March 2015

TheCROW’SNEST

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Sometimes making a boatload of money takes a long, long time...

And that is fine by me. I’d rather get rich slowly than go broke quickly. Usually that’s the way it works.

When I set up The Crow’s Nest portfolio, my main goal was to safely and effectively grow wealth for my readers... and myself.

I follow the same principals that I write here: I allocate 80% of my investing to long-term dividend growers. I enroll in dividend reinvestment plans when I know I’ll hold the stock for at least five years.

And yes, occasionally I’ll swing for the fences with a microcap if the trends are my friend.

I have a real-life example of someone who has used this same get-rich-slowly strategy to accumulate $8 million — without anyone ever even knowing about it. This story not only helps restores my faith in humanity, but it also confirms the way we’ve been investing. This particular tale will both warm your heart and set you up for a lifetime of wealth.

Without further ado, allow me to introduce you to Ronald Read, a former janitor and gas station attendant from Vermont who amassed an absolute fortune right under everyone’s noses. When he passed away last year, he was able to leave millions of dollars to his two favorite charities: his local hospital and library branch.

To say that his community was shocked would be an understatement...

You see, Ronald lived frugally: He drove a used Toyota, he wore flannel shirts, and he held his coat together with safety pins. Even in his old age, he would park his car blocks away to avoid feeding quarters into the parking meters.

He was so thrifty, in fact, that locals were known to pick up his tab at the coffee shop he frequented because he appeared not to be able to afford it.

Little did they know that poor, unassuming Ronald had grown his stock investments into a war chest of $8 million!

The only clue that revealed his secret investing habit was his routine of reading the Wall Street Journal each and every day at that same coffee shop. Now, if everyone who read the Wall Street Journal was able to die with 8 million bucks, then I bet the subscription rate

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would go through the roof. But he didn’t make his money from reading the WSJ. Even so, his strategy was just about as easy...

So how in the world does an ex-janitor quietly grow into a multimillionaire? Did he strike it big with real estate? Was he an early investor in a tech giant? Did he rob a bank?

None of the above...

Ronald Read got rich thanks to one simple word: dividends.

“He only invested in what he knew and what paid dividends. That was important to him,” his attorney noted.

Just like his attire, his stock holdings weren’t anything fancy. His biggest holdings were AT&T (NYSE: T), Bank of America (NYSE: BOA), CVS (NYSE: CVS), John Deere (NYSE: DE), GE (NYSE: GE), and General Motors (NYSE: GM).

So how does one get rich on simple, dividend-paying blue-chip stocks?

The power of compound interest. When you reinvest the dividends on blue chips like the ones above, dividend yield is added to the principal so that from that moment on, the interest begins to earn interest on itself.

In short, your money continues to snowball and becomes a moneymaking monster.

Albert Einstein was so fond of this strategy that he once said:

“Compound interest is the eighth wonder of the world. He who understands it, earns it... He who doesn’t, pays it.”

Luckily for you and I, it doesn’t take a rocket scientist to unleash the power of compounding interest; you simply have to follow these steps...

I’ve been telling you guys this since day one: The key to building a successful, long-term position in dividend stocks is dollar-cost averaging.

I just gave an interview with Money Show about this very topic. Here’s what I told them:

Essentially, dollar cost averaging is buying a fixed dollar amount of a particular stock regardless of the price. Instead of, say, buying a stock one day for, say, $50 a share and just dumping all of your money into it, what I like to do is ride the

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trends. It’s a pretty simple strategy if you can keep your cool.

It does require you to have the stomach to stick to the plan, especially when the markets drop, you just want to keep buying.

I think a lot of retail investors generally fail at this because they have it all backward. They like buying the hype and then they sell the fear. When you dollar cost average, the more shares you purchase when prices are low, it drags down your entire cost of your investment.

Purchase more shares when the prices are low and then you buy fewer when the prices are high and you kind of ride the wave along with the stock. The end result is that over time the average cost of your shares will become much, much smaller as if you were to dump all of your money into a stock all at the same time.

That is what Ronald Read did with his positions, and look how well it worked out for him. But I suspect he was also plugging these stocks into a dividend reinvestment program.

The whole story reminds me of my first experience with a secret millionaire: my wife’s great-aunt Esther.

Like Ronald Read, Esther was an “old-school,” frugal lady with a penchant for costume jewelry and thrift store dresses. When we cleaned out her apartment, we even found years’ worth of saran wrap and unused rubber bands. Esther let nothing go to waste...

But when she passed on at 98, we found out that she had quietly been sitting on millions of dollars! After some digging, I discovered that she had used a little-known stock loophole that allows regular folks like you and me to collect compound interest on a select few stocks... without ever paying a broker a dime. She never had to check her portfolio, she never paid trading fees, and she sure didn’t have to fork over 3% of her wealth for a money manager to move a basket of stocks around.

In fact, her investment was locked in on autopilot and made more and more money each and every year, without anyone having to lift a finger.

The story started when she worked for Bell Telephone Company — known back then as Ma Bell. As a young woman in the 1940s, she entered a company stock program that was — at the time — only available to employees of a select group of companies. It allowed them to accumulate shares automatically, so when those shares paid dividends, they would be dumped right back into their portfolios.

But truth be told, this will not make you a millionaire overnight. It is a long-term approach.

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Many of my readers often tell me they do not have decades to sit around and wait for their money to grow.

They need cash now.

While I am keen to set our crew up for the long-term payday, I am acutely aware that not everyone wants to wait 10, 20, even 30 years in order to amass a fortune. That’s why I’ve provided plays like Collectors Universe (NASDAQ: CLCT), which is currently up 100% in just a year, and Insys Therapeutics (NASDAQ: INSY), which is up 80% in a matter of months.

That’s also why I introduced you to Newtek Business Services (NASDAQ: NEWT), which is not only up 20% in a month but is also set to unleash a massive special dividend windfall to all of its shareholders.

I have updates on all of those companies, plus a great interview with David Hall and Van Simmons of Collectors Universe that identifies the best ways to predict what investments will be hot over the next few decades.

With that, let’s take a peek at our current positions...

Charting the Course

Delta-9

INSYS Therapeutics (NASDAQ: INSY)

I hope you got my alert last week to sell half of our position in Insys for a cool 81% return. Congratulations, it’s the first profits of our Delta-9 positions.

For readers who got in later, do not fret — there is plenty of upside for Insys. But in this market, I’ll take an 80% gain any day of the week.

That being said, here’s what has been happening with Insys...

As you know, the main driver for Insys’s success over the past year has been Subsys, a

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fentanyl-based painkiller for cancer patients. The patent sublingual (under the tongue) spray has driven some serious profits for Insys. Here are some quick stats:

• Since getting FDA approval in 2012, Subsys is now the single-most prescribed fentanyl therapy on the market.

• Annual sales are over $250 million and continuing to grow.

• Subsys revenue clocked in at $66 million last quarter, which is almost a 70% increase from last year.

“Subsys revenues more than doubled in 2014 over the prior year, enabling us to execute our strategy to develop important new products and new indications for Subsys to further expand our revenue stream,” said Michael L. Babich, President and Chief Executive Officer.

I cannot stress enough how far successes like this go when you are developing new therapies and drugs — especially in the controversial cannabinoid sector. Insys has proved it can do it and is developing a number of other cannabinoid-based drugs to add to its portfolio.

The company just received FDA “Fast Track” designation for its pharmaceutical cannabinoid treatment of Dravet Syndrome — which is a severe form of childhood epilepsy that currently has very few effective treatments.

Children with Dravet Syndrome never outgrow it, and it can lead to debilitating seizures that last a very long time — sometimes as long as an hour — and occur up to 100 times a day. At its worst, Dravet Syndrome can lead to SUDEP (sudden unexplained death in epilepsy).

Obviously, this is a horrific condition to have, and I’d urge you to watch the documentary Ciara’s Light for a real-life look into the horrors of Dravet Syndrome.

As a father of two children, I cannot imagine the helplessness parents must feel when trying to help their children through something as traumatic as this.

Thankfully, Insys has shown a lot of promise in treating it — which is why the FDA gave it Fast Track designation for its cannabis-based approach. Fast Track designation is only given when a drug can treat a serious condition that currently has unaddressed medical needs.

The company is touting it as just that...

“Coupled with our candidate’s orphan drug designation in Dravet syndrome, Fast Track designation represents significant additional support of our goal of addressing the significant medical need of children suffering from this rare and catastrophic treatment-

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resistant form of pediatric epilepsy,” said Michael L. Babich, President and Chief Executive Officer of Insys.

“Rapid advancement of our pharmaceutical CBD program is a key priority for Insys, and we are pleased to be initiating clinical trials with this program in 2015.”

If it is successful, it will pave the way for many more cannabinoid-based treatments.

Another one Insys is working on is a formulation of Marinol — an anti-nausea and vomiting control drug for chemotherapy patients. Its new version, which is an orally administered liquid version, should improve the bioavailability and have a faster onset of action.

If Insys can add these other drugs to its portfolio, the sky is the limit. Here’s the overall rundown for Insys:

• Insys delivered its eighth straight quarter of profitability as the company beat analysts’ estimates with its fourth quarter earnings.

• Net revenue for the fourth quarter increased to $66.5 million over last year’s $40.2 million.

• Net revenue for the year ending December was $222.1 million, an increase of $122.8 million over last year’s $99.3 million.

For an in-depth look at some of the other projects Insys is developing, please read last month’s issue.

We’re buying under $60 with the assumption that it will get FDA approval for its CBDs.

Let’s check in on our other Delta-9 positions...

AbbVie (NYSE: ABBV)

AbbVie got knocked down a bit over the past two months, so it makes a perfect entry position for those who haven’t yet invested, or presents a great dollar-cost averaging opportunity for those that want to pad their positions.

Here are a couple updates:

• AbbVie acquired cancer biotech company Pharmacyclics Inc. for $21 billion. It will allow the company to get into the multi-billion-dollar blood cancer

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market. Its drug — Imbruvica — has been approved for two blood cancers: a rare lymphoma and a form of leukemia. In January, the Food and Drug Administration green-lighted Imbruvica’s use for a rare form of cancer affecting the immune system.

• CEO Richard Gonzalez predicts that Imbruvica can generate peak annual sales of $7 billion a year. He also notes that deal is expected to boost earnings by more than $0.60 per share by 2019.

• AbbVie’s blockbuster drug — Humira — is currently being updated to provide advantages over the original drug, which could be crucial when Humira’s patent expires in 2016. “It’s a fundamental change in the formulation of Humira,” Gonzalez said. “I wouldn’t describe it as a tweak.”

Some people sold off their positions because they thought AbbVie may have overpaid for Pharmacyclics. Others are concerned that once Humira’s patent expires, the company will get beat up by generics.

Long term, I do not share the same fears. And I’m not alone...

In fact, a few big analysts are extremely bullish, like Jefferies, who cited an “iceberg” of positive catalysts for the stock in 2015 and beyond. They are predicting an $80 a share price point for AbbVie and have even cited the company as their Top Global Pharma Pick. Deutsche Bank also put a $980 target on the stock.

If we take that at face value, the ~$55 it’s trading at today is a great discount. You could be looking at 40% gains by the end of the year.

Add that to a 3.2% dividend, and you’re off to the races.

We’re buying AbbVie as a long-term dividend position under $65. I would recommend adding it as a DRIP, which you can do here.

T-Bird Pharma Inc. (TSX: TPI.V)

As I went to send this issue, there was big news out of the T-Bird camp...

They have agreed to sell a large chunk of the company to a U.S. company Medna Biosciences. Here’s the press release:

T-Bird Pharma Inc. (TSX:V.TPI) has announced an agreement to sell 45% of

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stock in the company to US-based Medna Biosciences for $4 million.

Though the stock trades at $0.45 at the time of writing, the deal values the shares purchased at $0.21 per share, due to the fact they are escrowed founder shares that don’t free up until the company’s provision to sell is restored.

The ‘selling half the company for a quarter of the market cap’ theme spread quickly across social media after the announcement, but those with knowledge of the deal insist it’s not just a good deal, but potentially a great one.

“It’s a big compliment to T-Bird that our new partners are taking the sort of risk that comes with escrowed stock,” said Hamza Thindal Capital Corporation Managing Partner Kam Thindal on the phone Wednesday afternoon. “These are experienced operators with substantial capital markets success, and they’re getting involved to take the T-Bird operation to a much larger level.” To be sure, the primaries in this deal are very serious biotech players.

For the uninitiated, Medna is a life science company focused on the research, development and commercialization of medical marijuana. Medna will be developing its own strains of medical marijuana designed to treat specific diseases, carrying out clinical studies to determine the efficacy of these strains, and producing pharmaceutical grade medical marijuana in its production facility in Richmond, British Columbia.

Medna is privately held and run by founder, chairman, and primary shareholder Dr. Avtar Dhillon, who served as President and CEO of Inovio Pharmaceuticals (NASDAQ:INO).

From the company news release, “Dr. Dhillon led the successful turnaround of the company through a restructuring, acquisition of technology from several European and North American companies, and a merger with VGX Pharmaceuticals to develop a vertically integrated DNA vaccine development company. Dr. Dhillon led multiple successful financings for Inovio, raising over $200 million for the company, and concluded several licensing deals that included multinational companies, Merck and Wyeth (now Pfizer). Dr. Dhillon has served as Chairman of the Board of OncoSec since March 2011 and of Arch Therapeutics since April 2013.”

Medna CEO Jim Heppell was a co-founder of BC Advantage Funds, where he managed a portfolio of life science companies.

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From the NR, “In 2006, Advantage’s investment in Aspreva Pharmaceuticals, led by Jim, won Canadian Venture Capital Deal of the Year for having the highest realized return (23.4X) of any venture capital fund in Canada.”

Punit Dhillon, current CRO of OncoSec Medical (OTO:ONCS) will join Heppell and Dhillon on the board of T-Bird. Making way, but staying on, are CEO Dr. Bin Huang, Frank Barr and Dr. Essam Hamza will step down as Chairman but remain on the board.

The market liked the move, as you can see:

That cash will come in handy as they get their sales license back.

I spoke with Kam right after news broke, and here’s the rundown he gave me about why the deal came to pass. For one, as many of you know, Robert Gagnon has stepped down as CEO and Dr. Bin Huang has taken his place, after previously serving as President and COO. Here’s the press release:

Robert Gagnon has stepped down as CEO and Board member. Dr. Bin Huang, who joined the Company last Fall as President and Chief Operating Officer, has been appointed CEO in his place. Noted Gagnon, “Now that the Company is launched and we have brought in professional management, it is time for me to step aside. I am confident in Dr. Huang and the team she is building and

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pleased that she has agreed to lead the next stage of our growth.” Gagnon will be retained by the Company as a consultant for a period of one year.

“Dr. Huang is a seasoned pharma executive with both operational and capital markets experience. In her short time with the Company she has implemented the processes and procedures needed to allow us to fully commercialize our operation. We continue to make great progress and are excited about our opportunities in 2015”, commented David Raffa, Chairman of the Board. “We will continue to build out our commercialization team and expect to have further announcements in this regard in the near future.”

Since joining T-Bird Dr. Huang has been instrumental in applying pharma processes to the Company’s operations as well as readying the Company for scalable growth. “I am impressed by the passionate team we have at T-Bird and believe we are well positioned to take advantage of the opportunity represented by this new and evolving industry. I couldn’t be more honored to have the opportunity to lead the Company as we go to market”, said Dr. Huang. “We have numerous grow rooms in various states of growth and have begun harvesting our initial crops. It is a very exciting time for the Company.”

Here’s Kam’s take:

“We had a CEO and CFO with a lot of founder’s stock who were no longer going to act in that capacity. We needed an active management team with skin in the game. They’ve (Medna Biosciences) had a lot of capital market success and a lot of success building businesses in the life sciences field. With them we’ve got the best of both worlds.”

I’ll have a full update as more news comes in. I think it’s good news, but I’ll be monitoring the partnership and send an update as soon as I get more information.

We’re holding T-Bird until news from this deal shakes out.

Newtek (NASDAQ: NEWT)

We have been cruising on Newtek Business Services. We’re up 26% in less than a month. And we haven’t even hit the “special dividend” yet. If you are a new reader or didn’t read last month’s issue, please do so here for the meat of the opportunity.

Essentially, Newtek Business Services Corp., formerly Newtek Business Services, Inc., is a

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holding company. The company provides financial and business services to the small- and medium-sized business market.

I have to stress that unless you get into the position by March 25th, you could miss out on the special dividend, which could be up to $4.50 per share.

Here are a few highlights from NEWT since the last issue:

• Revenue growth came in higher than the industry average of 12.8%. Since the same quarter one year prior, revenues increased by 9.8%.

• Newtek’s earnings per share is up 40.0% last quarter compared to a year ago.

• Net income has increased 45.3% over last year, from $1.82 million to $2.64 million.

I would highly suggest reading the latest issue of MicroCap Review, where Newtek is prominently featured. You can also read my colleague Nick Hodge’s excellent article on palladium, “Reasons for the Coming Palladium Bull,” on page 80.

You can check that out here.

If you still have any outstanding questions about Newtek, I have been in touch with Jayne Cavuoto, the Director of Investor Relations for Newtek. You can contact her at jcavuoto@thesba.com.

In the meantime, we’ve raised the buy-under for Newtek (NASDAQ: NEWT) to $19.

Dividends

Boeing (NYSE: BA)

I cannot stress enough how great Boeing looks right now. We’re already up almost 30% on this dividend aristocrat.

At the end of January, Boeing has a backlog of 5,070 commercial planes, which is about seven years’ worth of production. It’s safe to say that they will be selling planes for quite some time.

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It’s also shown impressive revenue growth, solid return on equity, good cash flow from operations, and an impressive record of earnings-per-share growth (it’s up 25% in the most recent quarter compared to the same quarter a year ago). Boeing’s net income growth has exceeded that of the S&P 500 and the Aerospace & Defense industry average, increasing by 19% from the year prior.

Some analysts are already putting their price targets at $200. It current trades around $152.00. That’s plenty of upside in the immediate term and a great entry point for a long-term DRIP.

We’re buying Boeing (NYSE: BA) under $175 for now.

Nucor (NYSE: NUE)

I spoke about Nucor in my Money Show interview. That’s because it has dropped in price a bit, which is exactly why it makes a good long-term dividend holding — because you can really take advantage of the dollar-cost averaging. Here’s what I told Money Show’s Steven Halpern:

They are the largest steel producer in the United States and they also are the largest recycler of any material in all of North America. They are a steel producer and it’s kind of a fun fact about their business, they have not laid off an employee because of a work shortage in 30 years.

Then, it has to do with the fact that they offer a pay per performance employee incentive program. Employees get up to 25% of their salary based on the return on assets of their plans.

It incentivizes workers to keep them humming along and they reward that hard work, which is interesting in a cyclical industry like steel, which can be pretty volatile based on world production.

As far as dividend aristocrats go, it’s actually far more volatile than most of the ones I cover. That being said, though, over the last ten years, they have returned 65%.

That’s on top of a 3% dividend yield and it’s also considering that they have hit a low of around $23 over those ten years and touched highs over $75.

It kind of works in perfectly with the dollar cost averaging because when the cycle starts heading downward, you can really scoop up a lot of shares during those low turns and then ride them all the way up to the cyclical highs.

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Long story short, Nucor has raised dividends for 168 consecutive quarters. As I said, they have a 3% yield so that’s not too shabby, especially if you load it into a dividend reinvestment program and continue compounding those dividends.

We’re buying Nucor under $50.

Collectors Universe (NASDAQ: CLCT)

My favorite stock is up 100% since I recommended it. Collectors Universe is the global leader in coin grading, authentication, and sports memorabilia. They are truly artists at what they do.

I visited their offices last year, and being a baseball card collector since I was six, I was like a kid in a candy store. I saw untold treasures that I would have killed for: first pressings of early Elvis LPs; the million-dollar “Inverted Jenny,” which is the most valuable stamp in the world; and my personal favorite, a signed letter from Albert Einstein helping a young girl with her homework.

Now, my baseball card collection is still worth a pretty penny. I still have a 1967 Mickey Mantel, a 1958 Roberto Clemente, a Rickey Henderson rookie card, and — being from Baltimore — my all time favorite: a Billy Ripken card with a very filthy word taped on his bat...

But I digress...

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The takeaway is that I love this company, and after talking to both of these men, I learned more about investing in one weekend then I ever learned reading the Wall Street Journal or Kiplinger for years. They just know how to spot trends and identify investments in a very special way. Whether it be rare coins, collectibles, artwork, or even pocketknives, these guys are all over it.

The founders of Collectors Universe are David Hall and Van Simmons — both incredible investors in their own right.

David Hall is the foremost expert in the world on rare coins.

Van Simmons is a genius at identifying trends decades before they become priceless collectibles. He was kind enough to show me his art collection, his impressive pocketknife collection, and a gorgeous collection of Navaho blankets.

Their expertise has shown in revenue growth for Collectors Universe:

They just gave a wonderful interview for the local Inside True Wealth podcast. I think it gives you a look inside what makes these guys so successful — individually and for Collectors Universe.

I’ll share some of their best advice right here — from thinking about the future when

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investing to identifying “forever” investments to buying the fear. Whether you buy rare coins, real estate, or stocks, there are takeaways for all of you:

Inside True Wealth: David, let me start by asking you. You’ve dealt with some of the wealthiest people in the world in your five decades in the coin markets. Now, I know you have customers from the little old lady around the corner buying one or two coins all the way up to the world’s wealthiest people, but I am interested in what the most successful people in the world do with their money. What are they looking for now? Do they do something different than the average guy with their money? So, David, tell me, what are wealthy people doing right now?

David Hall: They’re definitely looking for alternatives. There is a lot of money sloshing around in the world, you know, and, you know, it’s all created with QE infinity in the U.S., now in Europe, and the yields are, of course, interest rates are sorta zero, and so these very wealthy people are looking for alternatives. That’s why some of the very high-end collectibles in many, many fields have gone way up.

Didn’t Christie’s just have a modern art auction, not impressionist or old master, but modern art auction? It was $965 million, almost $1 billion, so they’re definitely looking for alternatives. Also I think they’re very long-term oriented and looking for something that’s going to be of value many years out, probably even thinking of their heirs.

Inside True Wealth: David, you say people are looking for alternatives that are going to have value in the future, but how do you know what will have value in the future? Van Simmons explained it to me once. He said, Steve, take a 35-year-old guy today. Twenty years ago, what made him feel rebellious and free? Now look ahead 20 years. What will this guy be buying? What will give him that feeling of freedom? What do you think?

David Hall: That’s very good advice from Van. What is gonna be valuable in the future? The things that matter to people, and that’s both the things of their youth and also the all-time classics. You know, as we say in sports collectibles, the Hall of Fame is forever. Babe Ruth will always be Babe Ruth. Elvis will always be Elvis. A 1907 $20.00 high-relief gold coin, arguably the world’s most beautiful coin, most beautiful coin ever made, it is always going to be desirable.

If you go into any collectibles field, it’s something that’s important, something that’s the best of the best. Quality is not just the grade and condition; it’s also the importance. So 1935, they had an Alaska bingles in the United States, they’re called, and they were tokens, and they were collected as part of the United States series, however, nobody collects them and they’re very low mintage, 5,000; 10,000 coins

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per each of the denominations, but nobody cares. And I think Van will confirm this. In my 50 years in the coin business, I’ve never had a want list for Alaska bingles. Nobody wants them. It doesn’t matter how rare they are.

Inside True Wealth: You kinda know these things, but does the customer? Does the person who’s learning, you know, that we’re talking with, talking to today?

David Hall: You do have to do your homework, and we talked about real wealthy people and how do they do things other than stocks and real estate, and they do do their homework. And they, like you, I found that a lot of the real wealthy people are very much contrarians, and maybe it’s the sense of self-confidence that helped them be successful in business or whatever they were successful in, but you have to — there’s such a herd mentality and, as you know, all kinds of trading. When we had people at $1,900 gold screaming this on the phone that they had to have their gold today, and where are these people now?

Inside True Wealth:: The phone’s not ringing at $1,300 and the phone’s ringing off the hook at $1,900.

David Hall: Yes, at $1,900. So as you always say in your contrarian approach, you kinda look for the stuff, and I’ve found that wealthy people have the self-confidence to, I think the old saying is buy when there’s blood in the street. Now, it’s not that bad but, you know, when things are a little out of favor and they’re high-quality in terms of both the quality, the condition, and in terms of their importance, that’s the time that you wanna take a position.

Van Simmons: That’s the hardest thing to do. For example, in 2010-2011, I called a couple of real estate friends of mine. I said, you know, I’m interested in buying real estate. They go, “Oh, you’re out of your mind.” And I said, “Okay, well find me something.” I looked at one condo, which I bought, and I paid $160,000 for the condo on a short sale. It rents for $1,600 a month. They sold it to me for $160,000. Their bank loan was $425,000. You know, it’s like, now the thing’s worth about $300,000; $325,000; so it’s doubled in the last four years, plus you collect 10 percent rent based on my investment.

So I mean, there were things like that that you could buy, but it was really hard to get even friends of mine who are real estate guys and say, “Well, what about building things, what about doing this,” and they’re, like, “You’re insane. I wouldn’t do this now. You’re smarter than that.” And I’m going, “Okay, well if the guy’s selling real estate as a friend of yours and he’s telling you not to do it, you’re probably pretty close to the bottom.”

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David Hall: So you have to look at — you know, you knew — see, again, it’s about doing your homework. You knew the real estate was okay and selling at a huge discount. So you can have that self-confidence if you do a little homework.

And, you know, we’re coin people, so we talk about coins all the time, but the coin market’s been around for, you know, the Romans collected Greek coins, you know, and House of Rothschild started as a coin shop. Now, I know that a 1907 high relief, a 1921 peace dollar, 1893 Isabella quarter, I know that those are forever coins.

And if they get undervalued, it’s because of my homework and my knowledge, as you knew on the real estate values, I know that, as you said, I knew it was okay. There was nothing wrong with it; it’s just selling at a discount. And that is self-confidence plus doing your homework.

Inside True Wealth: Well, and these things go in major cycles as well, and just as you’d said earlier, gold hit $1,900 and the phones are ringing off the hook because investors are incredibly enthusiastic. Then gold hits $1,300; $1,200 and the phones are not ringing because everyone’s scared and hates gold. And so you’ve been in this long enough to know where these cycles can actually go, and in, like, the ‘76 to 1980 coin bull market, the entire coin index rose over 1,000 percent, is that correct?

David Hall: Three-cent nickels were $110.00. In 1976, I saw some sell for $3,000. We call that one the Jimmy Carter bull market, by the way.

Inside True Wealth: We’ve done a lot of discussion on high-end coins, and I know that’s your real field of expertise, but you’re also as good as it gets on the bullion side as well. So if I was saying I wanna go out and buy gold today, how should I buy gold today?

David Hall: There’s two separate issues in the coin — two ways to look at it. The vintage rare coins and then the bullion-related coins, and this is where — very different than other collectibles. There’s no bullion component to art or antiques or stamps, okay.

Inside True Wealth: They can go to zero but the gold coin can’t.

David Hall: Yeah, the gold and silver is kind of a base, and there’s that whole other way of buying, and there’s a bunch of different ways you can do it, and why would a person pay a premium for a, you know, pre-1934 $20.00 Saint Gaudens, a small premium at this point, very small, compared to buying a gold eagle?

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Inside True Wealth: Minted yesterday.

David Hall: Yeah. And part of it is the confiscation issue that, even in 1933 when gold was made illegal, the collector coins were — gold ownership was made illegal until 1975. The collector coins were exempt, so some people approach that. And another — you don’t get a real premium play on the modern coins. You know, the premiums will always be small on the newly manufactured coins ‘cause they’re basic — they’re basically just a gold bar. A once-ounce eagle is just a one-ounce gold bar.

Inside True Wealth: You could make a fantastic return if just collectors start paying attention in the coin market again. Right now, we just have this hated moment in gold and this hated moment in gold stocks and gold coins, and so I thought you guys were the perfect guys to sit down and talk with to talk about how can a regular guy — how should he consider diversifying his wealth?

You know, he’s got money in the stock market, he’s got a house, he’s scared about both. Is there a recommendation that you feel is appropriate as a gold allocation or a gold versus rare gold allocation?

David Hall: Your age, the size of your net worth and all that come into play, but certainly talking about gold now, and I don’t know if we touched on the foreign currency differences, and I know you feel very, very strongly of gold’s move here up, even though the U.S. dollar is at an all-time high.

Van Simmons: You know, when you’re talking about different percentages and stuff, or how much would I allocate, I think everybody is different. I have a huge amount of my money tied into the gold bullion market based on rare coins and everything else, but I tell people, right now you’re talking about the dollar and gold both going up. For years, people would say to me, “Well, what do you think gold’s gonna be in five years?” I’d go, “What do you think the dollar’s gonna be in five years? Tell me that and I’ll tell you the answer.”

But you can’t do that right now ‘cause they’re both going up. But I tell people today, if they said, “Okay, I want to invest X, and X can be a dollar, it can be $10 million. But let’s say somebody wants to do $1.00. They say “How much should I put into gold, or what — how should I mix the gold?” It varies a little bit. For me, it would be about 50 percent rare coins, 25 percent or 30 percent in gold stocks and maybe 20 percent in gold bullion ‘cause I think gold stocks and rare coins, over the next five to ten years, have much greater upside potential than just the straight gold bullion coins.

But it may be different for somebody else, but I certainly wouldn’t put all my

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money just in gold bullion. I mean, that’s a good place to start, you know, one-ounce gold coins or $20.00 gold pieces, but I think there’s so much more leverage in some of the other areas, and like you say, the risk is kinda gone out of it. But that also is the hardest time to get involved.

The discussion is not far from what we value here at The Crow’s Nest. It is very rare that we try to time the market just right. We’d rather look at future trends and buy the value stocks that we know will be more valuable in 10, 20, even 30 years from now.

CLCT is still a buy below $20 in our portfolio, but if you do not currently have a position, I would advise you to get in and start buying more on the dip — following the dollar-cost averaging strategy I outlined above. Even if the stock stays flat, you are treated to a generous 6.2% dividend. Not too shabby at all.

I think this company will continue to climb as its Chinese exposure gets bigger. It has opened offices in Hong Kong and Shanghai, and David has been to been to China five times in the last 18 months. He has noted a big appetite for gold, for rare coins, for rare stamps, and for rare currency.

Last year, 6% of the company’s revenue came from its operations in China and Paris, and it expects this to increase as the brand starts taking off in China while it builds up a dealer network.

That’s huge business for Collectors Universe and its authentication business, because as David told me, “The only real thing in China are the counterfeiters.”

We’re buying Collectors Universe (NASDAQ: CLCT) on dips at $20 and under.

Tying Down the MastAfter this week’s market dive, I’m currently looking at which stocks to buy in the case of another major correction. But how can you tell if stocks are overpriced?

We constantly hear about company earnings expectations, price-to-earnings ratios, earnings per share, and countless other metrics.

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There is an endless list of metrics that can be useful, but all of them fail to capture the bigger picture.

However, there is one that is the exception to the norm.

The biggest players on Wall Street have been using it for years and collecting phenomenal returns.

As they use it for their own gain, they are turning to clients and investors and telling them to buy and hold to make sure they find a buyer and lock in gains.

Quite frankly, it isn’t right, and I’m going to make sure that you have the same tool at your disposal.

Studies have confirmed that it beats other metrics, especially the much talked-about P/E ratio, and has a strong track record of predicting market corrections and crashes.

In fact, it has pinpointed market tops and bottoms with laser-like precision over the last 40 years.

For instance, this formula:

• Issued a sell signal at the top of the market in 1973 before it crashed by 48%.

• Issued a buy signal in the late 1970s before the S&P surged 440% in the ‘80s.

• In 1987, before Black Tuesday, this formula issued a sell signal. And then, when the market bottomed days later, it issued a buy signal.

• In the early ‘90s, while recession gripped the country, it issued a buy signal — before one of the greatest bull markets in history.

• And in August 2000, it issued a sell signal, before the tech bubble burst.

• In April 2003, at the bottom of the market, this formula screamed “buy.”

• And in December 2007, at the top of the market, it screamed sell.

• At the bottom of the market in March 2009, once again it screamed “buy.”

Bottom line is, by signaling every market crash and upswing, this formula enables you to avoid losses and greatly increase your funds over time.

That’s why it’s allowed some of Wall Street’s biggest names to beat the S&P by a factor of

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10,000% over the last 40 years — while significantly reducing their risk.

So what is this obscure yet powerful tool we’ve all missed?

It is the Bond-Stock Earning Yield Differential Model, also known as the Equity Risk Premium.

We’ll just refer to it as the ERP, so I don’t have to keep typing either of the long names.

So what is it?

At the most basic level, the ERP is a way of figuring out if stocks or bonds offer a potentially better return over the other.

To put it another way and illustrate the purpose of it, the ERP is the extra return that investors demand for taking the additional risk of choosing stocks over far safer Treasury bonds.

The higher the ERP, the bigger the potential future returns. When the ERP is below average, gains on equities tend to be weak or non-existent in the years to come, and larger positions in bonds are prudent.

To determine the ERP, you simply divide 1 by the S&P 500’s price-to-earnings ratio, turn it into a percentage, and subtract it from the 10-year U.S. Treasury yield.

To make it even more accurate, it helps to use the cyclically adjusted price to earnings ratio (CAPE) developed by Robert Shiller and adjust the 10-year U.S. Treasury yield for inflation.

As of when this report was written, CAPE is at 27.04, the yield on 10-year Treasuries is at 2.13%, and the latest inflation is at -0.09%.

One divided by 27.04 comes out to 0.037, or 3.7%. 2.13% minus -0.09% is 2.22%. 3.7% minus 2.22% gives us an ERP of 1.48%.

This means the expected return from investing in riskier equities instead of bonds is only 1.48% higher.

That is a weak return for the extra risk, and it gets even worse...

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The Fed’s Influence

There is a problem with the standard ERP model we just went over.

Interest rates right now are artificially low and have been for many years due to the Federal Reserve zeroing out benchmark rates.

The low interest rates have kept bond yields artificially low, and high demand is suppressing prices further. Inevitably, these rates have to go up, and the consensus is that it will start, or be announced, during the Board of Governors of the Federal Reserve System meeting in June.

To get a better idea of what is going on, we’re going to modify the ERP equation slightly by using a much bigger basket of bonds that actually reflect the market.

By substituting the AAA-rated Corporate Bond Yield in place of the 10-year U.S. Treasury yield, we’ll get a substantially more useful metric.

All of the info we need to do this is easy to find. CAPE values can be found here, corporate bond yields here, and the inflation rate here.

Currently, the AAA-rated bonds of all bond issuers rated by Moody’s have an average yield of 3.71%. Tag in the inflation rate and we get 3.8%.

The expected return on equity remains the same at 3.7%. When we subtract the bond yield from the expected return on equity, we get -0.1%.

This is a signal that bonds will outperform the market right now and heralds a turning point for the markets.

When the Fed increases benchmark rates, the yield on corporate bonds will increase as well.

This will drive our modified ERP even further into negative territory. Bonds will become substantially more attractive. Funds will flow out of the market and into safer bonds, leading to a large correction in the markets.

This isn’t the end of the world, but it means it is time to lock in gains and get ahead of the herd.

Selling positions that are strongly correlated to the broader market ahead of the correction will preserve your funds.

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As the P/E ratio falls, the formula for our modified ERP will shift and signal stronger returns from equities over bonds.

Then we can jump back in and buy shares at much lower prices. It triggers the Wall Street fire sale, and we should be able to scoop up undervalued long-term stocks on the cheap. It sure beats buying stocks at current highs.

It has worked like a charm time after time in the past, and we’re going to use it for ourselves.

Next month, we’ll bring you some new recommendations to put on your watch list using this formula.

Godspeed,

Jimmy MengelInvestment Director, The Crow’s Nest

The Crow’s Nest, Outsider Club LLC Copyright © 2013, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. The Crow’s Nest or Outsider Club LLC does not provide

individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after

consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. Unauthorized reproduction of this newsletter or its contents by Xerography, facsimile, or any other means is illegal and punishable

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