How to build a business...

How to build a business... The most important secret of my life... Surround yourself with brilliant people... Introducing Stansberry Asset Management... The incredible opportunity in China... Reader feedback: Investing in airline stocks...

It was a special week for me (Porter)...

I was hosting our annual Spring Editors Conference. What you'll find below is a few of the best ideas I heard at the meeting, including what I believe is the biggest difference between successful professional investors and everyone else. I'll also share a secret change about to happen to China's equity markets... one that could mean billions and billions of dollars flooding into that stock market.

But before we get to the stuff you've paid for, I wanted to share something personal... something I think is a lot more valuable than just a few more investment ideas like you'll find below.

To me, last week was a lot like hosting my wedding... or a reunion of friends. It wasn't just a work event. I've spent more than 15 years building this business – and carefully selecting the people who work here. As you know, my guiding principle in writing these Friday Digests to you each week is to give you the information I'd want if our roles were reversed. That's the best way I know how to serve my customers.

And the best way I know how to build a business is by carefully selecting the people... My guiding principle to business building is to only hire people I respect, trust, and admire. I only hire people I want to be more like.

Of course, this isn't easy. But it is critical if you want to guarantee your success... and if you want to make sure that going to work every day feels like hanging out with your best friends.

I learned the core of this secret – which I consider the most important secret of my life – from an old, wise, Jewish salvage merchant named Arnie Sager. If you lived in central Florida any time between 1970 and 2000, you probably remember the name. Arnie ran a gigantic warehouse store near downtown Orlando long before such stores were common.

His business was simple. Arnie dealt in stuff nobody else wanted. Retailers with excess product they couldn't move would sell it, in huge quantities, to Arnie for pennies on the dollar. Arnie's store was like a giant garage sale, where the merchandise was always changing. Furniture one week, clothes the next. And no matter what, Arnie always moved the stuff. If we couldn't sell it for $0.25, we'd mark it down the next day to $0.10. And then to $0.05. After all, we knew Arnie had only paid $0.02 for it. Crap nobody wanted flew off the shelves.

I was only 14 years old when I started working for Arnie. I had gotten into a bit of trouble with some of the bad kids at school. I had to earn enough money to repair the damage we caused. While the other kids' parents paid for their share, my parents told me I'd have to earn the money. What a great lesson.

I learned how the world really worked at Arnie's store. It wasn't anything like the sheltered world I knew at home and at my school in the tony part of town (Winter Park). Most of Arnie's employees would steal from him every chance they got. And nearly all of the guys I worked with did drugs at work.

Somehow, even back then, I knew this place and these people were not for me. Arnie knew it, too. On my last day, at the end of the week, he pulled up to the store in his big, black Lincoln to pass out paychecks. I'll never forget what he said:

Porter, you don't belong here, kid. I don't know what you did to get into trouble, but I do know how. You were hanging out with the wrong people. Look, kid... you gotta pick better friends. You become your friends, whether you like it or not. Now get outta here, kid.

If you want to build a great business... if you want to have a great life... if you want to improve your health... if you want to have more fun... whatever your goals in life are, just look around at who you are with. Time is your most valuable asset. How are you spending it? The people you spend your time with are the people you will become.

When I started this company in 1999 (from my kitchen table, with a borrowed laptop), I only hired people I wanted to be more like. My first move was to hire Dave Lashmet, who had been my most brilliant college professor.

Then, I hired Steve Sjuggerud. I grew up with Steve. He was the best surfer, the best tennis player, the best guitarist, and the smartest guy I knew growing up. He was our town's Doogie Howser.

Steve graduated from high school two years early and had his Ph.D. in hand (in international finance) before I graduated from college. Steve taught me how to surf when I was in my early teens. Later, I learned basic finance from him in my first job out of college. Aside from my father, Steve taught me more about being a good man than anyone else in my life. I couldn't have had a better role model. And now I get to work with him every day. That's priceless to me.

Most recently, I hired Mark Arnold to head our business development efforts. I've known Mark since seventh grade. He's the most charismatic person I've ever met. There wasn't a pretty girl in my hometown that he didn't date, nor a guy who didn't want to be his friend. He was wicked smart, too – undergrad at Duke and then he got his law degree and an MBA all by the time I finished college.

I had been recruiting Mark to join our company since 2004. But he quickly made partner in a great law firm, so it was a difficult decision to leave and join a startup like ours. It took a while to convince him. Today, Mark is helping us make great acquisitions. Someday soon, he'll lead our company to the New York Stock Exchange and a public offering. If one day you end up a shareholder – not just a subscriber – you can thank Mark for your dividends.

It has been this way with all of the key people in our company. I never launch a new product, do an acquisition, or create a new business unit (like Stansberry Asset Management, which I'll explain in a minute) until I have what I consider to be the perfect person in place... a person I respect, trust, and admire.

When you meet these people – like Doc Eifrig, Dan Ferris, Sean Goldsmith, Jamison Miller (our conference organizer), Mike Palmer (the most talented copywriter in America), our longtime marketing specialist Sean Carroll, and our CEO Matt Smith... you'll see why our publishing company has been so successful. It's the people that make all the difference in a business.

"Fine," you say. "But what about investing? Isn't that why we are all here?" Yes, indeed. Sorry to bother you with a tangent...

The two best presentations I saw last week were Dr. Richard Smith's demonstration of his advancements to his TradeStops software and Erez Kalir's advice about how to use our newsletters to build high-quality portfolios. Erez, you may recall, is an old friend of mine and has been in the hedge-fund business for many years as both an analyst for some of the biggest fund groups in the world and as a principal manager of his own funds.

The biggest complaint I hear from our subscribers is that there's too much information and that they have a hard time managing their portfolios as a result. Finance is full of paradoxes. One of the most important to understand is diversification. The No. 1 most common mistake individual investors make when they use our newsletters is that they refuse to diversify.

For example, I got a letter last week from a guy who was complaining that he had subscribed twice over the last 10 years and that both times, he put all of his portfolio into one of our ideas. No surprise, the stock went down. No surprise, he didn't follow our recommended stops. No surprise, he lost all of his money. And no surprise, he blamed me. I can understand making this mistake once. But doing it twice tells me we're not going to be able to help this guy. I gently suggested taking his business to another firm.

We know that sensible amounts of diversification are one of the only "free rides" in finance. A portfolio of more than a dozen stocks will give you both higher average returns and less volatility than a smaller portfolio.

But give this advice to most individual investors, and they are sure to reply that they can't be bothered with too many "small" positions. Most professional investors will not put more than 2% of their portfolio into any stock. Most amateurs will not put less than 20% of their portfolio into any stock. Which group do you think is going to do better on average? Trust me, it's the pros.

Richard Smith has built a program that makes it easy for you to diversify and manage risk. There is a whole slew of advanced tools coming out that allow you to manage position sizes and trailing-stop levels according to risk. This will allow you to equalize risk across each position in your portfolio and, at the same time, use custom stop loss points that are selected based on each individual stock's trading pattern.

These are tools that normally only wealthy hedge-fund managers have access to via expensive computer terminals... and you now get the same tools for the same price as a newsletter.

These tools are critical to making sure your portfolio, as a whole, isn't too risky. For example, if you have 20 stocks but 50% of your portfolio is in Twitter and Tesla, you probably don't realize how much risk you're taking. With Richard's new tools, TradeStops will analyze your portfolio and tell you exactly how much risk you're taking. Thus, you can know how your portfolio is likely to behave if the market goes up 10% or goes down 10%.

Being prepared is the key to dealing successfully with volatility. There's no doubt in my mind that using these tools is the key to being able to successfully manage your money, while using the ideas we present in our pages. Without these position-sizing tools and risk-management tools, I don't think most individual investors can actually properly manage a portfolio.

The other presentation I thought was brilliant was from Erez Kalir. We've partnered with Erez to build a Stansberry-branded (though separately owned and managed) asset-management business tentatively called Stansberry Asset Management. This is something we've wanted to offer subscribers for many years, but because of concerns regarding potential conflicts of interest, it has taken a long time to bring to fruition.

What we want to do is simple: Offer portfolio-management service to our readers. We know plenty of people who love our ideas and approach to investing but simply can't do it themselves. They're stuck using brokers and other service providers, most of whom won't follow the advice we offer.

The other delay in launching this new business was Erez. We've been recruiting him for more than five years. We didn't want a regular broker to handle our subscribers' money. We wanted one of the world's best and most experienced hedge-fund managers – someone who has worked for the greats in the business, like Tiger Management's Julian Robertson.

To make sure there are zero conflicts of interest, Erez will run Stansberry Asset Management out of New York City (not Baltimore) and will be totally independent from us. He'll simply use our newsletters – like any other subscriber – as part of his toolkit for providing service to clients. Investors with significant amounts of assets (probably $1 million minimum) can open a managed account with Erez at Stansberry Asset Management and choose among a number of portfolios designed by Erez using our research. We asked Erez to demonstrate how he would build these portfolios at our Spring Editors Conference.

First, Erez showed us how he goes about "allocating to value" – meaning, rather than simply doing a standard 60/40 split between stocks and bonds, he breaks down the world's securities markets into regions and subtypes and then allocates according to three measures: liquidity (whether central banks are adding money to the system), price, and sentiment.

Those of you familiar with Steve Sjuggerud's "cheap, hated, and in an uptrend" method of finding attractive markets will recognize this approach. On this basis, the highest-rated equity markets were China's – so Erez would build a portfolio today that featured those opportunities.

The other thing Erez talked about was equalizing the risk of each of the positions – using the same kind of tools that Richard Smith is building into TradeStops. Erez and I have even discussed a way to use a safe portfolio to make market-beating returns by simply adding leverage. These are the kinds of things hedge funds do routinely to generate "alpha" – returns in excess of the market's level of risk. Most individuals have no ability to do this type of investing, so that's exactly what Erez plans to deliver to his clients.

Stansberry Asset Management isn't operating yet... there's still plenty of work to do in setting up the business, getting all of the licenses, etc. But it is the direction Erez is moving toward. We won't regularly mention his activities. It's a completely separate business. But if you want to join the mailing list, sign up here for more information.

In any case, I did want to mention Erez's presentation because it highlights the importance of asset allocation. I believe asset allocation is the most important factor in determining your portfolio's return... but most individual investors simply don't know how to do it. They have no idea.

My guess is that many of you have missed out on the fantastic gains in Chinese stocks this year because you simply aren't properly allocated on a global basis. That's where a good asset manager – whether a broker or a firm like Stansberry Asset Management – can really help improve your performance.

You should understand one other thing about asset allocation and China. Not only is China's currency about to be admitted to the "club" as part of the World Bank's reserve currency basket (see Steve Sjuggerud's work about this here and here), but Steve also tells me that right now, the most important emerging-markets stock index (the MSCI Emerging Markets Index) still doesn't include mainland Chinese stocks.

If they were included, these Chinese stocks would make up 10% of the index. MSCI rebalances the index every June. These Chinese stocks are sure to be included soon... $1.7 trillion is benchmarked to this index. So $170 billion will have to be allocated to mainland Chinese stocks when this index moves to include them.

Again, these are the types of opportunities that most folks don't understand or never even hear about. But a lot of money is about to be made as China joins the ranks as one of the world's developed markets.

New 52-week highs (as of 5/14/2015): Activision Blizzard (ATVI), AXIS Capital (AXS), Blackstone Group (BX), CDK Global (CDK), WisdomTree Japan SmallCap Dividend Fund (DFJ), ProShares Ultra Technology Fund (ROM), and ProShares Ultra S&P 500 Fund (SSO).

In the mailbag, a subscriber wonders if we'll write about an airline stock anytime soon. And he isn't joking. Please remember: although we cannot respond to everyone, we read all of your mail. We appreciate your feedback – good and bad. If you've never written anything before, let today be the day. I would love to know how you feel about the life philosophy I learned from Arnie Sager. And I'd love to know whether you think setting up Stansberry Asset Management is a good or bad idea. Send your letters to feedback@stansberryresearch.com.

"Hey Porter, you recently made mention of the letter you sent to Devon Energy's management team last July (which they basically ignored), and how Dan Loeb's hedge fund has now taken a significant position in DVN. Might I ask a favor of you? Could you send a similar letter to the Board of Directors (and shareholders) at United Airlines?

"As a 27-year employee of UAL, I have watched at least six CEOs come and go, each one seemingly more incompetent than the last. (The primary exception being the aptly-named Steve Wolf, who didn't lack in avarice, but at least knew how to run an airline.) The current CEO, Jeff Smisek, is at least as incompetent as he is arrogant. Before UAL merged with Continental Airlines, he was their (Continental's) CEO, but even though UAL was far and away the bigger partner in the merger, UAL's CEO (the much-detested Glenn Tilton) basically handed over the keys to the merged airline to Jeff and his minions.

"They have run the company in the finest tradition of Frank Lorenzo, and tried their best to run it into the ground. In the first quarter of 2014, when every other airline was making money, UAL lost nearly a billion dollars. We consistently underperform our competitors, American, Delta, and Southwest, quarter after quarter, year after year. Smisek and company have no vision, and no concept of how to run what should be the finest airline in the world. Their main focus seems to be on cutting costs, and browbeating their employees (not the most brilliant way to run a company in the service industry).

"Sadly, it isn't just one or two bad decisions that management has made (like with Devon) that is holding us back – it is staggeringly bad management, and the only solution is to clean house. I would like nothing more than to see an activist investor like Mr. Loeb take a large position in UAL, and convince the Board to find someone who has a basic concept of how to run an airline. Thank you for your time – I realize this is probably just tilting at windmills, but I figure it was worth a shot." – Paid-up subscriber Mark H

Porter comment: Legendary investor Warren Buffett says that someone should have shot Wilbur and Orville before they ever got off the ground, because on a net basis, the airline industry consumes more capital than it produces.

Businesses that require both tremendous amounts of people and tremendous amounts of capital are tough. Businesses that require people and capital AND offer a commodity service to a largely unregulated market are impossible.

While I respect your view that your company is poorly run compared with your competitors, note that all of the firms you mention (except for Southwest) have all been in bankruptcy several times. I personally won't fly Southwest (unless there's no other alternative) because of its painful, cattle-car-like approach to flying. Like author Ayn Rand said about the poor... when it comes to airline investors, "don't be one of them."

Regards,

Porter Stansberry
New York, New York
May 15, 2015