Category: simonblack

Down here at the farm, one of the most important things we do each year for our fruit trees is the winter pruning.

This happens annually during Chile’s winter period from late June through early September when the trees have put themselves into hibernation.

(The trees are starting to wake up and produce flowers as you can see in this video, and we finished the last of the pruning over the weekend.)

Pruning trees is a little like you might imagine carving up a miniature Japanese bonsai; we literally cut entire branches off to sculpt and shape each tree in a way that maximizes incoming sunlight and fruit production.

It’s counterintuitive, but pruning actually aids a plant’s long-term growth.

When left un-pruned, trees will become massive beasts with unwieldy, complex networks of branches that hardly produce any fruit at all and succumb to disease.

Our species works the same way.

In order to maximize our own potential, we must constantly assess what’s working and reduce complexity by pruning what is wasteful and unnecessary.

Entrepreneurs, in our efforts to expand, often launch new products, services, or subsidiaries that produce little results yet drain resources from core operations.

Investors frequently maintain positions in poorly managed companies hoping the stock will rise again, instead of redeploying that capital to more productive use.

And we all have people or mundane tasks in our daily routines that suck time and energy.

Pruning is a good principle that applies to business, investing, and even personal lives; we maximize our own potential when we reduce complexity.

Governments could easily do the same.

When they expand unchecked and unpruned, governments quickly become overly complicated bureaucracies that squander taxpayer resources.

And, last week, Wells Fargo proved once again that this principle applies to banks.

On Thursday, Wells Fargo admitted to secretly creating millions of bank and credit card accounts over the past 5 years without their customers’ knowledge or consent.

They would typically create, say, a new savings account for a customer, then transfer funds from his/her existing checking account into the new bogus savings account without ever once asking permission.

This is a pretty horrendous practice that tells you everything you need to know about banking.

Think about it: you hand over your hard-earned savings to these people but have absolutely zero idea what they do with the money.

Banking is a black box. There is very little transparency, especially with extremely large banks.

Wells Fargo’s annual report, for example, shows roughly $300 billion in “commercial and industrial loans”.

That’s it. That’s all the detail we get. (It’s not just Wells Fargo, by the way. Every mega-bank maintains the same lack of transparency.)

We have no idea if they took depositor’s funds and floated a billion dollar loan to a failing business that’s about to go under.

Or if they have been making no-money-down loans to people with terrible credit.

No one knows anything about the inner workings of such an enormous bank… until it all hits the fan like it did in 2008.

And how could anyone know? When something becomes that big, that complex, with hundreds of thousands of employees and thousands of branches, it’s impossible to keep track of it all.

The latest banking scandal at Wells Fargo proves this point handily.

The people at the top clearly don’t have the foggiest idea of what’s going on.

And if they don’t know that thousands of their employees are opening up millions of phony customer accounts, how can they really be sure that your money is safe, and not being dumped into a new class of toxic investments?

Even worse, presuming the bank’s senior executives DID know what was going on, it means they were complicit in deceiving their customers.

Either way, it’s a shining example of how much deceit and incompetence there is inside the banking system.

We’re expected to simply hand over our funds to a black box that says, “Trust me, I’ll take good care of your money.”

Yet they never seem to miss an opportunity to prove that they are untrustworthy and make pitiful decisions with our savings.

(Including using clever accounting tricks to inflate their levels of capital and appear safer than they actually are.)

Don’t allow yourself to be misled: there’s a lot more risk in the system than they let on– primarily the risk that the people holding on to your money cannot be trusted.

You can easily mitigate this banking system risk: go take some money out of your account and hold some physical cash.

There’s very little downside in doing this. After all, you’re only giving up 0.01% interest in exchange for reducing a lot of counterparty risk to your savings.

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Last week in the Australian state of Queensland, federal police confiscated a whopping 5,465 ounces of silver (worth roughly $106,000) from a man’s home.

This was part of a larger series of police raids instigated by the Australian Tax Office against individuals suspected of tax evasion.

Two obvious lessons come to mind which bear repeating:

1) As we discussed yesterday, only an idiot commits tax fraud or tax evasion. This goes without saying.

There are far too many completely legitimate ways to reduce or even eliminate what you owe… which means there’s absolutely zero reason to take any chances by wilfully breaking the law.

I know this doesn’t apply to the vast majority of people reading this, but if you are one of the handful of people out there who has been noncompliant with taxes, definitely consider your options to get it fixed.

They will find out eventually.

It’ll be a much better outcome that you step forward and admit a mistake than wait for the inevitable federal agents to kick down your door in the middle of the night.

2) Don’t keep the majority of your assets at home

I’m sure that at least some of the people who were subject to the Australian Tax Authority’s raids probably did commit tax evasion.

But there are probably many who didn’t… people who just happened to end up on the agency’s list through some honest misunderstanding.

Nevertheless, they still had federal police raiding their homes, confiscating anything that looked valuable, including cash and precious metals.

This could happen to anyone. Any of us could end up by mistake on the wrong side of some government agency’s list. It happens to innocent people every single day.

The real downer is that once armed agents seize your property or freeze your bank account, it’s up to you to prove your own innocence… even though they’ve deprived you of your financial resources to do so.

You don’t ever want to find yourself in this position. And merely hoping it will never happen isn’t exactly a great insurance policy.

Have a backup plan.

Yes, it makes a LOT of sense to hold some physical cash and precious metals in a safe at your home or office.

These are both great hedges against risks in the banking system and monetary system, neither one of which should be underestimated.

Remember what happened in Cyprus back in 2013? The entire banking system went bust, prompting the government to freeze everyone’s bank account and lock an entire nation out of its savings.

It all happened overnight. Friday afternoon everything was fine. Saturday morning was chaos.

Just imagine being frozen out of your life’s savings without warning. It must have been debilitating.

But anyone who had thought ahead and maintained a small stash of precious metals or physical cash at home was just fine.

This is an easy, no-brainer, almost zero-cost strategy to implement.

But just remember that any domestic assets, whether a local bank account or even cash held in a safe at your house, are still within the jurisdiction of your home country’s government agencies.

This means that everything you own is at risk if you happen to be the next innocent person to mistakenly end up on the wrong side of their list.

Don’t keep too much in the home safe. I’d suggest that 1-2 months of living expenses would go a long way in mitigating those financial, banking, and monetary risks.

And don’t keep the rest in your local bank account; again, bank accounts are especially easy for domestic authorities to freeze and confiscate.

Definitely consider keeping at least some assets in a different jurisdiction overseas where your home government has no direct authority.

This could include assets like a savings account at a foreign bank, precious metals held at a secure storage facility overseas, or even cryptocurrency like Bitcoin.

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If you’ve been a reader of this letter for any length of time, you know I hate taxes.

I unequivocally believe that I have a moral obligation to reduce my taxes to the lowest level possible.

It’s not about Maseratis and private yachts (I drive a Volvo and get seasick easily).

I’ve slashed my taxes because I know that tax dollars pay for some of the most vile, immoral things imaginable.

Drone strikes on children’s hospitals. Illegal wars that benefit a few defense contractors and oil companies. A gigantic police state that makes people less free every day.

All of this is paid for with your taxes.

In addition to the morality issue is the extraordinary waste that comes with government spending.

Just think about all the money they squander, from the $2+ billion for the Obamacare website, down to the $387,000 that the NIH spent giving Swedish massage to bunny rabbits.

Sure, there are plenty of programs that have noble intentions.

But they’re so bogged down with bureaucracy that they consistently fail to get the job done– just consider how many sick and wounded US veterans have died waiting to see a physician under their government health plan.

The icing on the cake with taxation is a complete lack of transparency.

The US Army just got caught red handed, for example, cooking its books and making willful accounting misstatements totaling trillions of dollars.

People have gone to jail for far less egregious offenses.

I founded a large company that raised tens of millions of dollars of capital from investors.

Management submits detailed budgets and cash balances to the Board of Directors and provides all shareholders with clean, audited financial statements and regular updates.

This is the only proper thing to do.

When someone else hands over his/her capital to you, it comes with a supreme fiduciary obligation for the funds to be invested with great care and transparency.

This solemn vow also applies to taxation: paying taxes demands transparency, results, and accountability. But governments fail on all fronts.

Now, we’re told growing up that when we disagree with our government, we’re supposed to wait patiently for several years and then voice our dissatisfaction in a voting booth by choosing between two lackluster candidates.

But in reality this changes nothing.

Voting is a pointless and rigged exercise that leads many to false hope, others to angry protest, and everyone else to despair.

My approach has long been to restrict the resources that I contribute to a government that I disagree with.

Money is far more powerful than voting.

And by taking completely legal steps to reduce the taxes that I owe, I no longer make direct financial contributions to what I morally oppose.

Plus staying in control of my income has put me in a position to use the tax savings in more productive ways.

Rather than funding illegal wars, my tax savings have gone to support a distressed village in Nepal, fund a wounded veteran’s $70,000+ experimental prosthetic, and put an orphaned girl through university.

No matter what you do or where you live, there are plenty of ways you can make a huge dent in what you owe.

Maximizing contributions to tax-advantaged retirement accounts is an easy example.

If you’re a US taxpayer, you might also be able to restructure your retirement accounts into a self-directed SEP IRA or solo 401(k), allowing you to take over $50,000 per year off the table, with the added benefit of giving you more influence over how your funds are invested.

Many small business owners can also generate hundreds of thousands of dollars in tax savings by setting up captive insurance companies under Internal Revenue Code section 831.

For anyone with a more flexible lifestyle, moving overseas can also bring significant tax benefit.

I’ve discussed the Foreign Earned Income Exclusion before for US taxpayers, which provides an exclusion for over $100,000 of ‘earned’ income (i.e. NOT investment income), plus further deductions for overseas housing.

Here in Puerto Rico exists yet another phenomenal tax tactic, especially for US citizens.

US citizens can move to Puerto Rico in an instant. For you, coming to Puerto Rico is like moving from California to Texas. There are no visa or immigration requirements.

And once you get here, there are a myriad of special tax incentive laws aimed specifically at investors and entrepreneurs that can dramatically reduce or eliminate taxes on business and investment income.

Act 20, for example, slashes your corporate tax rate down to 4%. Act 22 cuts your dividend income and capital gains taxes down to ZERO.

Remember that Puerto Rico is a US territory, so it has its own tax code and local government.

This means that if you become a resident here earning Puerto Rican income, you are no longer subject to pay tax to the IRS.

That’s the primary benefit.

Here’s an example for an entrepreneur: you could start a business in Puerto Rico without actually moving here under Act 20.

Each year the business pays just 4% tax on its income to the local government, and nothing to the IRS.

After a few years it has accumulated a sizeable cash pile, none of which has been taxed by the IRS.

You then move to Puerto Rico under Act 22, file some paperwork to notify the IRS of your move, then take ALL the money out of the company as a dividend, tax free.

The next year you could move right back to the US with all that money in your pocket and absolutely zero tax liability to the IRS.

This is just one small example, and it’s completely legal.

Only an idiot commits tax evasion or tax fraud. There are countless ways to legitimately reduce what you owe.

And if you believe as I do that they’re wasting your money, it makes sense to consider your own options.

PS-

Premium members: I’m just out of meetings with senior government officials here in Puerto Rico; next week I’ll send you an in-depth report of what I learned and how you can maximize the tax benefit here.

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[Editor’s note: Tim Price, London-based wealth manager and frequent Sovereign Man contributor, is filling in while Simon travels to Puerto Rico today.]

As Mark Twain is purported to have once said, “Predictions are hard, especially about the future.”

And with this principle in mind, libertarian Harry Browne advocated a four-factor portfolio to protect investors “no matter what the future brings”.

Such a portfolio would have to cater to at least four separate economic outcomes:

• Prosperity: a period during which living standards are rising and the economy is growing;
• Inflation: a period during which consumer prices are rising;
• Recession: a period during which the growth is slowing (or negative);
• Deflation: a period in which consumer prices are declining.

Only four types of investments would cover all these separate bases in Browne’s so-called ‘Permanent Portfolio’.

For example, stocks would thrive during a period of prosperity. But during deflation and recession, stock prices fall… so cash would be one of the best assets to hold.

Bonds perform reasonably well during periods of prosperity, but also during recession and deflation.

But during periods of intense inflation, gold perform exceptionally well, unlike cash, which loses value.

Harry Browne’s idea was simple: allocate 25% of an investment portfolio to each investment – cash, gold, bonds, and stocks– and keep the money parked there forever.

The idea worked.

For the nearly three decades between January 1970 and December 1998, the portfolio delivered average returns of 9.9% per annum, a comfortable 4.5% per year above inflation.

And the permanent portfolio continued growing through every economic environment it faced. It even gained in real terms during the highly inflationary 1970s.

More importantly, the portfolio was also remarkably stable.

In the course of 29 years the portfolio lost value in only three: it lost 6.2% in 1981, 0.7% in 1990, and 2.4% in 1994.

Those are negligible losses compared to the average loss suffered by most investors in those same years.

On October 19, 1987, when the Dow Jones Industrial Average fell by 22.6% in a day, Harry Browne’s permanent portfolio lost just 4.3% of its value. And it still returned a gain of 5.3% for the year.

So on a risk-adjusted basis, the portfolio posted very strong returns for decades.

Until now.

The Permanent Portfolio allocates 25% to bonds.

Yet with $13 trillion worth of government bonds now victimizing investors with negative yields and desperate, experimental monetary policy, bonds have become foolish investments.

Another 25% of the portfolio is allocated to cash.

But cash is becoming dangerous to own, with more and more governments floating the idea of cash controls or all-out cash bans.

The latest assault from the establishment on physical cash comes via Harvard Professor Ken Rogoff, who advocates for the abolition of cash in a recent essay ‘The curse of cash’.

Rogoff, of course, relies on the old fascistic premise that physical cash can only be used for the purposes of crime.

This is just a convenient excuse to be marketed to the gullible.

The fundamental reason why the establishment wants to abolish cash is as a necessary precursor to the imposition of negative interest rates.

As interest rates head below zero, savers will rightly be resistant to the idea of paying banks for keeping cash on deposit.

The obvious answer for any responsible, sensible saver is to remove his/her savings from the bank and hold physical cash.

Policymakers will try to prevent this from happening at all costs; even a small uptick in cash withdrawals poses extreme risk for many already-fragile banking systems.

Rogoff and like-minded policy wonks also claim that when people ‘hoard cash’ it’s bad for the economy; in their view, people should be spending, not saving.

This is an incredibly disturbing view shared by many policymakers with God complexes; as Jay Hughes responded to Rogoff in a Wall Street Journal editorial,

“When someone uses the term ‘hoarding’ instead of ‘saving’, it means deep down they believe that others are more entitled to your money than you are.”

Hughes is right.

Our entire central bank controlled financial system is based on the premise that unelected, unaccountable bureaucrats should be able to direct individuals’ consumption and production behavior from ivory tower conclaves.

And they have abused their authority to the point that two entire asset classes are now poisonous.

So with cash and bonds off the table thanks to negative interest rates and a growing movement to abolish cash, an investment strategy like the Permanent Portfolio which allocates 50% to cash and bonds can no longer accomplish its purpose.

This isn’t Harry Browne’s fault. He died in 2006.

Never in his wildest imaginings would he have foreseen central banks wilfully and so feverishly destroying the values of their currencies and forcing savers to suffer the indignity of punitive yields.

Of Permanent Portfolio’s original four asset classes, only two now make any sense: stocks, and gold.

Stocks are a mixed bag.

Shares of productive businesses can be wonderful ‘real assets’, particularly when procured with a value-based approach at prices far below the business’s intrinsic value.

Great businesses purchased at great prices truly are great assets.

Yet so many markets around the world are in bubble territory right now with valuations near all-time highs.

Shares of overpriced businesses selling for 350x earnings cease being ‘real assets’ and join the club of toxic ‘paper assets’.

This is especially the case when you realize that in many jurisdictions you don’t actually own the stocks you buy.

Your shares are likely registered in your broker’s name, not yours. You merely have a claim on your broker’s balance sheet… hence being ‘paper assets’.

As for the original Permanent Portfolio asset classes, gold still shines.

It is the obvious remaining REAL asset, which is something you want to own when there is every reason to expect more inflationism and monetary debauchery from the world’s major central banks.

Plus gold is a lot easier to transport and exchange than an oil well or apartment building.

You’ll find this to be a remarkable benefit as the ‘hoarding’ crowd’s cash ban chorus grows ever louder.

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One of the members of Team Sovereign Man just arrived for the first time in his life to the United States.

This is pretty unusual, especially for the incredibly well-traveled members of our team.

Peter, an Australian in his mid-40s who has been living in Asia for most of his adult life, is taking a few days rest in Arizona in transit from his home in Bangkok to our headquarters in Chile.

It’s not every day that someone I’ve known for several years comes to the country of my birth for the first time ever, and I thought his impressions were quite interesting.

I’m forwarding them to you below:

I’ve been to 30 countries, so I’m not widely traveled by Sovereign Man standards, but I do have an interesting perspective: I’ve never been to America. Until now.

I was expecting everything to be big and awesome and based on consumption, but I simply wasn’t prepared for what I was going to see.

Old town Scottsdale, where I’m staying, is beautiful, clean, and full of fun people.

The biggest 4x4s I’ve ever seen cruise up and down the roads, along with golf carts, a Thai tuktuk, and some contraption with eight young women pedaling while they drank cocktails (they had a sober driver) and waved to the odd Australian who was actually walking.

Nobody seems to walk here. I asked about the comedy club which is a 10-minute walk from my hotel. They told me it’s a 3-minute drive. Everything is an x-minute drive away.

And everything is mind-bogglingly big.

I walked into the convenience store and they had seven types of hot coffee, five types of cappuccino, and a larger wine collection than most wine shops in Bangkok where I live.

There were two long walls of fridges: one for soft drinks and one for alcohol.

And the breakfast at my hotel had six types of coffee cream for God’s sake.

Simon reckons that America is the best place in the world to be a consumer. I had no idea how spot on he was until I arrived here.

The place is tidy, quiet, and has everything you could possibly want for a good life. I keep thinking, “Yes, this is a place and a lifestyle you would fight to preserve. And it’s a damn shame how quickly it’s disappearing for so many.”

After seeing a small piece of America and talking to a few of the locals, I finally understood the feelings behind the two strangest things that I witnessed at the airport.

The first was the high regard Americans seem to have for their military:

• There was a welcome message over the public address system from LA mayor Eric Garcetti, with a special message for service men and women.
• Convenience stores have donation boxes so that an American serviceman can make a phone call home. (They haven’t heard of Skype?)
• Billboards and notices on the wall had welcoming and thank you messages for service men and women.

This is bizarre for me. Nobody in Australia (where I served in the Army Reserve) or any other country really cares one way or the other if you serve in the armed forces.

Heck, when I joined the Australian military and told the interview panel that I “want to serve my country” the senior officer just shook his head and replied, “You can serve your country just as well as an engineer working at a private company.”

But here in the US of A, I can really see what they want to protect.

People here do seem to feel that this lifestyle could be in danger from radical Islam. Maybe so.

But it’s even more in danger from exploding national debt, endless money printing at the Federal Reserve, and a mountain of laws and rules that get passed each day.

The second strange thing that I witnessed was the two women ahead of me in the security line at LAX getting a “second level” screening.

I was shocked.

Female officers felt up their entire bodies: boobs, crotch, and backside included.

What was most strange to me, though, was the way the lady in front of me took the body search. It didn’t faze her at all.

I caught up with her after security and asked her about it.

“I think it’s something to do with the baby formula that sets off the machine.” (She had a 2-year old daughter and her husband with her.)

“Are you ok with it? Has this happened before?”

“Yes, many times. I’m used to it now. Thanks for asking.”

And just like that, Stockholm Syndrome has set in.

People just accept that they have to send soldiers overseas and have to submit to government intrusion for the price of being free.

Everyone knows it doesn’t make a difference, but everyone just accepts it because they don’t have the power to change it and don’t want to think about what the government will do to them next.

This is a wonderful country, but it’s clear to me that the Land of the Free has already lost a host of freedoms… and a bunch more will be on the chopping block under either Clinton or Trump.

At least the woman’s daughter, who watched her mother willingly submit to a humiliating body search by government officials, will grow up to be an accepting model citizen.

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Today I decided to shoot a video and answer one of most frequently asked questions we receive here: What is Simon’s life at the farm like?

I hope you enjoy it and can get insights of how you can apply my philosophy in your own life.

PS: This week we sent out a free preview of the latest issue of our 4th Pillar investment service. If you haven’t had a chance to read it yet, you can download the PDF here.

 

 

 

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Tulips aren’t native to Holland.

The first Tulips were brought over from Istanbul (then known as Constantinople) by a horticulturalist named Carolus Clusius in 1593.

But the scent, shape, and rarity of the flower soon caught on and quickly became a status symbol among wealthy Dutch residents.

As with any popular commodity, the price started to rise, giving way to all-out ‘Tulip Mania’ in Holland during the 1620s and 1630s, during which rare tulip bulbs could easily sell for thousands of dollars in today’s money.

It seems extraordinary that anyone would pay so much for a tulip.

But I often think the same about so many assets across our modern financial system.

Consider Uber, the ride-sharing pioneer.

I like Uber and use it myself occasionally. But I’m astounded that people pay so much for shares of this privately-held company.

Based on financial results leaked last week, Uber lost at least $1.27 billion in the first half of 2016 alone. And they’ve lost roughly $4 billion in their seven-year history.

Now that is truly impressive. It’s -very- hard to lose so much money so quickly.

Uber is even losing money in the United States, its most developed market.

But despite these horrific results, Uber’s market valuation is nearly $70 billion. And they’re far from alone.

Uber’s smaller rival Lyft, which promised investors it would ‘only’ lose $600 million per year, is worth $5.5 billion.

And now that Google has entered the ride-sharing business at prices that are far cheaper than Uber and Lyft, it’s hard to imagine either one of them turning a profit anytime soon.

None of this makes any sense. How could deeply unprofitable companies that are burning through record amounts of cash be worth so much money?

Then again, how is it possible that the bonds of bankrupt governments in Europe and Japan have NEGATIVE yields?

How is it possible that some banks are charging negative interest rates to their best customers?

Our financial system is full of these bizarre anomalies that don’t make any sense. And the reason is obvious:

Central banks have printed too much money– trillions upon trillions of dollars over the past few years.

And this rapid expansion of the money supply has created embarrassing misallocations of capital and extreme distortions in the marketplace.

When money is simply conjured out of thin air and so easily abundant in the financial system, it has no value.

And when money has no value, the people who control so much of it tend to make stupid decisions.

Case in point– 15 years ago after 9/11, central bankers printed hundreds of billions of dollars in hopes of boosting their economies.

Instead they ended up creating a massive housing bubble in which bankers routinely gave zero-down loans to borrowers with pitiful credit.

These idiotic financial decisions were enabled by central bankers who printed way too much money.

And it’s been this way throughout history.

Think about it– providing a no-money-down loan to a borrower with bad credit isn’t much different than paying thousands of dollars for a tulip.

Or valuing an unprofitable company at $70 billion.

Bear in mind that this works both ways.

Just as companies that lose tons of money can be valued at billions of dollars, it’s also possible for high quality, profitable businesses to be selling for less than their bank balances.

It’s like a financial yin and yang– extreme anomalies exist at both ends of the spectrum.

When the market breaks down, assets can be absurdly overpriced. But some assets can also be underpriced.

Never forget that major institutional investors share a surprising herd mentality.

So at times of peak foolishness when capital is cheap and abundant, bankers and fund managers routinely follow one another into bad investments.

This is exactly what happened during the housing bubble back in 2006; nearly EVERYONE was making bad loans and buying toxic securities.

Anytime this happens and a giant crowd forms around certain asset classes, it always leaves small corners of the marketplace underpriced.

It takes work to find them, but these opportunities do exist.

Just this morning, our Chief Investment Strategist recommended a new company to his premium subscribers; it’s profitable and has more than $400 million cash in the bank, yet its market value is only $322 million.

It’s literally $78 million in free money for the taking.

(You can download a preview of the recommendation here.)

Just like overpriced assets at the other end of the spectrum, these types of underpriced assets also exist because central bank policies have completely distorted the market.

As crazy as it sounds, major investors are too busy buying negative-yielding government bonds or shares of overpriced companies, because those investments are what’s popular right now…

But sooner or later these asset prices will correct.

Assets that are deeply overvalued will fall in price. And great assets that are undervalued will eventually rise in price.

Frankly I’m grateful for the chance to make such no-brainer investments; it makes me feel like I should send Fed Chair Janet Yellen a fruit basket for creating such incredible distortions.

Or perhaps a bouquet of tulips.

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Two months ago at the annual Benjamin Graham Conference in New York City, billionaire hedge fund manager Leon Cooperman told the audience that their industry was on the ropes.

“[O]ur industry is in turmoil. It’s very ironic because you’ve got Clinton and Sanders crapping all over us and they don’t realize Wall Street is in the midst of a very serious downturn. . .”

He’s right. Investors are bailing on hedge funds in record numbers because these hot shot investment managers aren’t able to generate meaningful investment returns.

All the tricks that used to work for them in the past are now falling flat.

And as Cooperman explained, there’s a giant consolidation right now where only two types of people will be able to make money in financial markets.

The first is traders… specifically high frequency traders (HFT).

These are the gigantic financial institutions and billionaire math geniuses who build sophisticated algorithms that buy and sell stocks at blinding speed, sometimes entering and exiting positions in just a fraction of a second.

High-frequency traders rarely (if ever) hold positions overnight, let alone for months and years.

They’re not interested in the fundamentals of a business, merely the volume and momentum of the stock.

The second group is long-term value investors– people that are trying to buy a dollar for 50 cents.

Value investors care very deeply about what they’re buying; in fact, they don’t buy stocks, but rather shares of high quality businesses with talented, honest, energetic managers.

These two methods– trading vs. value investing– are remarkably different.

To be a trader today means competing against titans like Goldman Sachs, with their legions of PhD quantitative analysts, plus some of the most advanced networks and intellectual property in the world.

Or even worse, competing against high-frequency traders who have paid bribed the exchanges so that their own servers can be co-located in the same building as the exchanges’ servers.

This enables the traders to receive information from, say, the New York Stock Exchange, a fraction of a millisecond before anyone else.

But in that fraction of a millisecond, the HFT firm’s algorithms can process the information and place trades ahead of the crowd.

That’s the environment that traders are competing in.

And to be successful in this environment, you need an edge. You win by being smarter, accessing information faster, or developing superior technology.

Value investing is entirely different.

Value investing is about patience, common sense, and good old fashioned hard work.

Here’s a great example– Tim Staermose, our Chief Investment Strategist at Sovereign Man, recommended a business called Nam Tai Property to subscribers of his premium investment newsletter, the 4th Pillar.

Around New Year’s 2015, Nam Tai had $261 million in CASH, plus a ton of real estate in Asia conservatively worth $221 million, even at recession prices.

Yet the company’s market value at the time was $204 million.

So in theory you could buy the entire company for $204 million, put that entire amount right back in your pocket, and still have $57 million in free money left over, PLUS $221 million in real estate.

It was an unbelievable deal.

But Tim was skeptical (as usual), so he hopped on a plane and spent a LOT of time on the ground investigating the company’s assets first hand to determine for himself that it was real.

It was absolutely real. (We’ll discuss later this week why the market sometimes presents these crazy opportunities…)

So with some common sense to recognize a great opportunity ($57 million in free money… duh.)

Plus a LOT of hard work for Tim and his team to make sure that it was legitimate and real.

Plus a little bit of patience (it took about 18 months for the stock to surge), Tim’s 4th Pillar subscribers are up 108% on Nam Tai Property.

That’s the great thing about value investing: it’s not rocket science.

Yes, investigating a company’s assets and analyzing its balance sheet is a skill, and one that can be learned. Great value investors like Tim have become masters of it.

But it’s not about being smarter or better or more advanced than everyone else. It really is about patience, common sense, and hard work.

Between the two, it’s clear to me that DEEP value investing is the superior approach.

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[Editor’s note: This letter was written by Tim Price, frequent Sovereign Man contributor and manager of the Price Value International.]

The scenic mountain resort of Jackson Hole in Wyoming played snowy host this weekend to the world’s major central bankers, meeting in conclave to discuss their latest victories over the world economy.

Thronged by adoring savers, the so-called Ja’ss Holes (the J is silent) were quick to point out that they were nowhere near running out of fatuous experiments with untested monetary policies or making it up as they go along.

“We still have plenty of tools,” remarked a spokesperson: “Janet Yellen, Mark Carney, Andy Haldane, Mario Draghi – does any remote, unelected bureaucracy anywhere in the world have a bigger set of tools?”

The theme of the meeting is “What, if anything, will be left when we have finished?”

Given the Fed’s stated intention not to surprise financial markets, it is believed that the next 25 basis point rise in fed funds will come, as it did last year, in December – but as part of its forward guidance policy, the decision will be announced by means of a ‘policy dove’ that will be released at the end of the weekend, after a ritual of Native American dancing and hallucinogenic drug-taking, and sent circling around the world with its message of peace and extremely modest monetary tightening.

In the event that the ‘policy dove’ is incapacitated or shot out of the sky, it will be replaced by a ‘policy Elk’ from the National Elk Refuge nearby.

Although official interest rates seem low, a spokesperson said that was only if you looked at them from the perspective of numbers.

Viewed more holistically, from the vantage point of a numeric base system yet to be invented, or one that operates only through color, rates could actually be regarded as quite high.

In any event, the US central bank would not find itself out of weaponry if a new recession caused by the US central bank were to hit.

The US Federal Reserve has already commissioned a fleet of B2 Stealth bombers to initiate the next stage of its economic policy, codenamed ‘Obliterate hope’.

The intention is to bypass the introduction of so-called ‘helicopter money’ and fast forward instead to the endgame of a long, vicious carpet-bombing of North America’s major cities using napalm.

A spokesperson for the European Central Bank pointed out that ‘Obliterate hope’ had already been a key plank of ECB policy across the euro zone for some time, especially in periphery countries.

Determined not to be outflanked by its US rival, the Frankfurt- based organization indicated that it had its own plans for weaponizing its existing QE program, codenamed ‘Project Bubo’.

The ECB, in conjunction with the European Science Foundation, is believed to be planning to tackle the longstanding ‘savings glut’ by means of reintroducing Europe to the Black Death.

Economists believe that such a step could be a key means of boosting productivity, among the survivors.

Speaking to reporters, Mark Carney for the Bank of England pointed out that by comparison with the efforts of the US and the EU, the next phase of UK central banking stimulus would have to reflect Great Britain’s now more modest role in the world, post-Brexit.

He acknowledged that a coordinated aerial bombardment of the UK’s major cities “was certainly desirable”, but that in these more straitened times we might have to settle for a posse of Team GB Olympians jogging from town to town and assaulting random businessmen with socks full of wet sand.

Central bankers acknowledge that they were slow off the mark dealing with the last property bubble, and they point out that they have gone beyond the call of duty to fuel the current one and ensure that its collapse will be even more spectacular, given that interest rates are forecast to be close to minus 280% by then.

With years of monetary accommodation having inflated bond, equity and property prices to unsustainable levels, developed world economies are now beset by low productivity and weak levels of investment and impaired prospects for banks, insurance companies, pension funds, savers and investors.

Ms Yellen, however, piloting an experimental nuclear-powered leisure cruiser, the ‘Permanent Liquidity’, was proud to announce that she “saw no signs of problems ahead,” shortly before steering her yacht into the Teton Glacier where it immediately foundered with all hands.

Observers suggested that its shattered debris would likely stay at the bottom of the Snake River “lower for longer”.

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In 1999, as an arrogant 20-year old kid who thought he knew everything, I went flat broke.

Actually, I was worse than broke. On top of losing all of my money, I was also in debt more than $22,000… so I had a negative net worth.

That was an astronomical sum for me at the time, and I thought I’d never recover.

I wrote about this a few months ago, explaining how I had borrowed money through a bank loan that was secured against my future earnings as an Army officer.

And then, without any real knowledge or training, I dumped the entire amount in the stock market, pretty much at the peak of the dot-com bubble.

At first I had a couple of small wins. I was daytrading popular Internet stocks like Yahoo, moving in and out of positions sometimes in as little as a few minutes.

For example, I would buy 1,000 shares of a company at $20, and then immediately sell if the stock price went up by 5 cents.

Doing so would net me about $30 after commission, and every time I made money it only reinforced my own arrogant conviction that I was a highly skilled investor.

In reality I was just a stupid kid, and I didn’t realize how much risk I was taking.

Eventually my good luck ran out. Stock prices started falling, and I suffered my first losses. All the little profits I had made evaporated, and soon I was in the red.

But rather than learn from my mistakes and re-assess what I was doing, I doubled down, borrowed more money on margin, and bought even more shares of companies I didn’t know anything about.

Then one day the inevitable happened.

I bought shares of Compaq, a leading computer manufacturer at the time.

The day I bought Compaq shares may have been the stock’s all-time high. In fact, I may have literally been -the guy- who paid the most money for the shares.

Because as soon as I bought the shares, the price started to fall… just a little bit at first.

I convinced myself that the shares would rise again and I just had to be patient. But the price kept falling.

Mind you, my belief wasn’t grounded in any actual fact. I hadn’t conducted any analysis about the business, management, or share fundamentals.

I made a decision based on absolutely zero data.

I did, however, ask my friends, who were just as naïve as I was. And naturally they all encouraged me to NOT sell because the price would go back up.

It didn’t.

And eventually the broker liquidated my entire position through a margin call, leaving me with absolutely nothing. And I still had to pay off the original $22,000 debt (plus interest).

It was a difficult, painful, expensive way to learn, but I eventually did gain from the experience.

It’s not to say that going broke taught me how to be a better investor. Far from it.

Going broke taught me that I didn’t know anything about investing.

And how could I? How could anybody?

Investing, just like so many things that make us successful, is a SKILL.

I have friends, for example, who are phenomenal surgeons. They didn’t just wake up that way. They didn’t roll out of bed one morning and start operating on people.

They studied. They interned. They spent years in residency honing their craft and building their skills until they became master practitioners.

Like surgery, investing is a skill– and one that most people never had the chance to develop.

Again, how could we? Successful investment habits aren’t taught in public schools, and most people don’t grow up with much exposure to the topic.

Laszlo Bock, Google’s top HR executive, published a fantastic book on recruiting and conducting job interviews last year called Work Rules.

He suggests that a lot of people think they know how to interview prospective employees for their businesses because we believe we have an innate, gut instinct to select the right person.

In reality, Bock writes that hiring phenomenal people is a skill, and one that can be acquired.

So is investing. Growing a business. Sales.

The danger is when we don’t realize these are skills; when we believe that we’re highly skilled when in fact we are not; and when we take advice from other people who don’t have the skills.

That’s precisely how I went broke when I was 20.

Now, obviously I recovered. I grew from the experience, and, over the last 17+ years, built a number of successful businesses and have made tens of millions of dollars of great investments.

But I was only able to do this because I sought out the smartest people I could find.

I developed investing skills learning from people who were far smarter than I was, like Doug Casey, Jim Rogers, Robert Kiyosaki, Tim Price, Tim Staermose, and countless others.

I developed business skills learning from partners and mentors who all had a track record of building successful companies.

And the learning never stops.

I still sometimes make bad decisions, but I’ve also learned how to limit their impact and make it right with other stakeholders if things go south.

It seems like common sense to learn from smarter people. But when you think about it, it goes against our human nature.

We can be very ego-driven creatures, so admitting what we don’t know can be quite difficult. We all hate looking stupid (and some part of me still hates to stop and ask for directions…)

I had to go broke to learn how to check my ego and seek advice from highly skilled people with proven track records.

But acknowledging my own ignorance has produced some of the most extraordinary benefits in my life.

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