3 questions to ask before you buy this Chinese Starbucks IPO
China loves Starbucks (Exchange: New York; ticker: SBUX). After entering China in January 1999, there are now over 3,700 Starbucks outlets in China - making> READ MORE
China loves Starbucks (Exchange: New York; ticker: SBUX). After entering China in January 1999, there are now over 3,700 Starbucks outlets in China - making> READ MORE
Sports fans (or anyone interested in making money) – listen up… With the blockchain, you could make big gains from your favorite athletes. For example,> READ MORE
The silence was alarming... On Sunday, I tried to use messaging app WhatsApp to contact a few friends in Sri Lanka after the day's horrific terrorist> READ MORE
One of the world's best-performing stock markets is about to get a big boost ... I'm talking about Indonesia, which returned a compound annual rate of 23.2> READ MORE
Income matters. But… don’t let it be the tail that wages the dog of your returns. First… I’ll explain why it matters – and where you can find the> READ MORE
If you're not yet invested in China, you’re going to regret it. That's because China is poised to hit the trifecta. By that, I mean a year when the> READ MORE
Right now, U.S. regulators are raging a quiet war on cryptocurrencies. Earlier this month, the Securities and Exchange Commission (SEC) released its> READ MORE
Editor's note: In today’s essay, we're sharing more timeless advice from our friend and Empire Financial Research founder Whitney Tilson. Today, Whitney tackles> READ MORE
China loves Starbucks (Exchange: New York; ticker: SBUX).
After entering China in January 1999, there are now over 3,700 Starbucks outlets in China – making China the company’s second-largest market next to the U.S.
Starbucks sees so much potential for the Chinese coffee market that it’s aiming to have 6,000 stores in China by 2021. (We wrote about China’s coffee boom here.)
But Starbucks isn’t the only coffee shop in town…
Homegrown competitor Luckin Coffee has about 2,000 outlets in China. And it’s catching up fast – opening 2,500 new outlets this year alone, which is nearly three times the rate of Starbucks’ ongoing expansion. This puts Luckin Coffee on track to have more outlets in China than Starbucks does by the end of the year.
This fast-growing company now plans to raise up to US$800 million from investors by listing its shares on the New York Stock Exchange.
So should you buy into its IPO?
Their technology is already running in 500 airports.
And this is just the beginning.
See how these systems are driving a booming US$2.8 trillion market… and why their stock could nearly triple by the end of the year.
Three questions to ask before you buy
IPOs are exciting – they offer the promise of owning shares in a company with great plans for the future. And they allow ordinary investors to finally invest in companies that previously were unavailable to them.
But there are three important things to ask before putting money into any IPO:
1. Is the company profitable?
Despite having 2,000 outlets last year and selling over 90 million items (mostly cups of coffee), Luckin Coffee isn’t profitable.
Luckin Coffee disclosed that it lost US$241 million in 2018 on revenue of US$125 million. It lost nearly twice as much as it made in revenue.
A fast-growing company that’s losing money isn’t unusual. There are many loss-making companies that have become successful investments, including Netflix (Exchange: New York; ticker: NFLX) and Tesla (Exchange: New York; ticker: TSLA).
But it’s important for a loss-making company to have a strategy to eventually become profitable.
In its prospectus, Luckin Coffee states that “There is substantial uncertainty with respect to our results of operations and we cannot assure you when we will achieve profitability.”
That doesn’t sound encouraging.
2. Does the company have an operating record?
Luckin Coffee was founded in Beijing in October 2017. That means the company has only been in existence for a little over 18 months.
By contract, Starbucks was operating for 21 years before it listed its shares.
Having a track record is important, especially for a bricks-and-mortars business like selling cups of coffee over a counter. A long track record means a company has established that its business model works, and that it’s something it can replicate.
So how was Luckin Coffee able to open up 2,000 outlets so quickly?
Most of its outlets are what are called pick-up stations. These are kiosk-type shops that have little to no seating, are manned by just a couple of employees and are geared towards the takeout and delivery market.
With most of the company’s outlets open for less than a full year, Luckin Coffee doesn’t have the operating track record that would show its business is sustainable beyond the current pace of growth.
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3. Does the company have a unique advantage?
Starbucks changed the way people experienced coffee in a retail setting. This has allowed Starbucks to expand into over 100 different countries and dominate almost wherever they went.
Does Luckin Coffee have its own unique advantage? The answer right now is no.
Luckin Coffee sells coffee at prices about 20 percent lower than Starbucks and focuses on takeout and delivery. Neither of these are unique. They are also easily replicated by companies looking to compete against Luckin Coffee in the future.
These are just three important questions you need to ask before buying Luckin Coffee’s IPO (and any future IPO).
Editor, Stansberry Pacific Research
Sports fans (or anyone interested in making money) – listen up…
With the blockchain, you could make big gains from your favorite athletes.
For example, I expect to make at least 440 percent returns from baseball player Shin-Soo Choo if he has a decent season this year. He plays right field for the Texas Rangers in the Major League Baseball (MLB) sports league.
And if he makes the All-Star Game like he did last year… I could make 1,000 percent.
Through the Shin-Soo Choo digital collectible I bought from an online baseball draft licensed by the MLB Players Association.
The 2019 digital collectible for Shin-Soo Choo
MLB digital collectibles are a kind of crypto token, known as non-fungible tokens (NFT). With an NFT, a digital representation of Shin-Soo Choo is recorded on the blockchain, with me as the owner, until I decide to sell. The developers of the collectibles have also created a fantasy-sports type of game to go with the collectibles.
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The non-fungible part means that the blockchain protects collectors from fraud by verifying the authenticity of each collectible. So while someone could copy the artwork, all of the collectibles are registered – while the fakes are not.
NFTs also all have one characteristic that could allow them to be worth a fortune – a very limited supply.
For the 2019 MLB season, the total number of collectibles created in the draft was 195,000. That’s for the whole league, where up to 100 million people tuned in to watch games in 2018, according to ESPN.
We also won’t know exactly how many of each player were created until the draft finishes. So my Shin-Soo Choo could be common or it could end up being pretty rare.
440 percent returns from MLB digital collectibles
Investing in the 2018 version of the MLB collectibles made investors 440 percent returns when the collectibles rose from their original price of US$5 to an average of US$22 between December 2018 and January 2019.
But some of them did much better than that. If you were lucky enough to own a Babe Ruth – a very rare collectible – you’d have been able to sell it for an average price of around US$444. The 2018 MLB trophy collectable sold for US$12,400.
Of course, there’s no guarantee this year’s collectibles will do as well.
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Investors who are interested in collectibles are faced with a broad range to choose from. There’s plenty out there, ranging from sports figures to cute animals, and not all of them will be profitable. But these digital MLB collectibles could see their prices rise because they’re still new and very limited in supply.
If you’re interested in purchasing these collectibles and are savvy with Ethereum and Metamask, you can buy your favorite player from the draft here. The draft doesn’t have a set end-date. It runs until all 195,000 of the collectibles are purchased. That’s estimated to be through mid-May. You can also buy collectibles directly from other sellers on the open market here. And you can check values here of real-time transactions.
If you want to purchase these collectibles, I encourage you to act before the lineup is set for the MLB All-Star game, which is played on July 9. The All-Star game features the best players in the league. This often drives the values of collectibles for these players up.
These collectibles are just another example of how crypto and the blockchain innovation of recording and storing information from our daily lives is growing.
As I’ve shown you before, it’s being used in everything from tracking diamonds and fine art to reduce fraud… to improving national security… to making gambling fair and transparent… to making voting easier.
All of this is just the beginning. Crypto and the blockchain are here to stay.
Lead Crypto Analyst
The silence was alarming…
On Sunday, I tried to use messaging app WhatsApp to contact a few friends in Sri Lanka after the day’s horrific terrorist bombings.
But no one responded.
The country’s government had temporarily blocked access to social media networks.
The Sri Lankan government wanted to prevent rumours about the bombings from spreading. Of course, the government can’t prevent people from talking. But word-of-mouth spreads a lot slower than word spreads over the internet.
In a time of crisis, restricting the flow of potentially faulty or inflammatory information can save lives. But some governments are doing this – and far worse – in a way that will eventually kill the internet as we know it.
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Whenever you access the internet – on your phone at Starbucks or on Wi-Fi at home – information passes through an internet service provider (ISP) before it gets to you. All it takes to turn off the internet is for the government to tell ISPs to shut off access to specific websites or services (or the entire internet).
That’s what the Sri Lankan government did. The Zimbabwean government similarly restricted access to messaging apps in January during a crackdown on violent protests.
Other governments have morality in mind when they close off parts of the internet. Access to pornography is restricted in lots of countries. And the United Kingdom has set up a way to prevent malicious – political or otherwise – internet traffic from coming into the country.
This kind of fragmentation of the internet doesn’t change the network, though – that is, the processes and protocols that get internet traffic from one place to another. Cutting off a few side roads or forcing a detour doesn’t change the highway system.
In the bigger picture, there are far bigger threats to the internet – and they could end up killing the internet (and some internet companies) completely.
Here are four ways governments could kill the internet…
1. Making their own versions. In China, there’s no Facebook, YouTube, New York Times, Google and many other web sites and apps. Instead, the Chinese government has created its own internet. And it’s closely monitored by the government.
(Savvy users in China can bypass firewalls with virtual private networks (VPNs). But that’s risky – and inconvenient. So most people don’t.)
China’s model is Russia’s aspiration. Russia is creating the infrastructure to allow the country to operate its own, different network that would be isolated from that of the rest of the world.
If enough countries, and people, have access to only a ring-fenced internet, the entire network (internet as we know it) suffers. Imagine going to the beach, but the sand and surf is walled off in a bunch of separate small fiefdoms. That would kill the whole beach experience.
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2. Turning the internet off – for good. As I said, it’s logistically easy to turn off the internet indefinitely. Many governments don’t have the time, money or know-how to use anything but this kind of hammer. The western African country of Cameroon did this. So have some regions of India.
But there are two problems with this approach. First, being cut off from the rest of the world for long will quickly hurt economic growth, as the main method of communicating with anyone is restricted.
Second, people won’t like it. “When Egyptian strongman Hosni Mubarak cut off the internet to try to stamp out protests that were being organized on social media during the Arab Spring, it only solidified popular opposition to his regime,” explains Gzero Media.
3. Tightening the rules. Here in Singapore, you can access any web site you want… but the moment you say something bad about the government in a Facebook post, you’re in serious trouble. The efforts of many governments to defeat foreign hackers are part of this approach. The European Union is (for now) creating more strict privacy rules and trying to find ways to reduce hate speech online. This probably won’t kill the internet, but it could if it goes too far.
4. Regulating it to death. Politicians in the U.S. and in Europe are trying to figure out how to best regulate (or even break up) Facebook, Google, Apple and Amazon. Restricting free speech can easily be taken too far, or interpreted in politically convenient ways. Privacy and “national security” are two great ways to chip away at the internet. I think this is the most likely way governments will kill the internet in the long term.
Tech giants like Google (with a US$870 billion market cap) haven’t priced in the death of the internet to their shares yet.
That’s because the death of the internet isn’t going to happen soon. And companies are always looking for ways to reinvent themselves and diversify.
But make no mistake – the internet will change. So appreciate today’s internet. And make sure that you diversify into other industries and sectors.
Publisher, Stansberry Pacific Research
One of the world’s best-performing stock markets is about to get a big boost …
I’m talking about Indonesia, which returned a compound annual rate of 23.2 percent from 1999 to 2018.
That’s three times better than the S&P 500, which returned 7.2 percent per year (including dividends) over the same period.
Last week, Indonesia – the world’s fourth-most populous nation and 16th-largest economy – held presidential elections.
Incumbent Joko Widodo (more popularly known as “Jokowi”) won.
And his victory could lead to more big gains in Indonesian stocks. Here are just four reasons why…
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Elections in developing Asian nations typically result in large campaign- and election-related spending that is disproportionately large compared with developed countries.
For example, in India, election spending this year is estimated at US$14 billion, making it the most expensive in the world. That’s equivalent to 0.54 percent of its GDP.
Indonesia is estimated to have spent US$1.8 billion on this year’s elections, a 55 percent increase from the 2014 elections. That’s about 0.18 percent of total GDP.
By contrast, the US$6.5 billion spent during the U.S. elections in 2016 was equivalent to just 0.03 percent of GDP.
Large election-related spending leads to a boost in consumer spending, which results in stronger corporate profits and higher stock prices.
For example, in the 2014 election year, retail sales in Indonesia jumped 14.9 percent, according to the central bank. That was higher than the previous year’s 12.8 percent increase.
That same year, the Indonesian stock market soared 20.2 percent.
This year, in January and February alone, retail sales in Indonesia grew 7.2 percent and 9.1 percent year-on-year. That’s significantly faster than the 3.7 percent increase in all of 2018.
Jokowi campaigned with a promise to cut corporate tax rates from 25 percent to 17 percent.
A cut of that magnitude could free up US$3 billion to US$6 billion in corporate profits to be reinvested.
But more importantly, it means a significant jump in reported corporate profits from listed companies. That’s always good for the stock market.
The most recent example of this is from the U.S. stock market, which gained 5.6 percent one month after President Donald Trump signed the Tax Cuts and Jobs Act of 2017. That lowered U.S. corporate taxes from 35 percent to 21 percent.
The stage is set for a major socialist takeover on U.S. soil.
Over a dozen socialist lawmakers are “marked out” to implement socialist policies that will become a part of America’s fabric.
And it’s all backed by a vicious cartel of powerful men and women who have major influence regardless of who’s in the White House.
It doesn’t matter which state you live in – even the most conservative states will be affected by the nation-wide socialist change that’s coming.
As I said earlier, Indonesia has been one of the best-performing markets over the past 20 years, up an average of 23.2 percent per year from 1999 to 2018.
And Indonesian stocks have historically performed well after elections.
During the past four election cycles, Indonesia’s stock market has gained 12.4 percent on average in the three months after the election. After six months, stocks were up 31.4 percent on average… and after 12 months, they were up 37.8 percent on average.
Of course, this is no guarantee that the election will push stocks higher this time around, but history is promising.
As I’ve just shown, Indonesia’s elections will help boost the country’s market in coming months. But in the bigger picture, Indonesia is also a great place to invest.
Economically, it’s one of the most stable markets in the world.
Since 2001, Indonesia’s economy has grown between 4 to 6 percent – though global financial crisis, political uncertainty and currency fluctuations. Even during the global economic crisis, the country posted GDP growth of 4.7 percent in 2009.
Indonesia also has favourable demographics characterised by a large, young labour force.
Forty-two percent of its population is 24 years or younger. That’s bigger than the entire population of Japan, and it supports growth in its local industries.
Indonesia is also a major producer and exporter of natural resources and agriculture. It exports crude oil, natural gas and coal to China, the U.S. and Singapore. It’s also the world’s largest palm oil producer, the second-largest rubber producer and a top 10 natural gas producer.
So Indonesia generates a substantial amount of revenues from exports of natural resources, giving it a good balance of trade (the difference between imports and exports) with other nations.
And because Indonesia has historically exported more than it’s imported, the country has a high level of foreign currency reserves (US$120 billion) – enough to pay for nearly an entire year worth of imports.
All this makes Indonesia more resistant to external shocks – like another global financial crisis.
In short, with an election boom, tax cuts, growing GDP, favourable demographics and its exports, Indonesia’s stock market (already up 5.3 percent since January) is likely headed higher this year.
One way to get exposure to Indonesia is through the iShares MSCI Indonesia ETF (Exchange: New York; ticker: EIDO). Its top holdings include the country’s largest listed banks, telecom service providers and automotive companies.
Editor, Stansberry Pacific Research
Income matters. But… don’t let it be the tail that wages the dog of your returns.
First… I’ll explain why it matters – and where you can find the highest-yielding markets in the world. But don’t forget the cardinal rule of investing for income.
If you’re a speculator who’s aiming for a 300 percent gain on a hot stock tip, then (some investors would argue): Who cares about a measly 3 percent dividend?
If you can consistently – that is, over an investment lifetime – generate enormous capital gains regardless of market conditions… then congratulations, you’re in the top 0.0001 percent of all investors in history. And income wouldn’t matter much.
But if you’re a mere investment mortal like the rest of us, dividends are probably critical to your returns – thanks to the magic of compounding.
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Let’s say you invest a sum of money that generates a steady return. But instead of taking that return and spending it, you reinvest it by buying more of the original investment. The next year both the original investment and the reinvested interest will earn interest, which you again reinvest.
With compounding, your original investment is growing in size due to repeated reinvestment, and every year you are getting a larger and larger sum of interest. It’s like a snowball rolling downhill, growing bigger in size as it picks up more snow on the way. (We wrote about this here.)
Compounding is why investors who opt to re-invest their dividends, rather than pocket the income, will have far better investment returns.
As you can see in the chart below, Pakistan (a 5.7 percent yield), Russia (5.6 percent) and the United Arab Emirates (4.9 percent) are the three highest-yielding markets in the world. The MSCI Asia ex-Japan index offers a yield of 2.5 percent (Singapore is at 4 percent and Hong Kong has a yield of 3.3 percent). The S&P 500 trails with a lousy 1.9 percent yield.
So if you’re looking for high-yielding stocks, start your search in Pakistan, Russia the United Arab Emirates and Asia.
You can look at ETFs like the Global X MSCI Pakistan ETF (NYSE; ticker: PAK), Vaneck Vectors Russia ETF (NYSE; ticker: RSX), and the iShares MSCI UAE ETF (Nasdaq; ticker: UAE).
Imagine a stock that pays you 100% income on your money every year… and continues to do so for the rest of your life. $1,000 in savings would pay you $1,000. $10,000 would pay you an extra $10,000. $100,000 would pay you $100,000. And again, that’s every year. We never thought an investment like that would be possible…
If you’re looking for the regions with the most dividend stocks, look to Asia.
As you can see in the chart below, there are 326 stocks from the Asia Pacific ex Japan region (that are part of the MSCI All Country World Index) that yield greater than 3 percent. Europe has just 227… and the U.S. has just 149.
The ability of a company – or, more broadly, of a market – to sustain its dividends depends on several factors: earnings, free cash flow and debt levels. These factors can change dramatically year over year, quarter over quarter.
And – this is the dangerous part – what happens if a market drops, or the share price of a high-yielding stock drops? It doesn’t take much of a decline to erase the gain you’ll make from making 5 (or so) percent in dividends.
For example… PAK (the Pakistan ETF) is down around 40 percent over the past year. The fund’s 4.5 percent yield barely makes a dent in that. If you’d been drawn to PAK by its dividend, you’re hurting now.
Brian wrote about something similar with China Mobile (Exchange: New York; ticker: CHL)… you can read more about the red herring of dividends here.
Dividends matter, but…
In short, you shouldn’t buy a market or a stock for dividends alone. Compounding is fantastic – but if you’re buying a stock that’s declining in value, the dividend will only dampen the damage.
Publisher, Stansberry Pacific Research
If you’re not yet invested in China, you’re going to regret it.
That’s because China is poised to hit the trifecta.
By that, I mean a year when the currency, economy and stock market all do well.
This happened in China in 2006.
Beijing had abandoned the decade-long currency peg to the U.S. dollar in July 2005. The Chinese currency, the yuan, could finally begin to adjust according to market demand. In the first full year that the yuan was free of the peg, it gained 3.3 percent against the U.S. dollar. It would go on to rise a lot more.
(A rising currency is good for foreign stock investors because it boosts their returns in their home currency. For example, US$1 million invested in the Chinese yuan at the start of 2016 was worth US$1,033,000 (assuming all other factors remained constant) by the end of the year.)
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Despite fears of the impact a stronger currency could have on Chinese exports (which grew more expensive relative to the U.S. dollar), China’s economic growth didn’t slow down. Instead, gross domestic product (GDP) growth increased, to 10.7 percent in 2006, from 10.4 percent the previous year.
The same year, the China Securities Regulatory Commission (China’s equivalent of the Securities and Exchange Commission), approved a record 18 applications for its Qualified Foreign Institutional Investor (QFII) programme.
The QFII programme was launched in 2003 as a way for foreign investors to participate in China’s yuan-denominated stock market, which had previously been accessible only to domestic investors.
The QFII programme had a quota – total potential investment permitted – of US$30 billion. That was tiny in the context of the size of China’s stock market. But the 50 percent increase in the number of foreign institutions (from 36 to 54) looking at buying domestic stocks was a big confidence-booster for local investors.
So in 2006, China’s currency was strong. Its economy was growing fast. And foreign investors were focused on the stock market.
That year, the Shanghai Composite Index rose 143 percent in U.S. dollar terms.
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Last year, China’s stock market fell 25 percent. It was the worst-performing large market in the world.
The U.S.-China trade war, along with concerns over rising interest rates and the potential for a global recession, threw global markets into a tailspin at the end of the year.
So far this year, Chinese stocks are up 27 percent. But I believe they could double this year – like what happened in 2006.
I know that’s a big call. So let me explain why I believe it could happen.
First is the trade war, which is hurting China more than the U.S.
Chinese Vice Premier (the equivalent of a cabinet member in the U.S.) Liu He met with U.S. President Donald Trump early this April. Both sides appear committed to reaching a deal that will benefit everyone.
An agreement that ends the trade war, even if it simply postpones decisions on some key issues, will be bullish for China’s stock market.
But even if a trade agreement isn’t reached, other factors are already helping re-invigorate the world’s second-largest economy.
That includes a new stimulus programme in China.
But unlike the spending-driven stimulus programmes of the past that resulted in enormous waste and problematic debt, today’s programme is designed to generate more sustainable growth.
That includes cutting the reserve requirement ratio (RRR) by 2.5 percentage points.
The RRR is the percentage of total deposits that the nation’s banks are required to keep in reserve and not lend out. The less money that banks have to keep in reserve, the more they can lend – which boosts economic growth.
That amount of reduction in the RRR frees up an estimated US$300 billion, which can be used for new loans. And after a weak December, new loans in January hit a record US$476 billion.
Manufacturing is also picking up. China’s official manufacturing purchasing managers’ index (PMI) rose to 50.5 in March from 49.2 in February, signaling expansion in the important manufacturing sector despite tariffs still in place. (A PMI reading above 50 signals expansion while a reading below 50 indicates contraction.)
Global bank HSBC said in a report last week, “The shape of the stimulus package this time is very different from earlier rounds. We believe that it will not only work, but will also trigger a self-sustained recovery in the coming quarters.”
A strong economy normally results in a stronger currency, which leads me to the Chinese yuan.
It depreciated 11 percent against the U.S. dollar at the height of trade war tensions last year. (See chart below.)
So far this year, it has gained 2.5 percent, despite trade tensions.
As I mentioned earlier, a rising yuan is welcomed by foreign investors, because it boosts their returns when converted back to their own currency.
The yuan has about another 8 percent to go to return to pre-trade war highs. If a trade war deal is reached, the yuan could snap back in a hurry.
But even without a trade war deal, the strengthening Chinese economy will support a steadily rising yuan.
As for the stock market… 27 percent gains so far this year sounds like a lot, but for China it’s just getting warmed up.
Since 2001, every time China’s stock market gained more than 20 percent in a year, the average gains amounted to a staggering 97.8 percent.
That’s happened four times, excluding this year.
So history suggests that China’s stock market has another 65 to 70 percent more to rise in 2019.
Last month, I told to you about how MSCI Inc., a global provider of research-based indexes, announced plans to quadruple the weighting of Chinese stocks in its global indexes.
An estimated US$14 trillion of assets are benchmarked to the various MSCI indexes.
The recent hike in China’s weighting in the MSCI indexes is expected to result in as much as US$125 billion of funds flowing into the 448 selected Chinese-listed stocks.
This weighting change is going to happen over three phases (May, August and November). It will act as a steady, rising tide that lifts the Chinese stock market.
This is similar to the QFII programme in 2006, only on a scale four times larger (US$125 billion vs. US$30 billion). So it’s only just beginning.
Last week, JPMorgan Asset Management and Morgan Stanley both concluded that the run-up in Chinese stocks still has room to run.
So while China is four months into its newest bull market, if you don’t own Chinese stocks, it’s not too late.
There are exchange-traded funds that help investors get exposure to a broad range of Chinese-listed stocks. But not every industry will benefit.
A better way to ride the bull market in Chinese stocks is with little-known companies growing sales and profits in the industries most impacted by Beijing’s determination to keep its economy humming along.
In Strategic Wealth Confidential, I’ve found one of these companies. I believe it could soar 400 percent in the next two to three years. To learn more about this incredible opportunity, click here.
Editor, Stansberry Pacific Research
Right now, U.S. regulators are raging a quiet war on cryptocurrencies.
Earlier this month, the Securities and Exchange Commission (SEC) released its long-awaited guidelines on digital assets.
Under the guidelines, nearly every cryptocurrency (also known as tokens) that’s ever been offered up for sale is a security. (The SEC does NOT consider bitcoin and Ethereum securities since they’re not operated by a single company or group.) That means those tokens should have registered with the SEC and filed the same sort of rigorous financial statements and disclosures that public companies are required to.
Up to now, token sales existed in a netherworld. Anyone could issue them, anytime. Without guidelines from the SEC, it wasn’t clear that token issuers were breaking any laws. Now, token issuers can’t hide behind unclear regulations. The SEC has made its viewpoint known.
But the SEC is wrong… tokens aren’t like traditional securities.
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Tokens aren’t a certificate entitling you to equity in a company. If they were merely digital representations of stocks, there’d be little need for cryptos at all.
Many are actually tools (hence the nickname, “utility tokens”) that unlock specific functions or services. For example, there are several crypto projects aiming to become the “Airbnb of file storage.” Users could lend out excess storage space on their computers in exchange for tokens. Others could spend those tokens to rent out that space.
But by declaring many tokens securities, the SEC could potentially take action against these projects. They could levy fines against token creators, attempt to shut projects down and even impose jail time on creators and promotors.
This was just the latest shot the U.S. government has fired against cryptos…
War by red tape
Forcing a crypto to register as a security creates layers of costly red tape. Suddenly, many small, community-drive crypto projects will be required to retain lawyers, compliance analysts, auditors and corporate accountants.
While larger crypto projects should have those elements in place, it will likely lead to the closure of smaller U.S.-based projects.
By forcing cumbersome regulations onto virtually every crypto that’s been conceived, the U.S. is stifling innovation.
Meanwhile, countries including the dual-island nation Saint Kitts and Nevis, Switzerland and Gibraltar either allow all forms of token sales (commonly called initial coin offerings or ICOs) or they’ve developed straightforward frameworks for them.
Take a look at the circled window in this photo. A medical experiment commissioned by Adolf Hitler was done here in 1944. Our own US Government has refused to acknowledge the important scientific results of this experiment.
War by taxes
Every trade or purchase that you make with crypto triggers a taxable event in the U.S. It doesn’t matter if you’re buying a US$2 cup of coffee or a US$200,000 Lamborghini… it needs to be reported.
Not only that, you have to show what you paid to acquire the bitcoin you’re spending (even if you acquired it a decade ago).
It’s an accounting nightmare that discourages individuals from buying crypto. And, if they do buy crypto, they’re hesitant to use it because they don’t want to complicate their taxes.
In contrast, many other countries, including Germany, Singapore, Belarus and Slovenia don’t require their citizens to track and file taxes on their crypto transactions (or they set thresholds where taxation begins).
In short, the U.S. is overregulating and overtaxing crypto, and it will fall behind in the global crypto race.
Crypto will force the government to change
Here’s the thing: U.S. regulations may slow the adoption of crypto in the country, but the technology will be so transformative that the government will eventually be forced to change its stance.
That’s because crypto will impact just about every industry in the world.
Crypto’s first killer use-case was giving people the ability to send money across international borders almost instantly at very little cost.
Cryptos are also enabling anonymous loans, automatically-executing insurance claims and self-running companies that share profits with participants.
Smart money sees the opportunity. It’s moving in… and even more will arrive once the operators of the New York Stock Exchange launch a bitcoin exchange called Bakkt early this year.
More companies are also getting involved in crypto… from Facebook, which will soon launch its own crypto, to credit card company Visa, which is launching a crypto-backed debit card.
And more people continue to buy crypto… an estimated 54 million people around the world bought crypto for the first time in 2018.
And while the U.S. is attempting to shoe-horn crypto into regulations that are more than 70 years old, other governments are opening themselves up to crypto companies. Japan, Switzerland, Singapore, Malta and others have all passed pro-crypto legislation. That’s helped them attract some of the world’s largest crypto companies and ICOs.
Zug, a small city outside Zurich in Switzerland, has even earned the nickname “Crypto Valley” because so many blockchain companies have set up there. Altogether, Switzerland’s home to more than 600 blockchain companies, and the top 50 of those companies have a combined market cap of more than US$44 billion.
A glimmer of hope
Some U.S. lawmakers understand how much is at stake. Last week, U.S. Representative Warren Davidson reintroduced the Token Taxonomy Act, which would exempt many cryptos from federal securities laws. It would also create a tax exemption for swapping one virtual currency for another, and it would exempt residents from filing capital gains taxes on cryptos as long as their gains fell below a US$600 threshold.
The bill’s not perfect (and it’s a long way from becoming law), but it would be a huge step in the right direction.
And even if the bill doesn’t go through, I believe the U.S. will be forced to address its outdated laws soon. The userbase and use cases for cryptos are only growing. Other governments are getting onboard. So it’s only a matter of time until the U.S. must change its stance. And when the U.S. does reverse course, cryptos will rocket higher.
Cryptocurrency Analyst, Stansberry Pacific Research
Editor’s note: In today’s essay, we’re sharing more timeless advice from our friend and Empire Financial Research founder Whitney Tilson. Today, Whitney tackles one of the biggest mistakes you can make – and shares three simple steps to help you overcome it.
When you buy a stock, one of two things will inevitably happen…
It will go up. Or it will go down.
In the beginning, it’s really that simple. You buy a stock with just two possible outcomes.
But the truth is, things can get complicated really fast. And as that happens, it often leads to one of the biggest mistakes an investor can make… letting your emotions get in the way.
When you let your emotions take over, you often rush into decisions that you’ll regret later… That’s the case no matter which way a stock is moving.
One common and costly mistake is selling a big winner too early.
As I explained yesterday, that happened to me with video-streaming giant Netflix (Nasdaq; ticker: NFLX)…
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On the day Netflix’s stock bottomed in October 2012, I pitched it to a crowd of 500 at my Value Investing Congress and then went on national television on CNBC. I said Netflix was going to be this decade’s Amazon (Nasdaq; ticker: AMZN), a stock that had risen 20 times in the previous 10 years. And as it turns out, my analysis was spot on…
Over the next two years, the stock rose sevenfold as Netflix’s streaming business grew. But as the stock kept moving higher, I made a terrible mistake… I started to let my emotions take over.
After the stock doubled, I sold half my shares. And when it doubled again, I sold some more. As the stock was doubling a third time, I exited the position altogether.
My analysis revealed that Netflix was trading at a 90 percent discount to its intrinsic value – in other words, a “10-cent dollar.” So as the story played out even better than I could have hoped for, why was I selling it after it doubled? It was still a “20-cent dollar.”
I thought I was conservatively managing risk and didn’t want to be greedy. But I had it backward… To build a successful long-term track record, you must be greedy when the opportunity arises. Finding a monster stock like Netflix only happens maybe once a decade – or even once in a lifetime. So it’s critical that you make the maximum amount of money on such moonshots.
I should’ve made more than US$100 million on Netflix for myself and my investors. Instead, I made less than US$10 million. Of course, that’s not terrible… But it was a costly mistake.
It’s equally important to harness your emotions when a stock is running against you…
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Take SodaStream, for example. Its machines help you turn regular tap water into sparking water with the touch of a button.
I knew SodaStream had a great business model. The company sells something that people use over and over. And the carbon dioxide bottles in its machines need to be replaced regularly. So SodaStream made something like an 80 percent profit margin doing so.
But the company had botched its marketing in the U.S. and was also relocating its main factory in Israel, so its sales and earnings were down. I patiently waited until the stock had been cut in half and bought a small position in 2014.
It turns out that I was much too early. The company continued to struggle and the stock kept drifting lower and lower… for nearly two years!
Making the right decision in these situations is critical. Had I stumbled into a “value trap” that would never turn around – in which case I needed to sell? Or was the company still strong, with fixable problems – in which case I should buy more?
It was very painful losing so much money for so long. Emotionally, I wanted to sell and never think about this terrible investment again.
But I was able to set aside my emotions and focus my analysis on the fundamentals, which remained strong. I added to my position all the way to the bottom – and was well rewarded.
In early 2016, SodaStream’s stock took off as I expected…
By the time I closed my funds in late 2017, it was up five times. And then PepsiCo (Nasdaq; ticker: PEP) bought the company last year for 12 times the price only two years earlier.
It can be challenging to figure out whether a stock is just hitting a few speedbumps (like SodaStream) or if it’s doomed for good (like old-school film company Kodak). But by following a simple three-step process, I realized that I should hold on to SodaStream…
First, assume the market is right and you’re wrong.
You must begin with this mindset because it helps overcome the natural bias we all have to not want to admit a mistake.
You must respect the market. The hard truth is that most of the time it’s right… and you’re wrong. My experience with SodaStream is the exception, not the rule.
Then, you must figure out what you’ve missed and actively seek out disconfirming information.
Redo your work… But don’t just rehash what you already did. That won’t lead to any new conclusions. Instead, you must ask – and honestly and correctly answer – a series of key questions.
Have you made a research error? Are you possibly missing anything? Have you openly and carefully considered contrary arguments? Have you invented new reasons to own the stock (so-called “thesis drift”)?
Many smart investors lost a lot of money owning film company Kodak’s stock in the decade before it filed for bankruptcy in January 2012. It wasn’t an unreasonable investment initially… The company had one of the strongest brands in the world, it generated robust cash flows, and its stock traded at a low multiple of earnings. Sure, digital photography was a threat to Kodak’s film business, but it seemed far off – and the company was making investments to compete in this space.
For most investors who lost money with Kodak, the mistake wasn’t so much the initial purchase. Rather, it was failing to recognize that the film industry was rapidly being obliterated and that Kodak was getting no traction in the digital arena. So its profits were destined to disappear.
The key is to tune out the noise and think clearly and rationally. Focus on the fundamentals… If the company’s earnings rebound, its stock will as well.
Lastly, to make the right decision, you must pretend like you don’t already own the stock.
It’s so hard to make the right decision about a stock you’ve lost money on. The emotions are so powerful!
On one hand, you’re probably telling yourself that if you liked it at the price you bought it, you should like it more now that it’s cheaper. That may be true – but it could also be a value trap. No matter what, you must resist the temptation to double down again and again to try to make back your losses. Remember the old saying… “You don’t have to make it back the same way you lost it.”
On the other hand, your emotions are likely telling you to sell, so that you don’t have to suffer any more pain and never have to think about this terrible stock ever again.
There’s also a powerful feeling of wanting to wait until it gets back to the price you bought it before selling.
You must resist all of these feelings! Emotions are deadly when it comes to investing…
I’ve found that it helps my thinking to pretend like I don’t own the stock. I ask myself, “If I were 100 percent in cash today and building a portfolio from scratch, would I own this stock? And if so, what size of a position would I have?”
Doing nothing may be the best option, but you also must have the courage to admit a mistake and get out – or know that you haven’t made a mistake and buy more.
If a stock is going against you, follow this simple three-step process. And if you wouldn’t buy the stock if you were starting a portfolio from scratch, then you should sell it immediately.
Editor’s note: On April 17, at 8 p.m. Eastern time, Whitney will join Stansberry Research founder Porter Stansberry for a special investing event. He’ll reveal the secret to his investing success… and announce the biggest prediction of his career. Folks who tune in will even get the name and ticker of the company he calls the “No. 1 retirement stock in America”… just for showing up. Sign up for this free event right here.
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.