Blessed Saturnalia...

Why my opinion differs from Doc and Sjuggerud…

In last Friday's Digest… Porter made a forceful call for a market correction next year – an outlook that differs from two other prominent analysts of ours…

Drs. David Eifrig and Steve Sjuggerud believe the bull market has more room to run. And in today's Digest Premium, Porter addresses their difference in opinions.

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Blessed Saturnalia... Off to my mountain... The core factors you can't forget... The easy way to vastly improve your results...

Today is the last Friday Digest of 2013. I'll be taking next week off, to celebrate Saturnalia with my family.

On Christmas Eve, we'll drive up the mountain lodge that I built in 2012. It's at "the end of the road" on top of a mountain in central Pennsylvania. With lots of young children, plenty of snow, and a sleigh full of presents from Santa, these are the experiences and the memories that I've worked hard to provide for my kids.

I hope you'll have a great holiday, too. Take some time off from the market and the quest for investment success.

I wanted to close the year by reminding you about a few of the most important "core" ideas we've discovered that can help make you a successful individual investor. I'm going to write about setting your investment goals for 2014 in January.

But in preparation for next year, I hope you'll spend just a bit of time this weekend thinking about these core factors and what might be holding you back on your path to wealth.

First and foremost, the simple reason most people will never acquire a significant amount of wealth is because most people lack the discipline to save money. It's really that simple. Think about how much money you earned in 2013 after taxes. Think about how much you saved. Was it enough for you to meet your financial goals?

My recommendation is that you always save half of what you earn. That's what I've done my entire life. Now, understand, I count a lot of things as "savings." Real estate purchases, for example – even stuff like my mountain cabin – aren't really investments at all. They're a form of savings.

Saving half of what you earn isn't impossible. I know, because I've done it... even early in my career when I was working as an entry-level analyst making $34,000 annually. I lived on a friend's sofa for two years. I drove a 20-year-old Honda Accord. Now... none of these things may be attractive to you... but the point is, it can be done if you make it your top goal.

If you don't, it's unlikely that you'll ever possess a significant amount of wealth. That's not what we write about in our sales letters. But it's a real, hard-core fact: Without capital, it's impossible to make good investments.

Here's a good rule of thumb... get completely out of debt (except, perhaps, for your primary mortgage) and save at least $50,000 in cash before you consider investing in securities (stocks and bonds). I can imagine the howls I'll get for putting this simple rule out there. People will complain that I'm only interested in serving "rich" investors. That's nonsense... We sell the highest-quality investment research you can buy for as little as $5 per month. We care, passionately, about serving small investors and helping them develop an edge over Wall Street.

Nevertheless, this is the advice I will give my sons, so it's the advice I will give you. The principle behind this idea is very important to understand: Until you've mastered the discipline of saving money, you have no realistic chance of developing the discipline to manage capital. For another, far more famous perspective on this idea, try reading The Richest Man in Babylon by George Clason.

Now, here's the bad news... Even if you develop the discipline to save a lot of capital, you are unlikely to be successful as an investor. At least, that's what studies of actual individual investor results tell us.

The investment-management firm BlackRock conducted one of the largest, most thorough studies. Over a 20-year period from 1992 through 2011, the average individual investor earned 2.1% a year before taxes. Stocks went up 7.8% annually during the same period. Those same kinds of numbers – around 2% annually – are also what mutual-fund consultancy Dalbar has found in its research.

In my experience, the No. 1 reason most individual investors fail to achieve positive results (never mind beating the market's average return) is because they're totally unprepared to manage risk. So let me tell you as clearly as I possibly can: 90% of your success or failure as an investor will have nothing to do with your investment selections. Almost all of your returns will be dictated by asset allocation – how much of your portfolio you assign to categories like stocks, bonds, cash, and commodities – and how you manage risk.

Until you begin to rigorously allow your winners to run and always cut your losers, it will be nearly impossible for you to be successful. Consider your results for the last year and ask yourself how much better off you'd be today if you had simply cut your losses based on a 25% trailing-stop loss and allowed your winners to run (rather than selling to book a quick profit).

If you haven't yet, I'd urge you to try using TradeStops. This is the easiest way I know for you to improve your investment results. It's a Web-based service that will track all of your trailing stops for you (so you don't have to enter them with your broker) and contact you when one of your positions triggers its stop. You'll never miss a stop again. Now... do you have the discipline to follow the strategy?

By the way, I recognize that trailing-stop losses aren't the only way to manage risk. If you prefer to invest in very conservative companies with strong balance sheets that have essentially no chance of going bankrupt, you might be better off with a "buy and hold no matter what" strategy.

As I explained in a recent mailbag, folks who use this approach need to have strong accounting skills, know how to value a security, and have excellent business judgment. They also have to have an iron will... because most people end up practicing "buy and fold" instead of "buy and hold"… that is, they lose their nerve in a downturn and sell at the worst moment.

If you're using this approach, I'd still recommend disciplined risk management. Keep your initial position sizes small, so that no matter what happens, you can't suffer a catastrophic loss. My largest initial position sizes are no more than 3% of my net worth. If something surprises me and goes wrong, it won't change what I eat for breakfast, nor will it ruin my investment returns for more than a quarter or two.

Unless you've been successful as an investor in securities for at least 10 years, I'd consider using trailing stops to be mandatory. Think of them like training wheels that are going to keep you from having any catastrophic wrecks.

Now... here's the last part to becoming more successful as an investor. Do your best to learn how to value a security.

To help folks get the basics of how to do this, I recorded a video where I go through the financial statements of two different companies. On the screen, you get to see the numbers, as they're shown on Yahoo Finance. I walk you through what I'm looking for when I buy a stock and when I sell a stock short. I take it step by step.

I don't tell you the names of the stocks until we go through all the numbers and figure out what they mean. The cool part is, by the time you learn the names of the stocks, it doesn't really matter... because you'll be able to tell just by the numbers which company you should buy for the long term and which you should avoid. You can get this video for free by signing up for Stansberry Radio (my weekly podcast) here.

If you don't want to watch the valuation video I've made, another good way to teach yourself how to value a security is to think of a business you know well and look up the annual report (form 10-K) it filed with the Securities and Exchange Commission.

Read it carefully – especially the notes at the end. Look at the financial statements. Figure out how the numbers correspond to the business activities. Once you've done this for two or three businesses, you'll be able to figure out how just about any business in the world works (except insurance companies, whose annual reports are ridiculously complex).

Once you've figured out how to look up the numbers, a final rule of thumb is to never pay more than 10 years' worth of cash profits, after all capital investments have been taken out. Understand, this is merely a guideline... but I'm certain that if you haven't been successful as an investor, the two most likely reasons for your underperformance are: 1) You suffered catastrophic losses, and 2) You've purchased too many expensive securities.

It's very difficult to do well in stocks over time if you're buying them at expensive valuations. On the other hand, it's nearly impossible to lose money in stocks if you'll buy high-quality businesses at reasonable prices – especially if you're disciplined about managing risk.

On a different note… we have a few spots still open to join me, Sean Goldsmith, and some of our friends at Rancho Santana in Nicaragua. We're hosting a small group down there January 8-12.

We think it's a great place to get some money offshore… And a great place to relax with friends, play golf, and surf. We wrote more about "The Ranch," as we call it, here. There's a lot going on right now, including a new airport, roads, and a hotel. We hope we'll see you next month.

That's it for 2013. Next week, we're running a special holiday Digest series in lieu of our regular daily missives… We'll return with our usual content after the New Year.

We hope you enjoy what we've put together for you…

But please, be sure to read the Digests next week. As a holiday gift to you, our Digest readers, we've come up with a special, never-before-seen offer just for the week (which includes a way to get one of our most popular advisory services for free)… We'll tell you about the offer in Monday's Digest.

I hope we've helped you become a better investor this year. If we have, I hope you'll drop us a note at feedback@stansberryresearch.com. We would really like to know how our work has made an impact on your investing. Your 160 friends at Stansberry & Associates Investment Research thank you for giving us the best job in the world. Happy Holidays!

New 52-week highs (as of 12/20/2013): Alcoa (AA), BLADEX (BLX), Chicago Bridge & Iron (CBI), CVS Caremark (CVS), Emerson Electric (EMR), Energy Transfer Equity (ETE), 3M (MMM), Altria Group (MO), Prestige Brand Holdings (PBH), PowerShares Buyback Achievers Fund (PKW), Targa Resources (TRGP), and Wells Fargo (WFC).

"Is there ever a reason to sell a stock before a trailing stop has been triggered? For instance, if you have gains in a stock and are considering selling it for tax reasons in a certain calendar year, but it is not low enough to trigger your normal stop.

"Some of Porter's recent writings have hinted at the fact that tough times could be on the horizon and that raising cash would be a good idea. Is it fair to assume this means it's OK to sell positions you have gains in even if a stop has not been triggered or should you always wait for that to happen prior to exiting a position?" – Paid-up subscriber Jay Canada

Porter comment: There are exceptions to every rule… I discussed some of them in today's Digest. For example, if you feel a position you hold has reached its intrinsic value and you have a better use for the money, you could consider selling.

As for selling for tax reasons, that's different for every person. And you should consult your accountant.

But trailing stops are the best way for most investors to manage risk in their portfolios.

Regards,

Porter Stansberry
Baltimore, Maryland
December 20, 2013

Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)

Why my opinion differs from Doc and Sjuggerud…

Whenever two of our analysts disagree on something, it always generates an uproar from our readers. And my bearish call for 2014 conflicts with the stance of two of my colleagues…

First off, I (Porter) think it's important that people know the analysts at Stansberry & Associates are all independent. That means we often have different ideas about things. Right now, specifically, I'm bearish on the market... My friends Drs. Steve Sjuggerud and David "Doc" Eifrig believe the bull market has longer to run.

I have tons of respect for what Doc says and the analysis he has done. And I have tremendous respect for what Steve does. But with all due respect, I just have a different opinion.

Even though we are looking at many of the same numbers, I have a different view of the market. My view is predicated on a belief that the Federal Reserve is going to stop quantitative easing. When that happens, interest rates will go higher and stocks will go lower. It's important people understand that's the catalyst for my view.

My research team and I have studied 2,000 stocks across 39 different sectors for my last issue to understand what stocks did when the Fed stopped quantitative easing. In every case, every single sector we studied declined on average. So the stock market does not like the Fed stepping out of the bond market... That has absolutely been the case.

Today, Steve's view is that asset prices will all go a lot further than we expect. And he could easily be right, but that's just not my view. Doc's view is that with short-term interest rates low, the odds favor stocks in general.

So in both cases, I just disagree with their perception of what the future will bring. I have plenty of respect for their abilities... And they could be right.

But with the median price-to-earnings (P/E) ratio for stocks at a record high, I don't believe stocks are cheap. You can make an argument that stocks could get more expensive. That can always happen. But in my view, you cannot call them cheap.

And the market is being driven by the Fed pursuing policies that were unseen in America ever before. We've never, ever had the government print $3.5 trillion. So you can't deny that the market is in some way being driven by a policy that's not sustainable.

In my view, that means stocks are no longer safe. When stocks are no longer safe and cheap, why would I make big allocations to them? I might want to hold onto what I've got and see what happens... And that's, of course, what we're actually doing in the Stansberry's Investment Advisory model portfolio.

Likewise, we recommended a stock that we actually think could go up despite a stop in quantitative easing. So it's not as though I'm saying every single stock in the whole world will crash. I'm saying I believe absent quantitative easing, you'll see higher interest rates. And with higher interest rates, you'll see lower valuations for stocks in general.

And because stocks are trading at a record-high median valuation, I believe that most stocks are going to decline. It would not surprise me at all to see an across-the-board 50% decline in the median valuation of the S&P 500. And it wouldn't surprise me at all to see some stocks fall by more than 50%. And that means it will be a tough environment for most investors next year.

– Porter Stansberry with Sean Goldsmith

Why my opinion differs from Doc and Sjuggerud…

In last Friday's Digest… Porter made a forceful call for a market correction next year – an outlook that differs from two other prominent analysts of ours…

Drs. David Eifrig and Steve Sjuggerud believe the bull market has more room to run. And in today's Digest Premium, Porter addresses their difference in opinions.

To continue reading, scroll down or click here.

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 12/19/2013

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.