Let me tell you a story…
One of my managers (let’s call him Rex) was out with his son after baseball practice on a recent Friday evening and pulled into the drive-thru at the local McDonald’s.
What happened next stunned me.
Rex pulled his Ford up to that big, lighted menu and ordered a Big Mac, two large fries, a Sprite and a Coke – only to have that disembodied speaker voice come back with: “I’m sorry, sir, but we’re out of Coke.”
On a weekend.
The story gets better. When Rex expressed his surprise over the “Coke-less” meal, the drive-thru worker actually sighed and said: “And, unfortunately sir, this isn’t the only time this has happened lately. We’ve run out of Coke a lot.”
This isn’t a rural-region Mickey D’s we’re talking about; this particular location sits at the intersection of two busy highways not far from downtown Baltimore, where TradeSmith has its corporate offices. And McDonald’s restaurants, in general, are known for an almost-robotic efficiency. So, when an iconic business like this one is consistently unable to provide its customers with a staple of its business (a Big Mac and a Coke is about as foundational as you can get), I have to see it as the latest sign that trouble’s brewing for the American economy and, by extension, for U.S. stocks.
It’s also a very real warning signal to investors like you – a signal that urges you to minimize risk, to avoid reckless speculation, and to focus on income, investment quality, and wealth-building for the foreseeable future.
In short, as I told listeners during my recent appearance on the Stansberry Investor Hour podcast, it’s time to be a “real investor.”
No two ways about it.
And I’ll take a few minutes here today to detail exactly what real investors need to do.
My Tip Sheet for Profits… and Wealth
There’s a frequently used investing maxim – we’ve all heard it – that “things are different this time.” We hear that line when investors want to justify speculative excesses or give themselves permission to buy junk and ignore proven rules of accounting, valuations, or metrics like sales, profits, and cash flow.
What my little tale about the Coke-less McDonald’s shows is that “things are different right now.” There are red flags everywhere. And that means you need to be a real investor – not a take-a-flyer speculator.
So let me share a list of seven tips that will help you be disciplined – and keep you on the real investor pathway.
1. Watch the world around you.
I used the anecdote about the Coke stock-out at McDonald’s as an example of the abundant red flags because it’s relatable. But those causes for worry are everywhere – if you look. Take housing, another slice of the economy that matters to most of us – and another of the biggest warnings I see. Earlier this year, I wrote that the average American was paying 36% more for homes than they were the year before. Emotion was the trigger for that massive run-up in housing – then sight-unseen appraisals and aggressive lending helped supercharge it.
But inflation – which must lead to higher mortgage rates – is the trap waiting to be sprung in an overvalued market. Shortages, inflation, corporate-earnings misses – these are just some of the recession-heavy influences headed our way. When inflation cuts deeply into corporate earnings, those firms will start cutting staff, cutting corners, and closing facilities. Moves like that will fuel a recession and fuel unemployment. We could see a big reversal in unemployment numbers almost overnight. So be a careful observer – and let those observations remind you of the need for caution, structure, and a long-term view.
2. Don’t mistake a bear-market rally for a bull-market rebound.
Where are we now? There can be some great share-price rallies on the way to a market bottom. And we’re seeing lots of micro-rallies here lately. But I can’t say the bottom is in yet. We’re just not seeing the bullish indicators come in for the big indexes. That means you must take extra care with everything you do. And you can’t abandon that caution at the first sign of an uptick in stocks.
3. Take out the trash.
Kill all the losers. Get rid of everything in your portfolio that is down and hasn’t bottomed. This is especially true of companies that are speculative, that don’t have sustainable businesses, and that aren’t generating the cash flow that can help them navigate a recession.
4. Don’t throw darts.
Coming out of the pandemic, I bought all the high-flying stocks – and I understood that it was an era of speculation. But now’s not the time to be bold – or reckless. It absolutely is not the time to be buying a whole bunch of speculative stocks; by “speculative,” I’m talking about the shares of companies that aren’t making money, that have no free cash flow, and that are groaning under heavy debt. Do that and you’ll be on the wrong end of the trade – and will see a portion of your hard-won wealth wiped away.
5. Buy businesses, not stocks.
This is an important follow-on to my “darts” comment. And it’s a bit of a mindset change. Stop thinking about buying stocks. Pretend you’re investing directly into a business. Look for “forever” businesses that are going to survive any recession – companies with iconic brands and definable, protective economic moats. I especially love businesses with hefty cash hoards and strong free cash flow. Companies like that can buy back stock, gush dividends, and generate “inorganic” growth during an economic slowdown by using their cash to buy out rivals, purchase complementary product lines, or just ride out sector lulls. That’s what it means to invest in businesses, not stocks.
6. Remember that green means “go.”
I’m a software guy and an entrepreneur – not a hedge fund manager or investment banker – so trust me when I tell you that the TradeSmith system is simple to use. It’s based on technical analysis and momentum – and gives you a simple “red/yellow/green” (sell/be careful/buy) rating.
Our system loves energy and utilities right now. Those sectors are in the healthy Green Zone. And the sectors continue to strengthen as inflation tightens its grip on every facet of our economy. Health care was in the Green Zone until yesterday – but the underlying stocks are a bit of a mixed bag.
Since we’re talking about taking extra care here, we can add a splash of fundamental analysis, too – specifically free cash flow (FCF). Stocks that are in that healthy Green Zone – that are also throwing off lots of “green” (as top FCF generators) – include Exxon Mobil (XOM), Chevron Corp. (CVX), Johnson & Johnson (JNJ), and UnitedHealth Group Inc. (UNH). Meshing the technical and fundamental gives you multiple layers of conviction that investors should be looking for against a backdrop as uncertain as this one.
7. Create a watchlist.
There are great businesses out there that may not be great buys right now. Take Walt Disney (DIS), one of my favorite companies of all time. It’s in the Red Zone right now. But that doesn’t mean it’s not still a great company. If you’re a strict adherent to our system, you’ll wait until it’s back in the Green Zone to buy it. The same with Walmart (WMT). Put them on a personal watchlist and follow them until they become buys.
Or, if you have a lengthy time horizon and a higher risk tolerance, consider buying these “forever stocks” to hold as wealth builders. Other great FCF companies that aren’t necessarily buys right now include Alphabet/Google (GOOGL), Amazon.com (AMZN), AbbVie (ABBV), Apple (AAPL), Meta Platforms/Facebook (META), Microsoft (MSFT) and Pfizer (PFE).
The bottom line here: Put money into real businesses to try and grow your wealth for the long term. That includes a careful look at the world’s best businesses – the “forever stocks” – that are or soon will be trading at multi-year lows.
Be a real investor.
If you exercise caution and do the work, you can always find real opportunities.
Even when you can’t find an ice-cold Coke.