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Unlike Fools, the Wise Avoid Most Stocks, Most of the Time

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empirefinancialresearch.com

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wtilson@exct.empirefinancialresearch.com

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Fri, Mar 17, 2023 08:35 PM

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Editor's note: Today in Empire Financial Daily, we're sharing an essay from our friend and colleague

Editor's note: Today in Empire Financial Daily, we're sharing an essay from our friend and colleague Dan Ferris over at our corporate affiliate Stansberry Research... Dan is the editor of Stansberry's Extreme Value newsletter, which focuses on buying world-class businesses trading at steep discounts. He also hosts the popular Stansberry Investor Hour podcast and writes […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Editor's note: Today in Empire Financial Daily, we're sharing an essay from our friend and colleague Dan Ferris over at our corporate affiliate Stansberry Research... Dan is the editor of Stansberry's Extreme Value newsletter, which focuses on buying world-class businesses trading at steep discounts. He also hosts the popular Stansberry Investor Hour podcast and writes essays for the Stansberry Digest e-letter. In this essay, Dan shares the dangers of "following the herd"... --------------------------------------------------------------- Unlike Fools, the Wise Avoid Most Stocks, Most of the Time By Dan Ferris --------------------------------------------------------------- [Reagan's Revenge to Kick Off March 31?]( 40 years ago Ronald Reagan implemented a radical new idea... which led directly to the rise of one of the most profitable investments of the decade. And now, starting as soon as March 31, 2023, Reagan's idea could be rolled out in full force once again... Leading to what could be the most profitable investment of the century. [Just click here now for the full story](. --------------------------------------------------------------- Buying what's popular is not a mistake – when you're buying almost anything other than stocks... You buy a Ford F-150 pickup truck or a Samsung smartphone because its popularity is a sign of its quality and consistency. But in financial markets, "following the herd" only looks wise – until its utter foolishness is revealed. In recent years, we've seen exactly how that happens. Just consider the poster child of the pandemic boom: the ARK Innovation Fund (ARKK)... As Simon Lack of SL Advisors pointed out in a blog post last year: "[ARKK's Investors Have In Aggregate Lost Money]( Lack does the math to show what any experienced stock market participant knows... More investors join a manic bull run at the top than at any other time. The situation with ARKK is no different. The fund focuses on disruptive tech innovators. That made it a magnet for foolish investors who were ready to pile in at exactly the wrong moment. As Lack wrote... [B]ecause inflows to ARKK followed strong performance, as is usually the case, it turns out that the cumulative P&L on ARKK is negative. [The total cumulative profit earned by ARKK investors since its inception] peaked last February at just under $12 [billion] and has been in steep decline ever since. At the beginning of this year, it crossed into negative territory. The average dollar invested in ARKK has lost money. One more time... The average dollar invested in ARKK has lost money, even though the fund soared as much as quadruple digits to its peak. And remember, that loss doesn't include its slide over the past year. It happened for a simple reason: Most of the money came in at the top. As I often note, fools do in the end what the wise do in the beginning. And it sure seems like every fool in the world fell in love with stocks in 2021... But here's the thing the herd doesn't realize: After they've bet (not invested) every spare penny they have, there's nobody left to buy. And that's exactly how we got here. The stock market boom went bust... turning 2022 into the worst year for the market since 2008. --------------------------------------------------------------- Recommended Link: [GM's next big release has no engine and no wheels]( In a shocking move, auto giant General Motors is venturing into a whole new space (hint: NOT electric vehicles). While industry analysts see this as a way of catching up with Tesla, the bigger reason could be because this new space is getting the full backing of the current administration, and that could mean huge tax credits in the future. Or it could just be that this fledgling industry has more scope than the declining auto industry. Whatever it may be, this move could put GM into the same bracket as Apple, Google, Microsoft, and Amazon. [Get the details of this massive trend here](. --------------------------------------------------------------- So, as investors grapple with the bear market that began last year, this seems like a good time to discuss one simple way to avoid being a fool... Seasoned professional investors tend to agree that avoiding doing stupid things is more important than doing something smart. The core of every successful investment strategy is avoiding risk. Otherwise, the strategy will eventually take on a risk it shouldn't and lose all the profit it made – just like all the fools who bought into the housing bubble before the financial crisis... and ARKK at its top in 2021. We all know this... or we should. But how many investors believe it? Tell me truthfully – when Warren Buffett says there are two rules to investing and Rule No. 1 is "Don't Lose Money" and Rule No. 2 is "See Rule No. 1"... do you really believe him? He's looking to make money, not merely avoiding losing it... right? Sort of. The two-rule adage is one of the all-time great investment truisms. However, it involves more than Buffett's folksy Midwestern wisdom suggests. What follows might earn me the title of Captain Obvious... but I would prefer that to Captain Obfuscator. The two-rule adage really means something like, "You can't make money in the market without placing your capital at risk. But you need to know the difference between a risk worth taking and one not worth taking, and there are a lot more risks you shouldn't take than you should take." That's the obvious part. Now, here's where it gets a little more complicated... "Learning to identify the good risks is more about avoiding the bad ones than most people realize... To be successful, you have to do a lot of work that results in not taking any action. Also, a catastrophic loss can wipe out years of compounding and must be avoided." Doing a lot of work that leads to taking no action is an especially big problem for most investors. People want action. They want to buy and sell every day... And they want to make a lot of money and feel great about it all the time. But investing doesn't work that way... Investing is a creative endeavor. And creative endeavors often mean doing work that doesn't generate any concrete result. (Just as an example, famed architect Frank Lloyd Wright designed more than 1,000 structures in his life – but only about half of them were ever built.) Most people find this seeming lack of action uncomfortable. So people overtrade their accounts and lose too much money taking bad risks... rather than avoiding the bad risk by putting in a lot of work just to "do nothing." Here's what I mean... When it comes to researching stocks, you'd be lucky to find that 40% of all the stocks you look at are worth owning for the long term. If you're truly embracing Buffett's two-rule adage, it's probably less than 4%. The actual percentage isn't what's most important. What matters most is understanding that it's desirable and healthy not to want to buy most stocks most of the time... That's particularly true for those stocks being snatched up in a speculative frenzy. Those are the money-losing propositions that the two-rule adage counsels investors to avoid. When you no longer jump at risks that aren't worth taking, you give yourself the time to find the worthwhile opportunities. Today, we're heading into a time where this matters a great deal... Just like we saw in 2020, many investors entered finance for the first time during the dot-com boom. They jumped in at the top. Then, when that boom became the dot-com bust, the ones who succeeded had to learn the difference between being smart... and being in a frothy bull market. Wise investors today will learn to be selective. Meanwhile, as always, the fools can't find a risk they don't like... Make sure you're not one of them. Regards, Dan Ferris March 17, 2023 Editor's note: According to Dan, a once-in-a-lifetime market event is about to happen. It's one that could earn you big profits... but you must start preparing now. To help investors do so, Dan recently teamed up with an investing legend to explain what's coming and how you should position yourself to take advantage of this shift. [Get the details here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 380 Lexington Ave., 4th Floor, New York, NY 10168 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. 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