An unpleasant truth...

For the past five years, I (Porter) have been investing most of my assets in real estate. I was fortunate in that my analysts and I figured out early in 2006/2007 that real estate was in a huge bubble. I think the first trip I made to Miami to report on the real estate bubble was in January 2006. Subsequently, we wrote a lot about the bubble markets in real estate – Las Vegas and Miami in particular.

Being from Florida and spending a lot of time in Miami, I focused on that market. I waited until the buyers were really desperate, and I bought a terrific waterfront home in Miami Beach in February 2011. I paid about $400 a square foot. Similar properties are now selling for between $800 and $1,400 a square foot. So the markets have already come back a good bit.

Today, you might not be able to buy trophy properties in the prime markets. But I think there are still values in the secondary markets. For example, Steve Sjuggerud has been writing a lot about cheap houses in Orlando. You might also look in places that have big college communities, like Gainesville, Florida or Austin, Texas.

The point is, you want to take advantage of the extremely low interest rates to buy rental properties that are easy to maintain and rent. This is difficult for a lot of individuals, so you can also look around for real estate management companies that you can invest with. I invest with a colleague who got into real estate full-time about four years ago. He's been investing my capital in apartments.

I've also been funding deals with a big apartment capital company called Pensam… One of its representatives spoke at S&A's recent conference for Alliance members at Sea Island, Georgia… where I'm putting up more than $250,000 to buy a little sliver of what is essentially a privately held real estate investment trust (REIT) that owns apartments. I'm generating 15%-20% pretax yields on my various real estate investments. And I think I can eventually book a large capital gain from all this real estate.

In the meantime, I have positive cash flow from these investments. By the way, I've done all these investments without using any debt whatsoever. I'm a little bit nervous about the long-term future of the banking system. I'm risk-averse and don't want to have borrowed money from a lot of shaky banks.

How Porter is investing in real estate today...

In today's Digest Premium, Porter explains where he's investing his personal money in real estate and where he believes you can still find value today...

To continue reading, scroll down or click here.

How Porter is investing in real estate today…

How Porter is investing in real estate today...

In today's Digest Premium, Porter explains where he's investing his personal money in real estate and where he believes you can still find value today...

To subscribe to Digest Premium and access today's analysis, click here.

An unpleasant truth... Most of you will not make money investing this year... Don't ever have this conversation with me… Two ways to avoid a catastrophic loss…

We have to start this year's Friday Digests with a very unpleasant truth. Most of you reading this note will not make money with your investments this year… or next year. Most of you, in all likelihood, will never make money in the stock market.

The statement above will shock some of you. It might make some of you angry. Or it might fill some of you with strong doubts about our credibility. I wrote it for two reasons.

First, it's simply true. We know from Dalbar… a Boston-based consultancy that studies actual mutual-fund returns. We know from the investment-management firm BlackRock, whose study is shown here…

We also know from discussions with dozens of certified public accountants that almost all their clients lose money in their personal brokerage accounts.

The second reason I'm putting my business relationship with you at risk to tell you an unpleasant truth is because I'm convinced the only chance you've got to become a successful investor is to start by acknowledging that reality. Once you know that individual investors generally fare poorly in stocks, you can begin to examine why...

Let's start with the most obvious reason: The financial industry does not exist because it enriches its clients; the clients provide all of the wealth required to maintain the financial industry.

Another common way of explaining this is to ask, "Where are the customers' yachts?"

The profits that power the branding and the marketing of mutual-fund companies and big investment banks came out of the pockets of their clients. Think about that. Think about it carefully the next time you consider following any financial institution's advice about what to do with your savings. Investment banks exist to raise capital for corporate clients. They do not exist to give you a good stock tip or put you in a safe bond. If you need a refresher course on the way Wall Street really works, read the famous book Liar's Poker.

The other main reason people, on average, tend to fare so poorly in stocks is that very, very few individual investors know anything about how to value a security – a stock, or a bond. Let me give you a vital tip: If you don't know more about the value of something than the person who is selling it to you, the chances of you profiting from the transaction are extremely close to zero.

We've written volumes about how to value stocks and bonds. But... the writing is boring. It requires careful thought and attention. Most people, it seems, would rather trust some lines on a chart... Yes, sometimes these guides will work. But if you believe charts can compensate for a complete lack of basic financial skills... you will soon go broke in the stock market. That, my friends, is a fact. If you don't know how to value the business you're about to invest in, don't make the investment.

Finally... the last nail in the coffin of the failed individual investor is a complete lack of risk management. Here's the conversation you never, ever want to have with me.

The failed investor starts out with, "Porter... I'm wondering what you think of XYZ shares today."

"I don't think of XYZ at all," I respond. "We stopped out of that stock about 18 months ago. We had it all wrong. Its new widget didn't work... (or it wasn't FDA-approved... or the CEO is a fool and he tried to buy a bigger company...) I can't remember what happened... and it doesn't matter in any case because when we hit our trailing stop, we're out. Period."

"Well... yeah... I know... I know... but I really liked that stock and as it went down, I thought it was too cheap to go any lower, so I bought more. A lot more. Now it's down another 70%... what do you think I should do?"

"I think you should learn to follow trailing stops."

Catastrophic losses happen for the same reason, every time. They don't happen because an investment idea didn't work out. Even great investors are only going to be right about stocks roughly 60% of the time. Catastrophic losses happen because people can't stand to take small losses. They allow them to grow into big losses.

There are two good ways to make sure this never happens to you. The first way is completely foolproof. Never invest more in any individual stock than you're OK losing. If it goes down 100%, it shouldn't matter to your financial well-being. That means if you're investing a total portfolio of $100,000… you'll limit your position sizes to $2,000 (or maybe $5,000 at the most). Worst-case scenario, you lose 5% of your portfolio. That's not going to kill you. With some kinds of companies (risky biotechs and mining stocks, for example), this is the only kind of risk-management technique that really works because the shares are too volatile for trailing stops…

The other way to prevent catastrophic losses is to simply decide, in advance, when you will sell. It might be on the basis of negative price action (a trailing stop). Or it might be at a fixed price – you'll sell if shares drop to less than $10, for example. Or you can use charts to find points where you no longer want to risk owning the stock.

I don't really care what kind of risk management you use... so long as you use something. I can guarantee that if you don't have your risk strategy figured out, sooner or later, you will suffer a catastrophic loss... and it will completely wipe out all your previous gains. That's just what happens.

Now... I want to remind you of one more thing before we get too far along in 2013. Most people have a knack for making exactly the wrong decisions, at exactly the wrong time, when it comes to their money and investing. Here's how I described these emotional hurdles a few years ago…

A lot of people are happy to sell you bad advice or provide you with financial services they know will eventually cause you harm. They're happy to cater to your instinct to gamble. They're happy to trade on your emotional weaknesses... and happy to sell you products and services that stoke your fears or excite your greed.

That's not the business I want to be in...

If you're a new subscriber, you might not know that I write these Friday Digests myself. This week, I'm writing to you from a beautiful waterfront cabin at a private hunting lodge just north of the Florida/Georgia state line. I'm here with The Atlas 400, which is a private wealth club. We're shooting quail and hunting boar. I shot a huge boar yesterday morning. Yes, I admit... I'm a lucky man. I've built a very good business.

But I didn't build this business to sucker investors into doing the wrong things with their money. Instead, since the beginning, I've worked hard to give you the information I'd want if our roles were reversed. This is the most important information I can possibly give you. You need to realize that most investors will fail. You need to understand why they fail and how they fail. They fail because they allow their emotions to overtake their reason. They fail because they don't have the most basic tools – they don't know how to value stocks. And they fail because they eventually suffer a catastrophic loss.

I truly hope you'll take this week's Friday Digest to heart. I hope you'll look back on the investment mistakes you've made and think about why they happened. It wasn't just because you bought the wrong stock. Find a way to eliminate these mistakes and you'll be on your way to becoming a more successful investor.

One way you can eliminate these mistakes is by internalizing my lessons and putting them into practice. If you enjoy the lessons in my Friday Digests, I'd encourage you to sign up for Digest Premium. I try to educate and inform every day in Digest Premium... This week, for example, I explained why I think silver will soar, my favorite way to invest in real estate, and the stock sectors I'm most excited about today. And I give real, actionable advice.

I believe our new Digest Premium is one of the best ways to become a better investor. And right now, you can sign up for this service for only $10 a month. (You're getting my best advice, five days a week, for around $0.30 a day.)

As if that's not enough, we're also giving away a free copy of Doug Casey's new book, Totally Incorrect... It retails for $20. Doug, who founded Casey Research, is one of my mentors... And his thinking on markets, government, and liberty is unparalleled.

In the book, Doug explains the best place to buy land right now. (It's also some of the cheapest.) He also tells you the best long-term bet you can make with your money today... And how you can protect yourself from government regulation of guns.

Plus, we've created a special report, "My Top Money Moves for 2013." We polled our top analysts (myself, Steve Sjuggerud, David Eifrig, Dan Ferris, and several others), asking their favorite single stock or money-making strategy this year. We also included two of our most trusted contacts in the collectibles and junior mining space.

To recap, you will receive my insight daily, a copy of Doug Casey's new book, and a report where our top analysts share their favorite stocks today for only $10 a month. To learn more, you can sign up here...

Good luck.

New 52-week highs (as of 1/24): Advent Claymore Fund (AVK), Berkshire Hathaway (BRK), MS China A Share Fund (CAF), iShares Germany Index Fund (EWG), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares iBoxx USDHY Fund (HYG), iShares DJ U.S. Insurance Fund (IAK), SPDR S&P International Health Care Sector Fund (IRY), iShares DJ U.S. Home Construction Fund (ITB), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), W.R. Berkley (WRB), Prestige Brands Holdings (PBH), CF Industries (CF), Monsanto (MON), Ericsson (ERIC), 3M (MMM), Chicago Bridge & Iron (CBI), Consolidated Tomoka (CTO), American Financial Group (AFG), Travelers (TRV), Blackstone Group (BX), Medtronic (MDT), C&J Energy Services (CJES), and Emerson Electric (EMR).

In today's mailbag, more subscribers share their success stories… We're always glad to see those notes… Send all your comments, good and bad, to feedback@stansberryresearch.com.

"I told you in my last e-mail that I would send more about myself, the journey I have been on, and how reading your e-mails have made me smarter. I will do this soon and also talk to you about my own history of oil reading binge. I get busy with work and life.

"Right now I'm in Panama City Beach on business, and I logged into my Scottrade account... This is the first account ever where I bought my own stocks. The e-mails I get from S&A inspired this. I didn't take positions in all your recommendations, but I did take positions where I had knowledge of the industry and where your reasoning made sense to me.

"So to skip to the meat... attached is gain/loss export to excel report the account. 22% total and 44% on LNG in six months. Pretty Cool, Man! Hey, we had a hard time keeping the snapper on our hooks the other day... " – Paid-up subscriber Gary Milam

"Just realized from this e-mail you have changed your position as CEO. Congratulations on building such a successful business. 'You could not have done it on your own' – just kidding. I am now 65 and still working a 30-hour-week standing without a break for 8 hours in a busy pharmacy. Life is way too short not to enjoy it as much as possible and as soon as possible for it can end or change way too abruptly. Enjoy your new found freedom. You have expanded my investment horizons as a lifetime Alliance Member far more than anyone. I have also picked up a good deal of real history never taught in the schools that I am grateful for and try to share with others." – Paid-up subscriber Peter Hillj

Porter comment: Yes, I resigned as CEO from Stansberry Research last June. I spent 13 years (1999-2012) building the company as both an investment analyst and an executive. I personally hired most of the first 25 or 30 employees.

As many entrepreneurs will recognize, at some point, you outgrow the ability to do multiple jobs. As we passed 100 employees, I simply didn't have enough time... especially not with a young family. So we recruited an excellent new CEO, Matt Smith. And I've returned to working on my newsletters on a full-time basis.

I'm still 100% committed to the company. (I haven't sold any shares.) I believe we can grow into a $1-billion-in-sales company and become the most respected name in financial research. All we have to do is continue to provide you with the information we'd want, if our roles were reversed.

Regards,