Tom Yeung here with today’s Smart Money.
Well, the Federal Reserve definitely surprised some folks yesterday after it opted for a jumbo rate cut. Markets jumped 1% to 2% today after the Fed cut rates by 0.5%. Only one major bank (JPMorgan) got the prediction right.
The size of the September rate cut had been a 50-50 coin flip. The data was too unclear, and the Fed had purposely obscured its intentions while waiting for more clarity that never came. We made no speculative bets here or in Eric’s paid services leading up to the cut, because the Fed could have easily reduced rates by just 0.25% in an alternate universe.
Nevertheless, here we are. The start of a new rate-cut cycle.
On the positive side, there’s palpable excitement in the stock market.
Suffice to say, the Fed’s actions on Wednesday – and expected further cuts later this year – should be positive news for healthcare and tech firms, commodities, speculative small-cap stocks, gold, cryptocurrencies, and a host of other investment vehicles.
For example, companies will have to refinance almost $2.2 trillion in debt over the next 12 months; lower rates will make this cheaper, which reduces the risk of bankruptcy and leaves more money for shareholders. Also, lower rates reduce market discount rates, which increases the value of “long-duration” stocks with profits further into the future (i.e., speculative growth stocks).
However, the jumbo rate cut suggests that the Fed isn’t so confident about the jobs market. According to the St. Louis Federal Reserve, eight of the last 13 rate-cut cycles saw a recession happen within two years. This current board is aware that past Fed chairs have cut rates too slowly and clearly want to avoid repeating that mistake.
That’s why we’re excited this week to introduce something akin to a “Billionaire’s Investor Club.” By studying the trading patterns of dozens of successful wealthy investors and combining it with a proprietary quantitative formula, Eric’s special guest at the upcoming Great 2024 Sell-Off event leads a team that has created a way for investors to outperform markets in good times and bad.
(That event is scheduled for this coming Tuesday, September 24, at 8 p.m. ET. You can learn more about it and sign up by going here.)
Not all of these trades are obvious. In fact, some will seem downright odd at first. But that’s what makes this kind of investing so different.
So today, I’d like to explore one of these billionaire trades, and share how you can access a free report that reveals “seven stocks billionaires are buying with both hands.”
Let’s dive in…
A Billionaire’s Take
In the 1980s, the Marriott Corp. hotel chain went on an enormous shopping spree. The company acquired hotel firm Host International, several restaurant chains (including Howard Johnson’s restaurants), and built up an enormous portfolio of locations.
However, the best part of Marriott’s business wasn’t owning the hotels… it was the large management fees it charged for running them. The company’s strategy soon evolved into building hotels, selling the real estate, and then keeping the lucrative contracts to manage the hotels.
This bonanza ended during the real estate market crash in the early 1990s. In the blink of an eye, Marriott was suddenly saddled with over a hundred unsellable hotels in an overbuilt market and burdened with debt it had taken on from its decade of acquisitions.
To save the firm, Chief Financial Officer Stephen Bollenbach created a breakup plan for the hotel chain in 1992. Under the agreement, Marriott would keep its lucrative management business (the “good” Marriott), while spinning off its less profitable assets and debts (the “bad” Marriott) into a new entity known as Host Marriott.
So, which would you have chosen to buy?
Most investors would opt for the “good” Marriott. After all, why buy a toxic waste dump when a profitable, debt-free alternative exists?
But billionaire investors think differently. As Joel Greenblatt of the $6 billion Gotham Asset Management hedge fund wrote about Marriott’s breakup in his 1997 book, You Can Be a Stock Market Genius…
Obviously, I was excited about… the toxic waste. “Who the hell is gonna want to own this thing?” was the way my thinking went. No institution, no individual, nobody and their mother would possibly hold onto the newly created Host Marriott after the spinoff took place. The selling pressure would be tremendous. I’d be the only one around scooping up the bargain-priced stock.
He was clear to emphasize this is not necessarily contrarian investing. He had done the research, known that Host Marriott’s actual asset value likely exceeded book value, and realized that CFO Bollenbach was actually moving over to manage the spinoff.
The result was nothing short of incredible. Over the next three years, the company would divest its airport and toll road concessions, add 55 hotels to its portfolio, and complete the sale/leaseback of all Courtyard and Residence Inn hotels. By 1999, it became the largest U.S. hotel-based real estate investment trust (REIT).
These improvements also translated into share-price gains. Within five months of the spinoff, the “bad” Marriott’s stock more than tripled… and shares would rise another 80% by the end of the decade.
The Billionaire’s Club
This is a pattern we see over and over again. Well-informed hedge fund managers often make decisions that seem counterintuitive… and then make out like bandits after their reasoning is known.
Some rely on smarts. Warren Buffett was a savant, graduating college at age 19 and then earning a master’s from Columbia University before turning 21. As documented by biographers, he does virtually all of his calculations in his head.
Others simply have enormous research budgets. Bridgewater Associates earns over $3 billion annually from its asset management fees alone, which it funnels toward buying reams of data and hiring top talent.
Either way, history tells us that skilled investors tend to keep outperforming. This is both true at the institutional level and individual one… and some studies have even found that following these experts on social media is enough to improve performance. There is a skill to beating markets, and following those who have previously demonstrated success is often enough to help your own boost performance.
Fortunately, you don’t have to take to X (formerly Twitter) and hope you stumble on these recommendations.
On Tuesday, September 24, at 8 p.m. Eastern time at The Great Sell-Off 2024, Eric and a special guest of his are going to reveal a unique way you could quickly grow your money while also being safe from any devastating losses moving forward. They have done extensive back-testing on the holdings of more than two dozen billionaires – like Warren Buffett, Bill Gates, and Ray Dalio – and have found ways to even improve on this billionaire’s club of investors.
The Next Marriott
In the meantime, you have the chance to access a free report that outlines seven companies that the world’s smartest and wealthiest billionaires are buying in bulk today. (Reserve your seat for that event and find out how to get that report by going here.)
I’m particularly excited for one of these companies, as it shares similarities to the Marriott spinoff…
Earlier this year, one of the companies in the Dow Jones Industrial Average decided to split its slowest-growing department into an independent firm. It would also “gift” $8.3 billion of its debts to this new entity, creating a “toxic waste dump” with negative tangible equity and relatively low prospects for growth.
The effects were as you might expect: Shares of this new entity fell 40% in initial trading as index funds liquidated their stakes. The spinoff was not part of the Dow Jones index, and so tracking funds were forced to liquidate their shares.
But since then, the stock has rebounded. In August, management flipped its 2024 guidance from a revenue decline to a slight revenue increase. And billionaires are now buying shares in enormous quantities. If history is any guide, this firm looks set to keep rising over the next several years.
To find out how to get the 7 Stocks Billionaires Are Buying with Both Hands free report featuring the name of this company and six others, be sure to sign up for Eric’s The Great Selloff 2024 special event. At this event, Eric and his special guest will reveal a breakthrough technology that will help keep you confident in the markets, squeezing out as much profit as possible… while also alerting you before the next big selloff occurs.
You can click here to reserve your spot to Eric’s special event.
Until next week,
Tom Yeung
Markets Analyst, InvestorPlace
