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The Threat to Stocks

Written by Briton Ryle
Posted January 30, 2017

I know the executive order to ban Muslims from seven different countries — Syria, Iraq, Iran, Sudan, Somalia, Yemen, and Libya — is an important topic today. We all saw the footage of people with green cards and temporary visas stuck in airports, unable to enter the U.S. Many of these people were already flying when the executive order was issued. One minute they were allowed in, the next they were not. 

We saw the American citizens protest the ban, we've seen two different judges overturn parts of the ban, and we've seen the mosque shooting in Canada that seems to justify the president's order.

Now, I'm not going to attempt to tell whether all this is right or not. The fact is, a ban on Muslim immigrants was a promise that Trump campaigned on, and he got elected. In other words, plenty of Americans want this ban. Plenty of Americans want a wall built on our border with Mexico. Is it really a surprise that Trump issued the order for a Muslim ban? Will it be a surprise when he starts building that wall? 

I'm here to try to sort things out from an investment perspective. It is my job to help readers find sectors, industries, and companies that are growing and offer you good investment opportunities. So I tend to avoid the political discussions. Typically, markets are pretty much immune to whoever is president. The forces of economics and demographics tend to have a more powerful influence on the stock market than any president. 

That's because populations grow, so more people buy more stuff. Add in that the Fed's 2% target for inflation essentially ensures that salaries rise along with consumer prices, and you have the framework for companies to see steadily rising revenues and profits. That is the most basic formula for rising stock prices I can come up with. 

It's fairly reliable, too. It's the reason somebody like Warren Buffett is usually bullish. He tends to buy companies that fit into this demographic/inflation dynamic — insurance, Coca-Cola, Heinz ketchup, a mobile home maker, a carpet company. 

You don't have to get fancy when you think about investing in terms of demographics and inflation. You just have to find the companies that have a couple of edges, a couple spots where they stand out. A solid brand name is always good. People tend to stick with brands they like. If you buy Ford, you keep buying Ford. You don't switch to Chevy.

And then you have to find companies with superior management teams that can both meet consumer demands and expectations and, at the same time, manage growth so that profit margins are a bit better than the competition. This is what Buffett does, and I'm sure you're thrilled to know that I've figured out the secrets of the master...

The Real Secret is Time

Warren Buffett has made himself into one of the richest men on earth because he is good at recognizing brands that don't go out of style. And he's really good at understanding management. But he does have another secret: time. 

Time is the real secret to long-term wealth building. You ever hear the one where you put a penny on the first square of a chessboard, and then double the number of pennies on the next square? And that if you keep going, you'd be a millionaire when you get done?

Yeah, well, that's the power of time. It means that a small start can have a really big finish. It's those last few squares where the piles of pennies really start to add up...

Again, this is a simplistic explanation. Lord knows Buffett uses a lot of complex strategies to get where he is. He also uses credit default swaps and index options to make money.

For instance, Buffett loves selling S&P 500 put options. Selling a put option means you get paid for agreeing to buy an asset at a lower price (the asset gets "put" to you). That satisfies two of Buffett's simplest investment goals: One, he gets cash, and he knows that if you invest cash correctly, you will beat inflation and at least keep pace with the S&P 500. And two, he might get the chance to buy the S&P 500 at a lower price than it is now.

As a perma-bull, buying the S&P 500 at a lower price is almost always a good idea, because time will ensure that it is higher at some point. 

The Timing of Time

As much as Buffett will say that he doesn't time the market — that is, try to pick tops and bottoms — he does pay attention to timing. And that's because there are times when stocks are cheap and times when they are expensive. One of Buffett's rules is that he doesn't want a good company at a great price; he wants a great company at a good price. 

So, let's remember that he bought a +10% stake in the Burlington Northern railroad in April 2007. And he plunked down $5 billion for some Goldman Sachs on September 23, 2008, just a week after Lehman went belly-up. And he put another $5 billon in Bank of America in August 2011, when the stock was around $5. 

Now, Buffett got very sweet terms for those bank investments. They desperately needed his money, both to bolster their cash levels and to serve as a vote of confidence about the businesses. None of us could have gotten the sweet terms that Buffett did for stepping in when there was a lot of uncertainty in the air.

And speaking of uncertainty, I have one final thought for you today. As I said earlier, I'm not here to dissect the political environment. But it is fair to say that the outlook is uncertain. Trump has said he wants to help U.S. corporations by lowering taxes and removing some regulations. It should also be clear that he is pursuing policies that may hurt U.S. companies. The Muslim ban is one...

Plenty of companies have spoken out against it: Microsoft, Starbucks, Tesla, Apple (which was founded by the son of a Syrian immigrant), and Google. Even GE CEO Jeffrey Immelt said, "We have many employees from the named countries and we do business all over the region."

Ever since Trump won the election, there's been a steady stream of corporate CEOs meeting with him. The reason for this is clear: they need to understand how Trump's policies might affect their businesses.

Let's take Ford as an example. Ford's CEO has met with Trump. And in keeping with Trump's desire to boost U.S. manufacturing, Ford has announced that it will scrap plans for a new plant in Mexico and keep 700 jobs here in the U.S. But the fact remains that Ford will still move small car manufacturing to Mexico. The potential for conflict here is obvious. 

What if GE suddenly has trouble doing business in some of its Middle Eastern markets? What if Google or Microsoft can't hire the talent from overseas that they want? The bottom line is that many American companies are multinationals. And the rules may be changing. There's a reason the Bloomberg headline reads "CEOs Face Uneasy Test of Doing Business Under Trump"...

Investors should be aware that there is uncertainty in the air about how things are going to play out. And the stock market does not like uncertainty. Don't be surprised if, sometime this year, you can buy great companies at a better price than you're seeing right now.

Until next time,

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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 also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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