The Free and Simple Way to Completely De-risk Your Portfolio

One of the most elegant concepts in all of finance... The free and simple way to completely de-risk your portfolio... How to avoid the usual troubles of 'hedging'... One question you must ask before you buy another stock...

In today's Friday Digest... we get back to our roots...

That is, rather than focusing on something esoteric and difficult (like building a portfolio of put options to hedge your equity holdings through a credit cycle), I (Porter) am going to show you something beautifully intuitive.

This is truly one of the most elegant concepts I've ever learned in finance. And I know that once you think about it for just a minute, the lightbulb will go off in your head and you'll wonder why you never thought of this before.

But before we get to the details... as usual... our standard warning and disclaimers apply...

There is no such thing as teaching. There is only learning.

Teachers, don't be offended. We don't mean this literally. We're referencing an old Confucian ideal: When the student is ready, the teacher will appear. We know from years of experience that giving investors even a foolproof, can't-miss investment idea – like buying chocolatier Hershey's (HSY) or fast-food icon McDonald's (MCD) – won't have any effect on them whatsoever unless their minds are open. So please open your mind to this concept.

There's a simple (and virtually free) way to completely de-risk your portfolio from market volatility. This strategy doesn't involve options. It isn't risky. And it can completely change your investing life forever. Wouldn't you rather own stocks in a way that's 100% devoid of any market risk?

As you'll see, that's what this strategy does. It can make your investments completely impervious to the stock market, while still delivering market-beating results and reasonable amounts of income.

If you've never made much money in stocks before, please read today's Digest carefully. It's free, as always. And it's one of the most surprising ones I've ever written.

For investors who are concerned about the economy, worried about our runaway debts and deficits, or simply concerned about the relatively high value of the stock market... this strategy can help you earn market-beating returns, without any market risk whatsoever.

Let's start by looking at your existing portfolio...

Your portfolio has probably done great this month. November was by far the best month in the stock market this year. The S&P 500 (an index of America's biggest publicly traded companies) was up 5% for the month – or about 63% annualized. And small caps soared even more, at something close to a 200% annualized rate.

So if you happened to own any smaller, riskier stocks, you probably saw huge gains. In my Investment Advisory model portfolio, we had two stocks suddenly take off – Fannie Mae (FNMA) and Freddie Mac (FMCC). They shot up from around $2 to almost $5.

The real test of any portfolio strategy isn't the "lucky" trade. It's how your capital grows as a whole...

As you might recall, there was a lot of uncertainty about where the market would go based on whether Trump or Hillary won the election. With Trump, we expected that higher economic growth, tax cuts, and more deficit spending would, at least in the short term, boost the stock market.

With Hillary, we thought the exact opposite was likely – higher taxes and more regulations would lead to even slower rates of growth. But we had no idea who would win the election, nor could we be certain what the market's reaction would be.

Therefore, going into the night of the election, our portfolio was hedged...

Ten of our investment positions were designed to go up if the market as a whole went down. Those 10 recommendations include all of our short-sell recommendations (which are obviously negatively correlated to the market) and the PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ), NovaGold (NG), and the Central Fund of Canada (CEF).

When Trump's victory first became apparent, the Dow Jones Industrial Average fell about 1,000 points. As that happened, our short positions and these hedges soared, reducing the losses in our overall portfolio by 50%. But then, as you know, the markets reversed. Stocks soared from the election virtually until the end of the month. By then, our hedges were down an average of 10%.

We've "paid" a small tax for the protection that our portfolio has enjoyed...

Even though, as it turned out, we didn't need the insurance we thought we might. I put "paid" in quotes because, although we've stopped out of a few of our short-sell recommendations, most of the positions remain in the black and in our portfolio. And when you look at our overall results, we haven't paid any taxes at all.

As I mentioned, the S&P 500 has surged about 5% since we last published, including a 4% move in the 12 trading sessions since the election. And guess what? Our portfolio is also up 5% (about 63% annualized) since our last publication. That's our entire portfolio, including our hedges.

How's that possible?

How are we able to minimize losses without reducing our gains?

First, we start with a very solid base of "capital efficient" stocks. These are companies we believe are overwhelmingly likely to outperform the market as a whole, regardless of macroeconomic conditions.

And indeed, our capital-efficient stocks are up around 5% since our last issue – in line with the market. Our core capital-efficient portfolio – our insurance holdings – however, did much better.

Bill Berkley, founder of longtime portfolio holding W.R. Berkley (WRB), recently told insurance ratings agency A.M. Best that he feels the Trump administration will be "positive for the industry." The market agrees. Our insurance holdings are up 9% since the election.

(Editor's note: Porter has been "pounding the table" on insurance stocks since 2012 and they've performed well. How many subscribers have listened and taken advantage of these low-risk, high-performing stocks? Please let us know at feedback@stansberryresearch.com.)

We also have some positions in our portfolio that are designed to "take off" if the market roars ahead...

These speculations are up more than 30% on average, driven by the big gains I mentioned in Fannie and Freddie.

Here's an interesting question for you to consider: Would you rather make 5% in a month by taking half of the market's risk or would you rather take a full measure of the market's risk and earn the same amount?

I believe most investors would choose less risk. That's definitely true about the kind of investments I seek to make with my own money. I greatly prefer zero risk because it's awfully hard not to make money if you can completely avoid losing any.

The trouble, of course, is this...

Building a hedged portfolio with lots of different positions is tricky. It requires a lot of discipline. Frankly, it's a lot of work.

You can, of course, pay someone to do it for you. We're happy to mention Stansberry Asset Management as an option for people with at least $500,000 to invest, but plenty of investment advisers are out there for you to consider.

Or you can subscribe to a newsletter – mine, or others – and build your own. Most investors, however, simply refuse to short stocks, no matter what.

If that's true for you, then I believe it's unlikely you'll see good results from your efforts to hedge your portfolio. So if you've never shorted a stock before... pick yourself up, put on your big-boy pants, and give it a try. Just try shorting one share at first to see what happens. Over time, you'll get more comfortable with it. Then, you can make it a bigger part of your strategy. Because you have to be willing to short a stock to do something even better than building a hedged portfolio.

What if there was an even better way to hedge risk?

What if there were a way to completely de-risk your portfolio? And what if this strategy were far easier than building an entire portfolio?

Please understand... I'm very proud of the work we've done on behalf of our subscribers. Our friend and colleague Dr. Richard Smith's back-testing (part of TradeStops.com) shows that for more than 10 years, our model portfolio has the best Sharpe ratio of any newsletter he has studied. (That means we've delivered the highest returns per unit of risk.) That's exactly what we seek to provide for investors. But I know building and managing these portfolios is hard.

And I know most of our subscribers won't do it. But what if there were an even better way?

There is.

Before I tell you about it, here's one more question. As you probably know, crude oil is up 40% this year. And as I hope you know, we've been bullish on America's leading onshore ("fracking") energy companies for several years. We believe as they build out America's best new oilfields (the Eagle Ford, Permian, Bakken, and Niobrara shales), their costs will continue to fall and they'll be an extremely competitive source of energy for the global markets.

Assuming you share our view, you could have simply bought a few of the companies with the highest-caliber assets. These stocks are all up big this year because of the rise in crude prices. Examples include EOG Resources (EOG, up 46%), Pioneer Natural Resources (PXD, up 48%), and Concho Resources (CXO, up 53%). Or to minimize single-stock risk, you could have simply bought the exchange-traded fund of the group – the VanEck Vectors Unconventional Oil and Gas Fund (FRAK, up 41%).

But however you positioned yourself, you would have been exposed to serious amounts of market and commodity risk. If the market falls, these stocks will probably fall more than the market, and if oil were to head back below $30, these stocks would get crushed. So if you're going to make these investments, you would have to find other ways to also hedge your portfolio against these risks. Or... you could do something even better.

Oilfields are not created equally...

While the frackers with high-quality assets have continued to ramp up production, many other oil firms have much lower-quality assets that rely on very expensive production methods. Examples include Suncor (oil sands) and Denbury Resources (which uses carbon gas to revive old oilfields). By "pairing" the best assets against the worst, investors can create a single hedged position that's impervious to market volatility.

We've recommended a few of these "pairs trades" over the years, including going long EOG Resources and short Suncor. It seems obvious and intuitive to us that a company producing lots of oil for something around $20 a barrel (EOG) is going to outperform a company that has to dig up oil sands and then boil them to produce a very low-quality crude at a cost of something around $80 per barrel (Suncor).

Buying EOG and hedging the position by shorting Suncor means that we're neither long nor short the stock market. We're 100% hedged. And we're neither long nor short the price of oil. We're 100% hedged. What we've done is make one specific bet – that in almost any market for oil, EOG will greatly outperform Suncor. And that's a bet we're willing to make with virtually 100% certainty.

But... how do these bets perform?

That depends on your ability to find opportunities like these where there are such clear and compelling differences in the quality of two businesses in the same industry. As I mentioned, so far this year, EOG is up 46%. Suncor had been flat for the entire year, until oil's recent rally. It's currently up 25%. We've earned the difference: 21%.

The Dow is only up 9% this year. The S&P 500 is only up 7%. Thus, this simple strategy has more than doubled the return of the stock market, without taking any stock market risk.

Does this work over time?

Yes. It's not just rising oil prices that make this trade work. Over the last five years, EOG is up 100%. Suncor is up 10%. Your net return: 90%. Stocks as a whole haven't done nearly that well. The Dow is up 57% and the S&P is up 74%. Over the last 10 years, EOG is up 200% and Suncor is down 13%. Your net return is 213%. The Dow is up 52% and so is the S&P 500.

And by the way, I didn't "cherry-pick" which stock to measure. I used EOG because it's the company we've recommended and it's widely known to be the highest-quality U.S. fracker. If I wanted to cherry-pick, I could have used Pioneer, which is up 355% over the past decade, making your net return (short Suncor) an incredible 368% in only 10 years.

And that's without any market or commodity risk.

The next time you're considering buying a stock, just ask yourself: What's the opposite of this business in terms of quality, growth, margins, and capital efficiency? If there's a clear way to hedge your position, do it. You can still beat the market while avoiding 100% of the market's volatility.

Finally... a holiday warning.

I know that most of you have seen the men's razor I created with help from New York's leading industrial-design firm, Pensa. What you might not know is that our new razor just won the most prestigious industrial-design award in the country. OneBlade was awarded a gold medal by the Industrial Design Society of America.

That recognition led to our new razor being included in the permanent collection of the Henry Ford Museum. We're right next to the Gramovox floating record player. No kidding. We were the only gold medal awarded this year in the personal-accessories category.

My bet is that you either think this razor thing is a complete lark and a waste of time... or you know that I've built a truly revolutionary tool, but you figure that you'll get around to trying it eventually. That's fine – we don't expect to get everyone's shaving business, only the people who are genuinely interested in the world's best shave.

But if you want to get one for Christmas, I urge you to order it now. We've already sold out of our initial production run. Even though we've made as many additional razors as possible, we only have about 3,000 in stock.

They won't last. How do I know? Well, even though the IDSA award is the most prestigious award we could have won, there's little doubt that being named to Gwyneth Paltrow's top Christmas gifts list and being featured on her lifestyle website Goop is going to move a lot more units. Avoid disappointment. Buy a OneBlade before everyone in Hollywood tries to. Get yours right here.

New 52-week highs (as of 12/1/16): China Vanke (2202.HK), American Financial (AFG), Boeing (BA), Berkshire Hathaway (BRK-B), ProShares Ultra Oil and Gas Fund (DIG), EOG Resources (EOG), BlackRock Floating Rate Income Strategies Fund (FRA), short position in Hertz Global (HTZ), Lindsay (LNN), PNC Financial Warrants (PNC-WT), Ritchie Bros. Auctioneers (RBA), VanEck Vectors Russia Fund (RSX), and W.R. Berkley (WRB).

In today's mailbag, one subscriber sends more praise for Porter's "Big Trade" Digest series, while another berates us for inviting her to surf. Clearly, we can't please everyone. How have we disappointed you? Let us know at feedback@stansberryresearch.com.

"RE: Porter's recent educational series… Even with a MBA or PhD degree in finance, we were miseducated with useless information... I've learned a lot from your newsletter Investment Advisory, and I've also learned how to trade options long with Stansberry Alpha and short with Stansberry's Big Trade. For fixed income, I bought bonds per your recommendations. We also learnt how to invest in gold & silver. We've prepared for investment long or short for the coming credit cycle and thank you so much for the great education!" – Paid-up subscriber Catherine W.

"It really irritates me when I receive invitations to surf, sail, go to expensive resorts with Stansberry subscribers. I am a 92-year-old widow trying to hang on to my investments and not doing as well as I had expected as a subscriber. Am I the only non-billionaire on your list?" – Paid-up subscriber Barbara M.

Porter comment: Apologies, Barbara. We certainly don't want to offend anyone. We take a lot of pride in serving investors of all levels. But, I gotta ask... would you rather take investment advice from a wealthy guy or a poor one?

Regards,

Porter Stansberry

Baltimore, Maryland

December 2, 2016