How (and When) to Be a Pig

The best money managers all do one thing... Why you need to be highly selective... Two of my absolute favorite stocks in the market today... A preview of the next issue of Extreme Value...

'It's the one thing all the best money managers do'...

I (Dan Ferris) stopped eating and leaned forward.

One of the sharpest value investors I've ever met (we'll call him Dave) was about to tell me the one action he's seen the world's best money managers take to generate huge, life-changing returns.

Dave and I met for lunch recently, and I was on the edge of my seat to learn what he was about to tell me...

The best money managers I know can recognize opportunities to put huge amounts of capital to work and have the temperament to follow through... That's what all the best ones do.

It reminded me of the famous trader Stanley Druckenmiller, known for taking large positions, which he calls "being a pig."

Dave shared a story about one such opportunity he found in the fall of 2016...

He had researched it thoroughly over several months. Then, the company went through a major transformation that made it even more compelling. Dave and his partners pounced. "We wanted to put 25% of our portfolio in it," he told me. "But we were only able to put 20% in."

It reminded me of legendary value investor Warren Buffett's famous story about putting 40% of his portfolio into credit-card firm American Express (AXP) during the famous "Salad Oil Scandal" of 1963. (I highly recommend reading chapter five of Roger Lowenstein's book, Buffett: The Making of an American Capitalist, which tells the story in detail.)

I also thought back to 1992, when Druckenmiller – then working for hedge-fund billionaire George Soros – decided to "be a pig" and bet $1.5 billion shorting the British pound.

When you know what you're doing, being a pig pays off. Dave's 20% position was the primary reason his portfolio doubled that year.

Dave told me about another "pig" opportunity from a few years ago. I don't know when (or if) he exited, but the stock went up several hundred percent over the next year.

Dave's style is based on a few key ideas, all of which resonate deeply with what I've been doing in Extreme Value since 2002 (with a lot of help from my chief research officer, Mike Barrett, since 2011).

The hallmark of Dave's style is concentration...

That means he only owns a few stocks and takes a big position in each one. Right now, he holds just seven positions.

For the past few years, the Extreme Value model portfolio has rarely held more than 10 to 12 positions. Right now, we have 12 positions, and it looks like we might be about to add another. But if the one we've been working on doesn't pan out, we have no qualms about not publishing a new recommendation.

Ideas fit for a concentrated portfolio don't show up on your doorstep every month like clockwork. Extreme Value readers understand that and frequently write in to say so. In fact, just a couple of months ago, subscriber K.T. wrote in to tell us...

I would continue to subscribe to [Extreme Value] if you gave only 1 pick a year. If the market is not producing great companies with a margin of safety, then there should be no picks. I think that is valuable information to know. Throwing out a pick on a monthly basis just because of a publishing schedule should never be one's objective. I think all from Stansberry could learn from that. Keep up the great work.

Once you decide to hold a highly concentrated portfolio, other factors logically follow...

For example, Dave and his partners are highly selective. They only look at one or two ideas per year, and they spend six months researching them, trying to figure out if they're good enough for their portfolio.

That six months of research is important. We've often spent that kind of time getting comfortable with our recommendations in Extreme Value. That selectivity has generally been responsible for many of our biggest winners, including booze giant Constellation Brands (STZ), which we closed for a 631% gain... household-products company Prestige Brands Holdings (PBH), which we closed for a 406% gain... and payroll processor Automatic Data Processing (ADP), the No. 1 open position across all Stansberry Research portfolios, up 383% as of Friday's close.

In Extreme Value, we run various stock screens on Bloomberg and other sources. We then take a deeper look at dozens of ideas each year. I attend conferences a couple times a year, where I get to hear from many of the world's best value investors pitching their favorite ideas. The overwhelming majority of ideas I hear about aren't what we're looking for, though. Most of the time, the companies are too risky due to high debt loads, no cash flow, or some other obvious headwind.

Risk is the biggest reason Dave spends six months researching his ideas...

And it's why we do the same thing in Extreme Value.

Value investing is about reducing risk. Every day during our research process, Mike and I dig a little deeper, understand the business a little better, and reduce our risk a little more.

When we're finally ready to pull the trigger and recommend a stock, it's less risky to us than to other investors, because we know the business better and won't let a little bumpiness in the stock price scare us out of it, as most investors tend to do – amateur and professional alike.

Some of our biggest winners in Extreme Value have endured drawdowns of 20%-30%. When that happens, we've counseled readers not to sell because we knew we had done enough work to understand the level of risk better than others. (Sometimes we do choose to sell when a stock is down, but not nearly as often as most investors.)

Out of our 12 model portfolio positions, I've called my readers' attention to two stocks in particular...

They're my "Dave style" positions. My readers know I won't be using trailing stops on them and know I'd be willing to put my entire equity portfolio in either one and leave it there indefinitely.

I expect one of these two stocks to become a five- or 10-bagger and the other to become a 10- or 20-bagger over the next decade. Even if nothing else goes right with either business, both gush cash and will likely continue to pay a growing stream of dividends.

I've known one of the company's management teams for nine years and one of the two most senior members of the other company's management team for 20 years. I understand the business models as well as anyone outside the companies. Both companies have repeatedly proven their abilities to "be a pig" and make transformative acquisitions by deploying huge amounts of capital under the right conditions.

I'm contractually prohibited from buying the stocks I recommend in Extreme Value...

We do that to remain a pure independent-research service, compensated solely by subscriptions from readers like you.

But if I were to leave Stansberry tomorrow, I'd split at least 80% of my equity portfolio between those two stocks. They're the best equity ideas I've found in 20 years of doing this.

Dave's portfolio is a lot like that. It's his seven best, highest-conviction ideas, and nothing else. He won't even consider investing in an idea if he's not willing to commit at least 10% of his portfolio to it.

As I thought about my talk with Dave, I thought of the fascinating and lucrative careers many of my readers have had. I wonder if they realized they were essentially running a highly concentrated portfolio by putting the bulk of their energy into maximizing their careers...

Concentrated investing is like that. In fact, Dave didn't simply buy stocks in the one industry he and I discussed. He started a private company to buy cheap, cash-generating assets in that same industry... essentially starting a new career in the process.

I believe we have a similar opportunity in my current No. 1 recommendation...

That's one of the two "Dave style" stocks I mentioned above. As we spoke at lunch, it was stubbornly hovering above my maximum recommended buy price... But I had a feeling it would move into "buy" territory again soon, as investors ignored it in favor of popular market darlings like Amazon (AMZN) and Facebook (FB).

My top recommendation has flirted with our buy range over the last week or so. I hope the Extreme Value readers who hadn't already bought a piece of this excellent business took advantage of it...

It gushes cash profits, even at the bottom of a huge cyclical downturn in its industry. It has the best management team in its industry. It has zero debt. It pays a regular dividend and sports a 4% yield right now. And its royalty-like business model just might be the single best way to make money in natural resources.

I don't use trailing stops on stocks like this. Again, I've known the management for nearly 20 years. I don't care if the stock falls 50% tomorrow.

I wasn't surprised to find out Dave owns a big position in the same stock. It turns out that he and I have a bunch of ideas in common, most of them in the natural resources sector (though we're both willing to invest in any sector, in any country, with any market cap).

Dave and I have one other thing in common right now...

We both recognize that great companies trading at cheap valuations are particularly hard to find these days. That's typical at the end of a long bull market. It doesn't present much of a problem for me, because we're willing to go months without recommending a new stock if need be.

Over the past couple of years, certain pockets of value have opened up, and we've taken advantage. Mining-related stocks endured a brutal four-year bear market that finally bottomed out in late 2015 and early 2016. Our two "Dave style" ideas in Extreme Value are easily the safest, highest-quality ideas in the entire mining sector, bar none. They have the same incredible multibagger potential as any small-cap mining stock... with almost none of the downside.

Besides mining-related stocks, some individual companies have come under fire lately...

We're looking to include one of them in the August issue of Extreme Value, which comes out this Friday, August 10.

It's an iconic, industry-defining brand with no peer. The stock is down substantially this year on short-term noise. You're not going to make 10 to 20 times your money on this stock, but it could easily double your money over the next few years, and with relatively low risk. The company pays a dividend of nearly 3%, and we expect it to continue to grow.

It's a great way to put money into the No. 1 foreign market you should invest in for the long term... And soon, it'll put billions of dollars in cash into shareholders' pockets. Even if it doesn't double over the next few years, it should earn you 10%-12% a year over the next five to 10 years.

What's not to like?

We'd never tell our readers to put 25% of their money into one stock in Extreme Value, like Dave would. Our maximum position size is 5%, which is plenty big for our readers. But when we find an idea that we think stands head and shoulders above the rest, we're not afraid to stand firm on the quality of our work and tell our readers about our deep conviction.

We don't offer refunds in Extreme Value...

I realize it's not for everyone. But if you like the idea of finding the best businesses trading at bargain valuations – and every now and then, finding a "Dave style," high-conviction idea with the potential to make 10 to 20 times your money (with limited downside) – Extreme Value might be for you. Learn about a subscription right here.

New 52-week highs (as of 8/3/18): Apple (AAPL), Disney (DIS), Nutrien (NTR), and Williams Partners (WPZ).

The mailbag is overflowing with answers to Porter's Friday Digest question. We'd love to hear from you, too. Send your reply to feedback@stansberryresearch.com.

"[Why didn't I buy Apple]? Because I have been short term trading the market on the short side and lost EVERYTHING doing it. I am dumber than Forrest..." – Paid-up subscriber V.T.

"Great question... Fear! That is the answer in a nutshell. It still applies. I love Amazon but I fear it is overpriced. I like Apple and have an iPad Pro and iPhone that I do enjoy but I have feared for years that it's days are numbered. I bought some Facebook on the IPO but sold quickly as I could not fathom this business model being profitable for long. I was late to the party on Grubhub; bought shares about 1-2 months ago as a trade but sold when it jumped 20% in a day (still not upset about that sell). I like the fact that you (Porter) challenge us to ask ourselves why? I wish I had bought all of them and held them until they triggered TradeStops stop loss data. I imagine many of your subscribers have not partaken of the meteoric rise of many of the FANG stocks for the same reason." – Paid-up subscriber Mitchell F.

"Perhaps I shouldn't comment... because I bought them all... Thanks to you, Ferris, and Eifrig. All three of you explain in detail why to buy, never 'buy this because I say so.' I was in and out of AMZN a few times, because of its illogical moves. But then I realized they were just following a successful Japanese idea from the eighties – market share first, everything else second. Good fishing." – Paid-up Stansberry Alliance member John D.

"I've been a loyal Digest reader since I bought an Alliance membership four years ago. This Fridays Digest was really dialed in! Perhaps the best. Four companies to buy that will surely be steals a decade from now. It's so simple, they say when you know the way you see it everywhere. I'm going to take you up on your challenge and hold a 5% position in each of these with a 33% trailing stops.

"By the way I did buy Apple on your colleague's recommendation. I just happened to sell it a few weeks later for a big gain, 25% I think. At the time my friends were impressed with my financial agility, however, the joke ended up on me. Every time I see the chart I shake my head. Unfortunately, I need to fail to learn. Keep with it though, and sooner or later it starts to click. Here the water, it's time to drink." – Paid-up subscriber Brock T.

"Well Porter, I've gotta tell you, there may not be teaching, but there is learning.

"I bought: AAPL (Jun 2013), AMZN (Dec 2017), NVDA (Jun 2015), GRUB (Aug 2017), and FB (Feb 2017). I regret not buying GOOGL, but 5 out of 6 isn't too bad. Thank you for all your good advice over the years. Yours and your other editors." – Paid-up Stansberry Alliance member Ed M.

"1) Alphabet, Facebook, Amazon all collect data, they violate personal freedoms, they share data with the police state, they are evil. 2) NIVIDIA... I don't play video games and consider it a terrible waste of precious time, and consider AI dangerous. 3) I would never order food online utilizing Grubhub... they do not operate in rural areas, same applies to Uber. 4) I might consider Apple, but certainly not Android because of police state surveillance. All have outrageous PEs and will ultimately fall." – Paid-up subscriber Kendrick M.

"Hello. Contrary to the theme, I have been making many of these investments in my retirement account, holding them over varying time spans since 2007/8. Things have gone well, on balance.

"My problem has been many little nibbles toward many positions (I am managing my retirement account); and selling off slices on the way up (ie Apple), though I am basically costed near zero on triple digit gains on Microsoft, McDonalds... Never sold any Intel, J&J, Verizon, Altria; did sell PM (profitably, though hated to pull away from the increased dividend) due to overexposure to single class. Buying on the dips has worked out well in many cases though.

"Problem has been trying to decide where to lighten up. I feel my portfolio is suitable for widows and orphans (retirement-legacy/insurance account), and I am keeping cash ready for discounted, quality bonds. Glad I found you guys. Have been reading you virtually every day since 2007. Have expanded into periphery a little, but you are the core, in addition to broad reading. Thanks." – Paid-up subscriber Dan S.

"Porter, I'm loving your company and have recently became a "Choice" member and have to make the decisions of which three to choose!!! A tough one... I'm working towards Alliance/Life member, eventually.

"Regarding Forrest's choice of Apple... it was actually Lt. Dan that put their money/profits from the shrimping business into... 'some sort of fruit company,' as Forrest states. (One of my favorite movies).

"A great movie that is actually fairly polarizing, since it pits the Fatalists/Pre-Destinationalists against the 'It's All Luck/Choice' types of people. Like Forrest, I believe it is a 'bit of both'... When I was a kid, I used to climb an old Crabapple tree and it had a branch that grew from one part of the tree INTO different part of the tree! I've never seen that again. Very unusual. I bring this up as an intro to an epiphany I had regarding Life/Death, Luck, Destiny, and Choice. (I used to climb a lot of trees!)

"Think of your life as a Tree. At birth, we are like a drop of water/energy traveling up the trunk and each of the leaves are your death. Choices made will take you up to the highest point on the tree or possibly to one of the first leaves. Each choice sends you to a different branch of Destiny, though each of these branches has myriad choices, each with its own set of Destinies... eventually you end up at the leaf of your death. Rarely, you can move from one branch to another. The leaf falls to earth... wash, rinse, repeat. Sounds a lot like options... which I've learned, (and earned) a lot about in the last year!

"Carry On My Wayward Son... your Choices are good, your Destinies are deep. Good Luck with the Stansberry Terminal." – Paid-up subscriber William K.

"I'm an all-in follower of you guys at Stansberry and own all the companies you mentioned except Apple and Facebook. I don't own them for the same reason I never owned Berkshire—they are led by people who take positions on moral issues that I cannot accept.

"I actually did own Apple after Steve Jobs left but stopped out and never got back in. I even owned Facebook on your recommendation, even though I was repulsed by what I heard about how Mark Zuckerberg got control of the fledgling company but then sold it when I heard the latest round of news regarding manipulation of people's personal information.

"I'm sure I must own similarly repulsive companies whose behaviors are unconscionable and will sell them if I learn of them. Personal wealth is important, but it isn't everything.

"That said, I truly respect your integrity which is why I am a lifetime Alliance member." – Paid-up Stansberry Alliance member John B.

Regards,

Dan Ferris
Vancouver, Washington
August 6, 2018