Category: simonblack

[Editor’s Note: Today’s Notes, originally published one year ago, is about one of the most impactful things I do each year. If you know a young entrepreneur who may be interested in what we’re doing, please forward this piece along. It could change their lives…]

I’ve always been a big believer in entrepreneurship.

But not in the sense that most people think of that word.

My dictionary defines “entrepreneur” as “a person who organizes and operates a business, taking on greater than normal financial risks in order to do so.”

I think this definition is totally wrong.

Entrepreneurship doesn’t have anything to do with owning or starting a business, let alone taking on great risk.

You can be an entrepreneur whether you’re an artist, charity volunteer, self-employed professional, entertainer, designer, teacher, or factory worker.

It’s all about your mindset.

An entrepreneur is fundamentally a value creator and problem solver: someone who creates something from nothing in order to solve a problem.

Essentially an entrepreneur is solution-oriented action taker– a person who works to fix problems rather than simply complain about them.

It sounds simple enough.

But when you think about it, this mindset goes against thousands of years of human development.

Since ancient times our species has been programmed to tolerate and accept problems… sometimes even ignore them.

Whether it’s barbarians at the gate, the astonishing decline of civil liberties, or even just the leaky faucet that won’t stop dripping, we have learned how to adapt and cope with obvious problems… and wait for –other people- to take action.

It’s the “Help! Someone do something!” mentality. This is for victims.

Entrepreneurship is about having the initiative to boldly step forward and take action– which is fundamentally what personal freedom is all about.

We spend a lot of time in this daily letter talking about solutions to big problems, problems like illiquid banks, insolvent governments, negative interest rates, etc.

You’ll probably recognize that the solutions we recommend are all about the individual.

We don’t ever talk about relying on the government to fix problems. They’re the ones who cause the problems.

Instead, we talk about taking matters into our own hands, distancing ourselves from the risks, and increasing our independence and self-reliance.

It’s an entrepreneurial approach to solving big problems at the individual level.

You don’t have to be a billionaire or start multiple companies like Elon Musk in order to adopt this mindset.

Musk is definitely a great example of an entrepreneur.

But that’s because, if you think about it, all of this ventures, from Tesla to SpaceX to his time at PayPal, spring from the same mindset: the initiative and willingness to create value, solve problems, and TAKE ACTION.

This same thinking can apply to a factory supervisor who takes the initiative to boost his production line’s efficiency…

… or to an office worker who takes the initiative to create a social media presence for her employer without being asked to do so.

Everyone comes across opportunities every day, big and small, to take action, create value, and solve problems.

Being an entrepreneur is about willfully flipping the switch in your mind, so that instead of merely noticing problems, you ask yourself, “How do I make this better?”

Certainly, sometimes the solutions themselves require special skills.

Even more, sometimes the solutions create an opportunity to start a business or create intellectual property, which in turn can lead to tremendous personal wealth.

These, too, are skills.

Starting a business is a skill. Managing a business is a skill. Designing products that solve problems and create value is a skill.

Sadly these are not skills that are generally taught in our government-controlled school systems.

But they are skills, nevertheless. Skills that can be learned. By ANYONE.

Like the entrepreneurial mindset itself, this requires the willingness and initiative to take action… in this case, to learn.

Books are a great start, and I can provide a comprehensive list in a subsequent post.

But I wanted to let you know about another option… one that we’ve found to be quite powerful.

By the way, it’s free. I pay for it myself.

I’m talking about our annual youth summer entrepreneurship camp.

(“Youth”, like entrepreneurship, is a state of mind… past attendees have ranged in age from 17 to 45.)

For five days each summer, my colleagues and I conduct an intensive workshop that focuses on teaching critical entrepreneur skills to select attendees who want to use what we teach them to make an impact.

It takes place at a beautiful lakeside resort in Lithuania and attracts incredibly talented, driven people from all over the world.

We only have about 50 slots available, and I’ve had the burden of selecting from countless applicants for the past eight years.

But if you’re truly interested in learning these skills, or improving on the skills that you’ve already learned, I invite you to learn more about what we’re doing.

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I’ve long held a working theory that US voters are completely predictable in Presidential elections.

The idea is that Americans almost invariably tend to swing wildly every few election cycles, voting for the candidate who is as close to the opposite of the current guy as possible.

Let’s go back a few decades to, say, Jimmy Carter.

In 1976, the country was sick and tired of the corruption, scandal, and disgrace of Richard Nixon’s administration (which at that point had been inherited by Gerald Ford).

Jimmy Carter was pretty much the opposite of Richard Nixon– a youthful outsider versus an aging crony.

After four years of economic disaster, Americans swung in the opposite direction from Carter, choosing an older, polished conservative in Ronald Reagan who represented strength and stability.

That trend lasted for twelve years– two terms with Reagan, and one term with his successor George HW Bush, after which the country swung in the other direction again– to Bill Clinton.

Clinton was another young, energetic liberal, pretty much the opposite of the elderly, curmudgeonly Bush.

After eight year of Clinton and his personal scandals, the country swung again to George W. Bush, a God-fearing, fundamental conservative who wouldn’t cheat on his wife. He represented Clinton’s opposite.

And after eight years of war and economic turmoil, the country swung once again to Bush’s opposite– a youthful, charismatic, black outsider.

Eight years later, the 2016 election was won by a man who is as far from Barack Obama as it gets.

Now, however you feel about the current guy, it’s safe to say that the country is probably going to wildly swing in the opposite direction in either 2020 or 2024.

Last night the world got a sneak peak at what that might look like– Congressman Joe Kennedy III, the 37-year old grandnephew of John F. Kennedy.

The young Congressman clearly represents Trump’s opposite and seems to embody so many of the gargantuan social movements that are coming to a head– the Dreamers, #metoo, BlackLivesMatter, etc.

Now, I typically hate talking about something as trite as politics and elections; elections merely change the players. It’s the game that’s rotten.

But in the Congressman’s rebuttal last night after the State of the Union address, he said something that I found quite alarming, almost inconceivable.

He lamented that the government has turned America into a “zero-sum game” where benefits received by one group must come at the expense of another– fund health insurance by cutting funding for education; build new highways by slashing teachers’ pensions.

He cited a number of examples, and then told his audience, “We choose both!”

Given the thunderous applause at that remark, everyone seemed to agree that the wealthiest, most prosperous nation in the world should never have to make a single tough financial decision.

Americans should have everything they want. And somehow, the money to pay for it all will just magically appear.

I found this astonishingly naive. He should have said, “We choose debt!” Because that’s the only way they’ll be able to pay for any of it.

Bear in mind the US government is already nearly $21 trillion in the hole and spending hundreds of billions of dollars each year just to pay interest on the debt.

In Fiscal Year 2017, in fact, the Treasury Department reports that interest payments on the debt hit a new high of $458,542,287,311.80.

That’s about 15% of federal government tax revenue… just to pay interest.

On top of that, the government spent another $2.15 trillion on Social Security and Medicare, and $720+ billion on defense spending.

So– just between interest, Social Security, Medicare, and Defense, they spent $3.3 trillion.

Total tax revenue was only $3 trillion to begin with.

So before they paid for ANYTHING else… National Parks, Homeland Security, infrastructure, foreign aid, or even paid the electric bill at the White House, they were hundreds of billions of dollars in the hole.

On top of that, the federal government has entire trust funds that are completely insolvent.

Both the Federal Highway Fund and the Disability Insurance fund, for example, have been bailed out within the last two years.

And there are several more, from the Pension Benefit Guarantee Corporation to Social Security itself.

This amounts to literally tens of trillions of dollars in liabilities; according to the Treasury Department’s own estimates from Fiscal Year 2016, its long-term liabilities amount to $46.7 trillion.

I find it simply extraordinary how few people in power seem to have a grasp on the magnitude of these long-term challenges.

Instead, the solution is to give everything to everyone without ever having to make a single responsible financial decision.

It’s total lunacy, a new form of American socialism that will be the final nail in the fiscal coffin.

And if history is any indicator, it’s coming… possibly as early as 2020.

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Earlier this month, General Electric took a $6.2 billion charge to its insurance unit for the fourth quarter. And the company said it will set aside another $15 billion over seven years to bolster reserves at GE Capital.

The charge had to do with long-term care policies (to pay for nursing homes and other late-life care) GE holds on its books.

So, one of the oldest and most highly-regarded companies in America just made a small, $21 billion miscalculation. Oops.

Keep in mind, GE’s entire market cap is only $140 billion.

The insurance charge, along with costs tied to the US tax plan, led GE to a $9.64 billion loss in the fourth quarter.

Then last week, GE announced the Securities and Exchange Commission (SEC) was investigating the company’s accounting practices (specifically how the company books revenue from long-term service contracts on things like power-plant repairs and jet-engine maintenance).

But this isn’t GE’s first run in with the SEC…

The company’s accounting practices have long been considered a “black box.” The New York Times even published a story in 2009 comparing the company to Enron – the energy giant brought down by fraudulent accounting.

And is all started with GE’s legendary former CEO Jack Welch.

Welch would regularly beat Wall Street’s earnings estimates by a penny or two. And he was named manager of the century by Fortune Magazine for his ability to pump GE’s stock.

And while Welch is lauded for his “six sigma” management, it seems his real talent was using GE’s many divisions to move assets around and goose earnings to hit short-term numbers.

The creative accounting caught up with GE in 2009, when the company paid $50 million to settle SEC allegations it had used improper accounting methods to boost numbers in 2002 and 2003.

Among the strategies GE used to make its 2003 numbers was selling railroad cars to banks, with side deals and verbal promises to assure the banks they couldn’t lose money on the deal.

Enron used the same trick in 1999 when it “sold” Nigerian barges to Merrill Lynch, allowing the company to fake a $12 million profit.

Today GE is a $140 billion company (shares are down by nearly half over the past 12 month). The company has nearly $160 billion in debt. And in fiscal year 2016, the company lost $41 billion in cash.

GE’s financial performance makes my favorite whipping boy, Netflix, look like a piker.

GE got here, in part, because the government guaranteed all of the company’s debts until 2012 to help it survive the Great Financial Crisis.

Then the Fed lowered interest rates and printed trillions of dollars to goose the economy.

Instead of using this beneficial environment to repair its horrible balance sheet, GE spent some $50 billion buying back stock and paying dividends… and allowed Welch’s successor, Jeff Immelt, to walk away with $211 million (despite the company erasing $150 billion of market cap value during his tenure).

GE has gotten away with this behavior because we’re in the middle of one of the largest asset booms in history. The markets are at all-time highs. And nobody asks the tough questions when they’re making money.

It doesn’t take a giant pin to prick the bubble. It just takes something unexpected… Nobody ever knows what will set off the next crisis.

But in GE’s case, you can bet there isn’t just one cockroach.

Plus, interest rates are rising today (the 10-year Treasury is above 2.7%) and the Fed is taking away the quantitative easing punch bowl. What will happen to overly indebted companies like GE (who are likely covering up more huge losses) when the credit dries up and debt service gets way more expensive?

Mind you, GE already can’t afford its debt.

GE is just one example of a potential crisis in the making.

Maybe a bank sets off the next crisis…

I just read a Wall Street Journal piece about “drive by appraisals.” When the big institutional investors, like private equity giant Blackstone, started buying tens of thousands of individual homes, they needed a quick way to appraise the properties to get loans.

Blackstone and its lender, Deutsche Bank, settled on these drive by appraisals, where brokers give their price opinion of the property. These assessments, called broker price opinions (BPOs) were outlawed by congress after the crisis.

But the prohibition doesn’t apply to investors buying tens of thousands of homes (of course you don’t want to have an accurate asset value for collateral behind really big loans).

Sometimes brokers will even outsource the process to India, where companies will use Google Earth and real estate website to come up with home values.

BPOs have been used to value homes backing more than $20 billion of bonds sold by companies like Blackstone.

As Warren Buffett says, “you never know who’s swimming naked until the tide goes out.”

Just know, there are major losses – and likely fraud – hiding out there today. But it’s gone largely ignored because of the one-way market we’ve experienced since 2010.

GE and these drive by loans are just two examples. And the worst is yet to come.

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After having traveled to more than 120 countries in my life, the only person I know who’s been to more places than I have is Jim Rogers.

Jim is a legend– a phenomenal investor, author, and all-around great guy.

(His book Adventure Capitalist is a must-read, chronicling his multi-year driving voyage across the world.)

Some time ago while we were having drinks, Jim remarked that he occasionally tells people, “If you can only travel to one foreign country in your life, go to India.”

In Jim’s view, India presents the greatest diversity of experiences– mega-cities, Himalayan villages, coastal paradises, and a deeply rich culture.

My answer is different: Japan.

To me, Japan isn’t even a country. Japan is its own planet… completely different than anywhere else in ways that are incomprehensible to most westerners.

(Watch my friend Derek Sivers explain it to a TED audience here.)

On one hand, this is a culture that strives to attain beauty and mastery in even mundane tasks like raking the yard or pouring tea.

Everything they do is expected to be conducted to the highest possible standard and precision.

They start the indoctrination from birth; Japanese schools typically do not employ janitors and instead train children to clean up after themselves.

Later in life, the Japanese salaryman is expected to practically work himself to death (or suicide) for his company.

Obedience and collectivism are core cultural values, and the tenants of Bushido are still prevalent to this day.

One of the most remarkable examples of Japanese culture was the aftermath of the devastating 2011 earthquake (and subsequent tsunami) in the Fukushima prefecture.

It was the worst natural disaster in Japanese history, causing nearly as much damage as the atomic bombs over Hiroshima and Nagasaki in 1945.

Yet rather than panic and pillage, the Japanese sat patiently outside of their ravaged homes waiting for direction from the local authorities.

Then again, this is also the place that brought us ‘Hello Kitty,’ and where men have to be admonished to not grope young girls on the subway.

The Japanese paradox also applies to its economy, which has effectively been in stagnation for nearly 30 years.

Japan’s government debt is more than 1 QUADRILLION yen (over $10 trillion) and more than twice the size of the entire economy.

This debt is so large that in the 2018 budget that was just released last month, the government reported that it will take more than 40% of tax revenue to make debt payments this year.

Despite such gruesome figures, however, there is no panic here on Planet Japan.

The government has told everyone to not worry, and that seems to be good enough.

Banks and and investment funds continue to plow their depositors savings into government bonds– which, by the way, carry NEGATIVE interest rates.

In other words, investors are loaning money at rates which are less than zero to a government that’s so heavily indebted it has to spend 40% of its tax revenue just to make debt payments.

This is pure insanity. But on Planet Japan, it’s perfectly normal behavior to engage in ritualistic financial suicide.

It wasn’t always this way.

After being demolished by the Allies in World War II, Japan set out to rebuild itself.

And the growth that came out of the next several decades was so astonishing that it became known as the economic miracle.

Japan ultimately became the world’s second largest economy after the United States.

And there certainly was cutting edge technology and productivity that contributed to that success.

Back then, some of the most popular consumer products in the world like Nintendo’s original game console, or the Sony Walkman, were Japanese.

And Japan’s production efficiency was the envy of the world.

But underpinning all that growth, especially during the later part of the boom in the 1980s, was a tidal wave of paper money.

Japan’s central bank was growing the country’s money supply at a dangerously unsustainable rate.

And, as with most cases where central banks conjure too much money out of thin air, the Bank of Japan created a dangerous asset bubble.

With so much money in the system, the prices of nearly everything– stocks, real estate, etc. skyrocketed.

The asset boom made people feel very wealthy, and that the good times would last forever.

They didn’t. Japan’s Nikkei 225 stock index finally peaked at nearly 39,000 points on December 29, 1989.

And over the next few years, the giant economic bubble rapidly deflated as the central bank gradually ‘tightened’ the money supply and raised interest rates.

Within two years the Nikkei 225 had lost half of its value. Within a few years more it had fallen to as low as 8,000.

Even today, nearly THIRTY YEARS later, Japan’s stock market is still 40% below its all-time high.

During the boom, some Japanese investors and businesses were astute enough to trade some of their overvalued yen for undervalued foreign assets while they still had the chance.

They bought real estate in California, businesses in Europe, etc. These investments ensured their prosperity even after the Japanese market collapsed.

But most Japanese kept all of their eggs in one basket. And they still haven’t recovered their losses.

There are very interesting lessons here. Namely– the good times NEVER last forever.

Markets never simply go straight up. There are always inevitable corrections.

Problem is, most folks tend to believe that market corrections will be very short lived, as if asset prices will fall 20% or 30% and then be right back to where they were before after a year or two.

Few of us can imagine the value of their retirement accounts collapsing– and NEVER recovering.

But Planet Japan shows us that the market can crash– and stay in the gutter– for DECADES…

… and that, when asset prices are at all-time highs, a prudent person ought to consider taking some money off the table and seeking undervalued alternatives.

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Almost exactly a year ago to the day, on January 23, 2017, I wrote to you in this column that the US dollar was overvalued against almost every currency in the world.

Specifically, I described how Donald Trump and Fed Chair Janet Yellen BOTH wanted a weaker US dollar:

Donald Trump told the Wall Street Journal last week that the US dollar is “too strong. And it’s killing us.”

On that single statement alone, the dollar index fell 1%.

Fed Chair Janet Yellen has also weighed in on the overvalued US dollar, calling it “a drag on U.S. growth”.

No one has a crystal ball, and it’s impossible to predict precisely WHEN this bubble starts to deflate.

In fact, it’s possible that the dollar becomes even stronger than it is today.

But when the two most powerful policymakers in the country both want the US dollar to get weaker, it’s pretty clear what’s going to happen.

At the time that article was published, the US Dollar Index was within 1% of its 15-year high.

That turned out to be the peak. Since then, dollar has been on a relentless and punishing slide, with the Dollar index falling nearly 13% in twelve months.

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The US dollar’s overvalue had been a theme in this letter for some time; going back to at least May 2016, we had often discussed the idea of trading overvalued US dollars for undervalued assets in undervalued currencies.

As an example, I acquired a business in Australia about two years ago at a time when the Australian dollar was at a near decade low against the US dollar.

Even better, I picked up the business for an amazing deal, roughly 1x the company’s annual profit (about $1.5 million).

In an age of bubble markets where even poor-quality assets trade for 100x annual earnings on major stock exchanges, this Australian business was a real bargain… a deeply undervalued asset.

Plus, since the Aussie dollar has increased so much in value since then, I’m able to earn an additional 10% on my investment just from the exchange rate boost.

We did the same thing in Chile, acquiring and developing tens of millions of dollars’ worth of productive farmland at a time when local land prices were depressed and the Chilean peso was exceptionally weak.

Land prices are rising once again, and the peso is more than 17% stronger than its 2016 low.

I’m definitely no genius. And I’d never pretend to have a crystal ball or be able to predict the future of financial markets.

But one of the few things that we know for certain is that NOTHING goes up or down in a straight line.

There are always cycles… periods of time when particular assets do very well… and then don’t do so well.

Oil is a classic example; it reached nearly $150 per barrel back in 2008 before collapsing down to $40 during the Global Financial Crisis less than 6 months later.

Then it rose again steadily to surpass $100 per barrel by mid-2014 before sinking below $30 eighteen months later.

Now it’s around $65.

You get the idea. It’s just like Mr. Miyagi said about Paint the Fence: Up. Down. Up. Down.

Nearly everything conforms to these cycles– stocks, real estate, commodities, Bitcoin, and the US dollar itself.

And understanding this cyclical nature is an important element in avoiding big mistakes.

It’s in our nature to buy assets when their prices are rising and near the top of their up cycle.

And we tend to sell in a panic when prices are falling, i.e. near the bottom of their down cycle.

In reality it should be the opposite– we should be sellers when prices are rising and buyers when prices are falling.

But as we’ve been discussing lately, this requires emotional detachment… and patience to wait out the cycle.

(These cycles can sometimes last for several years. So only buy what you’re comfortable holding for a LONG time.)

Obviously it’s impossible to nail the timing– no one rings a bell at the top or the bottom. And only a fool pretends to have a crystal ball.

But… even though you might not hit the exact top, it’s hardly ever a bad thing to take some money off the table to lock in some gains.

Similarly, you won’t be worse off acquiring a fantastic, undervalued asset at a cheap price, even if you don’t buy at the precise bottom.

In upcoming letters we’ll talk about the dollar’s down cycle… and what types of assets will do very well– including precious metals, commodity currencies like the Australian dollar, and other real assets.

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Puerto Rico won’t repay any of its $72 billion of debt until 2022…

The US territory declared bankruptcy last May. A combination of a shrinking population, bloated pensions and a job crisis (in 2006, the US government repealed tax incentives that attracted manufacturers to the island) caused Puerto Rico to go broke.

Even in its fragile economic state, PR was planning on paying creditors $3.6 billion through 2022.

Then Hurricane Irma and Maria destroyed the island last September.

In addition to the physical damage, the storm also accelerated the island’s population shrinkage… before the storm, Puerto Rico estimated it would lose 0.2% of its population of 3.4 million each year over the next five years. Now, the government projects its population will shrink by 7.7% (more than a quarter million people) just in 2018.

Today, four months after the storm, 450,000 Puerto Ricans (roughly 15% of the population) are still without power.

Yesterday, facing a $2-$3 billion budget shortfall, Governor Ricardo Rosselló announced the island would pay back zero debt over the next five years.

Despite the horrible situation, I remained bullish on Puerto Rico’s future. Because the island has one of the greatest tax incentives I’ve ever seen for Americans – Act 20 and Act 22 – which would continue to attract new businesses and residents.

I’ve written plenty about Act 20 and 22 in Notes (you can read a more complete definition here).

In short, Act 20 (the export services act) allows certain businesses to domicile in Puerto Rico and pay a 4% corporate tax rate.

Act 22 (for individual investors) allows Puerto Rican residents to pay zero tax on investment gains.

You could move your business to PR (without relocating yourself) and let your profits build up minus the miniscule, 4% tax. Then, when you’re ready to pay yourself a large dividend, you would simply move to PR long enough to become a resident (for about a year), pay yourself a dividend… and pay ZERO tax.

As soon as you received the payment, you could move wherever you wanted.

For Americans, who are taxed on their global income, this was the single-best way to drastically reduce taxes I’d ever seen – and it was written into US tax law.

But Trump’s tax plan may deal Puerto Rico a financial blow during its weakest time…

Act 20 and 22 remain. And while Puerto Rico’s tax incentives are still attractive, it will be more difficult for many Americans to take full advantage.

First, the new US corporate tax rate is 21% under the new law (down from 35%)… so the tax savings you’d enjoy in Puerto Rico are relatively less attractive based on that alone.

But the real sticking point is the new “global intangible low-taxed income” (GILTI tax). The GILTI tax essentially says you pay an effective tax rate of 10.5% on money you earn in a foreign corporation.

Even though Puerto Rico is a US territory, under the new tax plan, it’s considered a foreign country for GILTI tax purposes.

And because you need to hold a Puerto Rican company in your own name, as an individual, in order to take advantage of Act 20, the GILTI tax is a full 21% – bringing the effective rate to around 24% (4% of the income goes to Puerto Rico and the remaining 96% is taxed by the IRS at 21%).

You can still take full advantage of Act 20 and Act 22 (letting your money compound minus a 4% corporate tax, then paying yourself a dividend and paying 0% tax). But you actually have to reside in Puerto Rico the entire time.

Governor Rosselló believes the US government will change the rules for Puerto Rico to aid in the island’s recovery. But, for now, that’s how my personal attorney and I read it. We’ve spent countless hours analyzing the new tax bill (I actually read all 1,097 pages).

But don’t worry.

Again, you can still enjoy massive tax savings in Puerto Rico if you move to the island.

The tax bill also presents lots of other opportunities for business owners to cut their taxes to the bone.

In the latest Sovereign Man: Confidential (published today), I explain what I think is the single-best way for some Americans to reduce their taxes and indefinitely defer paying taxes on their income (while still using that money to buy property, assets, stocks, even crypto).

You can let the gains on these assets compound tax free… then pay yourself a dividend whenever the time is right (and be taxed at normal, dividend rates).

You can learn more about Sovereign Man: Confidential here.

My attorney and I are still analyzing the new tax bill. And I’ll continue to provide SMC readers with the best, new structures and strategies to reduce their tax bill.

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The year was 1720. And one of the smartest people to have ever lived had just made one of the dumbest financial mistakes imaginable.

Sir Isaac Newton was a genius in every sense of the word.

He practically invented the science and mathematics that is at the foundation of nearly every bit of modern technology that we enjoy today.

Newton was such an intellectual superhero that even Albert Einstein idolized him.

In fact Einstein wrote in a 1919 paper that “[Newton’s] clear and wide ideas will forever retain their significance as the foundation on which our modern conceptions of physics have been built.”

Yet Newton was a complete moron when it came to investing.

During his lifetime, the British Empire was becoming a major superpower and had colonies all over the world.

With so much new international trade under its control, Britain’s prosperity soared.

A handful of companies like the East India Company provided opportunities for investors to share in that prosperity. But the public was always clamoring for more.

So in the early 1700s, the British government chartered a new company– the South Sea Company– and awarded it a total monopoly on British trade in South America.

It seemed like a veritable goldmine, and investors clamored to buy shares.

Isaac Newton was one of those investors.

And initially it was a fantastic investment; Newton bought in early 1720, and within a few months he’d doubled his money. So he sold his entire stake.

Then something interesting happened.

The South Sea Company’s share price kept climbing… higher and higher.

In fact, almost right after Newton sold out, the South Sea Company’s share price climbed exponentially, reaching a peak of nearly GBP 1,000 by mid-1720.

(That would be worth nearly $300,000 today.)

Newton felt like a total buffoon for sitting on the sidelines while all of his colleagues were still makings tons of money in the stock.

So he got back in.

And, anxious to make back the profits he’d missed out on, Newton doubled down, investing an even bigger amount in the shares.

You know what happens next–

The South Sea Company turned out to be a complete bust. It turns out that Britain never really developed much trade with South America.

Yet the company had blown through most of the money, and there was nothing left for the shareholders. So the stock price quickly crashed.

Newton was broke. He lost his life savings, just seven years before his death.

Now, I’ve told this story a few times in this letter… because it’s so powerful.

Even one of the smartest people who ever lived made a terrible and completely avoidable mistake because he was driven by emotion instead of reason.

This has very much the case with cryptocurrencies over the past several months.

The prices of nearly every token and cryptocurrency have soared, and investors have clamored to chase their share of the easy profits.

Our advice in this column has always been to stay rational. Understand what you’re buying. And why.

Conduct your own independent supply and demand analysis, determining for yourself whether you think there will be MORE demand, or LESS demand, for that particular cryptocurrency in the future.

Think about the risks. Invest only what you can afford to lose.

It’s all simple but important advice.

But what I really wanted to talk about today was SELLING.

Over the past two weeks, Bitcoin has dropped from $17,700 a coin to as low as $9,600 (a 45% loss). It’s now recovered to around $10,200 as I write this letter.

Within the last three weeks, the price of Ripple collapsed 63% from nearly $3 to just over $1; it’s now around $1.25.

No doubt a lot of people are panicking. And when investors panic, they sell.

Just like people tend to buy assets that are rising in price, we tend to sell assets that are falling in price.

What I wanted to stress today is that the same lessons should apply, i.e. don’t sell because of an emotional panic.

Sell because you have a rational reason.

If you purchased cryptocurrency because you studied the market and formed a long-term view, ask yourself a question– has anything changed?

Sure, the price of Bitcoin (or Ether, etc.) has fallen. A lot.

But does that mean your analysis was wrong? Is there any new information today that didn’t exist two weeks ago about the future of cryptocurrency?

Maybe. Maybe not. But it’s worth asking yourself those questions before selling.

Sometimes the price of an asset collapses because there really is new information.

In September 2008, for example, the stock price of investment bank Lehman Brothers collapsed… because the market learned that the Lehman was insolvent.

This was critical new information, and a great reason to sell.

But often times investors hit the sell button simply because other people are selling.

So, once again, consider– if your cryptocurrency purchase was based on a sound analysis, is there any new information that suggests your analysis was wrong?

Or are you itching to sell simply because other people are panicking?

Again– I’m not suggesting you hold. Or sell. Or buy.

I’m suggesting that you be sure in your reasons for taking any action. After all, it’s your savings at stake.

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Back in 2013 I had an idea for a movie.

The basic premise was that some unknown domestic terrorist group executes an attack on the United States government by blowing up the Capitol during the President’s State of the Union Address.

It’s a little silly, but I even wrote a small treatment for it, including this scene–

ATTACKER speeds off to a parking garage where he ditches the bike, takes off his black motorcycle attire and helmet, revealing a three-piece suit. He drops the motorcycle stuff in a steel waste bin along with an incendiary grenade, lighting the contents on fire, then casually pulls the fire alarm. You never see his face.

After the attack is perpetrated, the US is effectively left without a government given that nearly every member of Congress, the President, Vice President, most of the cabinet, the Joint Chiefs, and the Supreme Court was all in that building.

The only guy who survives is the ‘designated survivor,’ some member of the President’s cabinet who’s supposed to head up a new government.

I never did anything with the treatment because I couldn’t quite figure out how I wanted the story to end. So it sat on my computer for years collecting digital dust.

A few years later I stumbled across a popular new TV show starring Kiefer Sutherland called Designated Survivor.

It had the same premise– terrorists blow up the Capitol building during the State of the Union address, effectively destroying the entire government.

Sutherland’s character is some low-ranking cabinet secretary who was the designated survivor, and he is urgently sworn in as President during the first episode.

The show is a bit of an action thriller as they try to uncover the plot of who these domestic terrorists are.

And that was the big difference.

My version of the idea back in 2013 was as a dark comedy.

I know that probably sounds horrible… but my main thinking was to showcase how utterly useless and ridiculous most of the government’s bureaucratic functions are.

My premise was that, after the attack, there would be an initial panic. The stock market would crash and citizens would freak out.

But after a bit of time they’d realize, “Wait a minute, the world didn’t come to an end.”

The grocery stores still had food on the shelves, the gas stations still had fuel, the power companies were still pumping out electricity, Apple was still making iPhones.

Nothing really changed. The Armageddon that everyone was anticipating never materialized.

More importantly, the LACK of government forced people to take on certain responsibilities for themselves.

Without the SEC to lull investors into an absurd false sense of security that financial markets were ‘safe’, people actually had to start doing real due diligence on their investments.

Without the USDA letting the Big Food companies sell everyone poison like High Fructose Corn Syrup while the government tells us that it’s all safe, people actually start paying attention to what they eat.

There’s no FDA to squash potentially life-saving cancer treatments, no FEMA to bungle emergency relief efforts, no Department of Education to turn the youth of a nation that was once self-reliant and entrepreneurial into a bunch of dumbed-down serfs.

Meanwhile, at least in my version of the story, the guy who was the designated survivor was a total buffoon.

Not that the character was stupid… but just so out of touch that, once he became President, his priorities were all about trying to re-assert mindless bureaucracy.

The script would work in real life examples of government waste that the new President would champion– like the $30,000 that the federal government really spent last year on a production of Shakespeare’s Hamlet… starring dogs instead of humans.

Anyhow, you get the idea.

I was thinking about this a lot over the weekend now that the US government has once again shut down.

Aside from being an utter embarrassment, though, the shutdown isn’t totally dissimilar to my version of the story.

There’s been all sorts of fear surrounding the possibility of a shutdown. And now that it’s here, it turns out there’s not really much of a major impact.

There’s still food on the shelves and gas at the pumps. The economy is still functioning.

There are simply fewer people to slow it all down.

And let’s be honest– it’s not a complete government shutdown. Any function deemed ‘essential’ is still at work, including the military, federal courts, air traffic control, etc.

Social Security recipients will keep receiving their benefits too.

But any government function deemed ‘nonessential’ has been shut down… which raises an interesting question:

Why does the government do anything that’s non-essential to begin with?

Every single function they take on sucks resources out of the economy. They squander and waste the majority of those resources, then end up giving people a $2 billion website that doesn’t work.

Clearly this is a government in need of serious downsizing.

Any other organization in the world with a history of such gargantuan waste would be forced to strip itself down to its core and limit itself to only the most essential functions.

Sadly, though, the public attention seems to be focused on how terrible this shutdown is and how these politicians need to come together to reopen the government.

Are you kidding me? This is a gift. Keep it closed.

The last time the government shut down in October 2013, the US economy posted its highest quarterly GDP growth in years.

And when the economy shut down TWICE in the fourth quarter of 1995, the US economy posted a whopping 7.2% growth rate in the following quarter.

The evidence is pretty clear– the longer these politicians bicker and argue, the better off everyone else will be.

Here’s to hoping they keep their doors closed for a very, very long time.

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In today’s podcast, I talk with our Chief Investment Strategist, Tim Staermose, about the global economy.

We’re in the midst of one of the longest economic expansions in history. Most assets are trading at all-time highs. Meanwhile, debt is also at all-time highs.

But we don’t have a crystal ball… this boom could easily continue for longer than anyone expects.

However, Tim notes the US economy largely runs on cheap money and cheap oil. And right now, both interest rates and oil prices are on the rise.

Most people aren’t talking about it, but oil prices have jumped 50% in the past seven months.

And that means, sooner or later, people will be spending more money at the pump and more money on debt payments – which leaves less money for everything else.

But if you look hard enough, you can still find value in today’s market.

In this podcast, Tim shares the one sector where he’s personally investing.

You can tune in here.

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I’ve been thinking a lot about death lately…

A very good friend of mine, who is also an executive at the agricultural company I founded here in Chile, was in a terrible accident with his family.

We’re very fortunate today because it looks like everybody is out of the danger zone.

There were some intense moments as this played out. And it led to the inevitable discussion with next of kin.

I realized these people were still in shock as they had to start thinking about what’s next.

And it was at that moment that I realized they were totally unprepared for what was going to happen.

This year, we’ve been talking a lot about avoidable mistakes. I’ve been writing about this so much because I’ve been thinking about it so much, mostly because of this unfortunate event.

It’s difficult to even think about it. But we’re all going to die. There’s no escaping it.

So it makes sense to be prepared. But in reality, most people just aren’t.

Whether it’s because we don’t want to think about it, or we just prioritize other things, most people don’t have any plans for what happens if (or really, when) they die.

But if we don’t take care of this now, when the moment actually comes, the consequences for the loved ones you leave behind are severe.

You’re talking about potentially losing enormous sums of money and causing your loved ones lots of pain and hardships.

Maybe you have a multi-million dollar baseball card collection stuffed in a safety-deposit box (or gold coins)… And if nobody knows they exist, they’ll disappear when you’re gone.

You also have to worry about the state, which can feast itself on your assets.

They will chase you into your death to tax you even then. You are no longer on this earth, but the government will still tax you.

The new tax plan in the US doubled the estate tax exemption from $5.5 million for individuals and $11 million for couples to $11 million and $22 million, respectively. So, on a federal level, it won’t affect many people (though I’m sure some of you will still qualify).

But at the state level within the US, estate and inheritance tax thresholds for inheritance tax can kick in at much lower levels (sometimes only a couple hundred dollars).

Other jurisdictions, including some US states, have rules called “forced heirship.” They force you to bequeath certain assets to heirs of the state’s choosing, not your own.

Louisiana, for example, has forced heirship rules. Let’s say you live in Louisiana and you’ve had a falling out with your family and you decide to bequeath your wealth to a single charity. The state can step in and say “no, we won’t allow that.”

It gives you a sense of how the government views you…

It’s not actually your property. They just let you use it until you pass on. And when you die, they carve it up as they see fit and take whatever they feel is their fair share.

Chile, where I am now, also has forced heirship.

If you ignore estate planning, you’ll also saddle your loved ones with probate – a painful legal process. When there are real assets up for grabs, you can face lengthy legal proceedings and fights.

So, if you ignore this important issue, you could end up paying huge taxes, having your property taken away from you (or your heirs) and subject your loved ones to lots of legal battles and costs.

But it’s one of the most easily avoidable mistakes ever.

There are some simple steps you can take, right now, to prevent this from happening.

The risk of faulty planning isn’t even a true risk… risk only occurs when there’s uncertainty involved.

But there’s 100% certainty that this will happen to all of us. So it’s smart to make the appropriate plans.

I like to think of estate planning in four pieces. But today, we’ll only discuss one of those – Knowledge.

A lot of what we discuss with having a Plan B involves holding various assets offshore. And some of these may not be very public assets, like an anonymous safety deposit box somewhere. But if your family or loved ones (or some appointee) doesn’t know these assets exist (like our baseball card example from earlier), those assets will disappear when you’re gone.

Or consider your basic checking account.

Did you know most jurisdictions have dormant bank account rules?

This means if an account has zero activity for some period of time, the bank is legally obligated to declare the account dormant. And if a certain period of time passes without the account being unfrozen (sometimes it’s only a matter of months), then all the contents of the account passes to the state.

But it’s an easy fix… just make a list.

Once a year, make a list of all your assets, account numbers, etc. And put all of that data into a centralized place. Include any points of contact (like brokers or lawyers) and any login info your family will need to access these accounts.

Here are some of the assets you should include:

– Checking and savings accounts
– Brokerage accounts
– Real estate
– Cash, gold and crypto
– Insurance policies
– Bills
– Important Documents (birth certificates, marriage certificates)
– Wills/estate plans

Just by listing these assets and telling your family about them, you can avoid a massive, financial mistake in the case of your untimely passing.

It’s an uncomfortable conversation to have. But take advantage of the new year to get started.

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