Crossing the desert... How this 1,000-kilometer trek relates to investing... Three things every investor must know to succeed... Our most controversial strategy... Are you the poor man or the rich man?... A four-step guide to beating the market...

Editor's note: In 1999, our founder Porter Stansberry took the first steps toward leveling the playing field for everyday investors...

That's when he started Stansberry Research in the kitchen of his Baltimore apartment. Now, 20 years later, we serve hundreds of thousands of subscribers worldwide.

As Dan Ferris explained in last Friday's Digest, everyone at the company is excited about our anniversary. But more important, we're celebrating this milestone with you – our loyal subscribers. To find out how, be sure to read to the end of today's Digest.

And on a related note, we're taking a break from our usual Digest fare over the next few days...

From today through Wednesday, we're sharing some of the most valuable, timeless works we've ever produced. Porter originally wrote these essays in the Digest in 2014 and 2015 to make sure every investor has the essential tools needed to survive.

If you missed these essays the first time we published them, here's your second chance... We hope you'll print these essays out, reread them once a year, and pass them along to anyone who is questioning how to build and protect their wealth.

Crossing the Desert

By Porter Stansberry

Let's start here... in the desert...

Imagine you had to walk across the Rub' al Khali – the "Empty Quarter" – of the Arabian Peninsula.

This 250,000-square-mile desert is the largest sand desert in the world. Sand dunes there reach as high as 800 feet. It rains less than two inches a year. The surface temperatures reach 125 degrees.

Think about the three most important pieces of equipment you'd need, beyond the most basic stuff like shoes, clothes, food, water, etc.

This isn't hypothetical. Three guys decided to try and walk across this desert completely unassisted. In 2013, South Africans Dave Joyce, Marco Broccardo, and Alex Harris became the first humans to walk completely unassisted through the Empty Quarter. They plotted a 1,000-kilometer course from Salalah, Oman to Dubai. Their story is completely nuts... but fascinating.

The most obvious piece of advanced equipment you'd need? A GPS, right? Nope. What they needed most wasn't a GPS... or even a map. What they had to have to make it across 1,000 kilometers of desert in 40 days (after which they would have quickly starved to death) was Google Earth.

They needed to know their precise position in the desert relative to the giant sand dunes, which you can only see using Google Earth's satellite photos. Before the advent of publicly available satellite photos, walking across this desert would have been impossible. GPS alone wouldn't have been enough.

The second item Joyce, Broccardo, and Harris needed was a strong, lightweight, easy-to-pull cart, so they could carry enough water for the journey. Obviously, they needed food, too. But the water was far more critical and heavy to carry. (You can survive for up to three weeks without food. But most people would only make it three days without water.)

They spent about three years testing various designs for carrying enough water. The key to success was using mountain bike tires on their cart, rather than wide full tires, which were too difficult to pull through the sand.

And finally... to make sure they had continuous access to Google Earth, they needed to use a solar-based charger to power up a satellite phone. They lost the charger on the 10th day of the trip. So one of them had to turn around and follow their tracks for 25 kilometers to find the charger before it got dark. Without it, they probably would have died. Imagine trying to find that charger... before dark... in the desert... by yourself... knowing that if you couldn't find it, you and your friends would probably die.

So what the heck do three crazy South Africans hiking across a giant desert have to do with investing? It's obvious (to me).

For most individual investors, the process of trying to manage their savings in the stock market is a lot like trying to cross the Rub' al Khali desert on foot. You have few landmarks to guide your way. And there are lots of ways to die. Most people don't make it.

Learning the story about the guys crossing the desert, I started thinking about the most important things investors need to understand if they're going to be successful in the stock market.

I'm not talking about the obvious stuff... like the way dividends compound returns or the time-value-money formula (which explains that your returns will be driven by how much time your investments have to compound and how much money you save).

I'm not talking about the more advanced, but still simple, concepts like position sizing, trailing stop losses, and avoiding taxes (where possible).

It's not that these things are unnecessary. They're critical. But they're like shoes, hats, and sunglasses when you're crossing a desert. Nobody would go without them, and they really don't require much foresight or wisdom. Instead, I wanted to answer two more difficult questions...

What are the three things every investor in common stocks must know to succeed, but that you believe most people don't know how to do? Where is the greatest gap between the value of knowledge and the inexperience of most individual investors?

I thought about these questions for a long time. Here's my list...

No. 1 Thing Every Investor Must Know to Succeed

The most important thing for investors to understand about investing in stocks is simply what kind of businesses make for great investments and how to properly value these kinds of businesses.

You can think of this knowledge as your personal Google Earth for crossing "the desert" of investing. Knowing how to recognize great businesses and what they're worth is like knowing where the sand dunes are and how to get past them.

Here's an example of what I mean: Do you think coffee giant Starbucks (SBUX) is an expensive stock at around $84 per share today? Why or why not?

If you can answer this question within 30 seconds by looking at a few key statistics, you're ready to cross the desert. If you can't... you're not ready. You have to power up your satellite phone and spend more time studying your maps.

If you have no idea whether Starbucks is expensive or cheap, don't worry. You're not alone. Judging by my experiences with wealthy and business-savvy subscribers, I estimate that fewer than 10% of our readers really understand these concepts.

Without this knowledge, you can't be successful as an investor. Not for long, at least. But that's why I'm writing to you today.

No. 2 Thing Every Investor Must Know to Succeed

The second thing I know you must have to "cross the desert" successfully is a strategy that will continue to make you money even when you're wrong about the big picture.

When we grow worried about a serious crash in stocks, we close some of our long positions. And we hedge our exposure to the market by selling short (betting against) some stocks.

But we don't sell everything. And we don't move to a 100% short portfolio. (In other words, we aren't "all in" on betting that the market will fall.) As a result, we'll do well even when the market defies our expectations.

The lesson is... you don't ever want to bet the farm on any particular outlook (or any particular investment recommendation). That's a hard idea for most investors to understand and implement...

When events in the world spook individual investors, they tend to pull out of stocks completely. They generally do so at the worst possible time. You have to learn how to make money even when you're wrong about the market as a whole. And you have to follow your strategy... even when it's scary.

No. 3 Thing Every Investor Must Know to Succeed

The last thing I think most individual investors either never learn or only learn the hard way after several big beatings is to never, ever chase what's "hot."

Investment "mirages" will cost you almost every time. It takes a lot of discipline to stick with great businesses that you can personally understand. It takes discipline to buy them when you can get them at a reasonable price. It takes discipline to follow your position-size limits.

When a great new business comes along – like online auctioneer eBay (EBAY) in the early 2000s – learn to be patient. Follow it for years, and buy it when it comes into your range.

If you had bought eBay back in December 2004, you'd have done great. Assuming that you held both eBay and PayPal (eBay spun off PayPal to its shareholders in 2015) shares through today, you'd be up nearly 250% on your investment. Sure, eBay was and is a great business with a huge "moat."

Nevertheless, investors who chased after eBay while it was "hot" saw their investments decline as much as 80% by early 2009. It was far better to have bought it for less than $5 a share once it was trading for a reasonable price.

So again, I believe there are three things every investor in common stocks must know to succeed. If you can follow these ideas, you'll be well on your way to crossing the desert...

1. Know what kind of businesses make for great investments and how to properly value these kinds of businesses.

2. Use strategies that will continue to make you money even when you're wrong about the big picture.

3. Never, ever chase what's "hot."

Our Most Controversial Strategy: Beating the Market

Out of all of the things I've said or written in my career, the thing that gets me in the most "hot water" is my view that you can and should time the market.

When I write "you," I don't mean some representative sample or some investor somewhere. No, I mean you... the person reading this essay... the person who is going to put his savings at risk when he invests in the stock or bond market. You.

A lot of people – even some smart ones – believe trying to time the market is a fool's errand. They argue that the best you can do is simply plow your savings, year after year, into a mutual fund or index fund. These folks make a whole range of arguments and back them up with plenty of "facts."

They'll cite academic studies and average investor results. They will say, again and again, that "no one" can beat the market, so why should anyone try?

I disagree... completely.

Let's start here. Let's say they're right. If the market is really efficient, it shouldn't matter when you invest or what you buy. If that's really the case, then why not try to do better? As long as you're investing in something, you should do all right, according to these folks. So what's the harm in trying to beat the market?

And here's another way to look at it. The efficient-market folks love to argue that it's impossible for the average investor to beat the market because it's impossible for most people to beat the average result.

At some point, it is a mathematical certainty that not everyone can beat the market. But just because something is "true" on average or across a population doesn't necessarily mean it must be true for you.

For example, I might argue... on average, everyone who marries will end up with a marginally attractive spouse of normal intelligence. Therefore, you're probably wasting your time trying to find a beautiful and intelligent person to marry you. In theory, that might be good advice. But was that your dating strategy? If you had dated any dog that would have you, would you have married the spouse you wanted?

In short... when it comes to a lot of important things in our lives, getting better-than-average results is a worthy goal. Luckily for investors, I don't believe beating the market is nearly as hard as trying to date a supermodel.

I'm 100% convinced that anyone with normal intelligence and a modicum of emotional stability can do it. There are a few simple and logical reasons why...

The reasons come from Wall Street's irrational focus on short-term "earnings" and most investors' total lack of discipline. Today, I'm going to give you my four steps to timing the market. If you use my strategy, I guarantee you can double your average investment results over 10 years... or maybe even do a lot better.

But listen... There's an entire army of people out there whose careers depend on you never doubting the idea that the markets are perfectly efficient and you can't beat the market. If you speak to any of these millions of people in the financial-services industry about my ideas, they will tell you I'm a fool, liar, or fraud. So get ready for an argument. Listen carefully. You'll notice these folks won't ever discuss the merits of my actual strategy.

You see, the financial industry can only survive and prosper if you're willing to give it your assets to manage. The industry needs you to believe that it's always a good time to put your money in the market. And it needs you to believe that you can't do it yourself. That's why when I write things like this essay, folks in or supported by the financial industry go bananas.

As far as who is right and wrong... listen to what one of the wisest newsletter writers ever, the late Richard Russell, said about market timing in his classic essay, Rich Man, Poor Man...

In the investment world, the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that he doesn't need the markets... The wealthy investor doesn't need the markets because he already has all the income he needs...

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks.

When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investor waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment.

But what about the little guy? This fellow always feels pressured to "make money." And in return, he's always pressuring the market to "do something" for him. But sadly, the market isn't interested.

When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values, so he constantly overpays... The little guy is the typical American, and he's deeply in debt.

Now... think about what Richard Russell said. Ask yourself, do you invest like the poor man or the rich man? How much do you know about the value of what you've bought? How long did you wait for the right opportunity to buy it? What's your downside? What are you expecting as your result? In a year? In three years? In five years? In 10 years?

The poor man can't even imagine a 10-year investment return. Nothing he buys lasts that long. Of course, if you want to get rich in stocks, almost everything you buy should last that long. It's the compound returns that will make you rich, not the quick trades.

What does Warren Buffett, perhaps the greatest investor ever, say? Is the market so perfectly efficient that knowledgeable and patient investors have no opportunity to earn excess returns? Buffett argues that all the value investors he knows – those who broadly followed the tenets of Ben Graham and David Dodd, authors of the value-investing bible Security Analysis – have beaten the market by a wide margin.

This isn't an accident or a coin flip. These investors all used the same principles to guide their choices. Their picks were not random or lucky. They involved all different types of securities and strategies.

The only common theme was an intense focus on understanding the value of each security purchased.

As Warren Buffett wrote in "The Superinvestors of Graham-and-Doddsville"...

The common intellectual theme of the investors from Graham-and-Doddsville is this: They search for discrepancies between the value of a business and the price of small pieces of that business in the market.

I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value.

When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.

I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way.

Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.

Step 1 in our guide to beating the market is based on the ideas of the men above. Before you buy a stock or bond (or anything else), ask yourself, "What's the intrinsic value of what I'm buying? And how does that intrinsic value compare with what I'm going to have to pay for it?" Always make sure you're buying at a good price.

There are a lot of ways to estimate intrinsic value. And as with the value of a house, there isn't one right answer. If I asked you to estimate the value of your home, you could give me a range based on similar sales in your area. You could tell me "replacement cost" based on what a lot nearby would cost and the construction costs. You could give me the tax basis. And I could look up what the insurance company estimates your house is worth. (That's usually the most accurate.)

The point is, people of normal intelligence can figure out what something is really worth. When it comes to publicly traded stocks, plenty of information is available to help you do the same.

When we look at stocks, we generally assign them an intrinsic value that's based on cash flow (how much cash this company can generate) for operating companies or a "take-out" price for asset-development stocks.

In general, public companies fall into one of these two categories. They're either operating businesses (which are designed to make annual profits) or asset-development businesses (which may have many years of losses as they build out something like a gold mine, oilfield, or new drug).

Simple rules of thumb? Never pay more than about 10 times the maximum annual free cash flow for operating companies. Never pay more than half of the appraised value of an asset-development company.

The next part of our strategy to "time" the market – Step 2 – is even easier.

Learn to make big commitments only when other investors are clearly panicking, stocks are cheap, and extremely safe investments are available. This is what most people mean when they refer to "market timing." This is what I mean when I say, "allocate to value." Two quick examples...

First, in the fall of 2008, investors were clearly panicking. Buffett even wrote a letter to the New York Times explaining why it was time to buy stocks hand over fist – and was criticized on CNBC for doing so! If there has ever been a better contrarian indicator, I've never seen it.

Meanwhile, you could have bought shares of iconic beer maker Anheuser-Busch – a stock I first recommended in 2006 – for around $50 for several weeks in October and November 2008. At the time, global brewer InBev had an all-cash deal in place to buy the stock for $70 per share. I told investors the situation was so safe, they should put 25% of their assets into the shares.

It was the easiest and safest way to make a lot of money I'd ever seen. Even if the deal fell through (and it couldn't – it was an all-cash deal at a reasonable price)... the stock was worth far more than $50 a share. In my view, there was zero downside and an almost certain profit of $15 to $20 per share in just a few days.

A few months later – in February 2009 – shares of renowned jeweler Tiffany were trading for less than $25. The company has large inventories of gold and precious stones. Subtracting the value of its inventory from its debt load and dividing by the shares outstanding gave you a liquidation value of around $24 per share.

In short, you could buy Tiffany – one of the premier luxury brands in the world – for the value of its current inventory. That means you could have gotten the real estate, the brand, and all the future profits for free.

Again, I remember the specifics of the trade because I wrote about this situation to subscribers. It's times like these when you must be willing to make large commitments.

Fine, you might say. But what should I do, just hold cash for years or decades, waiting for a perfect situation? Stocks were only as cheap as they were in 2009 three or four times over the last 100 years.

No, I don't argue that you should stay 100% in cash until stocks crash. That is probably the biggest misunderstanding most investors have about our advice. We never advocate selling everything.

We never believe that we can predict the future accurately. Instead, we want to build a portfolio that will thrive over time, no matter what happens. At market highs, we see that stocks are no longer great values. It's harder for us to find good opportunities. And so, we've told subscribers to begin building cash.

When you sell something, sock away the profits until better opportunities emerge. When do you sell? Well, that depends. But no matter what, follow your trailing stop losses. And that leads us to...

Step 3: Stay reasonably diversified, use trailing stop losses, and always maintain a large cash reserve. Here we part ways with most value investors. A lot of good value investors refuse to use trailing stop losses. Instead, they hope to sell when stocks become too expensive. But in our experience, it's nearly impossible for most investors to know when to sell.

Therefore, we want to focus on buying at the right time. Then we simply admit that we're not going to sell at the optimal point. We just can't predict how high stocks will go. And we want to capture as much of that upside as possible. Using trailing stops allows us to do this.

If you're not sure how to use them, please visit our corporate affiliate TradeStops.com for more information. Also, it's important to never give your stockbroker your stop-loss points. And never, ever base your stops on intraday prices – only closing prices. If you put your stops in the market (which is what happens when you give them to your broker)... events like a "flash crash" can wipe you out.

If you remain dedicated to only buying stocks at a discount from their intrinsic value... if you become a connoisseur of value... and if you only make large investments when other investors are panicking, you should find that it's easy to keep a cash reserve.

But how many stocks should you own? What's reasonably diversified? I recommend never owning more stocks than you can completely understand and follow.

A good test is: Can you explain the stocks in your portfolio and why you bought them (the elevator pitch) to a friend without using notes or looking at your portfolio? If you can't, you don't know your investments well enough to own them or you're trying to follow too many.

You're not going to be able to find more than a handful of extraordinary investments at any given time. Why own anything that's not extraordinary?

Another good test for your portfolio is to make sure that there's not a single position that could cost you more than 5% of the value of your overall portfolio. Don't end up with so few large positions that a catastrophe in one stock wipes out all your other gains for the year.

The last part of our strategy (Step 4) to always beating the market is do everything you can to avoid the damage from fees and taxes to maximize your long-term, compound returns.

Whenever possible, keep your assets in vehicles that allow you to compound your investments tax-free. Look for companies whose management is well-known for doing tax-efficient deals and rewarding shareholders in tax-efficient ways. And always reinvest your dividends – either in the same companies or in new ones that offer better value.

Studies show that most investors perform terribly when managing their own assets. That doesn't mean that you can't do well. It does mean that the odds are stacked against you. So read and reread this list. Start living by it.

1. Never buy a stock whose intrinsic value you can't estimate reliably – and always get a big discount when you buy.

2. Allocate to value: Wait to make major investments when other investors are panicking and truly safe, outstanding opportunities abound.

3. Use good money-management techniques. Follow position-sizing guidelines and trailing stop losses. Never own more positions than you can carefully follow. Always keep a large cash reserve.

4. Do everything you can to avoid fees and taxes. Simply avoiding a 2% annual fee against your asset base (by not using money managers) is the No. 1 surest way to outperform your peers.

Editor's note: No matter how much has changed about Stansberry Research over the past two decades, one critical thing has remained the same...

We're still giving investors the information we'd want if our roles were reversed.

In that spirit, we've spent the past few weeks putting together something special...

Several of the folks who built Stansberry Research into an industry leader recently gathered at our headquarters in Baltimore for a rare "look behind the curtain." More important, they made two huge announcements that will forever change how you can use our research. Watch their presentation right here.

New 52-week highs (as of 10/25/19): Celgene (CELG), Americold Realty Trust (COLD), New Oriental Education & Technology (EDU), Equinox Gold (EQX), iShares U.S. Home Construction Fund (ITB), JPMorgan Chase (JPM), Nuveen Preferred Securities Income Fund (JPS), Masco (MAS), O'Reilly Automotive (ORLY), Invesco S&P 500 BuyWrite Fund (PBP), ResMed (RMD), and TAL Education (TAL).

Several longtime subscribers wrote in over the weekend to share their thoughts on our 20th anniversary. As always, send your comments and questions to feedback@stansberryresearch.com.

"Some years back I buckled down and purchased an Alliance membership. It has turned into some of the best money I've ever spent. The education and entertainment alone would have made it worth every penny. I guess that the performance then must be on the house! What an offer you've made [in your 20th anniversary presentation]. Folks, jump in. You will not regret it!" – Paid-up Stansberry Alliance member Robert H.

"I just finished reading [Friday's] Digest and have to ditto the first few lines from Flex subscriber Robert...

"I could have written those lines myself. Since I'm already an Alliance member, I already have access to the Stansberry Terminal, so it was hearing all the stories that had value to me. Reading about them wouldn't have been the same. Happy anniversary and here's to many more!" – Paid-up Stansberry Alliance member Laura O.

"Hard to believe 20 years have passed. I go back to your Pirate Investor days. Great research then and even better now. Congratulations." – Paid-up subscriber George W.

"Anyone that has been a Stansberry subscriber for a while that doesn't watch [your 20th anniversary presentation] is missing out. You all are people that I know well from all of the newsletters that I have read and still read. And we are talking daily.

"On the next 20-year anniversary I will be 93. It is very likely that I will live that long since my dad died 2 years ago at 98 and my mom who is alive and well just celebrated her 97th birthday a couple of weeks ago.

"Porter, if you had not advertised on the Speed Channel years ago, I would have never heard of you and would have been just going along investing a little here and there. Listening to what you said made me realize that we were very like-minded about the economy and what the Fed was doing, etc. I had gotten a dividend of $6 and told my wife that it was money we did nothing for. That was my start. I subscribed...

"At the end of last year I told my wife 2 important things. The first being that since the markets were crappy, we should buy a hard asset. We bought a house in a town where we had vacationed in on and off for about 10 years. It is a 70 mile drive for me to take care of my mom. But it is a place that my wife and I have always loved. The other thing that I told my wife is that I needed to upgrade our membership to the Alliance.

"Why would I say that... pony up $30K for a bunch of newsletters? Simple. There were newsletters that I wanted to subscribe to that were important to our future. Stuff I knew all along that I was going to need if I was going to grow as an investor. The lifetime subscriptions that I had just weren't helping me grow. This is the piece of the Alliance that makes the difference. With the Alliance you can go in any direction.

"Thanks to Doc I have been trading options for about 4 years. It seems like a long time ago now. But the Alliance subscription has given me access to multiple options newsletters. Another one... Stansberry's Credit Opportunities. Sort of the opposite of options trading. That was one that I knew that I wanted. It is making me good money and gives me a platform.

"Porter, you have given me so much in so many ways. Gold. I have traded gold stocks on and off. But you had talked about gold as an insurance policy, so to speak. I got it. I have been buying bullion now for a couple of years. The one thing about that is that no matter what happens in the future, gold will always have value.

"Steve, you talked about real estate for so very long. Thanks to you I am living in a summer home that I bought because the markets stunk at the end of 2018. After living here for almost a year now, I am working on buying farm land. Not ready yet. But looking at it seriously. What else can I say?" – Paid-up Stansberry Alliance member Jeff S.