A great lesson on when to be a 'pig'...

There are times, dear friend, when it pays to be a "pig." In today's Friday Digest, I'll explore the idea with you. But... a word of particular warning before you begin reading.

I'm about to write about doing something dangerous... Something you probably already do (and you shouldn't). And I'm about to encourage you to do it more often. For lots of you now reading, this advice will almost surely prove to be catastrophic.

And so, if you don't have at least five years of successful investing under your belt – that is, five years of profitable, safe investing – just stop reading today's Digest right now. Today's Digest is not for inexperienced investors. It is not for anyone who hasn't mastered the emotions of trading. And it is emphatically not for anyone who is just a gambler at heart.

With that warning... let me show you how you can make a fortune, from time to time, in the markets.

The most obvious difference between the average "at home gambler" and the average professional investor is position sizing. The professional is never, ever a pig. That is, professional investors never allow themselves to build huge positions – not even in their best ideas. They would never pile 20% of their portfolios into a single idea. They know there are too many things that can go wrong, factors that are impossible to foresee.

As a result, professionals always diversify their equity portfolios. The most focused professional investors will usually have at least 20 different positions. Meanwhile, the most diversified individual investors rarely have more than 20 different positions. Thus, individual investors are sometimes "pigs" – overloaded into an idea – without even knowing it.

We consistently remind our readers not to put more than 4% or 5% of their portfolios into any single security. We might as well be talking to a tree. No one listens to us. Not until they've taken a beating once or twice. Not until they realize there's just too much volatility in the market to survive holding onto a 10% or 20% weighted position. But from time to time... we do advocate being a pig. In fact, I'd argue that if you want to make a lot of money in stocks in any given year (more than 10% or 12%), you have to be a pig sooner or later.

What's a pig? In 1988, legendary investor Warren Buffett bought 7% of Coca-Cola. The position made up 35% of Buffett's entire portfolio. That's a big, determined bet... that had better pay off. Buffett, of course, knew what he was doing. He had studied the company for nearly 40 years. He knew it was one of the greatest businesses the world had ever seen. And he knew why the business was so great: the company sold sugary syrup at a huge markup, to fanatical customers, via bottlers who shouldered almost all the real capital costs. Coke is a study in capital efficiency.

To be a successful pig, you have to know the investment inside and out. And it has to be trading at a price that's so extremely cheap, there's no way you can possibly get hurt buying it. (The stock market crash of 1987 allowed Buffett to begin building his position in Coke, a stock he'd wanted to buy for years.) You can't go looking for something to pig out on... it has to be so big, so obvious and so well-known, you literally couldn't miss it. Let me give you an example...

I've been studying the oil and gas industry closely since the mid-2000s because I believed natural gas prices trading above $15 per thousand cubic feet (mcf) represented a massive bubble. (You can click here to read more about my views at the time.)

Likewise, I thought West Texas Intermediate (WTI) oil prices – the benchmark for U.S. oil – trading above $100 a barrel made no sense from a fundamental standpoint. I also knew that the theory driving these bubbles forward (Peak Oil) was nonsense. Anyone studying the data of oil and gas production could have seen this, too. Simply put, production rates were not falling the way geophysicist M. King Hubbard predicted they would.

I famously told a room full of energy investors in March 2009 that anyone who was still long natural gas "should have their heads examined." (I even won a bet with master resource investor Rick Rule about whether or not prices would go below $3 per mcf. They did.) And I told a group of oil investors last spring that anyone still long oil was "screwed." (No, oil hasn't yet collapsed to below $60 a barrel, but trust me... it will.)

Following the natural gas market from the peak of the cycle all the way to the bottom allowed me to see clearly that prices for natural gas had bottomed last spring. As I wrote a year ago in my Investment Advisory...

There were other signs that natural gas was at a very significant low. First and foremost, Wall Street had gone from being massively long natural gas in 2005 and 2006, to being almost uniformly short. Trading volume on natural gas futures had soared – up 31% in a year, with almost all the financial firms being short.

But the most important factor in my analysis was that from a physical, arbitrage perspective, natural gas couldn't get any cheaper. Natural gas is just one form of energy. In theory, as an energy source, it's totally interchangeable with other fossil fuels. Think of it this way: A barrel of oil has 5.825 million British thermal units (Btu) of energy. One thousand cubic feet of gas contains just a little more than 1 million Btu of energy.

Thus, on an energy-equivalent basis, you might expect natural gas to trade for one-sixth the price of oil. That doesn't actually happen very often, though… In the real world, oil has vastly more utility. It's far more widely used in transportation, and it's much easier to transport. (It doesn't have to be frozen first, like natural gas does.) So in the real world, historically, oil has carried a 10x premium in price to natural gas on an energy equivalent basis. But last April... the price of oil was trading at over a 50x multiple to the price of natural gas. This enormous premium simply couldn't last – it was impossible.

That's why I was telling you to be a pig in natural gas. First, I had studied the investment carefully for a long period of time. Second, I knew that Wall Street was lined up on the wrong side of the trade – there would be plenty of people scrambling to unwind their short positions, which would push the price of natural gas up all by itself. Third, and most importantly, I knew the ratio of natural gas to oil prices had gone so far beyond the point of profitable arbitrage that it was impossible for natural gas to get any cheaper. That's when you know it's time to be a pig.

So... how did that advice turn out? Here's a chart showing the performance between natural gas and WTI crude oil. Being long gas and short oil would have earned you around 130% over the last year.

The main factor causing natural gas prices to be so incredibly low is an explosion in supply from U.S. shale and other large discoveries in Australia. Globally, the supply of natural gas has increased from around 96 trillion cubic feet in 1995 to more than 141.6 trillion in 2010 (the latest data available).

That's almost a 50% increase – and we know that supplies and stockpiles have continued to increase. This energy is in high demand in places like Asia (especially Japan) and Europe, where nuclear energy is being phased out as the primary source of electricity. But right now, there's almost no export capacity in the U.S. and precious little around the world.

That's why moving natural gas around the globe will be a major growth industry for at least the next two decades. To ship natural gas, first you have to turn it into a liquid by cooling it to 160 degrees below zero Celsius. In this form, natural gas is called liquefied natural gas (LNG). To use it, you have to warm it back up – re-gasify it.

Today, around the world, there are 89 LNG export facilities operating with a total liquefaction capacity of around 300 million tons per year. Meanwhile, there are 93 LNG import (regasification) terminals operating with a total capacity of around 700 million tons per year. As you can see, that's 300 million tons of export capacity versus 700 million tons of import capacity. That's an export shortfall of 2.3 times capacity. The primary reason this gap exists is because of a lack of liquefaction trains (production units that cool the gas) in the U.S.

Why don't we have more LNG export facilities in the U.S.? Politics, mostly. There are 20-plus companies waiting for export licenses from President Obama's administration. The only company able to legally export LNG from the United States today is Cheniere Energy (LNG), which was my top recommended way to profit from low natural gas prices last year. (My subscribers are up 84% in nine months.) We also recommended Chicago Bridge & Iron, which is a leading global builder of LNG infrastructure. (Readers are up 62% in 10 months.)

We've also recommended Teekay LNG Partners (TGP), which is one of the leading LNG transportation firms. (Readers are up 35% in just under a year and a half.) And we've recommended a natural gas liquids processor, Targa Resources (TRGP), which is able to export natural gas liquids legally, thanks to a loophole in our country's byzantine (and idiotic) energy export laws. (Readers are up 42% in four months.)

All in all, we've recommended around 10 different equities associated with natural gas production distribution over the past two years – all because we were fundamentally bullish on natural gas when most of the world was bearish. We've made a lot of money on these recommendations, which now make up a huge chunk of our portfolio. Today, with WTI oil trading around $95 and natural gas trading around $4.10, the ratio between these two energy sources is still unusually wide… at a multiple of over 20x.

The point is... On rare occasions, it's OK to be a pig. To do it safely, make sure you're very familiar with the company or commodity you're buying. You should have been following it for years. Or decades. Make sure you're buying at a price that's beyond what arbitrage should allow. And make sure Wall Street is lined up on the wrong side of the trade. If you follow these three guidelines, you really can safely make a killing.

One more thing... Next week, on Friday, as a part of our Stansberry Radio Premium service, we'll broadcast a roundtable discussion about the April Investment Advisory and our current portfolio recommendations.

We've never done anything like this before... but I know this roundtable discussion will add tremendous value to your newsletter subscription. The discussion format will allow us to delve far deeper into the rationale for our current recommendations – all while letting our subscribers "inside the room" to hear us debate these issues firsthand.

Last year, I added three additional analysts to the editorial staff: Brett Aitken, Bryan Beach, and David Lashmet. That allowed me to greatly expand the reach and depth of my flagship newsletter. If you're a longtime subscriber, I'm sure you've noticed the editorial change. And there's still more we can do for you now with our new podcast/roundtable format.

The idea is to give our subscribers a view into our thinking and the debates we have internally about our strategies, the portfolio, and our latest recommendations. We'd also like the opportunity to let you hear from our industry sources. But most important, we hope this new format encourages you to reach out to us...

With our large newsletter subscriber base (now in the hundreds of thousands), it's inevitable that some subscribers have valuable information to share about the recommendations in our newsletter. We're hoping our roundtable discussions will motivate more subscribers to reach out and share the insights they have or their concerns about our work. We also know that when we write about complex new ideas – in biotech, for example – listening to explanations sometimes makes it easier to understand the concepts you've just read.

This new roundtable format will allow us to discuss common questions fully. (As you know, we cannot address individual investment questions, and we can't offer individualized advice.) You'll be able to hear our different views on all these matters. So next week, for the first time ever, I'll host our in-house analytical team and our oil and gas industry insider (Cactus Schroeder) for the first hour-long roundtable discussion – something we'll call the "Advisory Roundtable."

As I mentioned, this new service is a part of Stansberry Radio Premium. All Stansberry Radio Premium subscribers will have access to the Advisory Roundtable at no additional cost. We plan to produce one episode of the Advisory Roundtable each month, a week after the publication of our monthly newsletter. To learn more about Stansberry Radio, or to sign up for a Stansberry Radio Premium subscription, please click here.

For all Stansberry Radio Premium subscribers… as you read the issue this month, jot down your questions and e-mail them to us at feedback@stansberryresearch.com. Just put "Advisory Roundtable" in the subject line, so I can organize them easily for the roundtable discussion.

New 52-week highs (as of 4/11/13): ProShares Ultra Nasdaq Biotechnology Fund (BIB), Berkshire Hathaway (BRK), Wisdom Tree Japan Hedged Equity Fund (DXJ), iShares Singapore Index Fund (EWS), Fidelity Select Medical Equipment & Systems Portfolio (FSMEX), Cambria Global Tactical Fund (GTAA), iShares Dow Jones U.S. Insurance Fund (IAK), iShares Nasdaq Biotechnology Fund (IBB), SPDR S&P International Health Care Sector Fund (IRY), PowerShares Buyback Achievers Portfolio Fund (PKW), ProShares Ultra Health Care Fund (RXL), Sprott Resources (SCP.TO), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), W.R. Berkley (WRB), SPDR Utilities Select Sector Fund (XLU), Constellation Brands (STZ), Coca-Cola (KO), Abbott Laboratories (ABT), Eli Lilly (LLY), Advanced Data Processing (ADP), Monsanto (MON), 3M (MMM), Calpine (CPN), American Financial Group (AFG), Chubb (CB), Navigators Group (NAVG), Travelers (TRV), Blackstone Group (BX), Becton-Dickinson (BDX), Medtronic (MDT), Procter & Gamble (PG), McDonald's (MCD), CVS Caremark (CVS), Walgreens (WAG), and Philip Morris (PM).

In the mailbag... Why precious metals are tanking. Send us your notes to feedback@stansberryresearch.com.

"I know that you like to teach about different topics for your Friday S&A Digest. Here's my suggestion for a topic: talk about silver. More specifically, why does it seem to be in a free-fall when so many of the so-called experts say that it is rarer than gold, has a million and one industrial uses, is a form of monetary exchange." – Paid-up subscriber Jeff Kelsey

Porter comment: The main reason silver isn't doing well is because speculative demand is drying up. The same thing is happening with the entire precious-metals complex, both in commodities and stocks. Rumors that the Fed will cease its quantitative easing (aka money printing) at the end of this year have a lot of people convinced that inflationary pressures could fall.

Also, a lot of industrial demand for silver related to photography has simply gone away because of digital cameras. (And for the record, silver is not rarer than gold.)

I've written quite a bit recently about "the new silver." My Investment Advisory subscribers are familiar with my argument. But quite frankly... I don't expect precious metals to do much in the short term... Not as long as the banking sector's profits continue to rise.

Don't misunderstand me... I'm not selling any of my gold. We still have a bankrupt government. We still have enormous inflationary pressures building in our economy. And we still have a Federal Reserve that's trapped itself buying over $3 trillion in bonds that it must sell someday… or else face a massive inflation. For now, the crowd clearly favors bank stocks over gold. (And... if you go back and read the Digests from last April and my April 2012 newsletter... you'll see I predicted this.)

"Your ALPHA trades have been outstanding. Most of my retirement is tied up in my businesses, so I don't have the margin to place every trade you recommend, but, I do buy the calls EVERY time and the lowest return I have realized is 30%! But the one that sticks out in my mind is LNG... I have half my account invested in WMT, D, KO, EXC and I trade the other half with calls and puts. When I am profitable, I take the spoils and buy more of the World Dominators. I wish I could say, that I always win, but, my emotions get the better of me about 50% of the time. If you have ~any~ advice on how to beat emotion, I will gladly listen. Can't afford much more of the services this year, but, you can believe me when I say; I shall continue to look to you, Dr. Eifrig, Steve and the rest of your staff for advice. Thank you so much." – Paid-up subscriber "Doyle"

Porter comment: The way to beat your emotions is to design an investment strategy that follows a few simple core rules: never put more than 5% in any single position... always follow trailing stops... always favor low risk (like Dan Ferris' World Dominators) over speculative positions... and always allocate to value, to name a few.

Write down your strategy. Follow it. Smother your instinct to gamble by making your investing a long and boring process. The moment you feel excited or sad... stop. Don't go forward until you've regained your footing. Act like an accountant, not like a gambler.

Regards,

Goldman Sachs and other lower forms of life...

As anyone who follows financial news knows, Goldman Sachs is supposed to be an investment bank. Theoretically speaking, its purpose is to pool capital from investors and lend it to businesses with the resources to back up the loans, turning a profit for its clients in the process.

What it actually does, of course, is borrow ungodly amounts of money from the government instead of its clients. It then loses it through incredibly harebrained schemes, such as lending billions and billions of dollars to bankrupt mortgage holders in the United States and to bankrupt nations in Europe.

However, its latest proposal is closer to its intended brief... Goldman will open a specialty financing unit called Goldman Sachs Liberty Harbor Capital LLC to buy high-risk debt. It's something the company should have done a long time ago: raising funds from domestic lenders and providing capital to U.S. entrepreneurs who are building small businesses.

There's only one thing unusual about Goldman's decision: by opening this lending subsidiary, the company clearly means to go public with it. In fact, it's already filed paperwork to that effect with the Securities and Exchange Commission, according to the Wall Street Journal. I suppose that's its prerogative.

To me, the bigger question is this: Why would anyone in his right mind ever do business of any kind with Goldman? How many times do you have to hear that Goldman has defrauded, defamed, or destroyed clients before you finally say, "Well, maybe it will be me next time"? I (Porter) honestly don't know the answer. The people at Goldman seem to be grotesque caricatures of the world's most despicable people.

The same question applies to Morgan Stanley, JPMorgan Chase, and the rest of those vipers. They trade on the gullibility and stupidity of their clients to enrich themselves. They do so from a fiduciary position where they're supposed to be representing their clients' best interests. It's abhorrent.

Apple co-founder Steve Jobs once said the most important dynamic on the planet isn't good versus evil or right versus wrong. It's constructive versus destructive. Until greedy little hustlers like those described above are put in their collective place, destructive will win out.

But Wall Street is in bed with the government... and we don't expect political corruption and Wall Street's influence over politicians to end any time soon. So the best advice I can give you today is to simply avoid these companies.

– Porter Stansberry with Sean Goldsmith