Editor's note: Today, we continue the Q&A with our Director of Research Austin Root...

You'll get more insight into what factors Austin considers when putting together a portfolio... learn how and why he believes individual investors can get an edge on the market... and hear about lessons he learned on the way to working at Stansberry Research.

And while we didn't get into these statistics during the interview, we want to point out that Austin's returns with our Stansberry Portfolio Solutions products have been outstanding... In 2020, Austin's "capital" portfolio gained 35%, the "income" portfolio earned 8%, and the "total" portfolio returned 20%. They all beat their benchmarks by a sizeable margin.

So keep that in mind as you learn what he believes you can do to boost your own returns...

Don't Trim Your Flowers Just to Watch the Weeds Grow

An interview with Austin Root, director of research, Stansberry Research

Corey McLaughlin: You talked [yesterday] about how the indexes are overweight the top five or six stocks in the U.S., like the FAANGs and Tesla. And to me, the sell-off in March 2020 represented an example of the dangers of index investing compared to a more nuanced portfolio, if you will... the kind you manage in Stansberry Portfolio Solutions.

To be fair, in March, everything sold off – individual stocks, of course, too. But if you were primarily invested in index funds, you were along for the ride down in a big way, as selling leads to lower prices and begets more selling...

Austin Root: I know what you're saying... It's sort of hard to try to explain it, but the most current example is Tesla (TSLA).

And it's for no other reason than the stock splits [in August] and then gaps up 70%, and it was announced that it's going to be part of the S&P 500. Nothing fundamentally has changed with the stock, but it's up four-fold since then on these two things.

If you own the index when a stock goes up, it's more expensive... But it becomes a larger percentage of the index. And if you're buying an index, you have to buy more of that stock, which is perverse.

It's the opposite of the way you should think about something... If the stock goes down in price, you want to own more of it, not when it goes up in price.

I wrote recently about the best way to invest your wealth in terms of long-term growth... It's to buy individual stocks and not to own mutual funds or exchange-traded funds ("ETFs").

First, I think you really can outperform the market when you do that. That's because you don't have to pay the fees... Even if the fees are low for the ETFs, they're not generally low for mutual funds. And part of the reason is this indexing issue that you've noted.

It pays to be diversified, but only up to a point... If you own 500 stocks, no one stock can be really that great for your portfolio. But in The Capital Portfolio, we own roughly 20 to 30 names. Any one of those stocks are really powerful and important... And they can be impactful to your overall portfolio. The other thing about it is, when you own individual stocks, you have a better chance of knowing what you own... and therefore, why you own them. And therefore, you'll make better decisions when things get crazy.

For example, when the world was still trying to figure things out in early 2020, I didn't want to be allocated to the overall market. I trust our research, and I really believe in what we're doing in Portfolio Solutions. You could still pick out and identify opportunities that were exciting... So we identified gold and some other world-class companies that had sold off, and we bought those.

For me, when you own individual stocks, I think of it like you own part of the business... And doing that makes you an overall better investor.

I wrote an essay about why it's time to stop renting your stocks and start owning them with a simple idea... When you go out and rent a car or rent a beach house, you do a lot less work on making sure those are the right things for you than if you go buy a car or you go buy a house or a vacation house.

If you do that, you'll make better decisions over the long run.

CM: I want to ask you about "risk management"... It's an easy phrase to say, but it's hard to put into practical terms a lot of times. How do you go about crafting a portfolio itself with risk management in mind?

AR: That's a great question. It's a careful balance... Mentors of mine remind you that so much of the market's gains and so much of your portfolio's gains will come from your big winners. So you need to balance risk management – in particular, the risk of any one portfolio position – with the problem that too often investors trim their flowers and let the weeds grow.

It's something that I hope people can learn from me and watch as we're doing this within Portfolio Solutions. For example, Sea Limited (SE) was up more than 300% before we started to trim it. But then, it got to be such a large percentage of the overall portfolio that we needed to start pairing that down, even though we still have a favorable outlook.

CM: What are the problems you've seen investors having when they manage their own portfolio?

AR: In speaking with individual investors and based on my prior institutional investment experience, two common problems arise...

Oftentimes, folks have portfolios that are too diversified. They just have far too many positions. Or they aren't diversified enough... where, maybe by virtue of working for a company and getting that stock in their retirement plans year after year, they're too concentrated in one or two very large positions.

The goal is to not do either one of those...

If you're over-diversified, that hurts your gains or your return potential. And if you're under-diversified, you run the risk of any one of those stocks or situations really hurting your performance.

So in Portfolio Solutions, not only do we make sure that no one position or no couple of positions are too large, we also look at something called "factor risk." We want to make sure that no one risk factor is too large in our portfolio.

So for example, China... We want to make sure our China exposure is not too large. And we also want to make sure that we don't have too many banks or too much commodities exposure. We're trying to manage risk and the portfolio across a couple of different vectors.

CM: This sounds like it can be difficult for an individual to do on their own, especially if you don't have somebody to teach you or to follow?

AR: I think that's right. And here's what I would also add... I believe Stansberry Research provides the greatest ideas and research that you'll find – better than anywhere on Wall Street, and that includes institutional investment research as well. We've provided something like 300 research picks as of the end of 2020.

How does an individual investor think through how to allocate to those, when so many of them sound good?

That's why our founder Porter Stansberry created our Portfolio Solutions products with the idea of it being a "greatest hits" version of our research. It's a way to simplify and show investors how we would do it, how we would manage it, and put everything together.

So in addition to providing a portfolio that we hope outperforms, we also hope it helps folks learn how to manage their portfolio on their own.

CM: That's great. One more thing... You've worked with, and at, some of the biggest investment firms around. Where was your formative experience? In other words, when did you get fully immersed in investing and learn a lot of what you've learned?

AR: There's no one, but I'll give you a few... When I was in high school, I applied to schools with undergraduate business degrees or really good economics programs because I already liked the stock market.

We had a competition in an AP class to identify a stock. And there were two winning categories... There was one that went up the highest percentage and one that went the highest in dollar terms.

And of course, I picked Berkshire Hathaway (BRK-B). I didn't know if I was going to win the percentage, but in dollar terms, why not pick the one with the highest dollar value? And I won... I think it only went up like $100, but it just was so much higher than everyone.

After my undergraduate days, I ended up going to Blackstone (BX) to try to get a more fulsome understanding of corporate finance. I worked in their investment bank group, but within the restructuring group... So it was actually trying to help troubled companies either emerge from or avoid bankruptcy.

That was great... It was really helpful for me to understand the bear case, when to look and see when things go wrong, and see that perspective.

While I was doing that, the most interesting situation we worked on was when a private-equity company had over-levered one of its own investments basically to pay itself a special dividend one too many times. That made me realize I really did not want to be an adviser, but be on the investment side. And I just felt like I liked the public markets better.

After going to business school, I first worked in the public markets for Steve Cohen. And whereas people talk about the "elevator pitch," Steve had the "chair swivel"...

In his office, he was sitting in front of 16 screens. He would turn his chair to you if you had to pitch something to him. And if you didn't excite him or he got bored on it, even in mid-sentence, he would just swivel his chair back to his monitors and start trading.

I observed this enough times to realize what he wants to understand is what matters most to the stock and for you to lead with that. You can get bogged down in tons of stuff, but he was the master at figuring out what matters most of the stock – both in the short term and the long term – and figuring out if you can develop an analytical, informational edge about that. That was really helpful for me.

From Julian Robertson [at Tiger Management], I learned a lot... This was a guy who could do both – understand the micro story, he was a great individual stock investor over his career – but also understand the macro and understand that you must get both right... that you can be right on the stock, but wrong on the macro situation and just get run over.

He actually highlights being bearish and "short" housing in 2006, 2007, and 2008 as his best trade ever. Even though he's this world-class legendary stock investor and hedge-fund investor, he routinely said that that was the trade he was most proud of and thought it was his best trade. That really helped me because, up to that point, I was focused on the micro.

As an analyst, you're building up models and trying to know everything you can about this one company. But it's really helpful as a portfolio manager to take a step back and understand that it's not just that one tree, it's the entire forest that matters.

Bringing it full circle to Stansberry, I believe we have some of the best analysts in the business, and we have analysts doing a lot of different things.

What I've learned from here is that there's a lot of ways to make money...

It's great during our idea meetings to understand the bear case on things and challenge each other not to fall susceptible to group mentality. It's better for our subscribers when our editors and analysts disagree on something because then we can sort of spend more time on it and think it through.

One of those examples is bitcoin, which we talked about yesterday. We had some big skeptics and some other big proponents... And it has been great for our subscribers.

CM: Well, Austin, I think we've talked long enough. I know you're a busy man, but we appreciate you making time to share some of your insights with Digest readers.

AR: No problem at all, Corey... Any time. I really appreciate the chance to talk about all these things. Hopefully everyone listening will get a better idea about our mindset.

Editor's note: We hope you've learned something from our weekend chat with Austin.

If you want to hear even more from him and find out exactly how our Stansberry Portfolio Solutions products can work for you, we encourage you to tune into our upcoming event... True Wealth editor Dr. Steve Sjuggerud and Retirement Millionaire editor Dr. David "Doc" Eifrig will join Austin to show how you can make 2021 your best investing year ever.

During this FREE broadcast, they'll reveal their 2021 market predictions for the first time... explain what's next for Steve's "Melt Up" thesis, gold, and bitcoin... show you what a "bulletproof" portfolio looks like... share their No. 1 stock for this year... and much more.

The action starts at 8 p.m. Eastern time this Tuesday, January 26. And if you've enjoyed this Q&A with Austin, you won't want to miss it. Click here to reserve your spot.