The China Household Finance Survey run by Gan Li at Chengdu’s Southwestern University of Finance and Economics, recently found that one fifth–that’s 20%–of Chinese homes do not have occupants. Instead these homes are owned as investments in what could be one of the world’s most distorted markets ever.

Back in February of 2012, I wrote about China’s “ghost cities,” and the dangers of investing in a command economy. Government subsidies, capital controls, and excessive regulations distort the Chinese economy, making analysis of normal economic signals difficult.

With Chinese shares already down over 20% (in yuan terms) in 2018, and Trump administration tariffs threatening to take a bigger bite out of the Chinese economy in the future, I urge all investors to read my analysis on investing in China here.

China

I have long advised against direct investment in China. Among the many reasons I am bearish on China is the country’s vastly distorted economy. China is a command style economy run by an unelected political party—the Communist Party of China (CPC). The CPC’s policies have resulted in a grand misallocation of capital. A mercantilist currency policy, perverse incentives for provincial government officials, and crude monetary policy tools have helped inflate a fixed asset and real estate bubble that puts the U.S. real estate bubble to shame.

A Quality Problem

It should be obvious to most that things are not as they seem in China. China has reported GDP growth of 9% or more in every quarter over the last two years, but the Shanghai Composite Stock Index has plunged more than 30% during that time. If China’s economy were truly booming, Chinese shares would most likely be trending up. China suffers not from a quantity of economic growth problem, but a quality growth problem. China’s GDP statistics are being propped up by unproductive fixed asset investment. The real estate sector is the most obvious example. To prop up GDP growth rates the Chinese are building entire cities, but they are virtually empty. For more on these ghost cities, be sure to check out the China’s Empty Cities video at www.youngresearch.com. It is perplexing that the world has allowed a command style economy run by an unelected political party to become such an important player in the global economy. China is now the world’s second largest economy and America’s second-largest trading partner. If China heads into the tank, the world economy will suffer.

No Profit Motive

China doesn’t play by the same rules or have the same motives as the world’s other large economies. China has consistently manipulated its currency to gain export market share and it has subsidized favored industries through its financial system to the detriment of non-Chinese companies. Take the rare earths industry as an example. China now has an effective monopoly on rare earths production. Not because of the country’s low labor costs or a lack of reserves in other countries, but because Chinese rare earths companies were provided with subsidized loans. Rare earths companies ramped up production in the ’80s and ’90s and drove prices down to unprofitable levels. The Chinese government was more interested in maintaining stability through high employment then, as they are today. Low prices pushed rare earths producers in the U.S., Australia, and elsewhere out of business. With the support of subsidized loans, China’s rare earths companies were the only companies able to remain in business at such low prices. Now the U.S. relies on China (at least temporarily) for a supply of metals vital to the defense industry and other high-technology industries. Sound like a smart strategy to you?

Four years ago, I told readers the story of David L. Stone, the manager of Beacon Hill Fund. The point of my story then, as it is now, was to encourage investors like you to avoid speculation, and instead to be patient with your money. Use simple strategies you can stick to in good times and in bad. Here’s what I wrote then:

As I write to you, I am listening to 1960s “Soul Station” by Hank Mobley, Wynton Kelly, Paul Chambers, and Art Blakey. It is an excellent remastered LP edition of the original on a stereo system that includes a Denon quartz lock turntable from the mid-’80s, a real basic NAD receiver that must be 20 years old, and a set of more than 10-year-old EPOS desktop speakers. Strictly low tech. Nonetheless, the sound in my office is quite pleasing. And vinyl records and their associated LP dust jackets offer a listening experience that CDs could never capture. In the case of Soul Station, the cover design by Reid Miles and Francis Wolfe are part of the Blue Note legend. Downloading? No thanks.

Complexity Destroying Value

So I am enjoying a musical experience today that I duplicated decades ago. And the foundation of this enjoyment is simplicity. On the investment front, the same simplicity prevails today as it has for decades. Jack Bogle, Vanguard’s founder, wrote in the WSJ recently that “hyperactive trading strategies offer incomprehensible complexity that ultimately destroys value.”

A Decision to Do Nothing

Over two decades ago, I read a Forbes article that I have kept and often refer to investors. The article was about the manager of the tiny Beacon Hill Fund. “David L. Stone, the 70-year-old manager of the Beacon Hill Mutual Fund, arrives early at his Federal Street office in Boston every day. He reads the newspapers, opens his mail and waits for a call from State Street Bank, the fund’s custodian, with the previous day’s closing price and cash position. He scribbles those down. Than he reads some more. Then he packs his briefcase and leaves.” Talk about simplicity. Stone commented, “People ask me what I do all day. Well a decision to do nothing is still a decision. It takes effort, psychological effort mainly. People get itchy. They trade too much, enriching their brokers and the tax collector in the process.”

Allowing Interest & Dividends to Work

Most investors do not have the patience of David L. Stone, and it is a pity, as investors would be well ahead of the game by holding costs and transaction activity to the minimum while allowing interest and dividends to work for them through the mathematical miracle of compounding. In my own accounts, I have not recorded a sale this year, nor did I record a sale for investment reasons last year. Thus, I have not turned over one red cent, due to trading, to the profligate government in Washington.

Not a down year this century. Projected by Richard C. Young to advance again in 2018!

How does your retirement portfolio look?

• Do you actually have any idea what you are doing? Do you feel like you are over your head and investing with a crap-shoot mentality?
• Are you subsisting on outmoded, far-too-big mutual funds or, worse yet, those ghastly oversized index funds?
• Are you a total neophyte on bond investing and pretty much devoid of understanding the miracle of interest, patience, and compounding?

If your answer is yes to any of these questions, you may require a whole new battle plan to strengthen your investment strategy.

Since 1978 Young Research has developed strategies for conservatives like you.

My son Matt Young, CEO of our family investment counseling firm, writes our monthly client letter to level the playing field for concerned conservatives.

After four decades of writing my monthly subscription-based strategy reports, I have retired. Now, I concentrate 100% on international research that supports the efforts of Matt and his senior leadership team at our family investment counseling business. My research is a fundamental component of Matt’s monthly client letters.

If you like the feel of my Dynamic Maximizers and the scenario I have painted for you, why not stay in touch with Matt and me monthly. If you are not yet signed up, simply add your name to our inquiry register below.

My family looks forward to welcoming you and your family to a whole new world of compounding, consistency, and comfort.

Warm regards,

Dick

Retired or retiring not too far down the road?

You will be a winner if you are “the ultimate patient investor.”

To be a genius in the financial markets you need a steel-trap grip on the single concept that virtually guarantees long term financial security.

The strategy is based on Einstein’s miracle of compound interest.

Here, in a nutshell, is the story:

Young Research’s Dynamic Maximizers® (DMs) portfolio is a maximum safety portfolio ideal for retirement investors, IRAs, and education programs. The Dynamic Maximizers® portfolio model invests primarily in dividend and income paying securities. Past performance should never be considered predictive of the future. Despite the dotcom bust and the 2008/2009 financial collapse, the DMs, however, have yet to record a single down year this century.

Young Research’s annual target total return range for the Dynamic Maximizers Portfolio® is 3% to 10%. Given those returns, investors have been able to comfortably enjoy a 4% retirement draw without depleting principal.

Double your Money over 10 years

Over this century, the DMs have generated a 6.9% compounded annual return*. Compare that to a more speculative portfolio such as the NASDAQ which has generated less than half of the gains of the DMs over the same time period.

Using the rule of 72, at a 6.9% annual return, an investor can expect to double his money every ten and a half years. The rule of 72 states that you can estimate the number of years it takes to double your money by dividing 72 by an assumed rate of return.

If you like the feel of Young Research’s Dynamic Maximizers and the scenario outlined here for you, be sure to sign up for a complementary copy of Young Research’s Dynamic Maximizers Over the Century display by sending us your name and email address in the box below.

*Past performance is not a guarantee of future results.

On Wall Street, traders and speculators are closing their doors. The Wall Street Journal’s Rachael Levy recently reported:

Boston-based hedge fund Frontlight Capital LP is shutting after fewer than three years in operation, people familiar with the matter said.

Four other hedge funds earlier this month announced they were closing, as investors re-evaluate a once-highflying industry plagued by weak returns.

Through September of this year, Frontlight’s fund, Frontlight Enhanced Macro Master Fund I, LP, lost 4.17%, according to a document reviewed by The Wall Street Journal. The fund lost 5.6% last year. The firm managed about $280 million, the document said.

Such speculators have no use for the ONLY three components of investor success I care about, and you should care about too.

1. Cash flow
2. Compounding and
3. Patience

Over the long term (patience) always leads to capital appreciation. ALWAYS.

Follow the cash, and compounding and time will allow the power of cash to steadily and relentlessly pull capital appreciation forward.

Stick with cash flow always.

Trading, and speculating that there will be a greater fool available to sell your shares to in the future is what has driven these hedge funds out of business. Don’t make the same mistake, focus on my three components for success.

Investing is all about attitude. Are you too eager to take on risk in good times? Too ready to cut and run in bad? Can’t commit to an investing plan? Don’t have the resolve to stick to a sustainable withdrawal rate?

In early 1999 I talked with the former American League MVP, Boog Powell about attitude. I wrote this that May:

I was talking to Baltimore Oriole baseball legend Boog Powell recently. During the baseball season, Boog runs Boog’s Barbecue at Camden Yards in Baltimore. Off-season, he is in Key West occasionally as “guest” barbecue celeb at his high-school buddy’s local spot. Boog will tell you that barbecue is an attitude. Well, successful investing is also all about an attitude. Your mental framework will go a long way in making you a successful investor. The primo way for you to have a winning attitude 100% of the time is to become a programmed investor. Operate on the premise that the economy grows over time, as do corporate earnings, and thus stock prices. Don’t trade in and out. Ride the long wave to prosperity in a risk adjusted way that reflects your age, investment acuity, financial resources, risk tolerance, and need for income from your investments.

Managing your attitude is the hardest part of successful investing. Keeping calm during market turbulence isn’t easy when you’re on your own. Working with a professional can make a difference in your comfort during difficult times. If the last week of market volatility has you looking for guidance, sign up for the Richard C. Young & Co., Ltd. monthly client letter (free even for non-clients). Take some time to read through older letters to understand our steady approach to investing.

When asked to name the greatest invention in history, Albert Einstein responded, compound interest.

Over three decades ago I started our family investment counsel firm focusing on the miracle of compound interest to help retired and soon to be retired investors just like you.

My short and quick goal was, as it remains today, safety of principal and a consistent flow of income through investors’ long and peaceful retirements.

In J.R.R. Tolkien’s The Hobbit, when the wizard Gandalf asked Bilbo Baggins to take part in an adventure, the Hobbit told Gandalf that he viewed adventures as “… nasty, disturbing, uncomfortable things! Make you late for dinner.”

To meet our mission for family-centric clients, we wrap the Hobbit’s security blanket around Einstein’s concept of compound interest. This duo forms the foundation of our prudent investor platform. And no, we do not advise investing adventures for our clients.

Consistent Cash Flow and Security of Principal

To a one, when clients join us, they know that we, on their behalf, are focused on a consistent flow of cash, security of principal, and the miracle of compound interest. We neither speculate nor market time. We base our sound investments on the Prudent Man Rule, first initiated by Justice Samuel Putnam back in 1830.

The discretely managed portfolios at our investment counsel firm are crafted selecting individual securities for clients one at a time, like rare postage stamps.  As you know from reading my reports, we have moved away from the mutual fund model, especially as regards index funds, products whose time has past.

We craft portfolios by combining dividend-paying blue-chip stocks, each with a long record of increasing dividends annually. Our portfolios also include a substantial mix of blue-chip fixed income, whether corporate or government securities. The majority of portfolios are weighted 60/40 (stocks/bonds) or the inverse.

Not a Single Down Year this Century

Our most defensive portfolios are aimed at investors looking to draw 4% (our base target) annually from retirement portfolios with (1) minimum volatility and (2) a high degree of comfort.

To that end, I have developed what I refer to as our Dynamic Maximizers^® model, which retraces the entire 21^st century. Despite the multi-year dotcom bust and the disastrous financial collapse of 2008/2009, my Maximizers model has yet to record a single down year this century. Saying that, however, as every prudent investor knows, the past can never be expected to be predictive of the future.

To date, the Dynamic Maximizers^® have offered total returns ranging most often between 3% and 10% annually. We look for an All-Star-like on base percentage, but do not expect many home runs. As previously noted, I have yet to log a single Maximizer’s down year this century. Given this comfortable long-term record of consistency, you can see that a 4% annual retirement draw should be comfortably enjoyed with a substantial Ben Graham-style margin of safety.

Get Young Research’s Dynamic Maximizers Over the Century

For anyone wanting to delve deeper into this investment marvel, I have assembled a graphic display on “Maximizers Over the Century.” If you are inclined to think that our Maximizers program might work for you and your family, simply enter your name and email address in the box below.  We’ll email you our “Maximizers over the Century.” Even a few minutes scanning this display will allow you to fully appreciate how our model works and how consistency and a high on-base percentage has been achieved over a tumultuous near two decades.

If you prefer more expedient action, give my family-focused investment counsel firm a call (888-456-5444) to discuss today how we might make your investment life a little bit easier, and more productive for you.

At Richard C. Young & Co., Ltd. we all look forward to sharing our retirement (current or future) strategies with you.

Warm regards,

Dick Young

I have been a longtime supporter of including gold in diversified portfolios. Gold is a safe-haven asset, an inflation and currency hedge, and a hedge against geopolitical turmoil and general market turbulence.  It is an insurance policy of sorts. When everything else is down, gold is often up. Gold’s counterbalancing effects can dull the pain of a market rout.

We have seen shades of gold’s counterbalancing power over recent weeks as both stocks and bonds have sold-off while gold prices have risen.

I’ve long been an outspoken advocate of owning gold (I say owning because I buy gold and do not intend to sell). I’ve spoken on gold at conferences around the country, and I have researched and written about gold for nearly 50 years.

Becoming a reliable purveyor of gold insight was no easy trick. At 30 years old I was given a tough, international assignment, and then judged by some of the most demanding names in the business. In August of 2017, I told readers the story of the research breakthrough that put me on the gold map. Here it is for you:

London, 1971

Portfolio strategy discussions and strategizing with the world’s biggest institutional clients started for me with a mix of Boston, New York, and London research. My institutional research and trading days trace back to August 1971 with Model Roland & Co. The Boston offices were on Federal St. in the old financial district. I was 30 years old.

Gold Research for Leo Model

By the summer of 1972, I was off to London on a gold/gold-shares research trip. This eye-opening experience gave me access and exposure to the largest players in the international gold market. I met contacts and gained background that would be invaluable to me, and thus to my clients, for the ensuing 45 years. Meetings at Samuel Montague and Consolidated Gold Fields, for example, allowed me to craft a detailed report for Leo Model on gold as a commodity as well as a monetary asset.

E.M.B. Comes Through

Mr. Model thought enough of my report to put it into the hands of no less than America’s dean of international monetary experts, Edward M. Bernstein. This was a little unnerving for me as a 30-year old who was prepared for a sour outcome and a lecture from Herr Model, a demanding employer.

Well, much to my surprise, Mr. Model soon received a note from E.M.B., perhaps the #1 expert in the world on the intricacies of gold: “I think the collection of papers on gold is excellent. It seems objective and pointed. I have no suggestions. … Put me on the list to get what Model Roland puts out on gold.”

That did it for me. I was on the map.

Most “get rich quick” schemes end up turning into “get poor quick” schemes. Reach too deep into the risk pool and you’re likely to fall in. I knew that 30 years ago, and in 1988 I wrote:

I’m an ultra-conservative investor at heart…and by intent. I know my reputation in the industry puts me in the most cautious camp possible, and that’s just swell with me. My motto has always been, “Get rich slowly with compound interest.”

At even a 7% rate of return, money doubles in about ten years. In IRA, Keogh and other retirement accounts, over half of total return should come from dividends and growth of dividends.

Dividends are the foundation for any serious investment portfolio. I’ve told you many times that over the 50-year period, end 1986, the Dow Jones Industrial Average compounded at 4.8%. Dividends on average provide a yield of 4.5%. And then there is the 4.6% long-term dividend growth rate that combines with current yield to make dividends the focus consideration in any investment-grade portfolio. Look for a yield that is higher than the yield for the average Dow stock (currently 3.6%); look for dividend growth better than the Dow’s historical 4.6%; and look for a price earnings ratio (P/E) that is below the Dow P/E (currently 14.2x). If you make it your point to select stocks that meet these three initial tests, you will be well on your way to assembling a portfolio with excellent prospects for long-term total return. Don’t be overly anxious about capital appreciation. Let appreciation take care of itself. You want to lock in a relatively high yield and good dividend growth prospects.

The Dow yields have changed today, and buybacks are a bigger part of the investment picture than they were in those days, but the principle remains the same: get rich slowly with compounding.