This month marks the 10th anniversary of Stansberry & Associates Investment Research. In August 1999, I launched this business with the help of Julia Guth, on the recommendation of Steve Sjuggerud, and with the backing of Bill Bonner. Happily, Stansberry Research has grown into a much bigger business than any of us dreamed at the time.
If you hire people smarter than yourself for long enough, good things happen. But consider the risks Julia, Steve, and Bill took at the time. Yes, I had a good track record as an emerging-markets analyst... but I was only 26 years old. My most sincere thanks to Julia, Steve, and Bill, who, I'm proud to say, remain my good friends and partners. And thanks to all of our employees who've made us what we are today.
The 10th anniversary of our business prompted me to look back at the recommendations I've made over the years. I don't want to bore anyone with a laundry list of great calls (or the horrible ones) that I made. But there were a few very obvious things that jumped out at me, that I know would improve our investing.
Looking back, I can see clearly the best work I've done in my career is on the short side of the market. The first issue of my newsletter, for example, correctly predicted the death of the entire long-distance telephone industry and, in particular, the original AT&T. I was right on the money with my exposé of stock-options abuses in Silicon Valley – four years before people started going to jail because of it. And most famously, my bearish reporting on GM, which began in 2007.
It occurs to me very few businesses – almost none, in fact – perform well over the long term. Certainly over the last 10 years, more companies failed than grew substantially. Looking at all of the publicly traded stocks with a trading history of at least 10 years and a market cap of $100 million or more, the average annual return for the last 10 years was only 4%. And 35% of these survivors had negative returns. If you were to add back all of the companies that failed in the period, I'm sure more than 50% of stocks experienced average annual losses. And yet, few investors are willing to short stocks. That's a curious anomaly – one that I will exploit more often in the future.
I've made too many recommendations. When I look back at my highest-rated recommendations, my results are extremely good. (For example, look at my Budweiser recommendation from March 2006.) I wonder what my track record would look like if I'd only written about the very best ideas I found, even if it meant re-recommending something three or four times.
I didn't pay enough attention to the market as a whole – to the big picture. There were times over the last 10 years when I was certain the market as a whole was very cheap or very expensive. I warned my subscribers a bear market was beginning in November 2000. I told my readers it was time to buy again in October 2002. Then in February 2007, I wrote a severe bear market was only a few months away.
I'd urge subscribers to go back and read those issues of my newsletter... if you took my warnings seriously, you would have timed the market perfectly over the last 10 years. Going forward, I am going to make far fewer recommendations. If it's not a great idea, I'll pass. And when I don't think the market is safe, I'm going to get out of stocks altogether.
There's nothing wrong with making mistakes. The trick is not to make them more than twice. I'm a slow learner. But I'm coming around...
Today, the market shot up – again. (I think I hear Jeff Clark moaning...) Nonfarm payrolls dropped 247,000 in July – the smallest drop since last August and less than the 275,000 economists predicted. Unemployment eased 0.1 percentage point to 9.4%. Remember: Sjug's economic-recovery script predicted an end to the recession in March. The data seem to be proving him right.
Not everyone is convinced. Legendary hedge-fund manager Paul Tudor Jones says the S&P 500's 47% rally from March 9 lows is merely a bear-market rally:
Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets. We are not inclined to aggressively chase the market here. Many doubts remain about the sustainability of this recovery, most prominently the weakness of household income growth.
Jones' biggest fund, the $8.9 billion Tudor BVI, is up 10% this year. At last filing, Tudor's biggest positions were Financial Select SPDR (XLF), Semiconductor HOLDRs (SMH), and Progenics Pharma (PGNX).
My take on the market? Well, like I told you the other day, I think it's time to be cautious. I expect we'll see a pullback – 10% or so – at some point soon. But I don't think we're going back down to the lows of last spring. Not anytime soon, at least. So you can put me in the new bull market camp along with Sjuggerud. In fact, I told my readers to pile back in last November and we were buying throughout the trough. We were a tad early. But on the whole, it's worked out quite well. I think as long as the Fed is printing money like there's no tomorrow, stocks and commodities will continue to go up. And I think that's going to keep happening for a long time...
How can you make a lot of money in garbage? Make sure it's nuclear garbage. The margins for storing radioactive material are the highest in waste management – typically about 45%. The profits are high because few companies can get into the business, thanks to a very tough permitting process: Nobody wants this stuff in their backyard.
In our latest issue of Inside Strategist, we found a small-cap stock whose insiders have been buying for months. Want to know why? The company is poised to receive a key new permit for handling nuclear waste. As soon as the permit goes through (yes... we can tell you the scheduled date), we believe the company will announce a large new contract with a major nuclear user. We expect to double our money this year. Judging from their buying, the company's insiders do, too. If you're not subscribing to Inside Strategist, you're missing our weekly analysis of the best opportunities in the market – for less than $4 per issue. To sign up, click here.
New highs: Vanguard Short-Term Tax Exempt (VWSTX), Eldorado Gold (EGO).
In the mailbag... a reader takes a shot at an easy (and large) target: my ego. We promise to read whatever you send us: feedback@stansberryresearch.com.
"You have always had an ego bordering on the absurd, but recently it has gone parabolic. Just last week, you were teasing your readers with the trials and tribulations of being rich, now you're starting off the digest with 'the secret to being a great trader is...' Grow up! So what you are rich. Get over yourself. So what you did well in your newsletter, that doesn't make you a 'great' trader. Great traders are humble in my experience. Socrates said his only wisdom is that he knows he knows nothing. You know you know everything, which makes you a douche bag." – Paid-up subscriber William Fitzpatrick
Porter comment: Recognizing the opportunity in the options market last fall and having the guts to take advantage of it by launching Put Strategy Report was one of the best decisions of my entire career. There's no doubt it was a brilliant move. We made money on 19 of the 20 puts I recommended selling. Our average gain was more than 50%. Included in this track record were several 100%-plus gains. In most of these situations, the puts we sold were priced as though the underlying stocks would go to less than zero. The market was completely irrational. We took advantage of it – when very few other people had the guts to make even the most obvious trades. I know the readers who profited think it was great trading. And if that makes me a "douche bag" in your book, so what?
"After being floored by the idiocy of Colleen's comments and Porter's astute response, I had to go back and read it again... I couldn't believe that someone could be this ignorant while having such a high regard of themselves. I still kept wondering if it is truly possible that she can be for real... maybe this was someone using her name maliciously... Just a couple quick googles and a picture starts to come together... Colleen and her company doing some redevelopment project in TX in 2006 and then going back for more 'assistance' from gov't in 2007 to complete project... Colleen purchasing a Turnberry condo in 2008 – falling knives anyone? I still get a kick out of her claim: 'There are many, many, many honorable people out there like me trying to meet their obligations who are getting virtually no help from anyone.' Keep up the good work and try not to slash your wrists (or die from laughter) reading letters from the detractors waiting for daddy government to save them." – Paid-up subscriber John Grovom
Porter comment: Out of all of the e-mails we've ever received, Colleen's might be the most memorable. We all know honorable people don't renege on their debts. Period. And honorable people don't ask for government handouts either. Beyond those bad ideas, you can see Colleen honestly believes other people have an obligation to help her out of her jam: "getting virtually no help from anyone..."
I don't mean to pick on Colleen personally – I'm sure she's a nice person. But where did she get these horrible ideas? I'm sure she's not alone in her view, either. How did this overbearing sense of entitlement become part of the American culture? How did a nation filled with brave, free, and independent people become home to so many pitiful, dependent cowards? What happened?
"I wish Coleen had the example of a father like mine. He is a toolmaker from Germany who immigrated to America. He started his own company, not through credit lines or loans from friends, but through his savings and a lot of sweat equity. He always ran the business conservatively never borrowing what could not be paid back. As his sons took over the business those values and principles have remained. We may not be high-flying business owners and we may not be luxuriously wealthy but we feel very successful in our manufacturing enterprise. I am very thankful to my father for the values he instilled in us. Obtaining credit is a privilege and it is my responsibility to not borrow out of my means whether it is personally or for our business. I really do feel sorry for the victims of this economy but most of all because they see themselves as victims.
"Our revenues are down 30% from last year yet we are not even close to being in jeopardy for any debt payments we need to make. But we did make decisions on our financing needs so that when things get tough we can still meet our financial obligations. Our responsibility is to react to what is happening around us and structure the company so we still make a profit. My hope is that Colleen and anyone else who sees themselves as a victim will find the many people out there like my dad and follow their example." – Paid-up subscriber Peter
Regards,
Porter Stansberry
Baltimore, Maryland
August 7, 2009