How to Play Offense in Today's Investing 'Fight'

‘I can’t sing, and I can’t dance, but I can lick any SOB in the house’…

William Dempsey was a poor kid from Manassa, Colorado just trying to survive. But in 1911, with no education beyond elementary school, and no trade skills of any kind, work was hard to find. So at the age of 16, already living on his own and desperate for money, Dempsey turned to the one thing he knew he was any good at – fighting.

“When I was a young fellow, I was knocked down plenty. I wanted to stay down, but I couldn’t. I had to collect the two dollars for winning or go hungry. I had to get up. I was one of those hungry fighters,” Dempsey once said, as quoted by the sportswriter Grantland Rice. “You could have hit me on the chin with a sledgehammer for five dollars. When you haven’t eaten for two days you’ll understand.”

And that is how the Manassa Mauler, William “Jack” Dempsey, got his start in what became a legendary boxing career. After hundreds (possibly thousands) of unsanctioned saloon brawls and small-time fights, Dempsey would go on to win 68 professional fights, including an incredible 53 wins by knockout.

Dempsey became the world heavyweight champion in 1919 and took over the boxing world for nearly a decade. His fights routinely set financial and attendance records, including the first-ever million-dollar gate in 1921 in front of a crowd of 91,000.

Dempsey’s bout against European champ Georges Carpentier was called the “Fight of the Century” and drew what was then the largest crowd ever assembled in the United States for a sporting event.

In 1950, the Associated Press voted Jack Dempsey the greatest fighter of the past 50 years.

A clash of styles…

Carpentier was the quintessential example of the European fighters who made up most of the other top boxers of the day. Nicknamed the “Orchid Man” for the fresh corsages he wore on his finely tailored suits, Carpentier was a World War I hero and a classically trained fighter.

During his bout, Carpentier took a typical European approach to fighting Dempsey. He spent most of the first round bobbing and weaving to evade Dempsey’s assaults, keeping him at bay with lots of movement, bear hugs, and an occasional straight-armed jab to create space between them.

In contrast, Dempsey’s fighting style was nothing the European had ever experienced.

Dempsey rarely moved any direction other than forward, and he rarely jabbed. Instead, he fought with an aggressive style that accentuated his biggest talent – devastating punching power.

Dempsey came at his opponents with a fury and force never before seen in the sport.

In other words, he brought the brawling style of an everyman streetfighter to a sport that was previously ruled by polished, methodical pugilists. That’s what made Dempsey so successful – and popular.

Early in the second round of their fight, Carpentier hit Dempsey with a hard right that hurt the American. Most fighters of the day, once wobbled, would pull back and try to “clear the cobwebs.” Not Dempsey. Instead, he unleashed an onslaught of 25 landed punches in a single half-minute exchange that debilitated Carpentier.

Two rounds later, Dempsey knocked Carpentier down twice and knocked him out for good. He’d won the Fight of the Century, then plenty more…

How he did it…

Dempsey passed away in 1983 at age 87.

He only lost six pro fights, but later in life, an interviewer still asked him about his aggressive fighting style and whether he thought in hindsight that it was too risky. Maybe he would have lost even fewer times with a different approach?

Dempsey was adamant that his approach was superior.

He said his attacking approach led to fewer losses and less damage to his body. He had unwavering conviction that his aggressiveness provided better protection than a more passive, reactive approach – because it usually shrank the number of punches his opponent could throw.

This explanation led to one of Dempsey’s most famous quotes…

The best defense is a good offense.

Investors should keep Dempsey and his consensus-defying approach in mind. Said another way, often the biggest risk is not taking any risk…

As I (Austin Root) will explain below, “going on offense” when conventional wisdom suggests getting “defensive” is the single most important mindset that will help protect and grow your wealth in today’s erratic and uncertain world.

I’m also going to discuss which type of assets I think are worth owning today.

An investor’s quest for a good offense starts with throwing out conventional wisdom…

In my role as chief investment officer at Stansberry Asset Management (“SAM”), I know our clients’ capital is precious. It provides freedom and opportunities not only in their own lives but to future generations.

I don’t take lightly the topic of sound investing in an unsound world.

My role also gives me the opportunity to speak with many smart, thoughtful folks who are looking for a better way to invest than the cookie-cutter groupthink of the financial mainstream.

And I know through many of these conversations that what I’m about to say runs counter to what many investors think they should be doing right now…

There are valid worries, no doubt…

You see, many clients at SAM are worried about the world right now… for good reason.

Governments and consumers around the globe have too much debt. Economies are showing real signs of slowdown, while prices for most assets – stocks, bonds, real estate – remain elevated.

It’s no wonder that many investors I speak with are tempted to sell all their stocks (and other risk assets) and go completely to cash. Maybe keep some gold, but otherwise, many folks think the best thing to do is to be out of the market completely.

On the surface, this may seem prudent. But you’d have to be lucky enough to get the timing exactly right – that is, selling before a major market downturn AND not missing a big rally beforehand.

Over the long run, sitting exclusively in cash will not serve you well…

You will not be able to protect yourself and the purchasing power of your capital without taking any risk. Put in boxing terms…

Sitting completely in cash in today’s market is like trying to win a boxing match by bobbing and weaving and wrapping up your opponent. You may avoid a few hits. But if you’re going to win, you’re going to have to throw some punches.

Now before I go any further, I want to be clear: I’m not against investors holding some dry powder. It’s a wise thing to do right now.

Virtually every one of the tailored portfolios we construct for our clients currently holds some cash, gold, and/or short-term U.S. Treasurys. Holding some cash or cash equivalents ensures we’re ready to buy world-class assets at fire-sale prices should other investors panic.

But sitting in cash for all or even most of your capital is a long-term money loser. You need to play a little offense…

For the core of your portfolio, you must own Productive Assets.

I’m going to share my favorite kinds of productive assets – the kinds that will help protect and grow your capital through good times and bad.

But first, I need to talk about why, exactly, we need to rely so heavily on productive assets to stay ahead in today’s environment.

It comes down to something that can be described in two words: government ineptitude…

Long gone are the days when we could trust Congress and the president to enact sound economic policy, the kind that could expand the percentage of Americans who are getting ahead and flourishing. You know, policy that includes basic fundamental tenets like sound money, balanced budgets, smaller government, moderate regulation, and free-market trade and economies.

Instead, we have a huge, sprawling government with massive debts and deficit spending, no accountability for whether our tax dollars are spent wisely, and an ever-increasing appetite to dole out more subsidies to garner votes.

This election, there’s even socialist talk of price controls for food, something that has never led to an increase in prosperity – not once – in the history of mankind.

The truth is, we can’t rely on the government to enact sound economic policy because it’s simply not in the politicians’ best interest. We’re at a point where doing the right thing is hard and would likely cost politicians votes.

Our country simply lacks the political will to do it on both sides of the aisle.

It took about 200 years for the U.S. government to rack up its first $1 trillion in national debt. Today, it takes about 100 days.

And there’s no end in sight. Politicians will continue to take the path of least resistance.

They operate on the hope that we can grow our way out of this issue. If gross domestic product grows faster than our debt balances, the problem looks less bad… at least, in theory. And in any case, they know they can print more and more dollars, devaluing the currency and reducing the “real” burden of the debts owed.

This means you should expect continued inflation and debasement of the dollar and other fiat currencies around the globe. It also means that the only way to protect your purchasing power and nest egg over the long run is to own assets that will grow faster than such inflation.

And that’s what I mean when I tell you that you need to own productive assets to protect and grow your wealth. In other words, we need to play offense.

So, which productive assets are best?…

One area I’ve explored with SAM clients is certain types of private credit.

A lot has been written about private credit recently, and we’re usually skeptical of areas that have captured the attention of the mainstream press.

But in some underserved, niche lending markets where we at SAM can put our clients’ money to work as strategic capital, we find the reward-to-risk ratio in private credit highly compelling. We like to say that such senior secured debt instruments provide equity-like returns at much less risk.

But the truth is not all investors can access these investments. You need to be an accredited investor (with at least $1 million in investible net worth). And you need a long investment horizon and the ability to allocate a portion of your capital to illiquid investments.

However, my other favorite productive asset right now is accessible to everyone…

That’s owning shares in well-run businesses with durable and growing franchises, pricing power, attractive margins, and high returns on investment, which should always be productive assets that protect and grow your capital.

We’re talking about high-quality stocks…

I wrote about this in a Digest essay in April, when I suggested folks invest more like the late Charlie Munger rather than Elon Musk…

At its heart, capital-efficient businesses are the ones that have some unique trait that allows them to grow sales and earnings for long periods without having to make large, corresponding increases in capital spending.

To invest more like Munger, you also need to find a good business that generates strong profits and returns for its owners. And you need to look for businesses that will get bigger and better over time…

When you buy high-quality, capital-efficient, durable businesses at a reasonable price, it tends to have a very positive effect on your wealth over the long term.

I also discussed this idea at length a few months ago in a sit-down event with Stansberry Research founder Porter Stansberry. To show an example of the kind of businesses we’re interested in, we compared three different companies from the same industry side by side.

One was auto-parts retailer AutoZone (AZO). As Digest editor Corey McLaughlin wrote in a recap of the event back in May…

The company is well known for its obsessive focus on using cash (not debt) to buy back shares, which has helped it return roughly 19% per year on average since 2001, outperforming the S&P 500.

As Austin showed, AutoZone bought back roughly 8% of its shares per year over 22 years, going from 109 million shares outstanding to 18 million as of 2023. That is one effective way to put cash to work and deliver shareholder returns consistently. And it makes AutoZone, as our Stansberry’s Investment Advisory team once called it, a “government-proof, inflation-proof, crisis-proof, bear-market-proof ‘super stock.'”

Note: We don’t own shares of AZO in any client portfolios, but I used this as an informational example.

And there’s more than one way to be a capital-efficient business. During that event, I discussed another stock that returned almost 21% per year, by buying back shares, but not nearly as many as AutoZone. Its strength was better sales and net income growth.

While not always easy to identify, shares of high-quality businesses that trade at reasonable valuations have something big in particular going for them today.

This is critical for investors to understand…

High-quality stocks can grow their earnings over the long run at a rate much higher than inflation. And in so doing, they become ever-increasing cash machines, affording their owners the superpower of compounding growth at a time when you need it most.

And importantly, we expect these types of businesses to not only survive a future downturn in economic activity but thrive, using it to their advantage to take share and distance themselves from weaker competitors.

Our team at SAM spends a lot of time researching and identifying companies that we believe will be successful over the long term.

But here’s what it boils down to…

If you can feel confident the business you are researching will be a bigger, more profitable enterprise a decade from now than it is today – and if the stock were to sell off and you’d want to own more of it – chances are, you’re on the right track.

In short, if the best defense is a good offense, the stocks of these elite businesses are the type of weapons we want to bring to the ring of financial markets to protect ourselves and our capital.

Identifying truly productive assets and world-class businesses is a mission-critical step in protecting and growing your capital. But it isn’t the only step. In fact, it’s what we at SAM consider one of the five steps to achieving financial liberty.

SAM believes all of these steps are crucial to investment success. They are designed to work no matter where you are in life or what the market throws at you.

Warm regards,

Austin Root
Towson, Maryland
September 5, 2024

Published on Stansberry Research Digest.