Your last chance to learn about Porter's favorite trading strategy...

 

Clearly, if anything has ever disappointed investors in an asset class or if it's not time to buy right now, then learning about the asset class is just a big waste of time... Oh, friends. Handing out fish is a lot easier than handing someone a rod and some bait. Why do I persist? I don't know. Let me know how I've let you down here: feedback@stansberryresearch.com.

 

 "I follow your advice quite seriously because I believe you are very smart and have the best interest of your subscribers at heart. From 2010 to 2012, I began buying bonds with your True Income service. Believe I bought 5 bonds putting about $10k in each investment.

 

"But [then-editor] Mike Williams... recommended a shipping company bond and in less than a few months the company went quickly and completely bankrupt and I lost almost 95% of my investment. He kept saying there was no major problem and hold on. I decided to not trust your bond guru then and stopped any further bond investing as I found it very risky in my case with his utter incompetence evaluating companies. Bond buying is only as good as the competence of your analyst for your subscribers." – Paid-up subscriber Richard H.

 

Porter comment: I could write an entire book about my experience as the publisher of True Income... No other product I've ever published produced better investment results when considered on a risk-adjusted basis. And yet... we found it impossible to sell the newsletter. Even our customers who did subscribe simply wouldn't follow the advice. Instead of creating a portfolio of five to 10 bonds, many readers would just "cherry-pick" the highest-yielding bond – just one. Can you guess what happened next?

 

Meanwhile... Mike Williams was producing outstanding results, overall. During the worst period ever in the corporate bond market (2008-2009) Mike produced outstanding results. From March 1, 2008, through the end of 2009, True Income recommended buying 22 separate bonds. We lost money on two. The annualized return during this period was 44.8%. In the 2010 annual Report Card that followed this performance, I wrote: "I doubt there was another bond investor in the world that did this well." I awarded Mike an A+.

 

In the 2011 Report Card (which covered the big bull market from March 2009-2010), Mike did even better, trouncing the S&P 500, earning annualized returns of 44%. He was awarded an A++ for crushing stocks in a bull market with nearly flawless recommendations.

 

And what about in the Report Card for 2012, following his disastrous recommendation of General Maritime? During the period, Mike made 19 recommendations, including five losing positions. Clearly, this was his worst performance. His annualized return (including the total loss at General Maritime) was 11.2%. If you'd bought the S&P 500 instead of his bond recommendations, you would have only made 5% during the same period. I gave Mike another "A" for this performance: He more than doubled the return of the stock market, while only buying bonds.

 

And yet... despite these great results... many of our customers, like Richard H., concluded they would never buy bonds again because Mike wasn't a good analyst. How could anyone draw that conclusion?

 

Let me explain what happened: General Maritime was a risky credit in a sector (shipping) that was collapsing. As such, it was offering a very high yield – more than 12%. This cash yield increased as the price of the bond fell.

 

A lot of our subscribers made a terrible mistake: They scanned the back page (where we publish the model portfolio) and simply bought the bond with the highest cash yield. Instead of taking a portfolio approach, they only bought one bond – the riskiest one. And they got badly hurt. That pain of those losses, instead of reinforcing the idea of a portfolio approach, simply taught them that bonds were terrible investments and that Mike Williams couldn't be trusted.

 

It's like my friend Bill Bonner says: "Rational investors are better investors; too bad I've never met one."

 

 "I started dabbling in bonds a few years ago with True Income [and] S&A guiding me. Instead of opening multiple positions, I opened one position that was appropriately sized. However, when the yield on that position started creeping up, I added new money to that position since it had a better yield than any of the other positions on the list.

 

"When the (former) S&A advisor said we should keep holding, I kept holding, and when the yield crept up even more, I couldn't resist, and bought more. General Maritime turned out to be a total loss and my personal account lost 7.5% of its value, and my wife's IRA, which she trusted me to manage, lost about 10% of its value." – Paid-up subscriber Alex W.

 

Porter comment: That's why, just as with stocks, you've got to make sure to keep your position sizes reasonably small and, just as importantly, you've got to spread the risks you're taking across a portfolio of bonds. That's absolutely critical when you're buying the kind of high-yield (and high-risk) bonds that we covered in True Income. And it's simply required when, as Mike Williams did, you don't use trailing-stop losses. A single big loss, on the other hand, doesn't prove that you can't make great returns in bonds. And it doesn't mean that Mike Williams did a poor job for our subscribers.

 

 "I enjoy your work and greatly respect your values and expertise. Not only do you carefully examine the pros and cons of your investments, you regularly caution your subscribers, paying much attention to the possible downside. With this in mind, I read with much interest your recent work on corporate bonds, and was motivated to relate my own experiences.

 

"Back in the early '80s I bought my first corporate bond. RJR Nabisco was in the midst of a corporate takeover and its zero coupon bonds were selling at a discount. I purchased a $5,000 bond for $2,000, which represented a significant discount. When it matured a few years later, I was paid in full and felt like a very savvy investor. Fast forward to 2007-2008. GM and Ford both had bonds paying over 8%. As the yields increased I bought more of each, expecting to make a healthy profit. Needless to say I did not anticipate our government breaking the law, forcing their own kind of bankruptcy, and illegally distributing most of the assets to the unions, thumbing their nose on the bondholders. When the smoke cleared I lost well over 50% of my investment. Thanks for your advice... but even seemingly safe investments can "self destruct." – Paid-up subscriber Ken Peyser

 

Porter comment: Investors who chase cash yield in bonds get killed, just as traders who chase rich options premiums eventually get killed. The key to bond analysis is knowing the collateral. GM didn't have beans for collateral. The company spent nearly 20 years operating at a capital deficit, borrowing money to fund its pensions and cover interest payments.

 

So here's the flipside to your story. I personally made a nice return buying GM bonds in bankruptcy for about $0.15 on the dollar. I'd studied the company for four years. I knew the collateral. And I knew the bonds I bought were worth something between $0.30 and $0.40. I made sure I didn't pay more than 50% of my appraised value. About a year later, I sold my bonds for more than $0.30 on the dollar – doubling my money. I would have made a lot more if the government had treated bondholders fairly. But I made sure when I bought that I wasn't going to get hurt either way. Again, the key is understanding the collateral. It's a whole different process than buying a stock.

 

 "I'm really getting into the research of insurance stocks. Looking through WRB's annual report, I see they have almost zero exposure to stocks in their investment portfolio! I believe everybody should have some of their investment capital in properly selected stocks, but they are almost wholly invested in fixed income. Since they could grow their float (and profits) at a higher rate if they had some allocation to stocks, why do you still feel so favorable toward the stock when I believe they are handicapping their future returns by not having more of their float invested in equities. By the way, they aren't just nervous about the current environment for stocks – looking back through past annual reports they've never kept much of their float invested in common equities." – Paid-up subscriber Ryan M.

 

Porter comment: Well, since the year 2000, the stock has gone from less than $5 to nearly $50. Over an even longer term (1985-today), the company has outpaced the S&P 500 by about 5,000%. If it can produce these results without taking the risk of buying stocks, that's fine by me. Could it, in theory, make more money by holding stocks as well as bonds in its portfolio? Maybe. But clearly, the firm's culture is entirely risk-adverse. The company earns its living as an underwriter. And its business performs incredibly well. I'm not going to recommend it mess around with the formula.

 

 "I have been wanting to write to you for over a year now... In 2011, I was more than $20,000 in debt, had maybe $800 in savings and no future plan to help my retirement other than watch my IRA go up and down with the market. After subscribing to several of your publications, I realized that I was in control of my finances and no one else...

 

"So, I opened my own brokerage account with Trade King and started putting first $50 a week, then later $80 a week into my account. Over the past three years I have purchased some of your recommendations, such as Microsoft, Johnson and Johnson, and Sysco.

 

"Since 2011, I have gone from a savings of $800 to a brokerage account of $12,000. My follow-up this morning shows an unrealized gain of 24% on my holdings in my account. I do not use Trade Stops, but I follow the closing price of my holdings each day and I have a written note of when to stop out on my positions. I have stopped out once in three years.

 

"I am still in debt, though less, and I am working with Vanguard to reposition some of my IRA. I am also now taking a much more active role in my financial future. I don't think that I will retire wealthy, but whatever level it will be, will be much better thanks to your continual information and encouragement. I truly appreciate all that you do for us who chose to make a change and take charge. Keep up the great work and encouragement. It means more to us than we can express to you." – Paid-up subscriber Tim Bradshaw

 

Porter comment: Everything in life changes the moment you realize no one else is going to do it for you. Whether that means learning to save and invest, improve your career, find the right spouse, or improve your health and fitness... you're going to be in the same place (or a little worse) next year and the year after and the year after... until you decide to change things. No one else is responsible. It's up to you.

 

Regards,
 

Sean Goldsmith and Porter Stansberry