By Jeff D. Opdyke, Editor, Emerging Market Strategist
Dear Sovereign Investor,
Give me a few minutes and I can change the way you look at investing.
In the pursuit of profits in the stock market, investors always seem to want to get in on the “the next Microsoft” or “the next Wal-Mart.” Instead, they often end up buying Microsoft and Wal-Mart and other big names after the magic is gone.
They can’t see what’s happening tomorrow, so they stick to what worked yesterday – and hope the fire reignites.
It’s largely a dead-money strategy, because once a company reaches a certain stage, the growth that made it famous is gone. It essentially becomes a utility racking up cash and spitting it back out as dividends. But the share price barely budges.
That’s not necessarily bad if you’re an income investor. But it’s not good if you are seeking the fast growth that made companies like Microsoft and Wal-Mart stand apart.
To profit from those kinds of companies, you need to have an advantage, an indicator that puts you onto the right path.
The Path to the Hottest Long-Term Trends
Everyone prognosticating the future ultimately claims that their crystal ball is cracked.
Mine is not.
I can tell you with 100% accuracy that demand for milk, dairy and soy is on the rise among the emerging-world’s new consumers. I can assure you without doubt that beer, palm oil and plastic consumption shadows rising wealth. I know with certainty that people who move from poverty onto the lowest rungs of the middle class spend their first additional discretionary dollars on protein such as chicken, fish and pork.
Best of all, it’s easy to profit from these assurances.
Just about any trend you can think of – from the 1950s fascination with hula-hoops to rising demand for better hygiene products among the new consumer class – follows what’s known as an S-curve, named for the shape of the letter.
It is as perfect an indicator as you will find – a divining rod of profits that can’t help but lead you to the hottest, long-term trends.
Take a look at the chart below. The red line depicts the curve we care about …
This particular S-curve shows how sales per capita rises alongside GDP – in essence, a depiction of consumer spending going up as a country’s economy expands. But I’ve thrown a few notes onto the chart to show you what’s really important about the S-curve.
Notice the three zones – Warm-up, Hot Zone, Cool-down. And notice there’s a take-off point and a point of saturation.
To explain how all of these pieces come together, consider the history of Wal-Mart. It perfectly exemplifies the S-curve and how you can use it to create real wealth in your portfolio.
Wal-Mart began in the 1960s as a tiny, Arkansas retailer with a novel idea – bring big-box stores with discounted prices to small-town America, where the retailing culture of the day insisted big stores couldn’t survive because local populations were too small.
Yet Wal-Mart proved the know-it-alls wrong and began to open additional stores with great success. The retailer was in its warm-up zone.
The company hit its take-off point when it launched its initial public offering in 1970 … and for the next 29 years Wal-Mart was in the hot zone. The shares – at a split-adjusted price of just $0.008 – rose more than 864,000%, ultimately topping out at $69.69 on Dec. 28, 1999.
It was on that day that Wal-Mart hit its saturation point.
Ever since then, the stock has been dead money, orbiting within a narrow band around the $50 mark. The business is fine. It kicks off huge cash flow that will fund ever-larger dividend payments. But the growth that makes investors long for “the next Wal-Mart” is long gone.
There’s Money to be Made
Everywhere on the S-Curve
It’s easy with hindsight to pick on Wal-Mart. But the fact is, had you been an active investor in the 1970s, the 1980s, or even the 1990s, you would have known (depending on what decade you were in) that retailing was either taking off in America or had become a huge part of the American consumer/cultural landscape. And you could have made big profits owning retailers like Wal-Mart that were obviously winning.
Heck, even if you’d waited until the summer of 1998 to finally get onboard the Wal-Mart story you would have still more than doubled your money.
Anywhere between take-off and saturation profits await.
When you know the trends of the day, those are the S-curves that will generate the huge profits of tomorrow. Find the key companies that are playing a big role in those trends (and they’re not hard to find), and then invest with an eye towards patience.
Wal-Mart’s hot-zone run, after all, was not a smooth, uninterrupted 45-degree ascent from left to right. It was choppy. At one point Wal-Mart’s shares fell more than 50%.
But those who held on, resolute in their belief that the American consumer trend was still strong … those people turned a modest investment into generational wealth.
The same opportunities are out there right now, in stocks markets around the world where the new consumer class is taking off. All you have to do is follow the S-curve, and it will lead you unerringly to profits.
Until next time, keep a global view …
Jeff D. Opdyke
Editor, Emerging Market Strategist