Warren Buffett is selling stocks... So is the 'dumb money'... The worst gamblers' latest bet... Inflation is poisoning society... Human nature, injected with steroids...
 'Smart money' and 'dumb money'...
People use these terms to talk about the actions of wealthy, connected, professional, often contrarian investors versus those of not-so-wealthy, not-connected amateurs who chase trends and bubbles. Sometimes you'll hear folks say something like, "I listen to the bond market. That's the smart money"... or maybe, "Dumb money is chasing cryptos and AI. They're all going to get wrecked." You may have even heard me say almost exactly those two things at some point over the past few years. But I no longer believe the bond market is "smart money." I watched banks and other bond investors load up on the most expensive debt in all human history in 2020, then get wiped out when the Federal Reserve raised interest rates at the fastest rate in decades. So these terms are probably unfair... The bond example shows you that smart money isn't always smart. And I know for a fact that there are many not-connected individuals reading these words who, far from being dumb money, are among the smartest money in the market. Unfair or not, we're currently being treated to pristine extremes of these polar opposites... Certainly you'll agree that Warren Buffett is among the smartest money that has ever existed. Since he took over as chairman and CEO of Berkshire Hathaway (BRK-B) in 1965 through the end of 2023, the stock compounded at 19.8% per year. That's nearly double the return of the S&P 500 at 10.2% per year. Invest $10,000 at that rate for that long and you'll wind up with more than $355 million. And what is Warren Buffett doing lately? He's selling stocks, raising cash, and talking about how much he likes Treasury bills at a 5% yield. I started getting concerned about the overall market valuation and speculative excesses in the May 2017 issue of Extreme Value. Berkshire Hathaway finished that year with $328.9 billion in cash, T-bills, and liquid securities. Its latest filings show a balance of $573.2 billion of cash, T-bills, other bonds, and stocks. According to data compiled by Bloomberg, Buffett has reduced his largest equity position – in Apple (AAPL) – from more than a billion shares in 2018 to about 400 million shares today. That's a 60% reduction in the biggest equity investment he's ever made. More recently, Berkshire has begun reducing its large position in Bank of America (BAC) from slightly more than a billion shares to a little more than 900 million shares. I realize it's harder than ever for Berkshire to find investments large enough to move the needle on its massive asset base, reported at $1.1 trillion on its latest quarterly report. But that only makes my point. The guy is desperate to find anything that's both good enough and large enough to invest in... yet he's selling two stocks that he has raved about for years. And in the case of Apple, he didn't just like it. He loved it. In 2020, Buffett told CNBC this: I don't think of Apple as a stock. I think of it as our third business. And this: It's probably the best business I know in the world. Buffett has often said his favorite holding period for an investment is forever... That's because if the business continues generating high returns on capital, the value of your investment will rise. Why sell when you can just keep compounding at high rates over time? In that context, selling the greatest business in the world is an even bigger deal than it seems at first. Besides its being the best business in the world, Buffett loved how Apple did his job – capital allocation – for him. Here's what he wrote in Berkshire's 2020 shareholder letter... Berkshire's investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I'm referencing the investment held in Berkshire's general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire's general account owned 5.2% of Apple. Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position. Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding. You almost can't imagine he'd ever sell it. And yet, he has reduced Berkshire's "third business" by more than half. Likewise, Buffett has often sung the praises of Bank of America Chairman and CEO Brian Moynihan. I've also heard him praise the banking business in general many times over the years, including at a couple of Berkshire Hathaway shareholder meetings. So far, Berkshire has only reduced its Bank of America position by about 10%. I'm willing to bet the position keeps shrinking, but we'll see... Overall, the value of equities on Berkshire's balance sheet shrank by nearly 20% from December 31, 2023 to June 30, 2024, while the company's T-bill position grew 81% during the period. In short, some of the smartest money ever is selling stocks and raising cash. Likewise, I've told Ferris Report subscribers to buy short-term T-bills and newly issued government-guaranteed mortgage-backed securities... and have made a few sell recommendations lately (and several others in Extreme Value). Both government-backed investments I recommended are safe sources of income that should maintain the value of your principal in a steep bear market or other chaotic environment. It's no time to take big risks, and these are two of the safest – and, yes, smartest – plays on Earth right now. This leads me to what the dumbest money on the planet is doing... As it turns out, these guys are also selling stocks. But when they sell, they're not putting it into T-bills or mortgage-backed securities. They're not buying stocks. They're not even buying options, futures, or cryptocurrencies. What are they buying? Well, Fortune magazine recently told the story of Rob Minnick. Minnick is a college student who used money from COVID-lockdown unemployment checks, plus funds generated from selling stocks, bitcoin, and Ethereum, to fund his growing habit of sports gambling. Minnick has lost it all multiple times. He promised his parents he'd quit... but still hasn't. And he is not alone. As Fortune reports: Since the U.S. Supreme Court overturned the Professional and Amateur Sports Protection Act in 2018 – effectively legalizing sports betting – U.S. sports betting revenue has exploded from $441 million in revenue in 2018 to almost $5.7 billion in 2024, according to Sportsbook Review. Last month, Scott Baker of Northwestern University's Kellogg School of Management published a study of gambling's impact on Americans' finances. He concluded that the average household has increased sports betting by more than $1,100 a year in states where sports betting is legal... and decreased investments by nearly 14%. And yet the American Gaming Association maintains that folks see sports betting as "good value for their entertainment dollars," according to spokesman Joe Maloney – not as a way to make a positive gain on their investment. I guess we shouldn't expect the guy who represents the gaming industry to say otherwise, but when folks are selling their investments to gamble, I mean... it's fairly obvious what's going on. Fortune also reported of rising gambling addictions leading to falling credit scores and folks losing their homes. And most of those eschewing investments in favor of gambling are young men. No wonder Pew Research reports that 63% of men under 30 are single. Though Fortune didn't mention it, I suspect inflation is a primary culprit... And it wouldn't be the first time. The late 1970s also saw an increase in gambling in the U.S. A 1974 survey for the Commission for the Review of the National Policy Toward Gambling reported that 61% of adults had gambled in some form during the previous year, which it deemed "no significant increase from [a Gallup poll's] estimate of nearly 25 years earlier" of 53%. Then, as a 1994 article in the journal Public Perspective reported... The pace quickened... in the late 1970s. The number of state lotteries increased dramatically, and the proportion of the adult population with access to a lottery in their home states grew to more than two-thirds. The article blames the rise of gambling on the "social, cultural and political changes of the late 60s and 70s." It also cited "the middle-class tax revolt that began in the 1970s." I can't see how those changes weren't heavily influenced, if not primarily caused, by that era's wild inflation. Inflation is like a flood of poison that seeps into every nook and cranny of society, quickly becoming a financial and economic mass murderer. In a 1980 speech, then-U.K. Prime Minister Margaret Thatcher said... Inflation destroys nations and societies as surely as invading armies do. Inflation is the parent of unemployment. It is the unseen robber of those who have saved. She added that countries that had been through rampant inflation knew that it led to "massive unemployment and the breakdown of society itself." Likewise, I doubt you can have a healthy society if large numbers of its young men are so desperate to make money quickly that they're constantly going broke gambling all their money away on sports contests. Here's the other victim of this shift... Importantly for financial markets, the gamblers appear to have abandoned the AI trade. The share price of the AI poster child – semiconductor maker Nvidia (NVDA) – peaked on June 18 and promptly fell 27% through August 7. It rose off that low but failed to eclipse the previous high before turning down again. On Wednesday, Nvidia reported a 122% rise in quarterly revenue from the same period last year – and the stock fell on the news. Nvidia is by far the highest-quality company directly serving the AI market and the only company that appears to be making money from AI. As analyst Peter Atwater of Financial Insyghts recently pointed out, the more speculative AI stocks – like Super Micro Computer (SMCI) and MicroStrategy (MSTR) – peaked in the spring and then sold off by more than 20%. Says Atwater: THE peak in the AI frenzy is behind us. Unappreciated by the crowd, it occurred in late February/early March. As they always do, the worst left the party first – and dramatically so. He's right. You'll remember that in 2021, all the garbage stocks peaked early in the year... the Nasdaq Composite Index in November... and the S&P 500 Index and Dow Jones Industrial Average in the first trading days of 2022. The garbage blows up first, the highest-quality stuff last. Atwater concludes... Short of a resurrection in irrational retail investor behavior, the course ahead is set. He might as well have said that the AI bubble's only remaining hope is for the gamblers to get out of sports betting and back into the stock market. Before we move on, let's get something straight... I don't feel bad about calling these investors-turned-gamblers the dumbest money around today... It's a moral failing. Everybody falls off the straight and narrow path sometimes, some worse than others. We do these folks no good by pretending they didn't choose the path that led them to their condition. When we tell a gambler that they have an illness, we give them an excuse. That doesn't help them. Even the fools at the National Institutes of Health know that gamblers need to make the right choice... According to Game Theory, gambling is a zero-sum game with the peculiarity that the outcome of the game always favors the one who manages the gambling. The only solution for the gambler is make the decision to stop gambling before losses become catastrophic or result in gambling disorder. (They're fools because they lay the blame for this situation on free markets rather than the gamblers themselves... Their idea is for the government to intervene, which rarely goes well.) But I'm more focused on that phrase, 'make the decision to stop gambling before losses become catastrophic'... For some gamblers, who might also suffer from substance abuse and addiction, the catastrophic loss could be death. For the rest, avoiding big losses is a basic requirement for trading... You have to survive to trade another day. The folks who were previously gambling on stocks and options weren't completely delusional... It's true that the instruments they bought might appreciate in value. They are investment vehicles. These guys weren't doing it right, but there was always the potential to learn a real strategy and survive to invest another day. But sports betting is not an investment. It's guaranteed to lose you money over time. It is totally irrational to expect to survive to bet another day, especially if you're draining every penny of your savings to do it. That distinction is lost on the new sports gamblers. They were the worst gamblers in the stock market. They were buying call options on Nvidia, putting everything they had into meme stocks, and buying the most worthless cryptocurrencies, hoping for a big score. And, of course, they were mostly losing there, too... which is why they left. People trying to make a lot of money quickly in the stock market is nothing new. Human nature hasn't changed. But the pandemic injected it with steroids, which helped to inflate the biggest financial mega-bubble – the "everything bubble" – in recorded history. Everybody who knows the mega-bubble is extremely long in the tooth – from Warren Buffett to Ferris Report subscribers – is loading up on cash, T-bills, and mortgage-backed securities. Meanwhile, the gamblers are still stuck in their 2020 mindset... only now they've moved on to actual gambling. I'm sure many young folks who found the stock market in 2020 took their early lumps and will survive, learn, save, and invest for the future. But way too many of them came to believe that, if the government wasn't going to allow them to work, then they'd just have to do what they were permitted to do and try to get rich quick by trading stocks, options, crypto... whatever, from home. And those bets have failed, so they're turning to the only other thing they know: sports gambling. I hope I'm wrong and needlessly wringing my hands, as folks my age tend to do about "the young." But I'm afraid we're witnessing a modern version of the "bread and circuses" that grew popular as the Roman Empire declined... Too many young men are becoming cynical about their prospects, and some are turning to a life filled with unfulfilling entertainments and moral weakness. I hope they find their way. One day soon we'll desperately need them to be responsible grown-ups. In the meantime, protect yourself. Shift some of your wealth into T-bills and other safe investments. The gamblers are fleeing stocks... and that's one more bearish warning sign for an unprepared portfolio.
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Eagle Point, Oregon
August 30, 2024
Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open stock positions across all Stansberry Research portfolios. Returns represent the total return from the initial recommendation. | Investment | Buy Date | Return | Publication | Analyst | MSFT
Microsoft | 11/11/10 | 1,361.4% | Retirement Millionaire | Doc | MSFT
Microsoft | 02/10/12 | 1,317.0% | Stansberry's Investment Advisory | Porter | ADP
Automatic Data Processing | 10/09/08 | 987.0% | Extreme Value | Ferris | WRB
W.R. Berkley | 03/16/12 | 819.9% | Stansberry's Investment Advisory | Porter | BRK.B
Berkshire Hathaway | 04/01/09 | 730.4% | Retirement Millionaire | Doc | HSY
Hershey | 12/07/07 | 477.3% | Stansberry's Investment Advisory | Porter | TT
Trane Technologies | 04/12/18 | 466.5% | Retirement Millionaire | Doc | AFG
American Financial | 10/12/12 | 461.3% | Stansberry's Investment Advisory | Porter | NVO
Novo Nordisk | 12/05/19 | 398.3% | Stansberry's Investment Advisory | Gula | TTD
The Trade Desk | 10/17/19 | 389.0% | Stansberry Innovations Report | Engel | Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals | | 5 | Stansberry's Investment Advisory | Porter/Gula | | 3 | Retirement Millionaire | Doc | | 1 | Extreme Value | Ferris | | 1 | Stansberry Innovations Report | Engel |
Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio | Investment | Buy Date | Return | Publication | Analyst | wstETH
Wrapped Staked Ethereum | 12/07/18 | 2,291.8% | Crypto Capital | Wade | BTC/USD
Bitcoin | 11/27/18 | 1,479.2% | Crypto Capital | Wade | ONE/USD
Harmony | 12/16/19 | 1,122.5% | Crypto Capital | Wade | MATIC/USD
Polygon | 02/25/21 | 733.0% | Crypto Capital | Wade | OPN
OPEN Ticketing Ecosystem | 02/21/23 | 279.3% | Crypto Capital | Wade | Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio.
Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios | Investment | Symbol | Duration | Gain | Publication | Analyst | | Nvidia^* | NVDA | 5.96 years | 1,466% | Venture Tech. | Lashmet | | Microsoft^ | MSFT | 12.74 years | 1,185% | Retirement Millionaire | Doc | | Inovio Pharma.^ | INO | 1.01 years | 1,139% | Venture Tech. | Lashmet | | Seabridge Gold^ | SA | 4.20 years | 995% | Sjug Conf. | Sjuggerud | | Nvidia^* | NVDA | 4.12 years | 777% | Venture Tech. | Lashmet | | Intellia Therapeutics | NTLA | 1.95 years | 775% | Amer. Moonshots | Root | | Rite Aid 8.5% bond | | 4.97 years | 773% | True Income | Williams | | PNC Warrants | PNC-WS | 6.16 years | 706% | True Wealth Systems | Sjuggerud | | Maxar Technologies^ | MAXR | 1.90 years | 691% | Venture Tech. | Lashmet | | Silvergate Capital | SI | 1.95 years | 681% | Amer. Moonshots | Root | ^ These gains occurred with a partial position in the respective stocks.
* The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%.
Stansberry Research Crypto Hall of Fame Top 5 highest-returning closed positions in the Crypto Capital model portfolio | Investment | Symbol | Duration | Gain | Publication | Analyst | | Band Protocol | BAND/USD | 0.31 years | 1,169% | Crypto Capital | Wade | | Terra | LUNA/USD | 0.41 years | 1,166% | Crypto Capital | Wade | | Polymesh | POLYX/USD | 3.84 years | 1,157% | Crypto Capital | Wade | | Frontier | FRONT/USD | 0.09 years | 979% | Crypto Capital | Wade | | Binance Coin | BNB/USD | 1.78 years | 963% | Crypto Capital | Wade | | 
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