Gold News

Start by Saving. Then Invest

And by saving, that means 50% or more of your post-tax income...
 
As NATURAL RESOURCE investors take stock of their 2014 portfolio shifts and make adjustments for 2015, The Gold Report quizzed top investing expert Porter Stansberry on what resolutions he is making and – perhaps more important – what steps he is taking to make sure they will stick to the hard choices they have vowed.
 
Porter Stansberry , head of Stansberry & Associates: My annual investment goal never changes. There are two parts.
 
First, I strive to save at least half of my after-tax income. I define "saving" broadly. Buying cars doesn't count. Buying gold does. Buying land does, even if it's merely land for recreational purposes like hunting and fishing. That's because I can be reasonably certain that in 10 years I could sell any of the land I bought last year for far more than I paid for it. And, of course, some of the real estate I bought was income producing. Last year, according to the latest numbers from my accountant, I saved 59% of my after-tax income.
 
Now, you might complain that saving so much is easy for me, because I have a large income. Bullshit. I don't care how much (or how little) you earn. Saving is always hard. The temptation is always there to enjoy the wealth you've accumulated right now. To save 59% last year I had to give up some of the things I've been able to afford historically. My income has fallen because I hired a CEO for my company and gave up a large amount of my compensation in exchange for his service. To make sure my savings rate didn't change, I had to make big changes to my lifestyle and spending habits. Believe it or not, it is every bit as hard emotionally to give up these perks – even harder, actually – than it was to do without things when I was younger. Back then, I didn't know any better. 
 
I have always been willing to exchange short-term gratification for long-term wealth. I made the same choices at 26 when my salary was $32,000 per year. Back in 1990, I lived in a walk-up, ghetto apartment at the corner of North Avenue and Eutaw Place in Baltimore. This is one of the 10 or so most violent neighborhoods in the United States. But it's all I could afford at $250 per month. I also drove a 10-year old car and rode a bike when it broke down. I never went out to eat. I didn't have a TV or internet access. What did I do? I read a lot. I spent a lot of time running, exercising. And I worked around 100 hours a week. I planned what I would do with the money I was saving and the businesses I was starting. That was how I saved half my income when my income was much smaller.
 
I would have never become wealthy if I hadn't made these choices. They gave me the financial footing I needed to drive a hard bargain, to make the right deal and to demand the rewards I earned in my business career. It would have never happened for me if I hadn't been willing to sacrifice near-term comfort and convenience for long-term gains.
 
If you really want to be wealthy (and there are plenty of other important goals in life), you had better learn to save half of your after-tax income. If you can't do that, then you're deluding yourself.
 
So, first goal every year is to save more than half of my after tax income. Part II of my annual financial goal is to secure a growing, substantial income.
 
Every year, I invest $1 million in one great business that's trading at an incredibly cheap price. Sure, I make plenty of other investments, too. But this is my main financial goal each year: Buy one great business. I don't diversify these investments. I don't try to buy 10 great businesses every year. And, I don't use trailing stop losses on these investments.
 
I normally recommend diversification and trailing stops to all investors for their portfolios.  So, why don't I use those tools with my own money? Well, I do. But just not in the way you're used to seeing. 
 
I started putting $1 million into a single stock when I turned 40 years old. I figured that if I did this 20 times, by the time I was 60 I would own a pretty incredible group of businesses. Sure, some of them may go bust. But I'll be diversified over time. My portfolio allocation is still only 5% into each business. If you limit your position size, it's okay not to use a stop loss. I don't want to tell you what I've bought so far, because I don't want you to invest in the companies I know and admire. I want you to buy great operating businesses that you know and admire.
 
Pick one a year. Make a substantial investment. Go to the annual meeting. Read the quarterly reports. Correspond with the management team. Think and act like an owner. I promise, this will change the way you think about business and the way you behave as an investor. And it will greatly increase your average returns. 
 
My goal is buy companies that can match these firms in terms of longevity, performance, return on assets/equity, profit margin, etc., but are trading for less than 10 times earnings. So far I've bought two great businesses for around four times earnings. These opportunities are available, year after year, for folks who are willing to study great businesses and buy them when, for whatever reason, the market turns against them. The key to success when it comes to buying publicly traded stocks is to simply know the business you're buying and never pay too much.
 
I could go on for a long time about the types of businesses I admire – they don't have any debt, they don't require much in the way of capital investment, their CEOs make very rational capital allocation decisions (such as buying stock instead of paying a dividend only when the stock is very cheap). The point is: I only want to invest in businesses that are far, far better than I could build with my own capital. If I buy 20 great businesses over the next 20 years, then, whatever else happens with my companies, or with my career, both my family and I will have a tremendous amount of financial security. I have the luxury of plenty of investment capital because I took the time to learn how to save. That's why saving comes first, and investing comes second.
 
Remember, every great journey begins with a single step.

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