A Safety Net For Investors

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 |  Includes: DIA, GLD, QQQ, SPY
by: Kate Stalter

His approach is a bit unique, but when Martin Weiss of Weiss Ratings first developed a stock rating system, his primary concern was protecting investors' portfolios, not risking them.

Nancy Zambell: My guest today is Martin Weiss of Weiss Ratings. Martin developed a rating system for stocks and banks, and has done just a great job in steering investors faithfully through the market for many, many years. Welcome, Martin, and thanks for joining me.

Martin Weiss: Hi Nancy.

Nancy Zambell: I'm here at the MoneyShow now in Las Vegas, and I'm talking to a lot of advisors about the markets and where you should invest your money right now. You've always been an advocate of safe investing. What do you think in terms of this market? How does an investor stay safe?

Martin Weiss: Well, I hear that in Las Vegas, the big question is how high can the market go?

Nancy Zambell: Exactly.

Martin Weiss: Some of the analysts are beginning to kind of outbid each other in an auction for the highest point they can point to on the Dow ($DJI) and still save face. One says 20,000. The other says 25,000. Some people are offering up even bigger numbers on the Dow.

You know that the higher and bigger that number gets, the more worried we should be, just based on contrarian theory. The giddiness, the high speculative fever, are all warning signs.

But rather than sit here and speculate exactly how high the market's going to go and when it's going to start turning down, why not just look at disciplined ways of investing more safely, in a prudent manner? You can do that whether the market's going up or it's going down.

It was with that goal in mind that we originally developed our stock ratings many years ago, and decided to make those stock ratings very different from everything else that's issued either by major brokerage firms on Wall Street or independent research firms.

Nancy Zambell: I'm very familiar with most of the rating systems, as an analyst, and they are primarily based on how fast a company's earnings and revenues can grow. I know that your system does take that into account, but you really do keep safety in mind.

Martin Weiss: Yes. The ratings we use are based on the model I originally developed in 2001. When we originally developed the ratings — which are now published jointly by The Street and by Weiss Ratings — we decided to create a series of indexes, which then feed up into a final grade.

Some of those indexes are based on exactly what you said — how fast the company is growing, how fast the stock is going up, and the momentum — all the good things that we look at to make money. Some of those other indexes are based on capital preservation and what you have to do to avoid the big bombs and losers that can torpedo your portfolio.

Of course, that's especially important when you have very volatile markets where the market seems like it's going through the roof... but then lo and behold, one day you wake up and it has crashed through the floor.

It's extremely important to consider the safety side, and that includes looking at balance sheets, which is part of our model. It includes looking at maximum drawdowns. In other words, how much have people lost with this stock in the past from peak to trough?

If the stock has had a history of intermittent crashes of 20%, 30%, 40%, or 50%, it's obviously a riskier stock than one that has had a pretty nice, steady pattern of rising prices, even through the worst of times.

With that extra safety element built into this ratings model, we feel that we can effectively invest in the stock market much more safely. There is always some risk; I don't care how good your ratings are. But relative to all the other models we have ever seen — including those by independent firms, those by the bought-and-paid-for ratings of Wall Street, and ours — from what we can tell, is one of the very few and perhaps the only one that gives this important consideration to safety aspects.

Nancy Zambell: Where do you see the biggest threat coming to the markets? We've had such instability in Europe. The economies are just dropping one by one over there, and last year that had an adverse effect on our stock market.

This year, it is almost like investors are going "oh yawn, yawn, yawn, we don't really care about Europe," but it seems to me that it's more important than that. What is your take?

Martin Weiss: Some people think that the crisis in Europe is actually driving money to U.S. markets, so there are many ways of looking at it. The big surprises are not going to be the ones that we already know about.

It should be clear, the biggest surprise that we see coming is in the biggest bubble of all — much bigger than the tech bubble, much bigger than the housing bubble, in fact, significantly larger than both of those bubbles combined — and that's the bubble in debt. Not just debt that has grown large in size — government debt, private debt, and so forth — but debt that has been directly financed by central banks.

And that's where the great danger lies. Imagine the big Hunt Silver bubble, where the Hunt brothers were essentially the only buyers driving up the price of silver. As soon as they decided to sell, they had no one to sell to.

Nancy Zambell: Right, and the market was just devastated.

Martin Weiss: They were the only buyers. Totally devastated. Not just the market price, but the market mechanism itself practically collapsed, the market structure as a whole.

Now, we have a very similar scenario, but instead of silver, it's government bonds all over the world, and instead of the Hunt Brothers, it's a small number of central banking brothers that are getting together and printing money.

They're printing money in the 21st century in a way that's far worse in some respects than all the moneyprinting we've seen in the 20th century by banana republics, the Weimar Republic, and even big countries like Brazil, where I grew up. I saw that happen personally. I saw the consequences of that, and I think that what we're seeing today ultimately could be worse.

Nancy Zambell: What happens in the end? Now Japan has gotten into the act, and money is going to be eased trying to prop up their stock markets. I think Bernanke has done that, obviously, with our stock market, but he was talking last week about pulling back — not buying as many bonds — but where does it end for us?

Martin Weiss: I was in Japan during their big bubble -- the commercial real estate bubble of the 1980s — and the head of the central bank thought that their big real estate bubble was going way too far too fast, and decided "let's exit just a little bit."

They didn't want to rush out the front door. They decided they're just going to kind of silently and quietly exit out the back door and hope nobody noticed. So they raised their discount rate by a tiny little notch, which would be the equivalent today of the Fed exiting its bond-buying program by three percentage points.

That little change in direction turned out to be the big trigger that set off 20 years of deflation, stock market declines, and misery for Japan. The point is, once you build up such a huge pyramid like the central banks have done now, there is no easy exit. Either they have to keep paddling faster and faster and faster, or they have to just jump off entirely.

Nancy Zambell: So what do you think is going to happen, realistically?

Martin Weiss: Realistically, I believe that they are going to continue this pattern, and as long as they continue it, it looks like stock markets and most asset prices are going to be driven higher. But you must not invest in this bubble without a lot of safeguards and easy exit doors.

Nancy Zambell: Now, are you a buyer of gold?

Martin Weiss: Right now, Larry Edelson, who is our gold expert, is the only one that I know of who has warned people away from gold. It's not easy for someone like him, who is a gold enthusiast.

Don't buy. Don't buy, don't buy, don't buy. It's absolutely essential for him to be intellectually honest. I'm proud of him for doing that, because people have written him nastygrams and hate mail: "You were the guy who told me that gold was such a great deal. How come you're not telling me to buy?"

It turns out he was right...but we talked to him recently, and he is now beginning to look for the bottom. We don't know exactly when, but when he comes out and makes his big announcement that it's time to buy gold, I think everyone should stand up and listen.

Nancy Zambell: Where are you investing today? You're not buying gold right now. It doesn't sound like you really want to buy stocks unless you're just extra-ultra-conservative careful.

Martin Weiss: No, I think there is a place for stocks, provided they get a really good rating on the ratings system that we're talking about.

Nancy Zambell: And when you look at the system today, I would suppose the ones that you rate an A means that these are great buys.

Martin Weiss: It runs the same as our bank and insurance rating. It runs on a scale of A through E. Very similar to letter grades in school.

If you want to translate them to buy/sell ratings, the standard that we established long ago is that anything B or better is the equivalent of a buy. Anything D or lower is equivalent to a sell.

Nancy Zambell: Are you finding a lot of buy-rated stocks?

Martin Weiss: Yes. There are quite a few buy-rated stocks. That doesn't mean every single one of them is going to go up.

Nancy Zambell: Right. Well, we wish that we had that system down.

Martin Weiss: Yes.

Nancy Zambell: Are you finding that they're in certain sectors, or are they pretty much spread across the board?

Martin Weiss: Personally, let me tell you which ones I like. The ones I like are the ones that I would call bond-equivalent stocks that do not have the risk of the broader stock market, and do not suffer from the issues we just talked about regarding the bond market, the bubble in the market.

I'm not talking about the super-high-yield, speculative stocks. I'm talking about stocks that provide a steady, increasing dividend, a really good yield, and a stock price pattern that shows continuing steady rises and relatively minor declines when the stock market as a whole is taking a flop.

Disclaimer: The expert featured in this column, Martin Weiss, may or may not own positions in any investment vehicle mentioned here. The views and opinions expressed are his own.