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

The two most important things Porter sees in the market today…

Two things occurring in today's market scare Porter… and lead him to think that the investments many individuals are making will end badly.

And in today's Digest Premium, he describes those two things and what they mean for you, the investor.

To continue reading, scroll down or click here.

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The two most important things Porter sees in the market today…

I (Porter) see two critical phenomena taking place in the market right now... And I hope people will pay attention to them.

No. 1, the retail investor has returned to the stock market in a huge way. If you look at mutual-fund inflows, they're very powerful. In October, U.S. equity funds had net inflows of $10.5 billion, the highest monthly inflow since January. These inflows are the biggest influx we've seen into stocks since 2007.

Unfortunately, I believe the individual is late to the party. I sincerely thought the market top was being made in early June and in May when the junk bonds peaked and yields fell to less than 5%. I've been early on that call. Nevertheless, I believe the retail investor buying today is late to the party. I don't think it's going to end well for him.

Too much money is going into stocks right now at too high of a price. It's being driven there by the Federal Reserve. So you have to pay attention to the inflows into stocks. This is not the time to be buying stocks. You want to be buying stocks when other people are selling them, not when everyone in the world is buying them.

The second thing is this entire rush into stocks is being driven by the Federal Reserve. The Fed's [interest rate] policy and its quantitative easing are unsustainable. So if you know the reason why people are crowding into stocks is unsustainable, it's even more important that you become more selective in the investments you make.

Still, the market is offering some clear opportunities. When I look at the key indicators I use in my Investment Advisory, I see 18 stocks on our "Black List." That means right now, 18 companies with market caps of more than $10 billion are trading at more than 10 times sales. That is not going to end well. Maybe one or two of those stocks will thrive over time, but most of them will fail badly and will wipe investors out. That's just a very high-risk indicator to me.

So I really do think that we are putting in a top. I can't know exactly when the conditions will change, but I know that you'll be way better off as an investor if you can learn to be greedy only when other people are scared. And right now, people are clearly not afraid of stocks.

In Monday's Digest Premium, we'll check in with my top analyst, Bryan Beach, to learn his views on today's market from a "bottom up" perspective.

– Porter Stansberry with Sean Goldsmith

The two most important things Porter sees in the market today…

Two things occurring in today's market right now scare Porter… and lead him to think that the investments many individuals are making will end badly.

And in today's Digest Premium, he describes those two things and what they mean for you, the investor.

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

A great lesson on when to be a 'pig'... Why we were so bullish on natural gas... How to make sure Wall Street is against you...

Editor's note: As we noted yesterday, much of the Digest team is en route to Singapore for our annual Alliance conference. And once in Asia, they'll be busy hosting more than 100 of our lifetime Alliance members.

So while they're on the other side of the globe... we will feature some of our favorite Digests from this year. And as you'll see, each shares a common theme. They all contain timeless investment wisdom from our founder, Porter Stansberry, and lessons from the greatest investor of our generation – Berkshire Hathaway founder Warren Buffett.

Today's Digest, originally published on April 12, examines a surprising idea... when you SHOULD disregard traditional position sizing and load up on big stock positions...

There are times, dear friend, when it pays to be a "pig." In today's 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 huge 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: Plenty of people would be 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. (Editor's note: Porter closed that position in June, recording an 88.3% gain.) We also recommended Chicago Bridge & Iron, which is a leading global builder of LNG infrastructure. (Editor's note: As of Nov. 14, Porter's subscribers are up 120.3% in 17 months.)

We've also recommended Teekay LNG Partners (TGP), which is one of the leading LNG transportation firms. (Editor's note: As of Nov. 14, Porter's subscribers are up 39.5% on this position in a year.) 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. (Editor's note: As of Nov. 14, Porter's subscribers are up 66% in a little less than a year.)

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.

New 52-week highs (as of 11/14/13): Automatic Data Processing (ADP), Aflac (AFL), Chubb (CB), Chicago Bridge & Iron (CBI), CVS Caremark (CVS), Dominion Resources (D), EnerSys (ENS), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Dow Jones U.S. Insurance Fund (IAK), Medtronic (MDT), 3M (MMM), AllianzGI Equity & Convertible Income Fund (NIE), Procter & Gamble (PG), PowerShares Buyback Achievers Fund (PKW), Penn Virginia (PVA), Sturm, Ruger (RGR), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), Constellation Brands (STZ), Cambria Shareholder Yield Fund (SYLD), and Travelers (TRV).

In today's mailbag… a few more subscribers weigh in on Porter's Social Security comments. Send yours to feedback@stansberryresearch.com.

"After listening to Porter go off on Social Security as a Ponzi scheme I concluded that Porter is absolutely correct. I hope you can give me some help with this as I have been participating in this for three years so I am guilty of this crime myself. I want to turn myself in but I am uncertain which authority to report myself to. I have ruled out the IRS and SEC as it is not a qualified retirement plan nor are there any securities involved. I think the FBI might be the proper authority so I went to the FBI web site and filled in my personal information. There it has a space to report my crime in 3000 characters or less.

"I'm ready to do it but I want to secure legal representation before I pull the trigger on this. Can you recommend a good attorney for this? The attorneys that I spoke with are only interested in representing people who want to participate in this crime. I do think that when I come forward and turn myself in that I might be able to work a deal to avoid prosecution by reporting several of my neighbors as well as my friends from high school and college. Keep up the great work and thank you for any assistance you can give me with this." – Paid-up subscriber Joe "the Rat" Frattinger

"Thanks for your illuminating discussions about social security. You've opened my eyes, and I'd like to share my thoughts – a little different take on it.

"A true Ponzi scheme is a little different from Social Security because when I use Bernie Madoff to get me a payment, he has to fool you to get you to pay us. We're thieves who take your money by deception. When I get the government to hand me your money, we're thieves using the threat of force, and you have no choice. The Ponzi scheme is immoral both because it's theft and because of the lie. The government theft is immoral because it's a forced transfer of your wealth. What I finally get is that ALL the government's wealth transfers are similarly immoral. Much of the IRS functions strictly as wealth transfer. Obamacare is purely a wealth transfer. Much of the misuse of the Commerce Clause is for wealth transfer. Forced wealth transfer is the reason all Socialist and Communist systems are immoral.

"I applaud your stance on resisting the dole from Social Security. I think it would be much more difficult to resist the rest of the payments that come to us from tax breaks or subsidized education or whatever. The array of transfer payments is so integrated into our way of life that it's hard to see them all, let alone resist them." – Paid-up subscriber George Miller

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland and Miami Beach, Florida
November 15, 2013