Why We're Happy to Lag the S&P 500
An update on Stansberry Portfolio Solutions... How are we doing so far?... Why we're happy to lag the S&P 500... Our best ideas are outperforming... This is even more important than finding great investments...
In today's Digest, we take a break from our warnings about the credit cycle...
And revisit one of the few legitimate secrets of investment success.
But first, indulge us for a moment. We'd like to take a second to update you on the performance of our new Stansberry Portfolio Solutions product.
As regular Digest readers may recall, we launched this service back in February. And while it's still early, our portfolios are off to an excellent start...
Through its first three months, The Capital Portfolio – our most basic portfolio – was up 5.2%, on pace for a 21.2% annual return. The Income Portfolio – our second-tier portfolio designed to produce income – was up 3.4%, on pace for a 13.9% annual return. And The Total Portfolio – our most complete and diversified portfolio – was up 4.9%, on pace for a 20.1% annual return.
Over the same period, the benchmark S&P 500 Index was up 5.3%. That's on pace for a 21.8% annual return.
Now, you may be wondering what's so impressive about this feat...
After all, none of our portfolios are outperforming the S&P 500 over the first three months.
But as we've explained, central banks have focused much of their buying on large-cap equities. This has wildly inflated the values of market-cap-weighted indexes like the S&P 500. And these same stocks are likely to suffer the worst declines when the "music" finally stops.
Again, it's still early, but our returns are impressive if you consider that our strategies avoid many of the stocks the central banks are driving higher.
The 4.9% return of our top-tier Total Portfolio is particularly noteworthy... It's "hedged" not only with gold and cash positions, but also with a significant weighting – currently about 10% – in short positions.
As we've discussed, shorting stocks successfully is hard...
We maintain a short portfolio as insurance... expecting to break even or just a little better over the long term. We don't short stocks to earn big returns... And we certainly don't expect our shorts to do well during strong bull market rallies like we've seen since last November's presidential election.
But we're happy to pay this small "tax" today to protect our portfolio from the risk of a severe bear market.
And yet, despite large cash-like positions and significant short sells, The Total Portfolio is trailing the S&P 500 by a mere 40 basis points...
How is that possible?
How were we able to nearly match this "bubbly" index while minimizing our potential losses?
The answer will sound familiar to longtime readers...
First, The Total Portfolio is built around a "core" of our favorite high-quality, capital-efficient stocks. These are companies we believe are nearly certain to outperform the market as a whole, regardless of macroeconomic conditions.
Out of fairness to Stansberry Portfolio Solutions subscribers, we can't name them all here. But rest assured, if you're a longtime Digest reader – or a subscriber to our flagship Stansberry's Investment Advisory – you're familiar with most of these names (and likely own several of them).
As you can see in the chart below, these stocks have dramatically outperformed the market over the past three months. The six best-performing stocks among our "core" recommendations were up an incredible 21.7% over this time. That's nearly 145% annualized...
Meanwhile, despite the ongoing bull market, the market is finally waking up to several of Porter's longstanding short themes based around the credit-default cycle.
As you can see in the following chart, the subprime autos, failing retailers, and other troubled sectors that we've shorted have plunged. The six best-performing shorts in The Total Portfolio have returned 14.7% over the past three months, or more than 44% annualized...
Now, to be clear, we haven't held all these short positions since inception. Several were added to the portfolio over the past few months as we've become more cautious, so we haven't captured these total returns to date.
But these two charts illustrate how just well our best themes have been performing. We've been producing great recommendations on both sides of the market.
Of course, we don't bring this up simply to toot our own horn...
It's also to remind you of a critical lesson.
Choosing great investments is important. But what we've learned from years and years of working with investors is that asset allocation – how much capital you put into each investment and into each type of investment – is far more important to your actual results.
In this case, nearly all our returns to date have come from our core positions in these high-quality stocks.
This allows us to hold large positions in cash and cash-like investments – as well as positions in precious metals and "special situations" that are relatively uncorrelated to the broad market – without sacrificing our returns during the ongoing rally.
Meanwhile, our shorts – which, again, make up about 10% of The Total Portfolio – have done much better than we'd typically expect during an ongoing bull market. But the real value of these positions won't be apparent until the market declines.
In short, The Total Portfolio has performed exactly as we hoped during the late stages of this long bull market. We're continuing to profit from the rally, while protecting ourselves from the inevitable decline... And we expect to do far better when that moment finally arrives.
But the real magic of this portfolio isn't just the investments it holds... it's how much of each of these investments it holds.
If your returns are lacking, poor asset allocation is likely why.
The trouble, of course, is this...
Building a properly diversified, hedged portfolio is tricky. It requires a lot of discipline. And frankly, it's a lot of work.
You can, of course, pay someone to do it for you. We're happy to recommend Stansberry Asset Management as an option for people with at least $500,000 to invest, but there are plenty of investment advisers out there for you to consider.
Or like most of our readers, you can subscribe to our newsletters and build your own portfolio. But again, this takes work and discipline. And the reality is, many folks never succeed on their own.
Of course, this is exactly why we developed Stansberry Portfolio Solutions in the first place. If you're still struggling to put it all together, why not make this the year you finally "get there"? To learn more about Stansberry Portfolio Solutions, call our Director of Sales Michael Cottet at (888) 863-9356 between the hours of 9 a.m. and 5 p.m. Eastern time, Monday through Friday.
New 52-week highs (as of 5/4/17): American Financial (AFG), AMETEK (AME), Quest Diagnostics (DGX), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI Italy Capped Fund (EWI), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), Alphabet (GOOGL), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), McDonald's (MCD), 3M (MMM), Sanofi (SNY), Stanley Black & Decker (SWK), U.S. Concrete (USCR), and short position in Hertz Global (HTZ).
In today's mailbag, loads of praise for the latest from P.J. O'Rourke. Do you agree? Let us know at feedback@stansberryresearch.com.
"Well, I have to give old P.J. O'ROURKE kudos for nailing the Consumer Trends Among the 'Grumpies.' They are me and this evening I was particularly grumpy but I don't remember why. P.J. brought a smile to my lips and at the moment I am no longer grumpy. But don't worry, that won't last. Out of curiosity, what are the demographics of Alliance Members?" – Paid-up "long, long time Alliance Grumpie" Scott M.
"As an Alliance member from the get-go, I've been amazed at all the new & diverse projects Stansberry Research continually conjures up. Some are keepers and some get culled, such is the fate of serial innovators. But I must say, Porter, you scored an absolute coup when you signed P.J. O'Rourke to the roster. Witty and uplifting o'course, and what justifies inclusion in an investment publishing house's stable is his bulls-eye insight into real life situations, bringing it all home. Please, do not ever lose the services of this man... or I will become (even more) grumpy! P.S. 'Perjorative Term' is, o'course, an attempt at insult. I'd propose that a 'PJO'R Term' enter the new lexicon as any intended compliment directed at Grumpies... but Grumpies hate 'the new lexicon.' – Paid-up Stansberry Alliance member D.M.
"Dear PJ. I buy all things analog -- Dishwasher and Dryer included. I drive a 10 year old Volvo that makes perfect sense and even has a cassette tape deck. I'm not moving to paying things with my iPhone, I'm not moving to change anything. I may be younger than you but as a Tweener (born in the 60's and the Baby Boom ended in '58 not '64) I'm a Grumpie also." – Paid-up subscriber Craig R.
"For P.J. O'Rourke... I need to replace a washer and dryer soon. I am going with Speed Queen models. No IOT, just knobs and dials. They are tested to a standard of eight loads of laundry a week for 52 weeks times 25 years, or 10,400 loads without a failure. Built in the U.S.A. Check it out." – Paid-up subscriber Jack McLean
Regards,
Justin Brill
Baltimore, Maryland
May 5, 2017
P.S. Porter is on the road today. He asked us to pass along this note...
Today, I'm traveling to The Atlas 400 annual meeting in New York. It's the best meeting I attend every year – absolutely the most interesting, knowledgeable, and successful folks I get to interact with closely each year.
But... a surprise as I got on the train this morning... For the first time in my entire career, the first-class car to New York is completely sold out.
These tickets are typically $300 more than the exact same seat in a different car. Nobody in first class gets there faster. There's no security line you get to skip. The only benefit is usually there's plenty of room to spread out. But not today!
Sign of the top? Consumer credit is collapsing, but the D.C. and New York fat cats are fatter than ever before.