A big dividend boost...

A trader's rebuttal to Porter's bearish Digest…

Porter shocked many subscribers last Friday when he predicted a stock-market crash in the near future.

In today's Digest Premium, two of our expert traders explain why Porter could be right, but they're not selling just yet...

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

A big dividend boost... Herbalife hits a new high... Ackman is still short... The only way to make sense of the government... Volatility is spiking, but still too low... Porter answers one of the best questions we've ever received...

 Dr. David "Doc" Eifrig originally recommended technology conglomerate 3M (MMM) in the November 2011 issue of his Retirement Millionaire newsletter. At the time, shares of 3M were down 27% from their highs in the upper-$90 range and were trading for a little more than 11 times earnings.

"[3M] is a well-diversified technology company... It makes abrasives, adhesives, filters, drug delivery systems, cleaning products, and even the granules for roofing shingles," Doc wrote in his issue. "This broad array of products results from 3M's long-standing philosophy that nourishes new ideas: Management encourages cross-division sharing and 'bootlegging' of each other's ideas to create new products."

 He continued:

Plus, the company had a solid track record of raising its dividend...

 Since Doc made the recommendation, 3M has increased its dividend from $0.55 per share to $0.635 per share.

Yesterday, 3M announced it would raise its quarterly dividend yet again – a 35% increase to $0.855 per share.

The company also said earnings next year will be between $7.30 and $7.55 per share. Analysts expected 2014 earnings of $7.40 per share.

Finally, 3M increased its range for share buybacks to between $17 billion and $22 billion from this year through 2017. That's up from $7.5 billion to $15 billion.

 The company's shares jumped nearly 3% today to more than $131. Retirement Millionaire readers are up 75% on the recommendation.

 Shares of nutraceutical company Herbalife hit an all-time high today, much to the chagrin of hedge-fund manager Bill Ackman.

The Herbalife saga is a long one. We'll briefly recap...

 Almost exactly a year ago… I (Sean Goldsmith) attended the event in New York City where Ackman announced he was shorting Herbalife because he thought it was a Ponzi scheme. He thought the stock was worth zero. I wrote about it in the December 20 and 21 Digest Premiums. (Premium subscribers can read those issues here and here.)

Shares cratered...

Then, other hedge-fund managers – big guns like George Soros, Dan Loeb, and Carl Icahn – bought Herbalife. They argued Ackman's claims were overstated. Shares recovered...

You can read a good summary of the action in the January 10 Digest.

 Yesterday, Herbalife announced a re-audit of three years of financial statements found no material changes... Shares are up nearly 10% over two days to a new all-time high.

Ackman recently reiterated his conviction in the Herbalife short, saying he'll take the bet "to the end of the Earth." Despite being down more than $500 million on his short position, Ackman is still staying the course...

"It is not the role of Herbalife's auditor to determine if the company is a pyramid scheme," Pershing Square, Ackman's hedge fund, said in a statement yesterday. "Rather, that determination depends on whether distributors earn more from recruiting new distributors than from retail sales to consumers who are not distributors."

 In yesterday's edition of his daily e-letter, Diary of a Rogue Economist, Agora founder Bill Bonner explained why a healthy dose of cynicism can help make sense of seemingly irrational decisions by the government...

If you enjoyed today's excerpt from Diary of a Rogue Economist, you can sign up to receive Bill's work every day, for free, here...

 The Volatility Index (the "VIX"), which we like to call the market's "fear gauge," is on the rise...

The VIX measures the prices people are willing to pay for options that protect the value of their stock holdings. That's why we call it the market's "fear index"... The higher the VIX, the more people will pay to insure their stocks... hence, the more scared they feel.

And the index has risen from below 13 on November 27 to 16.4 today (an increase of more than 25%). Still, at this level, the VIX indicates a large degree of complacency in today's market.

 During October's debt-ceiling debacle, the VIX jumped above 20. But even that is a far cry from the 80 reading we saw during the financial crisis of late 2008. The VIX also jumped above 45 in 2011, the last time the government was debating the debt ceiling.

Just take a look at this historical chart:

Remember the words of Warren Buffett: "Be fearful when others are greedy and greedy when others are fearful." According to the VIX, people are greedy today.

 One trader did manage to make a healthy profit on the VIX's recent jump...

On December 12, Bloomberg reported a trader bought $5.1 million of call options betting the VIX would jump to 22 by April. The trader paid $1.28 per contract. They're worth $1.40 today, making him a quick $480,000 profit this week.

 New 52-week highs (as of 12/16/13): Blackstone (BX), Energy Transfer Equity (ETE), Kohlberg Kravis Roberts (KKR), Targacept (TRGT), and ExxonMobil (XOM).

 In today's mailbag... Porter responds to one of the best questions we've ever received in the feedback queue. Send your comments to feedback@stansberryresearch.com.

 "Dear Porter... May I offer some thoughts about the bearish outlook in your December 13 issue? You say you plan to sell all stocks bar one, but keep gold bullion, foreign real estate, farmland, Miami property, and your own business. So you're going to keep things whose value, apart from bullion, cannot be easily assessed from day to day. How do you know that your real estate (for example) will not collapse in value (or maybe it has already?). If there is a stock market crash how do you know that forced selling won't spill over into real estate? The answer presumably is that it doesn't matter to you because you hold real estate for reasons other than to speculate upon its short-term price movements.

"So why are you speculating upon the short-term price movements of stocks? Is it because the fact that they are priced from day to day so clearly allows people to get caught up in the hopes and fears that come with seeing their portfolios rising or falling from day to day, and that you are getting caught up in the same way?

"Or are you covering your business risk by being able to say to your subscribers that, if a crash does come, there was always a debate within your advisory service between those who remained bullish and those didn't, so your subscribers cannot be too annoyed with you (and in my book that's an entirely legitimate covering of business risk!)

"The entire stock-market industry encourages people to watch short-term movements – and your essay is just one such example. Perhaps you think that any other take on the stock market might not sell your newsletters, but I wonder... and herein lies a possible business opportunity.

"Take my own family office experience as an example. We invested in stocks, real estate, and our own businesses. We looked at the investments in stocks completely differently from the way we looked at our investments elsewhere, and it took us quite a while (and quite some losses) before we figured out how completely wrong we were. I expect it took us so long because that realization flew in the face of everything that we were reading and hearing about the stock market.

"Of course the key to making investments is to decide first why you are making them. We invested in our businesses because such investments would earn us good incomes. We sold our businesses when we saw either that the market was changing to threaten our future income-earning capacity or when a purchaser came along and offered us several years of income immediately rather than later. We didn't care about the day-today 'value' of our investments, because quite simply there was no day-to-day market for them.

"Similarly, our investments in real estate were based upon security of income from the assets as opposed to the hope of capital gain. We sold those assets when such security had run its course for our purposes. Yes we made good gains, but they were icing on the cake.

"We bought and sold stocks because we hoped for capital gain – and we made a real mess of it. Our profits never outweighed our losses by enough to make the investment of our time worthwhile.

"Your bearish view looks logical to you because you are sitting on some good profits from several years back. But what about those subscribers who joined the trend more recently? Aren't you reinforcing the hope/fear cycle to their detriment?

"You may be right to be bearish (I happen to think you are), but actually we don't care because now any investment we may make in a stock ignores any reference to immediate loss or gain – we just want to be as reasonably sure as possible that the businesses will deliver a certain amount of income over several years and won't go bust.

"The business opportunity is to show your subscribers how they can fulfill their goals while still avoiding the pitfall of chasing after gains and panicking at losses. Brokers' statements don't help – many of our stock purchases show capital losses. If we followed accepted stock market wisdom we ought to sell these out and 'wait for a low' (assuming you see a low before it's too late). The statements ignore the flow of income we receive from month to month and the purpose of our investments (the worst scenario of which is to write down the cost over a period of years rather than to secure a capital gain).

"This means two things: First getting your subscribers to think about why they invest and secondly putting together some model portfolios that take those motives into account. This would bring an overall coherence to many of the views expressed in your individual newsletters.

"I am not sure that people want too much philosophy about this, either. Something that is completely practical in that it translates philosophy into actions and portfolios would attract far more interest." – Paid-up subscriber Matthew Quirk

Porter comment: I agree wholeheartedly with your argument. If you study and buy common stocks the same way you would a private business (or a real estate opportunity), you can avoid 95% of the mistakes that most people (including professionals) make investing. And you can achieve vastly superior results.

I've written about this private-investor approach many times in the past. (For example, read this essay.)

Rather than being at the mercy of the market, you can learn to take advantage of it. You wouldn't sell your house or private business just because someone offered you a stupid, low-ball price for it. Thinking about your stocks the same way can make you a much better investor. (Hang on, though... there's a very big "but" coming.)

The key to success with this kind of investing is to have a substantial amount of business judgment, a lot of discipline and emotional reserve, and plenty of experience valuing businesses.

You have to know your investments (and the people running them) better than anyone else in the market. You have to know exactly what they're really worth to other private investors. And you have to never, ever pay a single penny more than this liquidation value. Trouble is, none of these things is easy to do... and such opportunities only come along rarely.

As you noted… getting the experience required, developing great business judgment, and learning to ignore panic is usually expensive. People don't naturally run into burning buildings. Nor do they naturally gravitate toward buying stocks when everyone else is selling. That is, of course, the key to success with the kind of private-investor strategy you're suggesting.

Nevertheless, one of the things we're trying to do with our newsletters is help investors achieve this level of confidence. We'd love to get all of our readers to this point... the point where they actually look forward to a new bear market, so that they can buy higher-quality businesses. That's where I am personally as an investor. That's the reason I only hold one common stock right now – one that I'm never going to sell. That's the reason I was buying stocks hand over fist in 2008 and 2009. (I planned to hold these forever too... But then real estate got so incredibly cheap I just couldn't help myself...)

You have to overcome two big hurdles to reach this level.

First, few individual investors have the skills required to identify a truly great business. Study Warren Buffett's portfolio over the years. Follow his top 10 holdings. By 1980, he owned nothing he had owned in 1970. By 1990, he owned almost nothing he'd owned in 1980. It was only in the 1990s – after he'd been the world's best investor for 30 years – that he began to develop his "permanent" portfolio. It is difficult to acquire the business judgment necessary to understand which businesses are likely to have a nearly continuous period of growth.

Next... and this is even more difficult... you must have the emotional discipline to simply sit tight and hold. Are you really going to be able to sit through a 40% (or more) drawdown in a position that makes up 25% of your portfolio? That's tough for most people to handle. And it's impossible to survive if you don't know everything about what you own, if you don't really, really know what you're doing. I'd argue that 90% (or more) of individual investors will never reach this level of expertise. For most people, then, this style of investing will simply never work.

(This is a very important point... If you're going to have a very focused portfolio with a few big positions, it won't be enough to simply follow a newsletter. Trust me about this. Unless you personally know what you're doing and are truly confident about the things you own, fear will overwhelm you at exactly the wrong time.)

Finally, no matter how good you get at picking great investments, there's still a huge external risk. Unless you are a controlling shareholder, it is impossible to safeguard against the risk that the managers of your superb long-term investment aren't going to screw it up, either through negligence or avarice.

So... to answer your question about the various assets I own... the biggest difference between the one stock I own today and all of the other assets I'm willing to hold through what I believe will be a significant bear market in 2014 is that I fully control all of the other assets. It's up to me to see that they're well-managed and productive. That's what gives me the confidence to hold these assets.

As to the one stock I own… it is the leading company in its industry. It has tens of thousands of valuable clients and operates all over the world. It has a 100-year-plus track record of success. It is a very high-margin business with huge cash flows. And I bought it for about four times cash earnings. There's no way you could get me to sell this business. (By the way, because I own this stock personally, I can't discuss it publicly. Don't begrudge me one stock... I've recommended the sector several times in the past and all of the companies have done well.)

Again, I agree with you that the optimal way to invest is to simply buy the world's finest publicly owned companies when they're trading at an attractive price and hold them. That is what I do with my own money.

If this were a perfect world, that's all anyone would do with his money. Buying the best businesses and re-investing the dividends will earn you 14%-16% a year – on an unleveraged basis – over the long term. That's almost impossible to beat. It is impossible to beat on a risk-adjusted basis.

The trouble, though, is being able to execute such an investment strategy. If it were easy, everyone would be rich.

What actually happens to most people who attempt this kind of investing is disaster: Rather than buy and hold, they practice buy and fold. They end up sticking with the program until there's a horrible bear market. At that point, they panic and sell at exactly the wrong time.

For the majority of individual investors, following a program like the kind we offer – diversified investing using simple rules to protect against losses (like trailing-stop losses and reasonable position sizes) can produce very satisfactory results with few (or even no) annual losses.

Our strategy will always work... whether you have great business judgment or not, whether you have emotional discipline or not, and whether any given management team screws up or not. All you have to do is follow our advice and our simple rules.

So while this program may not be perfectly optimal, it is almost guaranteed to achieve better results than subscribers would have achieved on their own.

I'd love to hear from folks who have tried "buy and hold" investing and found that it didn't work for them... I'd love to hear from folks who have tried our approach (diversified investing with trailing stop losses) and had success, for the first time ever, as an investor.

And I'd love to hear from folks who use our strategy... but also make some long-term investments that they set aside from their normal rules.

What works for you? Please let me know... I think this is an important discussion: feedback@stansberryresearch.com.

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland and Miami Beach, Florida
December 17, 2013

P.S. One more thing... even our analysts find that beating the trailing-stop loss strategies we endorse is nearly impossible. See this study that Dr. Richard Smith, founder of our corporate affiliate TradeStops, has done across various newsletters (not just ours).

In every case, rather than relying on the writer's judgment about when to sell, investors would have been better off simply following a 25% trailing stop loss. In some cases, the investment performance of the newsletter could have been doubled by following a simple mechanical when-to-sell rule (25% trailing stop loss) instead of following the analyst's advice on when to sell.

Which investment analyst came closest to matching the results he would have achieved using only Richard Smith's trailing stop loss exits? Yours truly. That's one of the reasons I've learned to trust my business judgment. Study your own results to see how you would have done with trailing stops instead of your own decisions to sell. To learn more about TradeStops, click here.

A trader's rebuttal to Porter's bearish Digest…

Editor's note: Today's Digest Premium comes from the December 17 DailyWealth Trader, co-edited by Amber Lee Mason and Brian Hunt.

 Porter believes that the Federal Reserve will reduce the amount of money it has been using to stimulate the economy, and that this "tapering" will prove disastrous for the market.

You can find his full argument in Friday's S&A Digest right here. Be warned: It's compelling. You might be ready to sell all your stocks by p. 3.

Here in DailyWealth Trader, we're going to let the market tell us what to do...

 First, we'll note that Porter makes many great points in his warning. Over the past few years, stocks have climbed and climbed without suffering a significant correction. It's unusual for the market to run so much higher without some "shakeouts." You could say the market is "due" for at least a 10%-20% correction.

Also, the market is getting more popular with mainstream investors. But it could get a LOT more popular... and prices could run MUCH higher from here. We can't know the future. Nobody can. But we can develop a common-sense plan for handling whatever comes our way...

 As we often say, the market is the judge, jury, and executioner of every trade. That's why we use predetermined stop prices on all our positions. If a stock we're following declines by a set amount, we exit the trade. If it doesn't... we can continue collecting profits.

That's the plan we've followed all year long... There were lots of great arguments for why the market shouldn't continue higher. But all year long, it did. And all year long, DailyWealth Trader readers stuck with the plan and made money.

Even after Porter's dire predictions, we suggest sticking to the plan...

 If Porter's crash comes, you'll cut your losers short. If stocks continue higher, you can let your winners run.

That's the key to long-term trading success.

– Amber Lee Mason and Brian Hunt

Editor's note: Amber recently released a brief educational video on this topic. It includes a quote she considers the most important thing ever said about trading. You can watch her video – and learn more about DailyWealth Trader – here.

A trader's rebuttal to Porter's bearish Digest…

Porter shocked many subscribers last Friday when he predicted a stock-market crash in the near future.

In today's Digest Premium, two of our expert traders explain why Porter could be right, but they're not selling just yet...

To continue reading, scroll down or click here.

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 12/16/2013

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

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