Why Corporate America Can’t Prop Up Stocks Much Longer

By Justin Spittler

Corporate America is bracing for tough times. Since you’re reading an investment newsletter, you likely own stocks. And if you’re like most investors, you keep up with how the companies you own are performing. You might even listen to quarterly “earnings calls,” which are when CEOs present results and give their outlook on the business.

Most of the time, CEOs act as cheerleaders on these calls. If business is bad, they’ll say business is good. If business is good, they’ll say it’s great. And CEOs are notoriously optimistic about the economy. After all, thousands of investors and analysts listen to these calls. CEOs know their stock can crash if they’re pessimistic about the business or economy. Because many CEOs will say anything to make their stock go up, we don’t put much stock in their words. We pay much more attention to their actions. And right now, large U.S. companies are acting like very tough economic times are ahead.

Business investment fell 2.2% last quarter..…
This metric measures how much companies spend on property, plant, and equipment. It was the third straight quarter that business investment fell. That hasn’t happened since the 2008-2009 financial crisis. We wouldn’t see this if the economy was headed in the right direction. Companies would be building more factories. They’d be buying more machinery. They’d be spending more money on research and development.

Instead, companies have cut back on investments. This tell us they don’t see many good opportunities. That’s a bad sign for the economy, yet stocks keep rallying. The S&P 500, Dow, and NASDAQ have all recently hit new record highs. At this point, you’re probably wondering what’s keeping stocks afloat if it’s not the economy.

Companies have spent about $2.5 trillion on “share buybacks” since the financial crisis..…
A buyback is when a company buys its own stock from shareholders. This can lift a company's stock price.
According to investment bank Goldman Sachs (GS), buybacks have been the biggest driver of U.S. stock performance since the financial crisis. Buybacks also reduce the number of shares that trade on the market.

This boosts a company’s earnings per share. But buybacks don’t make a company more profitable. They only make profits look bigger “on paper.” Companies have been buying up their own stock for two reasons: 1) They don’t see many growth opportunities. And 2) it’s incredibly cheap to borrow money.

The Federal Reserve has held its key interest rate near zero since 2008..…
The Fed cut rates to encourage households and businesses to borrow and spend more money. Mainstream economists thought this would “stimulate” the economy. It didn’t work. The U.S. economy has grown at an annualized rate of just 2.1% since 2009. This makes the current “recovery” the slowest by far since World War II.

The Fed did get folks to borrow huge sums of money. U.S. corporations have borrowed more than $10 billion in the bond market since 2007. Last year, they issued a record $1.5 trillion in bonds.
Buybacks are a big reason companies borrowed so much. MarketWatch reported last week:

Companies have been taking on piles of debt to finance buybacks, leading the total debt on the S&P 500 to grow 56% during the past five years.

According to Yahoo! Finance, companies in the S&P 500 funded 22% of last year’s buybacks with debt. This year, debt paid for 39% of share buybacks.

Corporate debt is now dangerously high..… 
According to Barron’s, corporate debt now equals 45.3% of gross domestic product (GDP). The only time this key ratio has ever been higher was in 2009, when it hit 45.4%. If the economy was doing well, this wouldn’t be such a big problem. Companies would be making enough money to pay their debts.

But right now, Corporate America is struggling to make money. Profits for companies in the S&P 500 are on track to fall for the fifth straight quarter. That hasn’t happened since the 2008-2009 financial crisis.
There’s no telling when this earnings drought will end either. According to research firm FactSet, analysts expect third quarter corporate profits to fall 1.7%. The third quarter ends on September 30.

Keep in mind, the U.S. economy is technically in a “recovery” right now. Imagine what will happen to corporate profits during the next recession. The more profits fall, the less money companies will have to prop up their shares with buybacks.
  
Companies have already started to cut back on buybacks..…
According to Business Insider, buybacks fell 18% last quarter. This sharp decline in buyback activity followed a near record breaking first quarter, in which companies in the S&P 500 spent an incredible $166 billion on buybacks. That’s the second most ever, and the most in one quarter since 2007. We don’t know exactly why companies are suddenly spending less on buybacks.

Maybe it’s because corporate profits are drying up. Maybe companies are starting to realize they have too much debt. Or maybe it’s because stocks are expensive. According to the popular CAPE ratio, stocks in the S&P 500 are 62% more expensive than their historic average. Since 1881, U.S. stocks have only been more expensive three times: before the Great Depression, during the dot-com bubble, and leading up to the 2008-2009 financial crisis.

Like any investment, buybacks only make sense when stocks are a good deal. With stocks as expensive as they are today, buybacks are a terrible use of money.

Without buybacks, there won’t be much to keep U.S. stocks from falling..…
If you own stocks, take a good look at your portfolio. We recommend that you get out of any company that needs buybacks to retain shareholders. We also encourage you to put 10% to 15% of your wealth in gold. As we often say, gold is real money. It’s preserved wealth for centuries because gold is unlike any other asset. It’s durable, easy to transport, and easily divisible.

Gold is also the ultimate safe haven asset. It’s survived economic depressions, stock market crashes, and full blown currency crises. When investors are nervous about stocks or the economy, they buy gold.
The price of gold has jumped 27% this year. It’s beat the S&P 500 4-to-1.

If you don’t already own gold for protection, we encourage you to do so immediately..…
According to Casey Research founder Doug Casey, the financial system is held together by “chewing gum and bailing wire” right now. When the public wakes up and realizes this, “they’ll flock to gold… just as they’ve done for centuries.” Doug thinks this could cause the price of gold to easily soar 200% in the coming years.

You could make 2x, 5x, or 10x that much money in gold stocks..…
Yesterday, we showed you how leverage works in the resource market. As we explained, this powerful force is why gold stocks can soar even if the price of gold doesn’t rise by that much. This year, gold’s 27% jump caused the VanEck Vectors Gold Miners ETF (GDX), which tracks large gold miners, to soar 128%.

Some folks might see that and think they missed their chance to buy gold stocks. But regular readers know gold stocks can go many times higher. During the 2000-2003 bull market, the average gold stock rose 602%. The best ones returned more than 1,000%. We expect even bigger gains in the coming years. To learn why, watch this short presentation. In it, Doug explains why we’re headed for “the biggest gold mania” he’s even seen.

By the end of this video, you’ll know why there’s never been a better time to own gold stocks. You’ll also learn how to make the most of this new gold bull market. We’re talking gains of 1,000%...2,000%...even 5,000%. Those kind of returns might sound impossible. But as you’ll see, Doug's hit many “home runs” like this throughout his career. And for the first time ever, he's showing the world exactly how he did this.

To learn Doug’s SECRET to making giant gains in gold stocks, watch this free video.

How Will Negative Interest Rates, the War on Cash, and “Helicopter Money” Affect the Markets?

Today, we have something special to share with you. Instead of the usual “Chart of the Day,” you’ll find a six-minute video presentation put together by our colleagues at Palm Beach Research Group.

In the video below, Palm Beach Research Group co-founder Tom Dyson and Palm Beach Letter editor Teeka Tiwari discuss how radical government policies are affecting global financial markets. As Tom and Teeka explain, these central bank “experiments” will have severe side effects. They could even push the price of gold to $5,000. To learn why, watch the video below.

If you like what you saw from Tom and Teeka, we encourage you to sign up for their “speed round” training series. Click here to get started.

The article Why Corporate America Can’t Prop Up Stocks Much Longer was originally published at caseyresearch.com.

Get out latest FREE eBooK "Understanding Options"....Just Click Here

Jared Dillian is Pulling Out All the Stops

By Jared Dillian

When I was a teenager, I had a different sort of part-time job. I was a church organist. Actually, it was the best job ever because I was something of a piano prodigy as a child. Around age 12, my parents and I had to make a conscious decision about whether I was going to pursue a career in music. I decided not to, which has greatly reduced the amount of Ramen noodles I have eaten over the years.At age  13, I decided I wanted to play the organ. I took lessons from the organist in the big Catholic church downtown. What an incredible instrument!

Playing the organ is a lot harder than it looks. In case you hadn’t noticed, there is a whole keyboard at your feet—yes, you play with both your hands and your feet. And since you can’t possibly learn all the hymns, you have to be really good at sight-reading three lines of music at once. It takes a great deal of coordination. Plus, you have two or more “manuals” (keyboards) and dozens of stops, which activate the different sounds in the organ. This is where the phrase “pulling out all the stops” comes from.

So I got a job as the organist at the Unitarian church down the street. For the first and only time of my life, I was a member of a union—the American Guild of Organists. I received my union-protected minimum wage of $50 per service, which is a great deal of money if you’re 16 years old in 1990. $50 a week definitely put gas in my car. And there was a girl in the congregation that I dated a couple of times.

I felt sorry for my poor schlep classmates who were bagging groceries for $4/hour. They had to work 12 hours to make what I made in one. I felt pretty smug.  The high point was when I transcribed the theme from “A Clockwork Orange” and played it as the prelude for one of the church services. You can see where the subversive streak comes from.

I Got Skills

So why did I make more than 12 times what my high school classmates made? Because my skills were worth 12 times as much. Bagging groceries is kind of the definition of unskilled labor. Literally anyone can bag groceries. The supply of labor that has those skills is limitless.

Church organists are in slightly higher demand. But not by much! I think a church organist these days—if you are hired by the church to play every week, plus run all the choir and music programs, probably pays about $35,000 to $50,000 a year, depending on the church. So not a lot!

It’s a decent living if you like playing the organ, but you also have to deal with church politics. The wages of an organist not only depend on the supply of labor but the demand for labor as well. And church construction has gone way down in recent years. Not to mention the fact that the latest fad in religious services is “contemporary music.”

However, the fact that church organists make more money than grocery baggers does reflect the level of skill the occupation requires. Before I became a church organist, I had been playing either the piano or organ for six years. Six years of practicing 30 minutes to an hour a day, every day.

Nobody practices bagging groceries for 30 minutes a day, every day.

I don’t particularly like manual labor (though I have done it on occasion). That’s why I do my best to acquire skills that are rare and marketable so I don’t have to do things like chip paint. In this country (and others), we have this unhealthy obsession with manual labor. Politicians talk about “working Americans” all the time. We say things like “putting in a hard day’s work.” The most popular car is the Ford F-150. Who wants to put in a hard day’s work? Not me! Instead, I will put in a hard day’s thinking.

Hate and Discontent

A lot of people spend too much time thinking about what other people make. It’s unproductive. Everyone thinks Wall Street guys are overpaid, for example. Okay, so let’s take your average ETF option trader at a bank. Say he makes $500,000 a year (which might even be generous these days). Let’s examine one trade of many that he is confronted with on a daily basis. A sales trader stands up and yells to him, “20,000 XLE Jan 75 calls, how?”

What’s happening here is that a client is asking for a two-sided market on the January 75 call options in XLE, which is the Energy Select Sector SPDR ETF, 20,000 times, which means options on 2,000,000 shares, or about $140,000,000. It’s a big trade, definitely, but there are bigger ones. So let’s think of all the things the option trader needs to know. He needs to know what an option is, starting from scratch.

He needs to know what XLE is, that it’s an energy ETF, and he should have a good idea of what stocks are in the portfolio. He might have a cursory knowledge about factors affecting supply and demand for crude oil. In order to come up with a price for these options, he has to have an idea of what implied volatility should be and what realized volatility might be going forward.

This requires a knowledge of an option pricing model like Black-Scholes and many, many years of college mathematics, including probability theory and differential equations. He needs to know how he is going to hedge this option. Will he hedge the delta all in the stock? Will he hedge with other options? How will he dynamically hedge the trade until maturity? Will he lay off some of the risk in other strikes? Will he buy single stock options on some of the names in the index, like XOM, CVX, or COP, to effect a dispersion trade?

This means he has to know what a dispersion trade is. More math. He also needs to understand liquidity. What will be his execution impact by trying to sell 800,000 shares of XLE? This affects how wide he makes his market. And best of all, he needs to think about all of these things in a split-second, without hesitation. If he is off by even a penny—he loses money on the trade. I would characterize that as “skilled labor.” And we haven’t even talked about the emotional fortitude it takes to take that kind of risk. $500,000 a year seems low.

CEOs

People get the most upset about executive pay. Here you have some dillweed CEO who is the direct beneficiary of the agency problem. If company XYZ does well, he gets paid millions. If it does poorly, he gets fired and loses nothing, personally. We say that he has no skin in the game.

Well, do you have what it takes to run one of the 500 largest companies in the world?

Pretend we’re talking about McDonald’s. Many people think McDonald’s is doing a terrible job. There’s a lot of evidence that they are. They’re losing market share to Chipotle and lots of other “fast casual” restaurants.

But running a company is hard enough. You have 50,000 odd restaurants, you have to manage supply and distribution for this massive network, you have to do all the managerial science behind what is on the menu and how much it costs, you have to directly negotiate, and I mean meet with leaders of foreign governments, you need to go on CNBC from time to time and not be a mutant, and above all, you need to lead inspirationally.

Not many people can do all that. I can’t. Maybe I’m smart enough, but I don’t have the emotional maturity or even the desire for that kind of responsibility. Everyone wants to be the boss, but nobody really wants to be the boss. If you think you are underpaid—maybe you are. The labor market is not perfectly efficient. Anomalies can persist.

Take a look at people who you think are overpaid. What are they doing that you aren’t? Maybe you just aren’t willing to do those things (like kiss lots of ass). The responsibility is yours and yours alone. And that, my friends, is something nobody wants to hear.

Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. 

The article The 10th Man: Pulling Out All the Stops was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

How Will John Carter Get Through this Weeks Market Turmoil?

You know him as our trading partner that made a name for himself as the guy who made the Big Trade on Tesla. Simpler Options CEO John Carter has continued to allow us to watch over his shoulder as he quietly took an account that he put $150,000 in at the beginning of the year and in 8 months turned it into $650,000.

Our readers have been attracted to John's trading methods due to the system's ability to limit risk while limiting the fees it takes to trade in this manner. And best of all it can be accomplished with any size account, no matter how large or small.

Markets appear to be down this morning again so our timing couldn't be better. How did John fair in the market turmoil of last week? He calmly continued to make money while using the volatility to his advantage. Luckily for us John put together another game changing free video that shows us exactly what he did in the peak of the madness.

Watch the video HERE

Here's what else he covers for you in the video.....

  *  Why the recent market sell off didn't change his plan

  *  How to compound profits correctly

  *  Why options are so profitable no matter the market condition

  *  And his plan that you can easily copy

Watch the video HERE for free, and let us know what you think

See you in the markets putting this to work,
Ray C. Parrish
aka the Crude Oil Trader


Get the latest updated version of John Carter's free eBook "Understanding Options".....Just Click Here

Going Vertical.....Our Next Online Event

There are again signs on the horizon that the next gold bull market may not be far off.

On February 11, Bloomberg reported, “Gold producers with cash on hand are on the hunt for cheap mining assets as rising prices drive shares higher.” $2.7 billion in deals have already been announced or completed year to date—compared to a total of $10.5 billion in 2014.

Private equity firms (the “smart money”) are circling the mining industry for great deals. GDX, the Market Vectors Gold Miners ETF, currently has an aggregate price to book ratio of 1.06, while its little brother, the Market Vectors Junior Gold Miners ETF (GDXJ), trades at 76% of book value.

A stronger US dollar and falling oil prices are presenting two deflationary forces that are good for gold. The last two times oil dropped more than 50% in one year—1986 and 2008—gold rallied over 25% the following year.

Here's our video primer for this weeks event "Are you Going to Buy Low and Sell High this Time Around"

Investors are waking up to the fact that gold is rallying. Among the top 10 non leveraged ETFs are five gold miners ETFs. As of early February, investors had already poured $885.4 million in new assets into GDX—one of the best results among sector ETFs—and GDXJ attracted nearly $226 million.

No one can say for sure if this is the beginning of the next gold bull market. However, what is clear is that once the bull market does get started, the best of the best gold stocks will go vertical.

Successful gold producers may go up 150-200%. But the top ranked junior miners—the companies with quality management and great assets will take a moonshot. 500%, 1,000%, and more is not out of the question.

Casey Research’s free online event GOING VERTICAL aims to help investors understand where we are in the gold cycle, what to expect, and how to prepare their portfolio so they have a real shot at the jackpot when gold rises again.

Just Click Here to Reserve Your Spot

Eight industry stars discuss the most pressing issues of the day......

Pierre Lassonde, cofounder and chairman of Franco-Nevada
Rick Rule, founder and chairman of Sprott Global Resource Investments
Ron Netolitzky, chairman and director of Aben Resources
Doug Casey, chairman of Casey Research
Frank Holmes, CEO and CIO of U.S. Global Investors
Bob Quartermain, president, CEO, and director of Pretium Resources
and Casey Research precious metals experts Louis James and Jeff Clark.

Topics they will talk about in GOING VERTICAL include: 2015 outlook on the gold market; up, down, or sideways?—What to expect from gold’s next leg up, and how even stocks that have dropped 75% or more can come back with a vengeance—How to make money on junior miners even in the midst of a downturn—Which country may end up controlling the price of gold and what that means for investors—4 signs that a bear market is turning into a bull market—Which types of companies institutional investors will flock to first when gold goes up, and how to “front run” them—3 reasons why the best gold producers might double when the gold sector recovers—and much more.

Also, some of the experts talk about their favorite gold and silver companies, naming names—and Louis James reveals one of his favorite junior mining stock with vertical potential.

Register now to watch the event on Tuesday, March 10, 2:00 p.m. EDT. Even if you know you can’t make it at that time, register anyway that way you’ll get an email with a link to the video recording after the event and can watch it at your leisure.

Click Here to Learn More and Register

See you on Tuesday,
The Stock Market Club


Get our latest FREE eBook "Understanding Options"....Just Click Here!

Beware of Flashy Stock Repurchases When The Market Is on The Rise

By Andrey Dashkov

Retail giant Bed Bath & Beyond just announced plans to buy back another $2 billion in shares, which the company will start doing after it completes its current share repurchase program. You’ve seen it before: Press releases emphasize that buybacks return value to shareholders, analysts sometimes rely on repurchases to spot a stock to write up next, and management likes to tout their focus on shareholder returns. But what’s the real story? Why would a company buy its own shares?


There are but a few situations when returning cash to shareholders instead of paying dividends or investing in new projects is prudent:

• The company has largely exhausted investment opportunities that would generate a positive net present value (NPV).
• The stock is trading below its intrinsic value; or
• The tax on dividends is so high compared to the capital gains tax that it makes sense to boost the share price and let shareholders enjoy the extra return instead of receiving heavily taxed dividends.

When these situations happen we support repurchases. In the reality, however, managers often have their own reasons to buy back shares; let’s look at the more popular ones.

First, management’s compensation is often based on share price performance or earnings based metrics like earnings per share (EPS), which buybacks are designed to boost.

Second, higher share price increases the value of a company’s options. Managers are often shareholders, too, but unlike you and me, they have direct access to the Treasury. When managers own a lot of their own company’s stock, they may have too much skin in the game. This may skew their preferences toward increasing the share price at the expense of long term business growth.

Third, share buybacks became a standard (and often abused) signal to the market that: a) the company’s stock is undervalued, and b) that management takes care of the shareholders. Both of these statements may be correct in isolation, based on the company’s fundamentals and management practices. Nonetheless, a buyback should not convince you that either is true.

One additional reason is often overlooked. Many a CEO has been fired for an acquisition that did not work out. When the decision is made to dump the acquisition, it is accompanied by a write off against earnings, sometimes worth billions of dollars. Wall Street armchair quarterbacks are quick to point out how much better off shareholders would have been if they had just paid out what they lost in dividends. Buying back company shares, with all the accompanied hoopla, is less likely to be a career threatening move.

Linking the two subjects together makes for nice copy; however, keep it in perspective. For example, a technology company that realizes their product line is becoming obsolete will often make acquisitions to increase their product line market share, or move them into a new business with long term potential. Buying back company stock, then having to go into the market and borrow at high interest rates, might be the exact wrong move. The key is making the right acquisitions for the company to continue to grow and pay dividends for the next generation.

In fact, managers have proven to be pretty bad stock pickers even when they have only one stock to pick. As my colleague Chris Wood showed in A Look at Stock Buybacks, managements have bought shares of their own companies at pretty bad times in the past. Moreover, the expectations of higher valuation based on higher EPS did not always materialize. Even though a lot of investors use P/E as their main gauge of value (which they shouldn’t), there is no convincing evidence that buybacks can support high valuation multiples in the long term.

Your Bottom Line

 

History has shown that the only value-creating buybacks were the ones carried out when stocks were deeply undervalued. In those instances, the repurchases helped companies outperform the market. But overall the optimism and confidence inducing press releases that accompany buybacks should be taken with a huge grain of salt.

As a rule of thumb, beware of increased buybacks when the market is on the rise (everybody is an investment guru when everything is going up) or when management compensation is closely tied to the share price performance or earnings based metrics. Companies with better corporate governance may fare better when it comes to managing conflicts of interest, but there is a significant vested interest there that investors should be aware of. Don’t mistake noise for a sign is all.

When it comes to returning value to shareholders, we appreciate companies that invest in long term projects—or pay dividends. Despite the potential tax implications, the yield strapped investors may be better served with a special dividend these days than with a promise of a better price in the future.

Learn more ways to cut through press rhetoric by signing up for our free weekly e-letter, Miller’s Money Weekly, where my colleagues and I share timely financial insight tailored for seniors and conservative investors alike.

Sign up here, and we’ll send a complimentary copy straight to your inbox every Thursday

The article Beware of Flashy Stock Repurchases When The Market Is on The Rise was originally published at Millers Money

Get the complete schedule for the Premier Trader University free trading webinars....Just Click Here!
 

Nine Secrets for Successful Speculation

By Louis James, Chief Metals & Mining Investment Strategist

When I started working for Doug Casey almost 10 years ago, I probably knew as much about investing as the average Joe, but I now know that I knew absolutely nothing then about successful speculation.
Learning from the international speculator himself—and from his business partner, David Galland, to give credit where due—was like taking the proverbial drink from a fire hose. Fortunately, I was quite thirsty.

You see, just before Doug and David hired me in 2004, I’d had something of an epiphany. As a writer, most of what I was doing at the time was grant-proposal writing, asking wealthy philanthropists to support causes I believed in. After some years of meeting wealthy people and asking them for money, it suddenly dawned on me that they were nothing like the mean, greedy stereotypes the average American envisions.

It’s quite embarrassing, but I have to admit that I was surprised how much I liked these “rich” people—not for what they could do for me, but for what they had done with their own lives. Most of them started with nothing and created financial empires. Even the ones who were born into wealthy families took what fortune gave them and turned it into much more. And though I’m sure the sample was biased, since I was meeting libertarian millionaires, these people accumulated wealth by creating real value that benefited those they did business with. My key observation was they were all very serious about money—not obsessed with it, but conscious of using it wisely and putting it to most efficient use. I greatly admired this; it’s what I strive for myself now.

But I’m getting ahead of myself. The reason for my embarrassment is that my surprise told me something about myself; I discovered that I’d had a bad attitude about money.

This may seem like a philosophical digression, but it’s an absolutely critical point. Without realizing that I’d adopted a cultural norm without conscious choice, I was like many others who believe that it is unseemly to care too much about money. I was working on saving the world, which was reward enough for me, and wanted only enough money to provide for my family.

And at the same instant my surprise at liking my rich donors made me realize that—despite my decades of pro-market activism—I had been prejudiced against successful capitalists, I realized that people who thought the way I did never had very much money.

It seems painfully obvious in hindsight. If thinking about money and exerting yourself to earn more of it makes you pinch your nose in disgust, how can you possibly be effective at doing so?

Well, you can’t. I’m convinced that while almost nobody intends to be poor, this is why so many people are. They may want the benefits of being rich, but they actually don’t want to be rich and have a great mental aversion to thinking about money and acting in ways that will bring more of it into their lives.

So, in May of 2004, I decided to get serious about money. I liked my rich friends and admired them all greatly, but I didn’t see any of them as superhuman. There was no reason I could not have done what any of them had done, if I’d had the same willingness to do the work they did to achieve success.

Lo and behold, it was two months later that Doug and David offered me a job at Casey Research. That’s not magic, nor coincidence; if it hadn’t been Casey, I would have found someone else to learn from. The important thing is that had the offer come two months sooner, being a champion of noble causes and not a money-grubbing financier, I would have turned it down.

I’m still a champion of noble causes, but how things have changed since I enrolled in “Casey U” and got serious about learning how to put my money to work for me, instead of me having to always work for money!

Instead of asking people for donations, I’m now the one writing checks (which I believe will get much larger in the not-too-distant future). I can tell you this is much more fun.

How did I do it? I followed Doug’s advice, speculated alongside him—and took profits with him. Without getting into the details, I can say I had some winning investments early on. I went long during the crash of 2008 and used the proceeds to buy property in 2010. I took profits on the property last year and bought the same stocks I was recommending in the International Speculator last fall, close to what now appears to have been another bottom.

In the interim, I’ve gone from renting to being a homeowner. I’ve gone from being an investment virgin to being one of those expert investors you occasionally see on TV. I’ve gone from a significant negative net worth to a significant nest egg… which I am happily working on increasing.

And I want to help all our readers do the same. Not because all we here at Casey Research care about is money, but because accumulating wealth creates value, as Doug teaches us.

It’s impossible, of course, to communicate all I’ve learned over my years with Doug in a simple article like this. I’m sure I’ll write a book on it someday—perhaps after the current gold cycle passes its coming manic peak.

Still, I can boil what I’ve learned from Doug down to a few “secrets” that can help you as they have me. I urge you to think of these as a study guide, if you will, not a complete set of instructions.

As you read the list below, think about how you can learn more about each secret and adapt it to your own most effective use.

Secret #1: Contrarianism takes courage.

Everyone knows the essential investment formula: “Buy low, sell high,” but it is so much easier said than done, it might as well be a secret formula.

The way to really make it work is to invest in an asset or commodity that people want and need but that for reasons of market cyclicality or other temporary factors, no one else is buying. When the vast majority thinks something necessary is a bad investment, you want to be a buyer—that’s what it means to be a contrarian.

Obviously, if this were easy, everyone would do it, and there would be no such thing as a contrarian opportunity. But it is very hard for most people to think independently enough to risk hard-won cash in ways others think is mistaken or too dangerous. Hence, fortune favors the bold.

Secret #2: Success takes discipline.

It’s not just a matter of courage, of course; you can bravely follow a path right off a cliff if you’re not careful. So you have to have a game plan for risk mitigation. You have to expect market volatility and turn it to your advantage. And you’ll need an exit strategy.

The ways a successful speculator needs discipline are endless, but the most critical of all is to employ smart buying and selling tactics, so you don’t get goaded into paying too much or spooked into selling for too little.

Secret #3: Analysis over emotion.

This may seem like an obvious corollary to the above, but it’s a point well worth stressing on its own. To be a successful speculator does not require being an emotionless robot, but it does require abiding by reason at times when either fear or euphoria tempt us to veer from our game plans.

When a substantial investment in a speculative pick tanks—for no company-specific reason—the sense of gut-wrenching fear is very real. Panic often causes investors to sell at the very time they should be backing up the truck for more.

Similarly, when a stock is on a tear and friends are congratulating you on what a genius you are, the temptation to remain fully exposed—or even take on more risk in a play that is no longer undervalued—can be irresistible. But to ignore the numbers because of how you feel is extremely risky and leads to realizing unnecessary losses and letting terrific gains slip through your fingers.

Secret #4: Trust your gut.

Trusting a gut feeling sounds contradictory to the above, but it’s really not. The point is not to put feelings over logic, but to listen to what your feelings tell you—particularly about company people you meet and their words in press releases.

“People” is the first of Doug Casey’s famous Eight Ps of Resource Stock Evaluation, and if a CEO comes across like a used-car salesman, that is telling you something. If a press release omits critical numbers or seems to be gilding the lily, that, too, tells you something.

The more experience you accumulate in whatever sector you focus on, the more acute your intuitive “radar” becomes: listen to it. There’s nothing more frustrating than to take a chance on a story that looked good on paper but that your gut was warning you about, and then the investment disappoints. Kicking yourself is bad for your knees.

Secret #5: Assume Bulshytt.

As a speculator, investor, or really anyone who buys anything, you have to assume that everyone in business has an angle. Their interests may coincide with your own, but you can’t assume that.

It’s vital to keep in mind whom you are speaking with and what their interest might be. This applies to even the most honest people in mining, which is such a difficult business, no mine would ever get built if company CEOs put out a press release every time they ran into a problem.

A mine, from exploration to production to reclamation, is a nonstop flow of problems that need solving. But your brokers want to make commissions, your conference organizers want excitement, your bullion dealers want volume, etc. And, yes, your newsletter writers want to eat as well; ask yourself who pays them and whether their interests are aligned with yours or the companies they cover.

(Bulshytt is not a typo, but a reference to Neal Stephenson's brilliant novel, Anathem, which defines the term, briefly, as words, phrases, or even entire books or speeches that are misleading or empty of meaning.)

Secret #6: The trend is your friend.

No one can predict the future, but anyone who applies him- or herself diligently enough can identify trends in the world that will have predictable consequences and outcomes.

If you identify a trend that is real—or that at least has an overwhelming amount of evidence in its favor—it can serve as both compass and chart, keeping you on course regardless of market chaos, irrational investors, and the ever-present flood of bulshytt.

Knowing that you are betting on a trend that makes great sense and is backed by hard data also helps maintain your courage. Remember; prices may fluctuate, but price and value are not the same thing. If you are right about the trend, it will be your friend. Also, remember that it’s easier to be right about the direction of a trend than its timing.

Secret #7: Only speculate with money you can afford to lose.

This is a logical corollary to the above. If you bet the farm or gamble away your children’s college tuition on risky speculations—and only relatively risky investments have the potential to generate the extraordinary returns that justify speculating in the first place—it will be almost impossible to maintain your cool and discipline when you need it.

As Doug likes to say; it’s better to risk 10% of your capital shooting for 100% gains than to risk 100% of your capital shooting for 10% gains.

Secret #8: Stack the odds in your favor.

Given the risks inherent in speculating for extraordinary gains, you have to stack the odds in your favor. If you can’t, don’t play.

There are several ways to do this, including betting on People with proven track records, buying when market corrections put companies on sale way below any objective valuation, and participating in private placements. The most critical may be to either conduct the due diligence most investors are too busy to be bothered with, or find someone you can trust to do it for you.

Secret #9: You can’t kiss all the girls.

This is one of Doug’s favorite sayings, and though seemingly obvious, it’s one of the main pitfalls for unwary speculators.

When you encounter a fantastic story or a stock going vertical and it feels like it’s getting away from you, it can be very, very difficult to do all the things I mention above. I can tell you from firsthand experience, it’s agonizing to identify a good bet, arrive too late, and see the ship sail off to great fortune—without you.
But if you let that push you into paying too much for your speculative picks, you can wipe out your own gains, even if you’re betting on the right trends.

You can’t kiss all the girls, and it only leads to trouble if you try. Fortunately, the universe of possible speculations is so vast, it simply doesn’t matter if someone else beats you to any particular one; there will always be another to ask for the next dance. Bide your time, and make your move only when all of the above is on your side.

Final Point

These are the principles I live and breathe every day as a speculator. The devil, of course, is in the details, which is why I’m happy to be the editor of the Casey International Speculator, where I can cover the ins and outs of all of the above in depth.

Right now, we’re looking at an opportunity the likes of which we haven’t seen in years: thanks to the downturn in gold—which now appears to have subsided—junior gold stocks are still drastically undervalued.

My team and I recently identified a set of junior mining companies that we believe have what it takes to potentially become 10 baggers, generating 1,000%+ gains. If you don’t yet subscribe, I encourage you to try the International Speculator risk-free today and get our detailed 10-Bagger List for 2014 that tells you exactly why we think these companies will be winners. Click here to learn more about the 10-Bagger List for 2014.

Whatever you do, the above distillation of Doug’s experience and wisdom should help you in your own quest.

The article Doug Casey’s 9 Secrets for Successful Speculation was originally published at Casey Research

Check out our "Gold and Crude Oil Trade Ideas"