Make 30% Annually for More Than 30 Years

Make 30% annually for more than 30 years... How our 'magic number' strategy works... Why most investors can't use it... Spoiling our own marketing message (again)...

In today's Friday Digest, I (Porter) continue my quixotic mission to give you the information I'd want to have if our roles were reversed. In today's letter, I'm going to show you a simple way to make sure the odds are always in your favor when you decide to invest in a trend.

Almost any kind of trend.

Once you learn this secret, your investing results will improve dramatically. The skill I explain below can transform almost anyone – even a complete novice – into a good, or even great, investor.

It's possible to make 30% annual gains with this strategy – reliably, year after year. In fact, one of the hardest parts of learning this strategy is simply accepting the fact that it works. I promise... you'll end up shaking your head when you realize how easy this is. And, of course, I'll show you all of the data to prove it.

"Why haven't I done this before?" is going to be the hardest question you have to answer today.

I bet this has happened to you, at some point, in your investing life...

Let's say 20 years ago, you noticed how shares of biotech company Amgen (AMGN) had rocketed up 14,500% from 1985 to 1996.

You could see dozens of new "biotech" companies were starting to emerge, all touting various kinds of new medical approaches and technologies. You might not have been an expert in this stuff, but it wasn't hard to imagine that the biotech sector as a whole was going to emerge and grow. Not every company would win. But not every company would lose, either. Buying the whole sector was an obvious way to ensure your capital would build over the long term.

But then, just after you decided to put 20% of your portfolio "long" a basket of biotech stocks... they crashed. It's like the market knew you were buying... and knew you were a little unsure of your position.

Making matters even worse, almost as soon as you decided to sell your biotech position to prevent even more damage to your portfolio, the sector turned back up. (Damn it!) It then hit new high after new high after new high.

A year or two or three later, you made the mistake of looking at your old mutual fund (or exchange-traded fund), and you couldn't believe how high the price had soared. How did you miss it?

How many times has this happened to you? You were right about the big picture and the trend... but it didn't matter. Instead of compounding your capital, you only ended up compounding your frustration.

That kind of outcome happens to individual investors again and again and again. Why? Because most people "chase" performance. They see a stock or a sector soaring, and they hop on the trend without really understanding what they've bought or the price they've paid.

Today, I'm going to show you an unbelievably simple way to avoid ever doing that again. Our marketing team calls this long-term, trend-following strategy the "magic number." Yes, that makes me chuckle. As I'm going to show you, there's nothing magical about this strategy at all. But give the poor guys in marketing a break. It's not their fault that you, our dear subscribers, will not read anything (or buy anything) unless we give it a goofy name.

Fortunately, it doesn't matter what you call this strategy. What matters is that it works. It's easy to calculate and use, and it will make you a vastly better investor.

If you've read these weekly missives for any length of time, you know that I believe my main role as company founder and namesake is to make sure that our clients remain at the heart of all of our efforts. Sometimes that means spoiling even our own marketing messages. So... if you've ever wondered what we really mean with claims like "magic numbers" and advertising puffery like that, read on. As you'll see, something important is at stake.

Let's go back to the biotech example I used above. Biotech investing is volatile and risky. Can conservative, risk-averse people who aren't medical professionals invest safely in this sector? Yes, as long as they understand the right strategy to use.

What's the right strategy?

Think about it this way. Have you ever played roulette or watched others play the casino game? You bet on either black or red. The wheel spins. The ball dances. And it randomly lands on a black square or a red one. If your money is on the right color, you double your "investment."

If it's on the wrong square, you lose everything. Biotech investing is similar... except you're choosing from a wider "palette" of colors. There are a few "lose 50%" colors. And there are a few "make 500%" colors. Even if you're a knowledgeable doctor, it's simply impossible to know how that ball is going to land on every spin (on every investment you make).

So, the first thing you have to do is realize that when you play "games" that feature a lot of variability of outcomes, you have to be widely diversified.

When you're making a big-trend bet – like on the biotech sector, the U.S. housing market, or the rebound of an entire economy – you have to buy a big basket of stocks or a mutual fund that invests across the space. You can't afford the "color" risk of being on just one square.

Luckily, the financial industry has created lots of low-cost products that make betting across an entire trend easy to do. You can make a good argument that the benefits of such diversification outweigh the costs so much that most individual investors shouldn't buy individual stocks at all.

(Shhh... don't tell anyone. I'd never sell another newsletter again!)

That first part is pretty simple and intuitive. As my friend Erez Kalir, an accomplished hedge-fund manager, often reminds me: a reasonable amount of diversification is one of the few genuine "free lunches" in all of finance. It costs almost nothing. And it can deliver significant benefits.

If you don't understand why it's important... then stop right now. Don't go further with our "magic number" strategy. It will only work properly with baskets of stocks – like exchange-traded funds (ETFs) and sector-focused mutual funds. Got it?

This next part is NOT easy for most people. It should be. But it's not.

What would you do if I told you I could guarantee you'd make 30% a year with an investment strategy for the next 10 years... but I couldn't guarantee any particular trade you were going to make would be profitable? And what if I told you that as a normal part of our strategy, you would certainly take losses? Maybe even several in a row. And you might experience losses for a year... or even 18 months.

You're still guaranteed to make 30% a year over 10 years. But you'd have to manage the risk of taking a loss on any particular trade. And you might have to deal with several losing trades in a row.

Would you follow the strategy?

Believe it or not, most people wouldn't. Even though it's guaranteed over the long run, most people can't handle any uncertainty in their investments. Every day, people choose to invest in bonds that offer certainty... and absolutely nothing else.

Good corporate bonds yield less than 5% annually. In many places around the world (where negative interest rates are common), some corporate bonds promise no return at all for periods of up to 10 years. That's a high price to pay for certainty, isn't it? Sure, your account balance will not fall. But it won't change at all – it won't go up, either.

It's amazing the impact of this desire for certainty. Most people want certainty more than anything else with their investments – and certainty is very, very, very expensive. It is far more lucrative to learn how to manage risk effectively than it is to try to avoid it entirely.

Much like learning to use trailing stops, our "magic number" strategy can be difficult (if not impossible) for investors to implement because they have to learn to accept that losses are part of the plan. In fact, it's because this strategy involves uncertainty, randomness, variability, and losses that it works so well. Most investors can't handle these factors, which is what creates the opportunities we've learned to exploit.

In short, if it were easy, everyone would do it... And then this strategy wouldn't work anymore, because the market is relatively efficient. Opportunities that are easy disappear quickly.

How does it work? Our strategy for trading big trends, over the long term, is so simple and foolproof that you're going to think it can't possibly work. It's just too simple. (But remember, the hard part is implementing the strategy without letting your emotions get in the way. And that's not easy at all.)

Before I tell you the secret, let me show you what it could have done for you over the long term in biotech and what it has done for our subscribers since we began using it in two of our investment newsletters.

Since 1985, if you had followed our "magic number" strategy in biotech, you would have made 30% annually. That rate of return is simply insane. No rational person would believe these numbers... But they're exactly right.

We're using the most reliable database of securities returns (Datastream). We're assuming you would have been trading in the Nasdaq Biotechnology Index. And we're assuming you would have been using the ProShares Ultra Nasdaq Biotechnology Fund (BIB) or the equivalent. That fund is designed to return twice the performance of the biotech sector.

Almost no matter what vehicle you used, investing in the explosive growth of biotech, over the long term, using our "magic number" strategy would have led to massive wealth creation on a scale few people can imagine. Our model's returns are big enough to transform a $100,000 grubstake into an immense $321 million fortune in a little more than 30 years. Even if we assume you earned half that amount, to take into account taxes and trading realities, it's still a huge fortune.

Now, I know... The smart readers are saying: "Sure, Porter, sounds great. But it's not hard to be a rear-looking genius. How do you know this kind of strategy will continue to work, in biotech or anything else? The markets are dynamic. And as you know, a lot of strategies that worked in the 1990s or in the early 2000s don't work anymore at all."

That's true. Most strategies "fade" or cease to work eventually. But like I said, our "magic number" strategy is so simple, it's completely foolproof. It's also the kind of strategy that works because of human emotions and crowd-like behavior. Those strategies don't fade because human beings don't change – especially human crowd behavior.

And yes, part of that data set is rear-looking. We "proved" our approach by studying many decades of data, across dozens of different markets. But we've also used this strategy in real time in our True Wealth Systems newsletter.

This strategy is the underlying "core" of all of our systematic research. We've found it works consistently with only minor variations across virtually every market in the world.

Of course, some markets trend more strongly than others. And some markets have created more value than others (like biotech). So where we use this strategy and how we implement it varies. Knowledge of these variations is incredibly valuable and forms the basis for our subscription fees in True Wealth Systems.

Here's what I mean...

If you invested $100,000 at the beginning of these trades and then rolled the capital into each new trade, you would now have almost $560,000 – a total return of nearly 460%. That's phenomenal compounded annual growth of 48%.

How are these huge returns possible? It's simple. When you know a big trend is emerging, all you have to do is make sure you're invested when the trend is going up... and that you're out of the market when the trend is going down.

You never try to buy at the bottom, because you know you don't have to. Trends like biotech are going to set new high after new high after new high for decades. All you have to do is capture the inevitable big upswings. And you do that by taking a lot of small losses to avoid the downswings. It's really that simple.

How this works technically, as I said, varies slightly from market to market. In biotech, for example, our system would have kept you invested on the "long side" about 60% of the time. You would have been completely out of the market almost half of the time! For most investors that's baffling... and hard to accept. But as you can see, it really works.

This "magic number" approach works best with big, wealth-creating trends like the emergence of biotech. It's not hard to see that the same kinds of patterns can be used to trade emerging wealth-creating trends today, too – like robotics, social media, and financial technology. The secret is simply accepting that in any given trade you may face a small loss, but over time, you're essentially certain to make huge gains.

I like to think of this strategy as being a kind of roulette wheel that actually offers you winning odds (instead of losing odds). If I told you that your odds of winning on my roulette wheel were 60% (instead of 49%), how much capital would you want to wager on each roll? How would you diversify your bets? And how upset would you be if you lost on any particular roll? It's learning to think about your trend investing in this way that will allow you to succeed – beyond even your wildest dreams.

If you think that's an approach that will work for you, I urge you... beg you even... to please begin reading True Wealth Systems today. I promise: It works. Click here to begin a completely risk-free trial subscription and to learn more about our incredible biotech trend model.

One last thing... There are two main battles you have to fight and win if you want to be successful managing your own savings.

Luckily, neither of these two big "fights" is too difficult... But most investors don't even know they're in a fight. So they lose. Badly.

The two bouts you face are knowledge and emotions.

First, of course, you have to learn the basics of the financial-securities markets. This means a lifetime of learning. There's always something more to learn. And second, you have to learn how to manage your emotions.

I've long believed that at a minimum, your investment knowledge must include a working familiarity of capital structures and financial statements. (It amazes me how many investors don't even understand that the nominal price of a stock has nothing whatsoever to do with its actual value.) And for a long time, I thought these fundamentals, along with a working knowledge of risk management (stop losses, position sizing), were all investors really needed.

But working with my friend and colleague Steve Sjuggerud – who writes True Wealth Systems – has taught me that in many markets, knowledge of trends is actually more important than knowledge of fundamentals. It pains me to admit that because it goes against my intellectual bias... and because my stubbornness on this point has probably cost me tens of millions of dollars in the securities markets.

Don't make the same mistake. And again, you can click here for more information about these "magic numbers" and for a limited-time, risk-free trial subscription to True Wealth Systems.

New 52-week highs (as of 5/19/16): ExxonMobil (XOM).

In today's mailbag, a longtime subscriber shares her experience with Stansberry Research. We love to hear stories like this. Please send yours to feedback@stansberryresearch.com.

"Porter, when my husband retired, a number of years ago, we chose to take a lump sum of $600,000 for retirement. We have lived on that money and paid for four years tuition in a private college for our daughter. When my husband, an accountant, developed Parkinson's, he wanted me to take over the investments. I'm not good at math, don't add well, but do understand numbers.

"Realizing I didn't know enough to handle the money and needed help, I tried and then got my money back from several advisories, until I found yours. I learned to invest from the information you provided... I now, at 87, have more than $2,000,000 and no debt. Two years ago, from your information, I began to learn about options. I only sell options. I'm making money and enjoying learning again. Thank you." – Paid-up subscriber Helen O.

Porter comment: What a great note! It's so wonderful to know that our efforts have helped a lot of investors get great results, without paying any big fees.

Regards,

Porter Stansberry

Baltimore, Maryland

May 20, 2016