Rule No. 7 to Find the Perfect Stock

Every investor should read Peter Lynch’s book, One Up on Wall Street.

Lynch was a legendary fund manager, directing the Fidelity Magellan Fund from 1977 to 1990 and posting an average annual return of 29%.

The book, aside from telling some great stories, shares clear ideas for finding great businesses that have even better stocks. You need to find things that make money and that investors underappreciate.

One of my favorites is his rule No. 7 for finding a perfect stock: There’s something depressing about it.

Some businesses simply seem unappealing. For example, take solid-waste company Waste Management (WM). Who wants to deal with garbage?

The garbage business is the epitome of boring. Waste companies don’t typically experience explosive revenue growth. Their stocks don’t shoot up 100% in a year…

But they don’t fall 100%, either…

These types of companies turn out to be great investments because no one’s really itching to get out there and start hauling away trash. Harvard Business School grads aren’t lining up to disrupt the landfill business. That means less competition. And great returns.

And the trade worked out well for subscribers. We closed the position for 2.8% gains on our capital at risk (and 14% on margin). And then, the next week after collecting our profits, we did it again! That time, we closed the position early for a profit of 1.3% in 35 days (or 6.5% on margin)…

That’s the benefit of these low-risk trades in businesses that are boring, depressing, or unappealing… you can keep going back to them again and again as long as the option premiums are high to collect more income.

So if you’ve found a stock that will end a conversation when you talk about it at your next cocktail party… you’re probably getting a good deal.

We just celebrated our third anniversary of Health & Wealth Bulletin. What are some things we’ve helped you learn along the way? Let us know at [email protected].

Q: According to the FDA’s website, they regulate supplements. But you’ve said several times the supplement industry is unregulated. Can you explain? – H.S.

A: The supplement industry, as a whole, is unregulated.

According to the U.S. Food and Drug Administration (FDA), supplement and vitamin makers must adhere to three basic rules… The makers can’t “claim to treat, mitigate, or cure any disease.” That’s why bottles don’t say they “cure” things like depression. Instead, the marketing departments say they’re “mood enhancers” on the bottle. Or they’ll claim an herbal tablet helps you sleep (but not that it “cures” insomnia).

Worse than this, the industry lacks any impartial parties to test these claims or the safety of the supplements and vitamins… which is why you should be very cynical. The FDA leaves the testing of safety and efficacy up to the supplement companies.

The FDA monitors complaints concerning supplements through MedWatch – its adverse-event-reporting program. If there are concerns about a supplement or an ingredient in a supplement, the FDA issues a warning… and sometimes does some of its own research. But researching a supplement after it has damaged folks’ health is too late.

Q: I’ve read that our bodies take in far less nutrients from food when elderly vs. young. It would seem that larger scale use of vitamins would be the solution. What say ye? – T.W.

A: It is true that our digestive systems slow down as we age. Specifically, our metabolism slows down once we hit our twenties, which is why we can’t chow down on burgers and fries without gaining weight like we could as teenagers.

Part of this happens naturally, since we produce less stomach acid as we get older. And we actually lose some of the cells lining our colons as we age, too. But another reason our metabolism slows down is that we lose muscle mass and become more sedentary. We need our metabolism to work effectively to get all the nutrients we need from our food.

That’s why we recommend adding so many vitamin-rich foods to your diet. Fruits and vegetables along with fish and olive oil will provide plenty of nutrients for you. But don’t forget to stay active to help your digestive system work properly. Combat muscle loss with weight-bearing exercise, too.

Q: I have been using Stevia for years. Reason, much lower calories (almost zero). – J.F.

A: Stevia, which is sold by the brand names of Truvia and PureVia, is the only sweetener that your body breaks down like sugar. So it isn’t as harmful as the other sugar substitutes. However, there is some evidence that stevia can lower blood pressure, which means folks on blood pressure medications should use it with caution. If you do need a sugar replacement, it’s the only one we suggest using.

But keep in mind… although this is the least awful of the bunch, overall we advise against any sweeteners. That’s because all of them contribute to problems like inflammation, which can cause heart disease, type 2 diabetes, and more.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
November 2, 2018