The Trade War, “No-Brainer” Stocks, And Investing Mistakes To Avoid
I hope everyone came back from Thanksgiving feeling fresh and ready to rock and roll. While it’s always good to take a break and catch up with family and friends, I usually find myself ready to get cracking after a few days.
The market certainly seemed to feel that way, too. After a couple of volatile days, conflicting reports on a potential trade deal between the U.S. and China, and the ongoing impeachment battle in Washington, the market capped off the week with a blowout jobs number.
According to the Labor Department, 266,000 jobs were added to nonfarm payrolls in November, smashing the estimate of 187,000. This brought the unemployment rate down to 3.5%, from 3.6%.
Speaking of catching up, I recently found myself shooting the breeze with StreetAuthority’s expert analyst Jimmy Butts.
When Jimmy lived close to StreetAuthority HQ a couple of years ago, he and I made a regular practice of going to the local watering hole around the corner after work to talk about life, the market, and everything in between. And while it’s always good to have beer and wings with a friend, it’s even better to have a level-headed sounding board. That’s especially true when you’re talking about Jimmy – who seems to make money in any market, good or bad.
During our recent chat, Jimmy and I talked about an idea that we’ve hammered home to StreetAuthority readers for years — that investing doesn’t have to be complicated. Some things never change. But when I heard his interesting take on the trade war, I knew this was something we shouldn’t keep to ourselves. So I asked Jimmy if we could circle back this week and formally hash out these ideas further.
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Some of our readers may not know you live up in the mountains in Idaho. Tell us what it’s like up there.
Jimmy: Yes, I moved back to Idaho (from Austin, TX) about two years ago. That’s where my wife and I are originally from. We realized that we really missed the seasons, the outdoor activities, and the snow.
We stay busy year-round. When I’m not at my computer analyzing market data, you’ll find me on multi-day whitewater rafting trips, hiking, fishing, hunting, snowboarding, and more recently mountain biking.
Nearly every fall we enter a fishing derby with my father-in-law for rainbow trout, and it’s a blast. While I’m used to catching smaller cutthroat trout out of the river, this derby offers us an opportunity to hook into some massive 15-plus pounders. Here’s a photo of my wife’s rainbow (she usually catches more, and bigger, fish than me):
What’s your take on the trade war and how it’s affecting the market? Will it ever end?
Jimmy: There’s no question that the trade war is affecting the market. Every time something comes out about it, the market either tumbles or rallies. This will be an ongoing process. My opinion is that it would be in Trump’s favor to get some sort of deal ironed out ahead of the election. The toll it’s taken on the agriculture sector isn’t winning him any points.
But here’s the thing about the trade war… this isn’t the first time, nor will it be the last time. It’s likely more prominent today because of how quickly information is spread.
Here’s a quick refresher on some of the notable trade wars we’ve been in.
In the 1930s, during the early stages of the Great Depression, the Smoot-Hawley Tariff Act was signed into law. On June 17, 1930, the legislation raised tariffs on more than 20,000 imported goods in an attempt to protect American jobs and farmers from foreign competition. The levy prompted aggressive retaliation from the U.S.’s trading partners, and ground global trade came to a standstill, falling by over 60% from 1929-1932.
Many believe the Smoot-Hawley Act exacerbated the Great Depression and stalled an economic recovery during one of the toughest times in U.S. history.
In the 1960s, we had the Chicken Tax…After World War II, the United States expanded chicken farming, which increased both the consumption and exportation of U.S. poultry. The growth in chicken farming eventually led to the United States capturing more than 50% of the European chicken market, undercutting local producers and driving them out of business.
In response, European nations placed tariffs and price controls on birds from the states. The U.S. retaliated with a 25% tax on light trucks, French brandy, potato starch, and dextrin. While the tariffs were later removed on brandy, starch, and dextrin, the 25% tax on light trucks remains in place today.
In the 1980s we had a trade war with Japan. And the interesting thing is that one has quite a few similarities to the current spat with China. At that time, Japan’s rise as an economic powerhouse was criticized by many American businessmen and politicians, claiming unfair trading practices. During that time, there was a big campaign to “Buy American,” especially when it came to vehicles, as we saw a flood of inexpensive automobiles come into the country.
Japan eventually agreed to what was called a Voluntary Export Restraint, which limited the number of Japanese car imports, among other protectionary measures. In April of 1987, the U.S. doubled the import duties on technology goods, including computers, power tools, and TVs.
Japan decided not to retaliate. Eventually, its rise as an economic superpower waned. The Japanese experienced what became known as the “Lost Decade,” as its economy fell into a prolonged deflationary recession.
More recently, in the 1990s there was the Banana Trade War. I doubt many of our readers even remember this one, but Europe imposed high tariffs on bananas coming from Latin America in order to help their former colonies in the Caribbean have an advantage. However, American-owned Chiquita took the brunt of the banana tariffs as its European exports collapsed. To retaliate, the U.S. placed tariffs on items such as handbags, linens and food goods. This trade war ended in 2012.
The point is that reactions to tariffs and trade wars can impact the market in both a positive and negative manner. Large sweeping tariffs coupled with aggressive rhetoric like we’re seeing with China can have a more lasting and adverse effect. At the same time, I think that some of the rapid selloffs that we see when pessimistic news comes out can provide for some great buying opportunities. After all, regardless of what happens with the trade war people will still use Google, eat Hershey chocolate, and buy things on Amazon.
Speaking to that last part of your answer, one thing your new subscribers might notice about your picks is that some of your biggest winners are what I call “no-brainers”. Everybody’s heard of them, but nobody really owns them. Why do you think that is the case?
Jimmy: I find this to be a common theme among most individual investors, and it’s unfortunate. I think a lot of it comes from the idea that you need to invest in the Googles and Amazons of the world before they become household names.
But what most find is that’s easier said than done. Of course, we would like to get in on Facebook or Microsoft on the ground floor, but that’s a difficult task. Very few have that kind of foresight. When I talk with most folks about investing they ask me about investing in cryptocurrency, or pot stocks, or penny stocks. They want something that will take off like a rocket ship, allowing them to retire tomorrow. Unfortunately, I don’t the answer they are looking for. When I bring up some of our best-performing stocks like Intel, or CME Group, or even PayPal, their eyes usually glaze over. Nevermind the fact that we’ve generated triple-digit returns from these stocks… Those aren’t “sexy” enough for them.
But investing doesn’t have to be sexy. A great way to build wealth (while getting a good’s night rest) is to buy wonderful companies at fair prices and watch the returns rack up year after year.
Do you see Warren Buffett investing in penny stocks? Did he invest in some no-name companies when he started out? No. He invested in Coca-Cola, American Express, and Geico. World-class companies.
What are some of the most common investment mistakes that you see average investors make?
Jimmy: The biggest mistake I see investors make has nothing to do with understanding P/E ratios or being able to read financial statements. Sure, being able to do those things is beneficial, but the biggest mistakes happen because of emotions.
The majority of investors have a hard time cutting losers and letting winners ride. What ends up happening is they book their profits too early and hold onto their losers for too long, hoping for them to rebound just so they can break even on the trade.
But the biggest detriment to a portfolio is letting a small loss swell into a big one. The percentages simply don’t add up. For instance, if you’re down 50% on a position, you need a 100% return just to get back to even. Believe me, it is no easy task to book a triple-digit winner. But the psychology behind cutting a loser is extremely difficult to overcome. Most folks believe that once they close that loser out, they’ve just confirmed that they’ve failed. Their ego and pride are hurt. But they have to realize that closing out a small loser is a victory… It’s a victory against a bigger loss.
Making sure you have a plan before going into an investment is key to success. Know the point where you’ll say “uncle” ahead of time — and stick to it. Whether that’s using hard stops, trailing stops, or something else, the point is to avoid letting small losses turn into big ones.
OK, last thing before I let you go. Tell us what you’re reading right now.
Jimmy: I like to read a lot (not just books). Right now, I’m reading “A 400-Year History Of American Capitalism” by Bhu Srinivasan. The next book on my list is “The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution.”
That’s all we have for today. I’d like to thank Jimmy for joining me, as well as you for reading.
Before you go, I should apologize for something really quickly. Due to the holiday last week, I didn’t get a chance to tell you about Amber Hestla’s Income Millionaire Project.
You may have seen us talking about it this past week. But for those who haven’t, the goal of this program is simple… Amber is showing 1,000 regular investors how to make $1 million in retirement income… without taking on extraordinary amounts of risk. If you’re looking for a fresh approach to bring more income to your portfolio, then I can’t think of a better way to go. In fact, our publisher is so confident in this project, he’s authorized $1,000 to each participant — simply for taking part in this project.
Unfortunately, I just got word that the program is just about filled up. But we may be able to get a couple people in — but only if you sign up today. This will be shut down tomorrow. So if you’d like to learn more, go here now.