Category: simonblack

On May 23, 1719, one of the greatest financial bubbles in the history of the world kicked off when the Compagnie Perpetuelle des Indes was granted a monopoly by the French monarchy over all the trading rights of all French colonies worldwide.

The company’s stock price quickly soared, from 300 livres per share to more than 1,000 just a few months later.

It was quite a jump. But the enthusiasm continued for more than 18-months.

In fact there was such a frenzy to buy shares that it wasn’t uncommon for the stock price to double in a single day.

By November, share price had surpassed 10,000.

Based on modern-day calculations, a share price of 10,000 livres would have valued the company at more than the entire GDP of France at the time.

That would be like Google or Amazon having a $20 TRILLION stock market capitalization today. Insane.

As with all bubbles throughout history, that one burst as well… quickly and violently.

Call it ‘reversion to the mean’. Stein’s Law. Or just plain old common sense.

It’s pretty simple– there are certain anomalies that are too absurd to last. And nature always finds a way to correct them.

While it’s nowhere near as extreme as the Compagnie Perpetuelle des Indes, the market today is also in a completely unsustainable position.

I’ll show you what I mean–

Take a look at Exxon Mobil; it’s one of the largest companies in the world and a favorite among investors due to its 3.7% dividend yield.

Quarter after quarter, Exxon Mobile has been paying dividends to its shareholders without fail for decades, even at the peak of the financial crisis.

Not only that, but the company has generally increased its dividend each year as well.

To stock investors, that kind of consistency is a gold mine. But there’s a small problem.

For the last several years, Exxon has been borrowing money in order to maintain its dividend payments.

Last month, for example, the company reported $26.4 billion in cashflow from its business operations during 2016.

But in order to maintain the business, the company had to spend $16.7 billion on what’s known in finance as “capital expenditures” or “capex”.

Capex is critical to a big business like Exxon Mobil; every year they have to replace old machinery, purchase more land, etc.

If they don’t do these things, the business will suffer and revenues will decline.

So after subtracting the capex, Exxon Mobil had $9.7 billion remaining in “free cash flow”. Not bad.

Except that, according to the company, they paid $12.5 billion in dividends.

Hang on a sec. How is it possible that the company could pay $12.5 billion in dividends when they only had $9.7 billion in free cash flow remaining after the capex spending?

Easy. They went into debt.

Exxon borrowed billions of dollars in order to pay its shareholders a healthy dividend. And they’ve been doing this for years.

Exxon Mobil is FAR from alone.

Verizon is another shining example: in 2016, the company earned $22.7 billion from its business operations, but had $17.1 billion worth of capex.

That left $5.6 billion remaining. Yet Verizon paid $9.3 billion in dividends.

Once again, the company took on billions of dollars in additional debt.

This has been a major trend across the biggest companies in the market.

There’s nothing wrong with debt; sometimes it can be a smart move that creates value for the company.

Our manufacturing business in Australia recently took on some debt to buy some new equipment, for example.

It’s been a great decision; we’re able to generate more revenue with less cost, so the overall growth in our profit is multiples greater than the interest payment.

But borrowing billions of dollars just to pay out what amounts to sham dividends is a complete waste of money… and irresponsible.

It also means that these record high stock prices are artificial, based on debt-fueled dividends and share buybacks instead of healthy free cash flow.

This is totally unsustainable.

In addition, with an average P/E ratio of 26.5, stock valuations are at their highest level since the financial crisis; it’s yet another layer of risk in this market.

Few people ever got rich buying what was popular and expensive. But that doesn’t stop anyone from trying.

Sometimes the hardest thing to do is wait patiently on the sidelines.

But successful people don’t follow the crowd. They get out in front of the crowd, even if it means being early.

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It seems like every time I come to Panama now the first word that springs to mind is “impressive”.

I first traveled to Panama back in 2003… fourteen years ago.

I remember landing at Tocumen International Airport for the first time– it was a depressing backwater that was barely functioning.

And on the way into town there was hardly any sign of civilization; everything seemed completely impoverished.

Basically Panama was just another third world toilet bowl back then.

But over the years as I kept coming back, and even as I lived here back in 2007, Panama really started to grow… thanks in large part to the expansion of the Canal.

Economists can quote figures about GDP and foreign direct investment to measure growth, but what really matters is standard of living.

And people here are living MUCH better than ever before.

Panama’s middle class has exploded, growing from almost nothing to more than a third of the population… and rising. It’s far higher in the capital city.

They’re able to afford the basics that Western countries take for granted– air conditioning, washing machines, laptops, televisions, smart phones, Internet access, etc.

Home and vehicle ownership have soared (contributing to Panama City’s horrendous traffic).

And since Panama has become a major international hub for trade, transportation, tourism, business services, and finance, the job market is robust.

This isn’t some country where the locals are all picking bananas; there are plenty of meaningful careers and opportunities available to people who work hard.

And unlike in the United States where wages haven’t kept pace with inflation, Panamanians become wealthier each year.

The transformation has been incredible.

Today Panama City is easily the most cosmopolitan capital in Latin America with a bustling skyline and nightlife that rivals Miami’s.

Everywhere you look there are clear signs of prosperity (and hence business and investment opportunities).

And that trend will likely continue.

I just came out of a meeting with a senior government minister in which we discussed a wide range of projects and incentive programs.

They’re keen to continue attracting more businesses and industries here, and I was pleasantly surprised to see that the minister had a particular interest in cryptofinance and how it might be implemented.

Bear in mind, this is a country where just about anyone can come and obtain legal residence to live, work, and set up a business. It’s great.

It’s called the “Friendly Nations Visa”, and it provides an easy framework for people from just about every country in Europe and North America, along with Australia, New Zealand, Singapore, Chile, Argentina, Uruguay, Israel, Japan, Hong Kong, and South Korea.

Basically you have to deposit a small sum of money in a Panamanian bank and submit an application packet to the authorities.

(By the way, Panamanian banks tend to be extremely conservative, liquid, and well capitalized, plus it’s a US dollar economy so you might not even have any exchange rate risk.)

Through this visa you can ultimately receive permanent residency in the country, which will remain valid even if you don’t live here.

Even if you don’t qualify for the Friendly Nations Visa for whatever reason, there are literally dozens of other ways to obtain residency here, ranging from reforestation to business investment.

Foreigners can also qualify to apply to become Panamanian citizens after five years of residency and obtain a Panamanian passport.

Bottom line, Panama is a great deal.

And it makes a LOT of sense to consider obtaining such an easy second residency in a growing, thriving country that might one day lead to a second passport for you and your entire family.

You might not ever need it. But it’s hard to imagine you’ll be worse off having such a great Plan B.

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I’ve written before a number of times about the long laundry list of reasons why I base myself and most of my business operations in Chile.

I could go on forever about this, but in short the country presents an exceptional mix of business, investment, and lifestyle opportunities that are extremely difficult to find just about anywhere else in the world.

But people ask me a lot– if not Chile, where else?

Colombia is definitely on my short list. In fact if I weren’t in Chile, I’d almost certainly be either here in Colombia, or in Puerto Rico.

Colombia ticks many of the most important boxes.

The lifestyle here is just fantastic. In Medellin in particular, the eternal spring-like weather is hard to beat.

Colombia is also absurdly cheap. The cost of living is low, as is the price of residential real estate.

It’s also a lot of fun. From the city vibes to the laid back coffee culture, there’s something for everyone here, whether you’re a young digital nomad or retiree.

From an investment perspective, Colombia is emerging from decades of civil war, and that opens the door to some pretty extraordinary opportunities.

One of the biggest beneficiaries will be the country’s pitiful infrastructure, which is in desperate need of a major upgrade.

For years, the Colombian government never bothered building new roads and fixing the rail system because they figured the FARC would simply blow it all up.

Now with the peace locked in, massive new infrastructure projects have already begun.

The importance of this work cannot be overstated.

The United States invested heavily in its transportation infrastructure in the 1950s, building roads, dams, airports, power plants, etc.

It had an extraordinary impact on the economy– cheaper electricity, more efficient transportation for goods and services, etc. Trade flourished as a result.

I’ve seen the similar effects first hand around the world, from Panama in the early 2000s to Myanmar today.

The same thing can happen in Colombia.

With modern, reliable infrastructure, trade and transportation will soar, and the multiplier effect across the economy could be phenomenal.

Moreover, the peace process has brought back tourists and foreign investors in droves.

Last year foreign investment in Colombia was 2.5x higher than in 2006, ten years prior. Tourism is up 3x from 15-years ago.

And we’re just at the beginning of these trends.

The sheer volume of capital flowing into this country has the potential to supercharge economic growth.

Real estate will increase in value. Businesses will make more money and the stock market will appreciate. The currency will appreciate.

Entrepreneurs will find a treasure trove of opportunities here as well.

Several of the alumni from our annual Liberty & Entrepreneurship camp live here, and they’ve started some amazing businesses, in some cases achieving success by importing a business model that’s already working in North America.

I’m here in the country for a few days meeting with the Board of Directors of a company we invested in last year.

It’s a unique business– they’ll likely become the largest and most cost effective producer of medicinal-grade cannabis oil in the world, which is a $200 billion industry.

This industry didn’t even exist in Colombia two years ago. Now it does, thanks to recent legislation that has legalized production.

It’s a win/win.

Rather than continue to wage a senseless and expensive war on plants that decimated this country for decades, the new legislation ensures that everyone, from foreign investors to local farmers, can prosper.

It’s a great example of the emerging opportunities that make Colombia place so compelling.

Of course, it’s not all rainbows and buttercups here. There are still risks.

One of the things that makes Colombia difficult is its painful bureaucracy.

Even simple, mundane tasks can be enormously time consuming.

More importantly, the Colombian tax system is extremely cumbersome.

It’s not just the high level of taxes that you have to pay, but the total number of taxes.

For example, in addition to a corporate tax of 25%, many companies have to pay an “income equality tax” of 9%, plus another “industry and commerce” tax, and then a financial transactions tax.

Then there are sales taxes and consumption taxes. Property taxes and payroll taxes. Tons of paperwork to fill out.

It can be debilitating, and they know it.

Last year I met with Colombia’s former president Alvaro Uribe at his home here in Rio Negro, and he agreed with me that the system needs to change.

They’re starting to move in that direction; there’s currently legislation in the works to reform Colombia’s Byzantine tax code and break up some of the bureaucracy.

So it’s definitely the right trend.

When you look at the big picture, it’s pretty astonishing.

A decade ago this country was still in the midst of a bloody civil war and dominated by murderous narco-guerilla groups.

The only two legitimate industries that even existed here were flowers and coffee.

Now Colombia is teeming with tremendous opportunities and has an incredibly bright future.

As one of my colleagues remarked this morning, it’s the biggest transformation story in the world.

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In 1927, US Supreme Court Justice Oliver Wendell Holmes famously wrote that “taxes are what we pay for civilized society.”

This quote is enshrined at the Internal Revenue Service, and it’s a rallying cry for people who constantly argue for higher taxes.

Almost everyone completely misunderstands what he meant.

First of all, tax rates in the United States were about 3.5% back in 1927, just a tiny fraction of what they are today.

And Justice Holmes actually wrote that famous statement as part of a larger argument that taxes can sometimes penalize and discourage productive activity.

People always seem to forget that part.

Tax, like most things, is fundamentally about value. It’s not how much you pay, it’s what you get in return.

I have friends in certain parts of the world who pay 40% to 50% of their paychecks in tax.

That’s obviously a lot. But they feel OK about it because they receive so much in return, from university education to quality medical care to ample social benefits.

But if your tax dollars consistently go to support more bombs, body scanners, bureaucrats, and $2 billion websites, it’s hard to feel like you’re getting a lot of value.

There’s nothing immoral about taking completely legitimate steps to reduce what you owe.

Why throw money down the toilet for something that you fundamentally disagree with?

After all, there are countless ways to legally reduce your taxes.

In this letter we’ve talked about a number of tax strategies, everything from maximizing your retirement contributions to setting up captive insurance companies to moving abroad and setting up foreign businesses.

Puerto Rico is a particularly unique paradise in this respect.

The island has a multitude of spectacular incentive programs for investors, retirees, and entrepreneurs.

You can live here for part of the year and earn virtually unlimited investment income completely tax-free.

You can establish a company here that exports services abroad and pay just 4% tax.

(Exporting services covers a LOT of ground and includes just about any service business, consulting firm, or Internet-based enterprise.)

There are so many more tax incentives, far too many to list here.

It’s extraordinary. There are few jurisdictions in the world that roll out such an extended red carpet to attract foreigners.

A few months ago when I was here, I met with a senior government official who proudly proclaimed that Puerto Rico was absolutely a tax haven, no apologies.

At the same time, Puerto Rico is a fairly easy transition, especially for North Americans.

Most people speak excellent English. Your US-based mobile phone works here. Amazon delivers here. It has all the normal shops and amenities that you’re used to.

Last night I had dinner with some Total Access members who live here– one of them told me that he gets 500MB Internet at his apartment.

So the people living here under these incredibly compelling tax incentive programs aren’t exactly suffering.

I’ve also come to appreciate Puerto Rico as something of a hidden gem when it comes to investing.

This is counterintuitive; after all, the Puerto Rican government is flat broke and has already defaulted on its mountain of debt.

So most people would rightfully ignore this place. I avoided it for a long time.

But boy was I wrong.

It’s not exactly blood in the streets, but there are a number of distressed investment opportunities here in large part to Puerto Rico’s ongoing economic malaise.

Some of Puerto Rico’s largest banks collapsed in recent years– another reminder that the banking system isn’t always as safe as we’re led to believe.

The FDIC took over the assets of those failed banks, and now they’re liquidating for pennies on the dollar to private investors.

This morning I met with the person I recently hired to run my private bank’s Puerto Rico office.

He’s a seasoned veteran with more than 20-years at some of the biggest banks in Puerto Rico, and he walked me through several of these deals.

For example, we’re looking at a $2.5 million loan portfolio that is backed by high quality commercial real estate at a 2:1 margin.

This means that for every dollar invested, there’s $2 in high quality collateral. This dramatically reduces the investment risk.

But because the loans can be acquired for so far below their original principal amounts, the effective yield ends up being around 16%. It’s extremely compelling.

Bottom line, this place should definitely be on your radar– great lifestyle, compelling investment opportunities, and incredible tax benefits abound.

That’s not exactly uncivilized.

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In a scathing editorial published in the Wall Street Journal today, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, blasted US banks, saying that they still lacked sufficient capital to withstand a major crisis.

Kashkari makes a great analogy.

When you’re applying for a mortgage or business loan, sensible banks are supposed to demand a 20% down payment from their borrowers.

If you want to buy a $500,000 home, a conservative bank will loan creditworthy borrowers $400,000. The borrower must be able to scratch together a $100,000 down payment.

But when banks make investments and buy assets, they aren’t required to do the same thing.

Remember that when you deposit money at a bank, you’re essentially loaning them your savings.

As a bank depositor, you’re the lender. The bank is the borrower.

Banks pool together their deposits and make various loans and investments.

They buy government bonds, financial commercial trade, and fund real estate purchases.

Some of their investment decisions make sense. Others are completely idiotic, as we saw in the 2008 financial meltdown.

But the larger point is that banks don’t use their own money to make these investments. They use other people’s money. Your money.

A bank’s investment portfolio is almost entirely funded with its customers’ savings. Very little of the bank’s own money is at risk.

You can see the stark contrast here.

If you as an individual want to borrow money to invest in something, you’re obliged to put down 20%, perhaps even much more depending on the asset.

Your down payment provides a substantial cushion for the bank; if you stop paying the loan, the value of the property could decline 20% before the bank loses any money.

But if a bank wants to make an investment, they typically don’t have to put down a single penny.

The bank’s lenders, i.e. its depositors, put up all the money for the investment.

If the investment does well, the bank keeps all the profits.

But if the investment does poorly, the bank hasn’t risked any of its own money.

The bank’s lenders (i.e. the depositors) are taking on all the risk.

This seems pretty one-sided, especially considering that in exchange for assuming all the risk of a bank’s investment decisions, you are rewarded with a miniscule interest rate that fails to keep up with inflation.

(After which the government taxes you on the interest that you receive.)

It hardly seems worth it.

Back in 2008-2009, the entire financial system was on the brink of collapse because banks had been making wild bets without having sufficient capital.

In other words, the banks hadn’t made a sufficient “down payment” on the toxic investments they had purchased.

All those assets and idiotic loans were made almost exclusively with their customers’ savings.

Lehman Brothers, a now-defunct investment bank, infamously had about 3% capital at the time of its collapse, meaning that Lehman used just 3% of its own money to buy toxic assets.

Eventually the values of those toxic assets collapsed.

And not only was the bank wiped out, but investors who had loaned the bank money took a giant loss.

This happened across the entire financial system because banks had made idiotic investment decisions and failed to maintain sufficient capital to absorb the losses.

Nearly a decade later, Kashkari says that banks still aren’t sufficiently capitalized.

(He also points out that banks today are obsessed with pointless documentation and seem “unable to exercise judgment or use common sense.”)

The banks themselves obviously don’t agree.

As Kashkari states, banks feel that they currently have TOO MUCH capital.

Bizarre. They’re basically saying that they want to be LESS safe, like a stunt pilot complaining that his helmet is too sturdy.

I’ve written about this many times– the decision for where to hold your savings matters. It’s important.

In addition to solvency and liquidity concerns, there are a multitude of other issues, like routine violations of the public trust, collusion to fix interest and exchange rates, manipulation of asset prices, and all-out fraud.

(I personally got so fed up with our deceitful financial system that I started my own bank in 2015 to handle my companies’ financial transactions. More on that another time…)

Yet despite these obvious risks, most people simply assume away the safety of their bank.

They’ll spend more time thinking about what to watch on Netflix than which bank is the most responsible custodian of their life’s savings.

There are countless ways to figure this out, but here’s a short-cut: much much “capital” or “equity” does the bank have as a percentage of its total assets?

These are easy numbers to find. Just Google “XYZ bank balance sheet”.

Look at the bottom where it says “capital” or “equity”. That’s your numerator.

Then look above that number to find total assets. That’s your denominator.

Divide the two. The higher the percentage, the safer the bank.

Kashkari thinks the answer should be at least 20%, especially among mega-banks in the US.

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About 20 years ago when I was still a cadet at West Point, my economics professor organized a class trip to the Federal Reserve Bank of New York.

The part of the trip that I remember most was touring the Fed’s high security vault, 80 feet below street level beneath the bank’s main office building downtown.

This vault houses the largest known depository of gold in the world.

None of that gold, of course, belongs to the Fed. The Federal Reserve doesn’t own a single ounce of gold.

Almost all of that gold is owned by foreign governments and central banks.

It’s been that way since the end of World War II—European governments wanted to store their wealth overseas, out of the reach of the Soviet Union.

As a kind of professional courtesy among governments and central banks, their gold has been stored for free by the Fed for the last 70+ years.

Even after the Soviet Union fell, most governments still chose to keep their gold in New York.

It was safe. America was a rich, trusted ally. Why bother moving it?

Fast forward a few decades and the world has clearly changed.

The US government is in debt up to its eyeballs. It has been caught blatantly spying on its own allies. And it’s much less predictable than ever before.

Germany was among the first out the door.

Even as early as 2013, the German government announced that they would bring back at least half of their country’s gold reserves (the second largest in the world) by the end of 2020.

They’re ahead of schedule.

Late last week the German government moved $13 billion worth of gold from New York to Frankfurt.

That shipment puts them nearly at their goal, almost four years earlier than planned.

It’s easy to understand why.

The entire global financial system requires having a great deal of trust.

If you have an online brokerage account, you may be surprised to know that you don’t actually own a single stock in your portfolio.

When you log in to your account and buy, say, Apple shares, the brokerage will typically register those shares in its own name, not your name.

Apple has no idea who you are. The shares are effectively owned by your broker. It’s their asset, not yours.

Now that’s putting a LOT of trust in a complete stranger.

It’s the same when you deposit your money in a bank. It’s no longer your money. It’s the bank’s.

The bank, in turn, uses your savings to make loans and buy bonds, thus entrusting your savings to yet another group of people.

This is how the system works; your money keeps getting passed around, which means there’s an entire daisy chain of other people, or “counterparties”, standing between you and your savings.

“Counterparty risk” is the risk that something goes wrong with one of the many, many counterparties in this daisy chain.

Imagine that you deposit money with X.

X invests the money with Y. Then Y deposits the money with Z.

If something goes wrong with Z, you’re all screwed.

This is the nature of counterparty risk. Someone far down the chain can cause consequences for everyone else.

Now, ordinarily, this isn’t a problem. When the system is functioning normally, institutional counterparty risk is low.

But counterparty risk becomes a BIG deal, and QUICKLY, when the system stops functioning normally.

We saw the effects of this during the 2008 financial crisis. As one bank went down, it dragged multiple others with it.

No one ever thinks about counterparty risk until it becomes a problem… and by then it’s too late.

The simple way to reduce this risk is to reduce the number of counterparties.

Germany used to place a lot of trust in the US government and central bank to store its gold.

But there are obvious signs that Uncle Sam is no longer the reliable, credible, trusted counterparty he once was.

Germany hasn’t quit cold turkey; they’re still going to store a minority portion of their gold in the US.

But they have taken a major step to reduce exposure to a counterparty that’s obviously bankrupt, which hence reduces the risk.

You can do the same thing; it’s why we regularly discuss holding physical cash.

Keeping some physical cash ensures that there’s no more middle men (i.e. counterparties) standing between you, and at least a portion of your savings.

When you eliminate the counterparty, you eliminate the risk.

Having some cash means that if some major crisis should ever befall the banking system, then you’ll at least have some emergency savings that’s not at risk.

But even if nothing happens… even if there’s never a single problem ever again in the banking system… you won’t be worse off holding a bit of cash.

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If you’ve been a reader of this letter for any length of time, you may have noticed that I try to spend my weekends and free time at our farms in Chile.

I’m still on the road at least 6 months out of the year and travel to 30-40 different countries annually.

But when I’m not traveling or I’m not needed at our offices in Santiago, I go out of my way to spend as much time as I can at the farms.

It’s paradise for me. I love being surrounded by so much pristine nature, organic food, and absolute quiet.

This past weekend at Sovereign Valley Farm we harvested our almonds.

Almonds aren’t a commercial crop for us; our primary business is blueberries, of which we’ll soon be one of the largest producers in the world.

But we just happen to have a bunch of natural almond trees at the farm.

They’re wild, we didn’t plant them. We don’t even need to maintain or irrigate them.

And yet, each year they explode with an abundance of nuts.

Our harvest method was pretty low-tech; we shook the trees by hand until the almonds fell out, onto a giant blanket that we placed on the ground.

This is pretty much the same way the ancients did it thousands of years ago.

But despite our primitive approach, we harvested a few thousand dollars worth of almonds in about an hour and a half.

Aside from enjoying a bit of time outside on a beautiful summer day, my cost of these almonds was basically zero.

They literally grow on trees. All we had to do was pick them up. Not a bad return.

The whole morning I kept thinking of what my dad used to tell me over and over as a kid– “Money doesn’t grow on trees.”

Well, actually it does.

Perhaps not money itself in the literal sense, but certainly the opportunity to make money.

Agriculture is an obvious example– a single tomato seed creates a plant that can produce 15-25 pounds of tomatoes, not to mention hundreds of new seeds.

At, say, $2 per pound, one seed can generate $30 to $50 worth of organic tomatoes. Nature does all the rest of the work.

This is all small potatoes (NPI), but it’s indicative of the opportunities that surround us.

It’s not just agriculture.

Opportunity is in the ground (gold, silver, other minerals). It’s in the sky (wind and solar power generation). It’s inside our digital devices (cryptocurrency mining).

It’s everywhere.

This is important to remember.

Hardly a day goes by without another eruption of anger and hate, or some bit of news that takes us closer to a trade war (China), financial crisis (Greece), debt crisis (most of the West), etc.

The social divisions in the United States stand out as being especially poisonous.

You may have seen the news from a couple of weeks ago when a bunch of people decided to “resist” by burning an American flag.

Flags are powerful, emotional symbols to hundreds of millions of people. To others it’s just some colored fabric.

Either way, I wonder– what did these people honestly think they were going to accomplish?

It’s not like throwing a childish temper tantrum and setting some cloth on fire will suddenly cause millions of people to change their views.

By definition, deliberately burning a flag (or anything else) is an act of destruction, which seems like a dubious way to make anything better.

The reality is that, as individuals, we have zero control over what happens next– trade policy, tax policy, monetary policy, national debts, federal budgets, etc.

We can only control what we do ourselves.

And that’s what brings me back to this idea of opportunity.

No matter what happens in the world… no matter how dire the long-term outlook or how strained the social tensions, there will always be a near infinite abundance of opportunities.

Some of them are literally growing on trees.

We don’t have the power to wave our magic wands and remake the entire world as we want it to be.

But we absolutely have the power to seize the opportunities in front of us and remake our own realities into exactly what we want them to be.

It’s 2017. You can live anywhere and make money anywhere.

You can start a business in a day and start generating income tomorrow.

You can reach prospective investors, customers, and employees who live on the other side of the planet.

You can raise money for new ventures on dozens of websites without ever having to set foot in a bank.

You can invest in countless asset classes in every corner of the world without having to get out of bed.

You can protect yourself from every major risk in the financial system with nothing more than an Internet connection.

We have so much power to affect our own lives, far more than any politician or government.

And THAT is the entire point of personal sovereignty.

It’s about being independent and self-reliant, not waiting around for some government to legislate the nation into prosperity.

All it takes is a little bit of education… and the will to act.

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Education is a BIG part of a having a Plan B… especially when it comes to money.

In light of the obvious risks that we discuss on a regular basis, safeguarding (and growing) our savings is absolutely critical.

Finance can be a little bit scary and seem quite complicated at first.

No one comes out of the womb a financial expert. And they certainly don’t teach this stuff in a government-controlled public school system.

But just like speaking a foreign language or learning to drive, knowing how to properly manage money is a SKILL.

And it’s one that can be learned. By ANYONE.

The difference between knowing versus NOT knowing how to manage money can have an EXTRAORDINARY impact on your life.

Simply being able to generate an extra 1% to 2% annual return on your investments can add up to hundreds of thousands of dollars in extra wealth over 20-30 years.

As with any other skill, learning about finance takes some time and patience. But the reward is extraordinary.

I wanted to pass along an email today that highlights key characteristics of the world’s most successful long-term investment strategy.

It was written by my friend and colleague Tim Price, a UK-based wealth manager who is a disciplined master of “value investing”.

This strategy is absolutely worth understanding. Learning it can truly have an enormous impact on your life.

— From Tim: —

Successful investing involves having an edge.

And if you do not know what your edge is, you do not have one.

There are doubtless many investors who, in the absence of a general investment strategy, randomly buy stocks, many of which they hear about on CNBC.

Other individual investors have dutifully followed conventional financial wisdom and have bought large index funds, like the S&P 500.

In this way, investors are essentially owning a small share of the entire stock market.

But Snapchat’s looming IPO highlights a lurking problem with this approach.

Snapchat is a California-based photo-sharing social network. It loses money and lacks a credible plan for long-term growth.

The company itself acknowledges that they may never turn a profit.

Yet Snapchat will soon IPO at a share price that will value the company at $30 billion, more than the GDPs of Iceland, Cameroon, Latvia, and Cyprus.

Investors are of course welcome to pour their money down whichever drains they choose.

The interesting thing, though, is that after it goes public, Snapchat will eventually become part of the S&P 500.

(This is the stock “index” of the 500 largest companies in the US, like Apple, Exxon, etc.)

There are dozens of mutual funds and “exchange traded funds” which follow the S&P 500, i.e. they own shares of each one of the 500 companies that comprise the index.

So once Snapchat joins the S&P 500, every single fund that follows the index will be obliged to buy shares of Snapchat.

This means that buying into large index funds guarantees exposure to low quality, expensive, risky assets.

Active investment management requires doing something different from the herd.

It requires focusing on what actually works instead of following the crowd.

So which investment strategy actually works?

One fascinating 49-year study by Research Affiliates highlights the best and worst performing strategies over the longer term for equity investing.

The best performing strategies, by far, were all value investing strategies.

You may not be familiar with some of the terms, i.e. Price-to-Book, Price-to-Sales, etc.

But value investing essentially boils down to buying the highest quality assets at the cheapest possible price.

Here’s a simplistic example:

Let’s say that the share prices of XYZ, Inc. and ABC Ltd. value both companies at $1 billion.

XYZ is flush with cash, generates $950 million in annual profit, has no debt, and $5 billion worth of high quality assets.

ABC is in debt up to its eyeballs, loses money, and has very few assets.

Both companies are essentially selling for the same price. Which would you choose?

Clearly XYZ is the better deal; you’re buying high quality assets at a discount, and you’ll make your money back in just over a year.

This “discount investing” natural sense to our species. We’re always looking for a great deal, whether it’s on a new car or steak dinner.

Investing should be no different.

There are plenty of high quality, profitable, well-managed companies whose shares can be bought in major stock markets around the world.

Some of those shares are incredibly expensive relative to the company’s true worth. Others are selling for astonishing discounts.

The challenge is knowing which is which.

Value investors have the skills to tell the difference. And that’s precisely what value investing is– a skill… and one that can be learned.

It’s worth learning, too.

The findings from the 49-year Research Affiliates study are consistent with a similar study conducted by James O’Shaughnessy in his book ‘What works on Wall Street’, the results of which are shown below:

Again, you may not be familiar with the terms, but O’Shaughnessy’s study shows that the four value investing strategies vastly outperformed.

A value strategy would have turned $10,000 into $22 million over the period in O’Shaughnessy’s study.

Given such obvious data, why would investors favour any other approach ?

Simple.

Value investing requires patience.

The share price of a company that’s trading for a steep discount can languish for months, even years.

Successful value investors must have the patience to buy great companies at a discount… and then do NOTHING.

Most investors do not have this much patience.

But the long term returns are worth it.

PS:

You can learn more about Value Investing in my recent video podcast on how to find the most compelling investments on the planet.

Here is what one of our subscribers said about it:

“Would you please pass along my thanks to everyone who contributed to the recent podcast about value investing?

I found the EVE to Leveraged Free Cash Flow explanation illuminating. I used it to evaluate which of my remaining US stocks to sell first if need be.

Even though I’m starting out, I also used it to evaluate (and to decide to pass on) a private business, and I’ll use it when I evaluate another private business in the near future.

I heard you got plenty of positive feedback about your two recent Black

Papers, and I want to make sure you get positive feedback about the podcast

too. You guys rock!”

– Ben, Subscriber of Notes from the Field

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There are lots of famous investors and hedge fund managers who are legendary stock-pickers.

Warren Buffet is a great example.

Others are hard-core quantitative analysts who build complex trading algorithms.

Ray Dalio, the billionaire founder of Bridgewater Associates, is neither.

He’s a macro investor whose fortune was built on an uncanny ability to spot big macro trends.

He predicted in 2007, for example, that the US housing bubble would burst, and warned the Bush administration that major banks were on the verge of collapse.

The government ignored him.

After the 2008 collapse of Lehman Brothers, Dalio immediately recognized that the Federal Reserve would have to print trillions of dollars to bail out the system… so he positioned his firm for big profits, buying assets like gold and foreign currencies.

Dalio was right again.

Now Dalio has a new warning for anyone who’s willing to listen.

In October he admonished a room full of central bankers in New York that there was simply too much debt in the world.

At the time, total global debt was an astounding $152 trillion.

Total debt has now risen to $217 trillion, according to a report published last month by the Institute for International Finance.

And as Dalio points out, this has consequences.

He told central bankers back in October that “there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”

Governments often go into debt in order to finance big spending projects which stimulate economic growth.

But eventually the amount of growth you can generate from debt reaches a point of diminishing returns.

We can already see plenty of data to support this assertion.

China has taken on hundreds of billions of debt over the last several years in order to maintain its economic growth.

But measures of China’s “debt efficiency” now show, according to the Wall Street Journal, that it takes “increasingly more debt to generate the same GDP growth.”

So China is rapidly reaching its limit in terms of how much economic growth it can squeeze from its debt.

Debt, i.e. government bonds, are supposed to be boring, low-risk investments.

Grandparents buy government savings bonds for their grandkids. Retirees and pension funds hold them as “risk free” assets.

But in a recent piece written for the Economist, Dalio suggests that “the bond market is risky now and will get more so. Rarely do investors encounter a market that is so clearly overvalued and so close to its clearly defined limits…”

He bleakly projects that “investment returns will be very low” and that investment risk will increase, i.e. the “reward-to-risk ratio will worsen.”

Dalio concludes his piece predicting that “savers will seek to escape financial assets and shift to gold and similar non-monetary preserves of wealth, especially as social and political tensions intensify.”

The funny thing about these big-picture, macro trend predictions, is that they seem so obvious in retrospect.

Just look at the 2008 financial crisis.

Banks had spent years accumulating $1.3 trillion worth of no-money-down mortgages made to unemployed borrowers with terrible credit.

Eventually the entire financial system blew up.

Duh. It makes so much sense looking back.

But in 2007 almost everyone thought the boom would last forever.

Nearly every major crisis begins with a false set of beliefs, like “housing prices always go up.”

And after the collapse everyone wonders how we could have believed such nonsense.

Today’s false belief is that these unsustainable debts don’t matter.

Looking back a few years from now it will seem painfully obvious.

$200+ trillion in global debt? $20+ trillion in US debt? Did we seriously believe this would turn out OK?

Dalio’s is a powerful warning, and he poses a logical solution: precious metals and real assets.

Maybe he’s wrong. Maybe $200+ trillion in debt really is consequence free.

Maybe the ultimate false belief of “This time is different” turns out to be true.

Maybe.

But it’s hard to imagine you’ll be worse off taking some very simple steps to reduce your exposure to such obvious risks.

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Yesterday I told you that the US government had recently released its annual financial report to the public.

And the numbers are pretty gruesome.

For example, the government’s “net loss” in fiscal year 2016 more than doubled, from MINUS $467 billion to MINUS $1 trillion.

It’s astonishing that anyone could manage to lose so much money, let alone in a year where devoid of major wars, recessions, financial crises, or infrastructure projects.

But what else can we expect from an institution that spent billions of dollars to build a website?

Today I wanted to highlight a few other items from the government’s report that are worth repeating:

1) The federal government failed its own audit. Again. (page 37)

Auditors have a bad reputation. People typically conflate ‘auditor’ with the guys at the IRS who harass taxpayers.

This isn’t the case.

Auditors actually work for you.

Their job is to be an independent, objective set of eyes. They go into a company on your behalf and review all the records to make sure that there’s no fraud or deceit.

Every year, big companies submit their financial statements to auditors for inspection, and auditors spend weeks doing their own studies to determine if those statements accurately reflect the company’s true condition.

In fact, our agriculture company is undergoing an audit right now by a large, international accounting firm.

It’s important: audits provide an independent assessment to the shareholders indicating that everything we’ve said about the company is true.

Needless to say, when a company fails its audit report, it’s a BIG deal.

That’s what happened to the US government.

The government submits its own financial statements each year to the Government Accountability Office (GAO), its in-house auditor.

But the GAO gave the federal government a failing grade, yet again, and specifically singled out the Defense Department for “serious financial management problems.”

If this were a private company, the senior executives would be out on the street and probably facing criminal charges.

2) The government’s single biggest asset is $1 trillion in student debt (p.81)

This is pretty sad.

Like any large business or bank, the US federal government holds a number of financial investments.

Big banks, for example, have bonds, loans, and mortgages on their balance sheet.

For borrowers and homeowners, a mortgage is a liability. We owe the bank money.

But to a bank, a loan is an asset; they’ve loaned the money, and they’re the ones receiving interest payments each month from us.

The government also holds loans as financial assets– specifically student loans.

As of September 30, 2016, America’s youth owed the federal government $953.6 billion from student loans.

By the end of December, that number increased another $100 billion to $1.05 trillion.

This constitutes the US government’s single biggest asset, even more than the aggregate value of their aircraft carriers or national parks.

In other words, the government’s most lucrative asset is the continued indentured servitude of young people in the Land of the Free.

3) This is just the tip of the iceberg… there’s so much more to tell you.

Click here to listen in on today’s podcast– I’ll explain how, based on the government’s own numbers, their actual “net worth” is nearly MINUS $100 TRILLION.

We’ll debunk so many myths from the debt sheep who think it doesn’t matter.

And we’ll discuss a VERY plausible scenario about how this could play out over the next few years… as well as some simple strategies to limit your exposure.

Listen in here.

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