Bulls' biases...

The secret to S&A's success…

In today's Digest Premium, Porter shares the strategies he used to make Stansberry & Associates the dominant financial research publisher today...

To continue reading, scroll down or click here.

 While reading Walter Isaacson's biography of Steve Jobs… the business principles of Apple's late founder – which we discussed in yesterday's Digest Premium – seemed very familiar to me (Porter)...

As I mentioned yesterday, in speaking to Isaacson, Jobs talked about the importance of making great products, not making a profit. And he highlighted the role honesty played in growing Apple.

 I got into the financial research business because my childhood friend Steve Sjuggerud and I were convinced that most people writing and publishing newsletters in the mid-1990s didn't know beans about finance and didn't care about their customers. We were right...

I can recall one major financial publisher telling me that he didn't think his subscribers really bought stocks at all. "Who would actually buy stocks?" he asked, as though buying stocks through a discount broker was the most gauche thing he could imagine. Another major newsletter writer at the time routinely disparaged his readers, saying of them, "They sit on their couches and watch football on Fox television... they're nobodies."

 Steve and I saw something completely different. We saw a world of tremendous opportunity where information about companies was finally available to all... where the game would be far more fair. All we had to do was put in the hard work of pulling all the newly available information into a format that most people would understand and enjoy reading.

We knew if we could help people succeed with their investing, we would be wildly successful, simply because, at that time, none of the major publishers were even trying. As one successful publisher told me in 1997, "Porter, I don't doubt that you can beat the market. I've seen you make a lot of good investments. But I'm not going to bet my publishing company on it."

I couldn't understand why he thought hiring better analysts and encouraging them to try to beat the markets would put his company at any greater risk of failure. Instead, we believed the exact opposite was true. We believed that if we couldn't actually perform for our readers, we wouldn't be in business long. As a result, almost all of our most significant innovations were based on a simple goal: trying to integrate our knowledge of finance with the best available information on behalf of our subscribers. Or, as we say, we try to give you the information we'd want, if our roles were reversed.

 By focusing on our product – the quality of it (see our Report Cards) and its usability (see the time we spend writing stories, as opposed to just publishing Wall Street-like reports) – we quickly grew into the largest financial newsletter business in the world. To us, the keys of our success were common sense... but the rest of the industry still doesn't seem to understand our approach.

 Our early successes led me to pursue step two, as Steve Jobs mentions – attempting to make sure the culture and people at Stansberry & Associates remain focused on our core values.

That requires being brutally honest. It requires firing people who can't or won't adopt our culture or prioritize our values. (I once fired 12 people, roughly 20% of our staff at the time, in one meeting.) As I explained to Steve, I didn't have time to be nice... and I knew I couldn't possibly fix what was wrong with these people. They would have to succeed someplace else – anywhere else.

 On the flip side, this approach also encourages setting a real example. I'm still one of the few owner/publishers in the business who writes his own newsletter, his own marketing copy, and his own weekly e-letters. I personally review all of our track records... Plus, I personally recruit most of our senior staff.

And even more important... it requires a dedicated commitment to our employees. Since we began, we've consistently paid our employees salaries between 10% and 50% more than other companies. And we have always paid annual bonuses that amount to about 5% of our total pre-tax profits. For many employees, that translates into a very, very good living.

So while I'm proud of my personal financial success... I'm much, much prouder of the dozens of employees I've seen become affluent while working inside our company. In our entire history (13 years now), I can't recall losing a single employee who we sincerely wished to keep. We have had almost zero executive turnover.

I believe these ideas – to focus on our products… to demand brutal honesty from our managers… to require excellence from our staff... and to reward our employees with significant compensation – are the keys to ensuring that Stansberry & Associates develops into a lasting institution.

– Porter Stansberry with Sean Goldsmith

The secret to S&A's success…

The secret to S&A's success…

In today's Digest Premium, Porter shares the strategies he used to make Stansberry & Associates the dominant financial research publisher today...

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

Bulls' biases... Graham on market ups and downs... India eases, too... Sjug nails his Indian easing and housing predictions... Subway credit-card hack...

 There are times to be bullish, and there are times to be cautious (or even bearish).

And just about nobody ever gets them right.

For example, in early 2009, after the market plunged more than 50% from its 2007 highs, nobody was bullish – even though it was the perfect moment to buy.

And if investors knew that they should become more bullish as stock prices fell and less bullish as they rise, we could have avoided a situation like we faced in 2009, when the S&P 500 traded for 13 times earnings. And I (Dan Ferris) might not have a job, for lack of stupidly cheap stocks to write about.

The stock market went up almost 20% in 2009. It's gone up every year since, including last year's 13% rise. So folks now are bullish, with the American Association of Individual Investors Sentiment Survey showing 52% of respondents bullish on stocks for the next six months. Historically, anything above 50% is getting into extreme territory. Less than 19% were bullish the week ending March 5, 2009, the day before the S&P 500 officially bottomed.

The mistake is obvious. The herd thinks whatever just happened will happen again soon. It's called "recency bias." It assumes the most recent data is the most important data. In the stock market, recency bias is closely aligned with availability bias. That's when you think the most readily available data is the most important data.

Price quotes are the most readily available data about public companies. So putting our two biases together, the most recent price quote history is irresistible to the vast, thundering herd of investors.

And now, after four years of stock market gains, all anyone can see in the rearview mirror is a rising market... so that's the overwhelmingly popular expectation.

Everyone wants to buy. Everyone wants to take more risk. "Junk" bond yields dipped below 6% for the first time in history this month. (Today, Steve Sjuggerud – one of the best contrarians I know – told DailyWealth readers that it's time to sell junk bonds.)

I'm not delusional enough to try to call a top in the market. To believe that is to remain under the spell of recent price quotes. I'm just saying if all you know is price quotes – and that's all most investors know – you're going to lose money... and from the looks of things today, it looks like folks are lined up the block to lose money in stocks once again.

 I was reminded of all of the above yesterday, while reading Chapter 20 of value-investing guru Ben Graham's The Intelligent Investor. I read it once a month. It's all about the concept of "margin of safety," which just means buying assets (like stocks) for less than their intrinsic value as a means of protecting your downside.

When you read the same few pages every month, different sentences jump out at you, ones you might not have noticed before. This one in particular jumped out at me yesterday:

If you think a stock's share-price history is more important than the value of the business, you might be about to lose a bunch of money.

 More bullish news for the global stock market herd: India's central bank has joined the monetary easing clan...

The country's central bank dropped the benchmark rate by 25 basis points (bp), or 0.25 percentage points, yesterday.

The world's second-most-populous nation has one of the highest interest rates on the planet. Even with the 25 bp cut, it's still 7.75%.

Here in the U.S., the benchmark rate is 0.25%. In Japan, it's even lower at 0.10%. In the U.K., its 0.50%, and in Europe, it's 0.75%. India's new rate of 7.75% is enormous, considering most of us have become accustomed to a near-zero-percent interest-rate world.

And the central bank didn't stop there. In what the Financial Times reports as a surprise move, India's central bank also reduced the cash-reserve ratio (the minimum reserves banks must deposit with the central bank) by 25 bp to 4%. Lower cash-reserve ratios mean banks can lend more money. This move should release $3.4 billion of extra liquidity into the banking system.

 India's policymakers have held rates high in recent years to combat inflation. Wholesale price inflation in India has hovered above 7% for the past three years. Bloomberg figures show the five-year average consumer price index rate at 9.8%. And it reports the country's five-year average GDP growth at a healthy 7.4%.

India's growth has fallen from more than 8% to now less than 6% a year. The central bank's governor, Duvvuri Subbarao, in crisp central-bank-speak, said, "It is critical now to arrest the loss of growth momentum without endangering external stability."

India's finance minister Palaniappan Chidambaram recently visited Hong Kong and Singapore and is now traveling in Europe. He's telling investors his government is determined to entrench reforms that will encourage investment.

The Bombay Stock Exchange, India's bellwether exchange, rose 0.4% on the news, as investors took the bait.

 True Wealth editor Steve Sjuggerud talked about this back in October...

 Steve is also bullish on housing... Considering the low prices and low borrowing rates, housing is more affordable today than at any time in U.S. history. And prices are steadily rising...

The latest data from the Case/Shiller Home Price Index shows prices in the 20-city index rose 5.5% year-over-year in November to the highest level since August 2006. Prices were up 0.6% on the month.

As of November, 19 of the 20 cities in the index posted gains... New York was the only loser. The traditionally strong market sank due to lower Wall Street bonuses.

 If you've bought a sandwich from fast-food chain Subway recently, you may want to check your credit report...

Tech magazine Wired reports that Romanian hackers breached Subway's point-of-sale system – the scanners it uses to record credit-card transactions. More than 80,000 Subway customers have had their credit-card information stolen. The hackers used this data to conduct several million dollars' worth of unauthorized transactions.

The victims may have to sort out the fraud in a painful process with their credit-card companies. In the meantime, their credit scores might go down, which could lead to banks offering them less favorable interest rates.

The crime ring also hacked into 50 other unnamed retailers that use the same point-of-sale system. They did so by exploiting a simple trick that has given criminals access to everything from celebrity e-mail accounts to behemoth tech companies, like Apple. If you haven't begun to recognize the serious threats to your privacy yet, you should... before your next footlong ends up costing you much more than $5.

Retirement Millionaire editor Dr. David "Doc" Eifrig just released a special report that highlights your risks to privacy – and shows you how to fix them. One of the simple techniques Doc describes provides security from a hacker making unauthorized charges to your account... even if he gains access to your credit-card number. You can learn why readers have praised Doc's groundbreaking privacy work as "worth the cost of many years' subscriptions" by clicking here.

 New 52-week highs (as of 1/28/13): Morgan Stanley China A Shares Fund (CAF), iShares Italy Fund (EWI), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Home Construction Fund (ITB), SPDR Barclays High Yield Bond Fund (JNK), Lucent Technologies (LUTHP), Targa Resources (TRGP), Anheuser-Busch InBev (BUD), Prestige Brands Holdings (PBH), Ericsson (ERIC), 3M (MMM), Chicago Bridge & Iron (CBI), Consolidated Tomoka (CTO), Calpine (CPN), American Financial Group (AFG), Medtronic (MDT), BLADEX (BLX), Enterprise Products Partners (EPD), C&J Energy Services (CJES), Sunoco Logistics (SXL), Procter & Gamble (PG), Walgreens (WAG), and Teekay LNG Partners (TGP).

 In today's mailbag, more positive feedback from traders making money... How has your trading gone this year? Let us know... feedback@stansberryresearch.com.

 "I have to admit at first I was skeptical of some of the claims being made when I first subscribed, but then I started trading options based on the recommendations in DailyWealth Trader. In the 6 months from July through Dec, I netted over $1900. Except for one hiccup when I had to sell INTC for $21 when I had paid $23, thus losing about $200, the rest of the trades have been positive. Thanks for the good advice and instructions." – Paid-up subscriber DH

Editor's note: In yesterday's mailbag, we published an e-mail from a subscriber quoting The McAlvany Intelligence Advisory. It listed states where there were more people on welfare than people employed. It was brought to our attention that this e-mail was incorrect.

The 11 states included in the e-mail have more people "dependent on the government," according to a recent Forbes article, than people working in the private sector. But the original meaning of "dependent on the government" was to include government employees and former employees receiving pensions. Our apologies for the misstatement.

Regards,