solvent 101: Don’t Put All Your Cash in One Trade

17. Homestyle Investing: Turning Your Next Home into a Moneymaker

18. Nobody Bats 1000: Lessons Learned from a Big Loss during the Financial Crisis

Conclusion and Appendices

The Lazy Way Out: A Model Portfolio to Take Advantage of Market Opportunities

Appendix A: A Quick Guide to Personal Finance

Appendix B: Core Investment Themes: 15 Principles to Keep in Mind When Investing

Appendix C: A Sample Investment Checklist

Epilogue

Notes

Index

About the Author

Foreword

Why You Need This Guide

Bill Spetrino

I consider myself an investor first and foremost. I’m not an economist—I’m not some Wall Street broker trying to sell you on the latest hot stock. I’m just a normal guy who unlocked the secrets to investing and have put them to work for myself and, later on, for ordinary Americans looking to get better financial returns.

The most important thing you need to do with your money is manage it well. It’s the difference between working for a living your entire life, or retiring comfortably . . . or even early, like I did at 42. That means finding the best opportunities and focusing on them to get the best returns. Few people get it.

Andrew Packer is one of the handful of people I’ve met who also gets it. He understands the importance of finding a great investment opportunity and how to best allocate capital to get the best returns. He always knows the right questions to ask before getting into any investment. He understands that there’s more to the market than just numbers; there’s a psychology to it too.

Most important, Andrew spends a lot of time thinking about what could go wrong before asking how much money he could make on a trade. Most people tend to see dollar signs in their future and plow in—only to end up underperforming the market or losing money.

Even though he’s a young and generally quiet guy, he has an intuitive grasp of what you need to know when investing. In this latest book, Safe, Debt-Free, and Rich: High-Return, Low-Risk Investing Strategies That Can Make You Wealthy, Andrew will walk you through some of his best and most interesting trades. He’ll explain why he selected those opportunities, what happened, and how he and his subscribers across various investment services made out as a result.

Throughout the book, you’ll learn how to be a better investor. Best of all, you’ll learn how to put that knowledge to use. By the time you’re done, you’ll have the knowledge you need to make better investment decisions, know when to exit a trade, and understand how to best maximize your returns while lowering your risk along the way.

Introduction

Investing Is about Reality, not Theory

While there have been some great investors throughout history—and many of the best are still active today—to really understand how to be a great investor, we need to go back to the source of the most critical idea to hang on to during a wild investment lifetime.

Our story really begins with the Greek philosopher Plato. Plato asks us to imagine that we are bound and tied in a cave. Behind us is a fire or other source of light. Figures by the fire use objects to project images on the wall, not unlike a modern-day movie theater.

Plato tells us that this is our perception of reality. In this allegorical cave, we see the images of things, but not the substance. If we were to break free of our bonds, we would see how poorly they mimic the genuine article. We could then escape the cave and see the real world.

I’m often reminded of this allegory because investing is fundamentally about the truth. It’s about determining what’s really going on, not what you’re being shown. In a world driven by 24/7 news coverage, irrelevant minutiae might be blown up until a better story comes along. And even then, what we’re told about a story is usually framed through two lenses: fear and greed. A story about a robbery might be commonplace in a big city, but it can be played up relentlessly to create a culture of fear.

This shows that there’s an emotional aspect to our lives as well. We need to not only see things as they truly are but be able to react to them appropriately and not merely in the way others expect us to.

When you can do that as an investor, there’s an endless world of possibilities.

If you’re looking to invest and not just trade, your investment journey starts with a world view. What does that mean? It’s simply how you see the world and the factors shaping it. If your world view is accurate, or as close as possible, you’ll be in a position to make realistic predictions about the future.

Since investing is about trying to gauge future trends today with some success, understanding where we are now is critical. After all, if you can’t find where you are on a map, how will you get where you need to go?

Many traders might not even have a world view. To those who truly day-trade—and start and end the day in cash—every day, they have to rediscover what’s going on. At the other end of the spectrum are those who invest by looking at longer-term trends that are in development. I’m firmly in the latter category. With so many traders chasing short-term gains (and often failing), looking toward the long term instead gives us a better edge and more time for an investment to successfully work out.

Right now, my world view looks at three major factors. Maybe I’m still in the cave, but I’ve found that if I look critically at these three factors when making investment decisions, I’ve gotten great results over time.

#1: What the Market Is Doing

This is a snapshot of the world. That’s a pretty simple thing to find. Pull up a chart of the overall stock market—I like to use the S&P 500 Index—and see what’s going on. This is the basis of technical analysis, but you don’t need to do anything too fancy.

In fact, you really only need to look at the direction that the market as a whole is moving to determine what about 80 percent of stocks are going to do at a given time. If the trend is going up, stocks will likely go up. If it’s down, you’ll want to wait for the line to stop going down if you’re looking to buy again with less risk of a decline.

When the financial crisis ended in 2009, stocks had an immediate and powerful rally that eventually petered out. Over the past few years, the markets have been in a pattern where they’ve tended to trade sideways, fall around 10 percent or so, and then rally to break to new highs.

A sideways trend is no big deal—it means you can likely find individual bargains in the market and, for many positions, you can simply wait for a new trend to emerge and collect dividends in the meantime.

An extreme upward trend, one with a 45-degree angle or higher over six months, is usually a sign of a bubble forming. Stocks got extremely bullish and briefly exhibited this in 1929 and again in 2000. Many individual stocks can do this all the time, too, when they hit a faddish peak. The cryptocurrency Bitcoin made this move in early 2017, before tumbling back down. It’s the only bullish trend that’s likely a good reason for you to be bearish.

#2: What Nonmarket Participants Are Doing

I’d like to think that the market is really all that matters. But it isn’t. A variety of nonmarket factors can influence the market as well. That includes political events, like elections in the United States and other Western nations. Surprise outcomes, like Britain voting to leave the European Union in June or Donald Trump’s presidential win in 2016, can sometimes cause shock as folks make quick decisions about how to better invest in light of these new events.

The biggest factor by far is the Federal Reserve. Whole volumes have been written about it—and I’ve written extensively about its failure to stem off the financial crisis in my previous book, Uncharted: Your Guide to Investing in the Age of Uncertainty.

What matters right now is that the Fed has kept interest rates near zero since the financial crisis. They raised the prime interest rate (the rate most talked about and the one they charge to banks) from 0 percent to 0.25 percent in December 2015. When they did, markets had a six-week tantrum that led to a 10 percent decline in stocks before things turned around.

Why is such a small move such a big deal? Think about it this way: When bonds yield 5 percent, a bond with an annual payment (or coupon) of $5 trades at $100. When investors demand higher yields and move rates to 10 percent, that bond will need to trade at $50 for the $5 coupon to meet the new going rate of 10 percent.

In that example, the price had to fall by half. If you’re a bond investor, right now, with interest rates so low and the Fed moving toward raising them, things look dangerous. But the alternative is to keep rates near zero, which also means ultralow interest rates on mortgages, car loans, and stock trades on margin. These low interest rates run the risk of overfueling the economy now, leading to a worse recession later.

Besides that danger, low interest rates mean bond yields are low, whether they’re government, corporate, municipal, or junk bonds. Investors looking for yield aren’t getting it from money market accounts or their checking or savings accounts either. Just think, 10 years ago, a savings account might yield 4 to 5 percent. Today, most yield less than 1 percent. That’s a 75–80 percent loss of income from a safe place to secure your money!

That’s pushed investors into stocks like utilities and telecoms. These highly regulated industries provide the most bond-like returns on the stock market. They’re now becoming much more sensitive to interest rates as long as the current low-rate regime continues.

#3: What the Underlying Company Is Doing

Knowing what you’re investing in matters. At the end of the day, a share of stock is one small fraction of an underlying business. Your best results as an investor will come from treating your investment decisions as though you were buying not just a share of stock but the entire company.

That’s where fundamental analysis and valuation comes in. It’s important to know what a company does, how they do it, and whether shares are cheap or expensive compared to their industry.

It means going through financial data like a company’s revenues and cash flows, learning about their different divisions and how they interact. But it also includes noting important nonfinancial information like recent changes in the company’s executive suite.

None of this information is static. Changes occur all the time. Most of the big changes occur four times a year, when companies report quarterly earnings.

Every sector also has its own quirks—those unusual trends that investors tend to watch to get an idea of how a company is doing relative to its competitors.

In the insurance industry, for instance, emphasis is placed on whether or not a company makes underwriting profits—the profits from writing policies before factoring in its portfolio of investments. If you’re looking at a bank, you would want to look at its loan-loss reserves, a gauge of how much money it’s setting aside in case it needs to write down loans with a dubious chance of being repaid. This information is part of a company’s quarterly filings.

But even more unusual measures aren’t. If you were looking to invest in a restaurant, you might want to look at seating turnover, or how many guests sit at the same table in a given night. That’s the kind of criteria where physically going and investigating can provide an insight into an investment that a Wall Street analyst just can’t get from the numbers.

Putting These Three Criteria Together

Armed with these three criteria, you should be able to get an idea of what’s going on with the company you want to invest in, and whether or not that makes sense given its valuation, fundamentals, what others are doing, and what the market as a whole is doing.

It sounds simple, and to some extent it is. Aside from a little bit of knowledge and some math, what you really need is the conviction to stick to your world view amid an ever-changing environment. If you think that interest rates will eventually rise, you may be right. But that may take time, and it certainly won’t happen in a straight line. There will be setbacks, and at many times, you’ll likely question your decision.

In cases like that, before you think about selling out, at least stop and think about your world view criteria. If something’s changed, you might be justified in closing the trade. If something’s changed and it looks better or if nothing’s changed but the overall valuation has improved, you might want to put more capital into the trade to increase your stake.

There are plenty of ways to think about a world view. And maybe you don’t have a world view so much as a collection of ideas that add up to a world. There’s nothing wrong with that. I tend to invest in what I believe the market’s best opportunities are at a given time. The rationale might fit in with one part of a world view—like how the market is doing. Or it might be because of something ultraspecific to the company involved. It’s creating an overall portfolio that fits your world view that matters, and different positions in your portfolio can do that in different ways.

When it comes down to it, recognizing what’s really going on is what investing is all about. It allows you to recognize value when it exists and find new opportunities all the time without taking the risk of simply buying shares of a company and hoping for the best.

Let’s jump ahead to see how these ideas all blend together. I’m going to take you on a quick journey—one that shows you what my average week looks like as I navigate the market and its various opportunities.

A Week in the Life

Who am I and why do I matter? For the first part of that question, you’ll find a short biography elsewhere in this book. But to really explain why I can help you find ways to safely and profitably invest in today’s challenging environment, I want to walk you through one of my workweeks. To some extent, this week is typical of what I do week-in and week-out. But in reality, there is no typical or average week. Each is structured similarly but can vary wildly. Take a look.

Monday

It’s 6:30 a.m., about sunrise. The stock market opens in three hours. I don’t set an alarm. Rather, I’m woken up by the prodding of my two rescue cats. They’re usually pretty sweet and affectionate, but for them, it’s breakfast time.

After feeding them, I get up and get ready to head into Newsmax’s headquarters, where I’m the senior financial writer. As I get in, I once again check the latest news. The