Special Report: The Real Secret of the Stock Market

Back in the day, Bear Stearns was one of the leading investment banks on Wall Street.

It was run by Alan “Ace” Greenberg.

His name was synonymous with Bear Stearns — the company he’d built in his image.

In 1949, after graduating college, he came to Wall Street. He was 21 years old and had no experience in the financial markets. He started as a clerk at Bear for $32.50 a week.

He was President Donald Trump’s and the Sultan of Brunei’s stockbroker. Ace was one of the highest profile financiers of the 1980s and 1990s.

When I met him in 1993, I was just starting my career. A few years earlier, I’d left the trading floor and started my own money management firm...

It’s All About Being in the Room

I’d been invited to a fundraiser at Bear Stearns. Besides being a titan on Wall Street, Ace was a philanthropist. He not only gave big, but he also encouraged others to do the same.

I’d arrived at the fundraiser held at Bear’s auditorium a little early — so early that they were still setting up the tables.

I was walking around, waiting for the bar to open, when I saw a small bald man without a suit jacket walking toward me.

He was checking the place settings and barking out orders to a young lady assistant who was trying to keep up with him.

That was the first time I saw Ace.

I would have tried to avoid him, but he was heading straight toward me. He stuck out his hand and in his Midwestern twang said, “Ace Greenberg.”

All I remember was shaking his hand; I don’t recall what I babbled. After shaking my hand, he continued on his rounds, making sure that everything in the room was up to his standards.

Over the next 30 minutes, the room started to fill up. I thought I’d lost my chance to chat with a Wall Street legend…

Keep It Simple: It’s About Earnings

An hour later, when everyone was networking, drinking cocktails, and breaking into small groups, I saw Ace standing alone.

I built up the courage to approach him, my knees shaking.

“Hi, Mr. Greenberg. The stock market has been crazy the last couple of days,” was what I remember saying. Yeah, it sounds just as stupid today as it did more than 30 years ago.

Ace didn’t say anything. So, I gathered more nerve and asked, “Where do you think the stock market is heading?” He looked at me and shrugged his shoulders.

He started to tell me that it wasn’t about interest rates, the money supply, or who was in the White House — stocks move because of one thing: earnings.

He said, “It’s all about the earnings. It’s always been and always will be about earnings.”

A Minute and a Half of Legendary Investment Advice

My whole “discussion” with Ace took about 90 seconds. Yet, I’ve never forgotten what he said.

And that small piece of advice had been the cornerstone of my investing approach.

While CEOs talk a great game and the media can hype a company, it still all boils down to one thing: earnings.

A company that can make money year after year is rare. I have a name for them: “compounding machines.” That’s the way you really make money in the stock market.

It’s not by day trading, buying penny stocks, or playing options. Instead, it’s about finding companies that are compounding machines.

Charlie Munger, Warren Buffett’s partner, calls it by another name: “sit-on-your-ass investing.”

In a nutshell, if you buy a few great companies that grow their earnings, then you won’t have to make another decision.

All you’ll need to do is sit on your ass and watch the company, and your net worth, grow.

I’ve seen sit-on-your-ass investors earn amazing returns. Yet, they never read the company’s annual report or follow how it’s doing.

Investors who bought Berkshire Hathaway stock back in 1965, when Buffett took over the company, didn’t have to make another decision for the next 50-plus years.

Back then, the shares were trading for $25. Today, they trade for more than $275,000.

A $10,000 investment back then would now be worth more than $110 million.

Once they made the decision to buy, they went on enjoying their lives, continued reinvesting the dividends, and saw a small investment turn into a life-changing fortune...

Firsthand View

I first came across sit-on-your-ass investing at a very young age…

One of my uncles was a pharmaceutical salesman for a subsidiary of Johnson & Johnson (JNJ).

Uncle George was a man who enjoyed life to the fullest.

Back in the 1960s, he worked from his home office, was home for his two daughters, spent time with his wife, and rode a motorcycle.

He was also a very good salesman.

During this same time, he began receiving his bonuses in JNJ stock.

He didn’t know much about the stock market or what the GDP rate was for the first quarter. All he knew was that JNJ was a great company.

In the early 1970s, he left his company and went to work as an electronics salesman for another company, but he still didn’t sell one share of his JNJ stock.

Back in 1972 — the farthest my data goes back — JNJ shares, adjusted for four splits and more than 35 years' worth of dividends, were trading for less than $1.

I never knew how many shares he’d had, but it’s safe to say that he’d had at least $20,000 of JNJ stock back in 1972.

As Uncle George grew older, he got sick and needed full-time care. He eventually had to be placed in an assisted living facility.

Each month, his family sold a few shares of JNJ stock to pay for his care.

Right up until his last day, he was cared for in comfort, had the best medical care, and passed away with those who loved him by his side.

When he passed in 2009, each share of JNJ was worth more than $50 share — a 50-times return on his money.

Even though he never read financial reports or the Wall Street Journal, he was able to amass more than $1 million, which took care of him when he could no longer take care of himself...

Lesson Learned

I saw close up how sit-on-your-ass investing works, and it always amazes me when most people never follow this simple idea.

Instead of finding a few great companies and holding them, they continually try to hit it big in options trading or by buying penny stocks. Unfortunately, they usually end up losing money and hoping that the next trade will be a winner.

In all of my years on Wall Street, I’ve never met an investor who’s made as much money, with as little effort, as sit-on-your-ass investors.

Here are the details of three stocks that fit the mold for Munger’s sit-on-your-ass stock-selection method…

Huntington Ingalls Industries Inc. (HII)

Huntington Ingalls Industries (HII) is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry.

The U.S. Navy currently has approximately 274 service ships, which is not enough to meet its global commitments. Experts agree that the optimum number of ships in the fleet should be in the 350 range. Demand for new ships will boost revenue and profits.

HII is the only builder of nuclear-powered aircraft carries. The company’s main customer is the U.S. government.

The company is so vital to national security that the U.S. Navy indemnifies HII from losses relating to its nuclear operations for the Navy.

HII currently trades at less than 17 times the trailing 12-month earnings, which we consider an attractive valuation for a company that has a virtual monopoly.

We recommend buying shares only when the stock price is trading at 18 times the trailing 12-month earnings or less...

TJX Companies (TJX)

The TJX Companies (TJX) is the leading the off-price apparel and home fashions retailer in the U.S. and worldwide.

They have more than 3,800 stores that offer a rapidly changing assortment of quality, fashionable, brand-name and designer merchandise. And all at prices generally 20% to 60% below department and specialty store regular retail prices on comparable merchandise.

We liked the business model, TJX’s dominant position as the leader in off-price apparel business, and how the company is working to increase its bottom line.

CEO Carol Meyrowitz is continuing to do an outstanding job in leading the company forward in a very difficult retailing industry.

TJX continues defying the retail slump. Despite the sell-off in the retail sector due to declining sales, TJX has been seeing sales at stores (open for at least a year) rising for 33 straight quarters.

TJX is continuing to thrive with only 1% of its sales coming from e-commerce.

Shopping at an off-price store is the main attraction — you never know what you’ll find and what bargain you’ll get.

Ask anyone who shops at TJX stores and you’ll quickly find out that the “hunt” for bargains is what brings shoppers out.

We recommend buying shares only when the stock price is trading at 18 times the trailing 12-month earnings or less...

Adient PLC (ADNT)

Adient plc (ADNT) is the world's largest automotive seating supplier. ADNT has a leading market position in the Americas, Europe, and China, and also has longstanding relationships with the largest global original equipment manufacturers (OEMs) in the automotive space.

After spending $332 million last year and $182 million the year before in restructuring plans, the company is forecasting operating cost savings of $280 million annually.

Due to ADNT’s recent incorporation in Ireland, the company’s tax rate at the end of 2016 was 14%, compared to 26% in 2015.

ADNT’s joint venture with YFAI makes it the leading company in China’s auto market, one of the fastest-growing markets in the world with a 45% market share...

A Rare Second Opportunity

If you missed out on buying Berkshire Hathaway in 1965 when it was $25, in 1985 when it was $1,900, and in 2005 when it was $80,000 — now’s your chance.

I’d like to tell you about a company that I’m calling the “next Berkshire Hathaway.”

The company has been growing earnings year after year — it’s a compounding machine.

A $10,000 investment in this company in 1985 would now be worth $2 million.

And right now, the stock price is trading at a very attractive price.

It really is a Berkshire Hathaway clone.

But here’s the deal: It trades for just 4% of the market valuation of Berkshire.

It’s a no-brainer, in my opinion.

So, this is your rare chance to invest in a company that has the very real possibility to grow your portfolio 109 times over the next decade.

But you have to get in now…

Buy it and sit on your ass as the returns come in!


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