How Do You Make Money?

Well, investors sure seem to like 2019 so far! It’s as if somebody finally remembered to flip the market switch back to bullish. I haven’t seen emotions flip around this fast since I was 14… but that’s the way it is when money’s involved.

I was around for the internet bubble and crash. And I can tell you that we humans can go from wildly optimistic to the depths of despair in about five minutes — about the time it took for Greenspan to say “half-point rate hike.”

Back then, a significantly larger percentage of the U.S. population was directly invested in stocks — around 57%, if my crusty old memory serves. Today, it’s less than 50%.

This statistic blows me away because investing has never been easier, cheaper, and more important. The internet has done to investing what it does with pretty much everything: It’s made it more accessible and cheaper. But the thing that gets me the most is that people don’t seem to appreciate why investing has gotten more important.

For one, pensions are virtually obsolete. Social Security won’t get you through. Plus, the economy is changing so fast that some careers that easily supported a middle-class lifestyle only 20 years ago barely pay the bills today.

The federal government is running a $1 trillion deficit every year. And what’s the first solution to this that always hits the table first? Cut Medicare spending. Yep, our politicians are hell-bent on making what’s an already challenging situation for the average American even worse.

And finally, there’s the unholy quasi-alliance among Comcast, Verizon, health maintenance organizations (HMOs), and universities to sop up every spare penny we have…

So, the message to the young and old alike is the same: You have to find a way to get money invested so you can live the life you want. Money means choices. Money means security.

The Rich Get Richer

So, remember that statistic I cited earlier about the number of Americans directly investing in stocks? Well, that’s a big reason we’re seeing an increase in income disparity in this country, especially since the 2008–2009 financial crisis. Those with the means to stay invested did so, while the majority of Americans got dealt a crushing economic blow.

I hope it’s obvious that the solution isn’t wealth redistribution. And I hope it’s obvious that trickle-down economics doesn’t work, either.

My question is: Why aren’t we teaching investing in school? Investing is about way more than numbers and the math behind compounding. Ultimately, investing is the process of asking one simple question: How do you make money?

By asking that simple question, I’ve learned about a wide range of industries: mining, retailing, technology, biotech, property management, health care, banking, and on and on. Plus, I’ve learned marketing, lead generation, and economics.

Ask Domino’s how it makes money at $7.99 for a large two-topping pizza when 25 years ago, the same pizza was around $16. You’ll get a quick lesson in automation, supply chains, and labor costs.

Ask Levi’s why the cost of a pair of jeans has only risen by about $15 over the last 40 years, and you’ll get a lesson in globalization and cotton use. And if you want to dig in, consider the degree to which the price on those jeans has failed to keep pace with inflation.

Oh boy, now we get to delve into why technology is deflationary…

My dad was a history professor at the University of Richmond. I grew up discussing ideas, concepts, arguing, and thinking. I’m grateful for my liberal arts education because it gave me a fantastic framework to answer this question: “How do you make money?”

Well?? How Will We Make Money This Year?

Yes, the stock market has gotten off to a great start in 2019. But please, do not just assume that this rally means the coast is clear for all of 2019.

The truth is the same challenges that started the S&P 500’s 20% correction back October are still around. Despite some optimism, there is no trade deal with China. Last year’s interest rate hikes are affecting lending. And we’ve got a very poorly timed government shutdown. 

The U.S. economy will not repeat the ~3% growth it posted in 2018. 2.5% is more likely, and that’s why profit growth is expected to be around 5%. And remember, when data is trending higher, surprises tend to be to the upside. GDP beats, companies beat on earnings. But when the data starts trending lower, surprises tend to be bad surprises. Growth comes in weaker than expected, companies miss earnings…

So I’m on high alert to start this year. Making money is not going to be easy. That said, here are some things I’m watching

Pot Stocks: I’ve said a bunch of times that AG Sessions would get canned (or quit) and that would open the “legalize cannabis” floodgates. This is happening now. I can’t say marijuana will be legalized at the federal level this year. But more states will legalize. And there will be a lot more attention on legal cannabis in Congress. Now, pot stocks are tough because it’s tough to know which ones will be winners in this emerging market. Right now, we know about a bunch of new companies in the space. But we don’t really know what big companies like Starbucks or Altria are planning. New companies with unique business models that are making money now and maybe have partnerships with the big companies are the ones to pay attention to. (Here’s my best idea.)

Tech Stocks: Since October, I’ve been telling my Wealth Advisory subscribers to take some profits, raise some cash, and be ready to scoop up some bargains. So, in the January issue (released last Wednesday), we bought what I consider to be one of the “must-own” chip stocks at a 50% discount to 2018 highs. And in December, we bought a cloud software stock at a similar 50% discount (and we’ve already got a 20% gain!). Now, just because I say these stocks are on sale doesn’t mean they automatically go higher. But if the sales and profit numbers are steady, the odds are sure better. To me, 2019 looks like the year to build positions in the really solid tech stocks and be very discriminating at the ones that are pricing in high expectations (like TWLO). It’s a good time to build positions in companies like Cisco and Microsoft. Oh, and 5G build-out starts soon. Probably gonna be bad for carriers (they have to spend all the money) and good for the equipment stocks.

Retail: Why. It’s tempting to just leave it at that. Why invest in a sector where the only catalyst is the execution of individual management teams? I don’t know. And that includes Amazon. Pro tip: Companies that become the biggest on the S&P 500 (like Amazon recently did) average a 7% gain over the following 12 months. But that actually underperforms the overall market. Of course, Amazon is nowhere near done growing. But there are a few unheralded companies out there that do a lot of Amazon’s grunt work. To me, these are the ones to watch because they have attractive valuations, pay dividends, and have a clear path for growth. 

Oil: Again, why. I talked about this recently, but I don’t think we see any more than an incremental boost to global oil demand, ever. Investment money wants to grow. That’s why it looks for growth opportunities. Oil ain’t that anymore.

Dividend Stocks/REITs: Yes, please, and thank you. Of course, as always, use discretion. As in, data center REITs are a good place to be, shopping mall REITs maybe not so much. So you know, we’ve got what I consider the top data center REIT in the Wealth Advisory portfolio. It pays nearly 5% in dividends and is ~25% below its highs. 

There you go, enjoy. I’ll talk to you again on Wednesday.

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.