2 Big Ideas for Making You Wealthy
Today's Digest isn't really about stocks.
I will be talking about stocks, one in particular, but today's topic is much more important ... it's about two ideas that separate the great investors from so-so investors.
These ideas are especially important now. As we've been discussing, the stock market's gains are narrowing. The great bull market that lifted all boats seems to be fading, and now investors must be more selective in where they put their money.
To be sure, there is still room for a significant upside in this market, but as I wrote Tuesday, looking at guidance for the first two quarters of 2019 confirms that many companies are expecting earnings to be significantly lower than last year.
Given that, it's more important than ever to stick to the ideas that make good investors into great investors. Your financial freedom depends on your investing choices.
One way leads to doing what you want with your limited time. The other way leads to a life where money worries dominate your thinking and steal your leisure.
Let's make sure we stay focused on ideas that lead to more freedom.
So, let me start with more market observations from John Jagerson and Wade Hansen, the editors of Strategic Trader.
Regular Digest readers know that John and Wade are both Chartered Market Technician (CMT) designees, technical experts and great market analysts.
And their key idea for growing wealth -- put the odds in your favor.
Last Thursday I shared their observations about the state of the market, and how some circumstances looked as if a correction was due. This week's performance certainly confirmed their observations.
We noted that interest rates -- namely the 10-year Treasury yield (TNX) -- were diverging from the performance of the stock market. Historically, that kind of divergence has been a sign of future weakness for stocks.
We noted that the chart of the S&P 500 showed there was a strong technical resistance level at 2,800 that formed between Oct. 17 and Dec. 3, 2018, and we anticipated this resistance level would be a difficult one to break.
We also noted that there were some conflicting signals we needed to take into account -- including strong market breadth signals, a bullish trend in high-yield bonds and a rising U.S. dollar. Making note of conflicting information helps you avoid falling into a confirmation-bias loop, like a perma-bear or a perma-bull will.
Lastly, we noted that these factors, when analyzed holistically, were typically indicative of a short-term consolidation, or pullback, not a bearish reversal.
Then we watched and waited.
Fast forward to today, and the S&P 500 continues to consolidate below resistance at 2,800, just like we said.
Did we have a guarantee that was going to happen? No.
Did we put the odds in our favor by conducting a thorough, unbiased assessment of market conditions? Yes. This is one of the key ideas that separates great investors from average ones. They check their confirmation bias. They base their analysis on what is actually happening in the market. They ignore the advice of perma-bears and perma-bulls who are permanently tied to one belief about the market. They pay close attention, heed the market signs and put the odds in their favor.
John and Wade do this every day. They're not beholden to their analysis from last week. So, what can the editors of Strategic Trader tell us this week? The new data we have seen this week -- disappointing ADP nonfarm employment numbers, growing trade balance deficits in the United States, weaker-than-expected economic data coming out of China and so on -- suggest resistance at 2,816.94 (the high reached on Oct. 17, 2018) is likely going to hold for now.
In fact, there is a high likelihood that profit taking could drive the S&P 500 back down toward support around 2,630 as we move into the quiet time at the end of earnings season and traders start to "sell the news" after having already "bought the rumor" of a trade deal being struck between the United States and China. Looking at a daily chart of the S&P 500 it's easy to see the high resistance levels and lower support. It's too early to say the bull market run of 2019 is over -- John and Wade don't think it is. But investors need to put the odds in their favor in case of a bearish correction.
You can read more of their market analysis, and specific options picks, by clicking here.
So, what's an option for gains in what looks like a sideways market?
That leads us to our second idea. This one comes from Neil George, editor of Profitable Investing, and an expert in income stocks.
In his most recent monthly issue, Neil noted that the market rebound of early 2019 is not an all-clear signal for investing at-will. Instead, he recommends having plenty of defensive plays, such as preferred stocks, bonds with strong yields and utilities.
Here is an excerpt from his latest Profitable Investing newsletter.
One of the best investing lessons I learned in my career comes from one of the best stocks in the model portfolios of Profitable Investing, which is to capitalize on others that take risks while you focus on locking in revenues. That's a great way to look at investments.
Neil has one particular stock in his portfolio that follows this model, a solid dividend REIT, and he recently recommended another to his subscribers. The stock he has owned for some time is W.P. Carey.
Below is the WPC chart since it was added to the Profitable Investing portfolio.
Neil explained why he still likes the stock so much ...
Since being added in 2014, W.P. Carey has generated a return of 64.83%, for an average annual equivalent return of 10.22%. W.P. Carey doesn't operate its properties. Nor does it pay for maintenance, insurance or taxes on those properties.
Instead, it does sale and lease-back and other leases known as triple net leases. This means it locks up long-term cashflows with less risk due to rising costs for the properties and the vagaries of tax rates.
Its tenants pay for all of that -- thus, W.P. Carey profits from other peoples' money. We'd all like to profit from other peoples' money.
Neil just made a similar call for a healthcare REIT that follows the same principle. You can get more information about this latest pick, and all of Neil's investing ideas by clicking here.
So, there are two solid ideas for investing - put the odds in your favor and find opportunities to profit from other peoples' money.
Picking these opportunities isn't always easy, but it's what separates great investors from the rest of the crowd.
We will continue to bring you the best investing ideas every day in the Digest.
To a richer life ...
Luis Hernandez, Managing Editor
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