Our Annual Report Card, Part I...

Our annual Report Card, Part I... Why we highlight our mistakes... Lies, damn lies, and statistics... The best analyst of 2010-2011... Porter and Rattner just the same?... Where's the successful solar company?...

In today's Friday Digest, we're publishing the eagerly awaited annual Report Card. Below you'll find a clear, completely transparent evaluation of our monthly newsletters. If you've never seen one of our annual Report Cards before... you might find it a little shocking. Why on Earth would we highlight our worst failures to every single subscriber? Normally when you go to a restaurant, the maître d' doesn't brag about the soufflés the chef ruined the night before.

So why are we doing this?!?

I started writing these Report Cards nearly a decade ago because I have no interest in selling an advisory that cannot produce good results. We routinely kill products if they can't produce at least satisfactory results – even if publishing them makes us a lot of money. (And yes, we are killing products once again this year because they cannot meet our expectations.)

There's a strange paradox in financial newsletter publishing: Frequently, the best-selling newsletters produce the worst results for actual investors. That's never bothered many of my peers in the industry, who care more about their subscriber rolls than their subscribers' accounts. But we've never done business that way… and we never will, as long as my name is on the masthead.

Our friends read our newsletters – and they invest heavily in the recommendations. Our parents read our newsletters – and they invest heavily in our recommendations. These Report Cards help us to make sure our newsletters are dependable.

Besides our responsibilities to the people who depend on us and trust us... what about the responsibility we owe ourselves to do good work? Who would willingly spend his life working for a business that didn't insist on producing high-quality products? When the time comes for me to put down my pen, what will I value more: the money in my bank account or the quality of the work I spent my life producing?

True, money is important. But beyond a certain point, money carries no value whatsoever. At this point in my life, another million dollars will not change the way I live. On the other hand, a hard-won reputation for quality carries rewards that cannot be bought. Those are the only trophies that matter – at least to me. These Report Cards help ensure we're moving in the right direction in regards to quality.

These Report Cards give us a terrific advantage in business. Our peers will not produce them. The fact that we do allows us to attract both the most sophisticated customers and most talented analysts. Everyone wants to do business with someone who is relentlessly dedicated to actual achievement. We are. And we prove it every year by publishing these Report Cards.

Finally... as the founder and managing director of Stansberry & Associates Investment Research, I believe my primary job is to give you the information I would want if our roles were reversed. To me, our constant efforts to provide this kind of full disclosure are one of the defining characteristics of our brand. You ought to know as much as we know about our products. You ought to know how reliable they are... or how volatile. You ought to know what kinds of returns are expected... or what kinds of losses are possible. In short, you need to know what to really expect – beyond the marketing pitches that many would like to use to define our products.

Before you scroll down to the results, READ THIS FIRST...

Below, you will find Part I of our annual evaluation. It contains a summary of the results and my evaluation of our monthly newsletters. We'll publish Part II, which will include all of our "trading" services, next week. (So if you're looking for an advisory not listed today, check for it in Part II.)

In addition to showing you the summary results, I also offer a grade. Why not let the numbers speak solely for themselves? Investment performance ought not be considered in a vacuum. The circumstances of a portfolio's performance matter a great deal. For example, if you were told – without any supporting information – that a newsletter averaged a 0% return for two years, you would immediately think the result was subpar. But... if you knew the time period in question was 2007 and 2008, when stocks fell 50% on average... a breakeven result would actually deserve an A+ grade. So while the nominal performance of the track record is the primary basis for the grade, I factor in the risks the editor took and the market's overall condition in awarding my grades. In some cases, you may disagree with the grade I've awarded. I look forward to your feedback in this regard.

A word about statistics... As a junior writer, I was taught several simple tricks that could turn almost any track record, no matter how bad, into an example of investing brilliance. One example... just put all the bad trades into a different category and show the average of the categories instead of the actual average of each position taken. There are many, many variations on this theme. And most of the publishers I know use them, at least from time to time. We do not.

We publish the straight summary results: How many positions were recommended? Which made money? Which lost money? What was the plain average of the results? We also offer a simple annualized number that takes into account the less-than-one-year timeframe of most of the holding periods. And we incorporate a number that shows an apples-to-apples comparison with the S&P 500. (To accurately compare ourselves to that index, we simply figure out what you would have earned if you'd bought one unit of the S&P 500 instead of our recommendation, at the time of each recommendation.) If you can think of a better, more transparent way for us to represent a summary of our results, please let us know.

And so... how did we do? For this year's evaluation, I asked Amber Mason – one of our most experienced managing editors – to compile results from March 2010 through the end of 2011. I picked those particular dates because it was back in February/March of 2010 that I became bearish again, following the rally we'd seen in stocks since 2009. As I wrote in Stansberry's Investment Advisory back then...

Looking at this 22-month time frame gives us a long enough period to fairly evaluate our analysts' performance. The market as a whole has been almost flat in the period. The S&P moved up slightly from 1,100 to 1,300 – but there's been plenty of volatility, giving our analysts a very difficult market to handle. We don't always select such tough periods for our evaluations…

Last year's Report Card showed how we did during the big bull market of March 2009 through the end of 2010. But this year's evaluation will be much, much harder… because the conditions were very tough for investors in general.

We recommended a total of 209 different securities during the 22-month period between March 2010 and the end of December 2011 in our six regular monthly newsletters (Stansberry's Investment Advisory, True Wealth, The 12% Letter, Small Stock Specialist, Retirement Millionaire, and the S&A Resource Report). The average return was 2.9%. The weighted S&P return (if you had bought a unit of the S&P 500 instead of our recommendations at the same time) was 2.1%. And the annualized return of our recommendations (if you'd reinvested your winning positions) was 4.6%.

Overall, this group of newsletters produced a satisfactory result, given the tough market conditions. I would give this group of products a "B" overall grade. On the other hand, I note that simply putting 50% of your assets in gold and 50% in Treasury bills (a completely hedged, cash position) would have given you a nominal return of more than 20%.

I don't make this comparison merely in retrospect either... That's been my constant advice since February 2010 for investors who are unable (or unwilling) to sell stocks short to hedge against volatility.

This year's Report Card shows you how difficult it has been for even skilled analysts to succeed in a market that's heavily manipulated by the Federal Reserve's quantitative easing programs. Not a single letter produced an average return (or annualized return) that beat my simple strategy of holding T-bills and gold.

Here's the report card...

Retirement Millionaire: A+

What more can you say about Dr. David Eifrig's performance except "outstanding"? Doc, as we call him, was far more bullish than I was. And he has done a world-class job getting his subscribers into top-quality blue-chip stocks, like VF Corp. (up more than 63%), McDonald's (up more than 42%), and Coke (up 27%). He's also avoided almost any significant losses. Only two of Doc's recommendations ended up being significantly down (Google and Cisco). In a mostly flat market, Doc's formula of buying conservative, high-yielding stocks that are safe has worked very, very well.

The secret is Doc's incredible consistency. His track record for the period was nearly flawless. There's no question Doc was our very best analyst in the period. Congrats, Doc!

Stansberry's Investment Advisory: A+/B-

I'm awarding myself two grades this year – something that's sure to inspire howls of protest from the other analysts on my staff. But the fact is, I told my subscribers to follow one of two different strategies throughout this period, both of which were relatively successful.

I knew that the stock market was unlikely to offer great returns and would be very volatile. So I recommended either hedging your stock portfolio with short sells or – if you were unable or unwilling to do that – moving completely into cash (Treasury Bills) and gold.

As I mentioned, none of our analysts were able to beat my 50/50 gold and cash portfolio for the period. On the other hand, my efforts to hedge our model portfolio were only marginally successful...

The market's volatility hurt returns on my stock recommendations. We got stopped out of several positions that would have been huge winners, if we could have withstood the volatility – like Petrohawk Energy and Cheniere Energy, both of which were sold for losses of around 25%. On the other hand, the overall volatility of my portfolio was extremely low because it was well-hedged. And our short positions did extremely well, including big gains in our shorts of First Solar (40%), Pulte (43%), Royal Bank of Scotland (27%), and Deutsche Bank (24%).

I wouldn't normally award myself a B (or even a B-) with a win rate of only 57%... But I will this year because we were well-hedged. The total value of our model portfolio was dramatically less volatile than the market as a whole, which reduced the real impact of a win rate less than 60%.

True Wealth: C

After many years of outstanding performances, I had to give Dr. Steve Sjuggerud a "C" this year. The goal of True Wealth is to produce stock market-like returns, with far less risk. And many of Steve's best ideas did exactly that for our readers. Steve was up almost 50% on Texas Pacific Land Trust – a very safe investment. And his mortgage REITs did well, too (with gains of more than 30%), while providing a big income for our readers.

But... when Steve decided to step outside these low-risk investments, the market's volatility cost him big. He was down 40% on a leveraged semiconductor exchange-traded fund (ETF) – simply because the timing was a bit off. I'm certain Steve will look closely at these results... and make the appropriate adjustments to his strategy.

Don't forget... in last year's report card, Steve boasted a 90% win rate and annualized returns of more than 45%.

S&A Resource Report: C

Given the big bull market in gold and silver during the period, it's hard to believe that Matt Badiali, our resident geologist, couldn't put together a whole slew of huge gains in mining stocks. But that's clearly not what happened... instead gold stocks have been in a huge slump. And commodity stocks in general have been so incredibly volatile, it's been nearly impossible for Matt to keep anything in his portfolio for long. Looking at the gold-mining stocks fund (GDX), I count four major corrections of more than 20% in the index. To be successful in these markets, Matt is going to have to become an even more relentless contrarian. Don't buy until there's blood in the streets of Vancouver...

The 12% Letter: D

What happened to The 12% Letter this year? Normally, this is one of our most conservative, low-risk letters. It typically delivers consistent returns... but not over the most recent period. On average, its recommendations produced a loss!

Judging by what I see in the portfolio, it looks like the editors (Tom Dyson and Dan Ferris) were stretching for yield, buying into lower-quality names like Niska Gas Storage Partners and Fifth Street Finance – moves that really hurt the portfolio when the market volatility forced them to sell because of trailing stop losses.

The key to successful income investing is avoiding losses… because you're not going to make big capital gains in these stocks to compensate for any losses. And unfortunately, that's what happened here. The letter had just too many losses to put together a successful campaign. We'll have to look carefully at how we're managing the stop losses in this portfolio... I bet with a small change in how we're handling the volatility, we can greatly improve results.

Small Stock Specialist (formerly Penny Stock Specialist): D

Ouch. This letter's strategy of buying the most volatile, small-cap stocks in the market has been a huge disappointment during this flat, but volatile market. Without a dominant bull or bear trend in place, our analyst Frank Curzio hasn't been able to get the timing right on most of these picks. To improve the performance, we might have to consider significantly tightening our trailing stop losses and trying to do a better job timing the market's swings.

Perhaps we should consider moving to a watch-list kind of portfolio, where we have a group of stocks to buy when the market's momentum gives an indication that it's time to jump in. Of course, that positions this portfolio as more of a trading service, rather than a regular investment newsletter. So there's a balance that I'm sure Frank is trying to strike.

In next week's Digest, we'll go over the results and the grades of all of our trading service products. Some did well... and some did not. We'll tell the whole story. Look for it next Friday.

New 52-week highs (as of 1/12/12): Invesco Insured Municipal Income (IIM), Monsanto (MON).

In the mailbag, a subscriber tries to paint me with the same brush as Steve Rattner. Just wait until you see the reason… Send us your feedback at feedback@stansberryresearch.com.

"Hello, I'm an S&A subscriber... My friends recently showed me an article on Wikipedia on Porter which claims that 'Stansberry was successfully sued for fraud in 2003 by SEC.' I am not saying this belittles S&A efforts to provide quality research and advice, which I still enjoy – but I must say, and hopefully you agree, that this is quite disturbing. I'm not even mentioning the fact that I looked silly as a result, and my attempts to attract people's attention to S&A now have this obstacle.

"Could you please ask Porter explain this? This is public information and no doubt others will stumble upon the same sources... Especially in the light of one of your latest Digests that mentions Steve Rattner and his unwillingness to discuss his own questionable past litigation... Here we are in a similar position, aren't we? If you're unwilling to discuss this publicly, can you please reply to my e-mail, even in short?" – Paid-up subscriber Denis

Porter comment: Far from ever trying to hide anything about our legal battle with the Securities and Exchange Commission (SEC), we have spent millions of dollars on lawyers to fight the case. I have agreed to every interview request (including with the Wall Street Journal and the New York Times, among other major publications) and written directly to our subscribers about the matter on dozens of occasions. And we have built a permanent website to host all the facts of the matter – including all of the third-party reporting from the Wall Street Journal and the New York Times. You're welcome to read all about it and share it with everyone you know who might be interested... www.StansberrySECInfo.com.

I am proud of all of my actions in these matters. As you'll see when you review the case, I did my job as a journalist to publish an important story – one that featured corruption at the highest levels of the U.S. government. At every step along the way – from the drafting of my controversial report... to my decision to fight the SEC (rather than quietly settle)... to our decision to continue to appeal the case – I have acted with the highest degree of integrity. Most people, for example, don't understand that we sued the SEC first to protect the identities of our subscribers, whom the government sought to harass and intimidate.

Most important, I do not believe it is a crime to write a report about a stock – even a stock that had become little more than a form of government graft. And that's why I continue to write about stocks despite the fact that the government has placed an injunction on my speech.

Like I said, when you learn about what we've been through in this matter, I think you'll be shocked.

"I was reading yesterday's Digest, and it reminded me of a newspaper article that I read last year.

"Apparently, Portland, OR transit authority TriMet didn't get the memo about solar power. Back in late November, there was an article in the Oregonian about how the transit agency is using solar power to power one of its stations. The Oregonian states...

"I made the same quick calculations of about 60 years to pay off the system, when I first saw the story! And the savings are just coming from the savings in power generation, but rather from cost savings from the project and a grant. And they still can't make it work.

"Doesn't anyone at TriMet know what the life expectancy of a solar panel is? From Solar Power Info's website (which is trying to promote solar power use): 'Solar panels have an effective lifespan of about 20 to 25 years, and their value and wattage output decrease steadily over time.'

"Who's doing the math on these projects? Probably a government bureaucrat that couldn't make it in the private sector! The cost of this 'project' is going to be 10, 20 or even 50 times what they stated it will cost, especially if they have to replace them sooner than 65 years from now!!!! They can't even add!

"This is an example of why we are coming to the end of America, sooner rather than later, shown from a micro level view. Scale this up to Federal Government, and you have us going to the EOA at ever accelerating speed!" – Paid-up subscriber Lance W.

Porter comment: My newest argument to solar advocates is to simply ask them to point out a solar company that's been successful – ever. There isn't one. If there isn't a single company in your industry that's been successful for at least a few decades... there's probably a big underlying problem.

Regards,

Porter Stansberry

Miami Beach, Florida

January 13, 2012