Make Sure Your Portfolio Can Survive Anything
Make sure your portfolio can survive anything... Don't let this idea scare you... The easiest way to drastically improve your investment returns... The single most profitable decision you can make... P.J. O'Rourke on negative interest rates...
Editor's note: Yesterday, we shared Porter's classic essay on "the single most amazing thing" he has ever learned about finance.
He explained how one simple change to your portfolio – which has nothing to do with the stocks you buy or trailing stops, and can even be used with the stocks you already own – can potentially double your long-term returns.
But you need to understand one more thing: This strategy won't just help you make more money... it will also help you avoid big losses during periods of market volatility.
In today's essay – which originally appeared in the Digest in February – Porter explains exactly how it works...
If you're worried about the stock market today, you need to read today's Digest...
There's a group of investors out there that is weathering this storm... They aren't experiencing the large losses and volatility most folks are battling on a daily basis... And they're able to sleep well at night knowing their portfolios are prepared for anything that may come.
The topics I (Porter) will discuss today should make (and save) you more money than any other advice I can give you. But you have to read today's essay carefully. You have to think about these concepts. And you have to promise yourself that you'll take the time to implement them.
I know hardly any of you will take these concepts to heart... Fewer will actually take action – even though it's one of the simplest and easiest things you can do – and it will make you a fortune over your lifetime.
So why do I bother writing to you about things I know you won't do? Because, as I often state, my goal is to give you the information I'd want if our roles were reversed.
If you take nothing else away as a Stansberry Research reader, let it be this...
The greatest investors in the world already know this secret. It's so simple, but it can make you a better investor overnight. It will transform a losing portfolio into a winner. And it has nothing to do with the stocks you buy or trailing stops.
I'm talking about using risk-adjusted position sizing.
Have you ever looked at your portfolio and noticed most of your best-performing investments are in the lowest-risk names? Companies like Berkshire Hathaway (BRK-B), Microsoft (MSFT), and Apple (AAPL), for example.
Look at the best-performing open positions across all of our editors' portfolios at the bottom of each Digest...
Constellation Brands (STZ) – the owner of alcohol brands like Robert Mondavi and Corona – has returned more than 600%. Tobacco giant Altria (MO) is in second place, followed by fast-food icon McDonald's (MCD).
Buying big, safe, slow-growing businesses has proven time and time again to provide the highest investment returns.
Yes, we all know "Warren Buffett-style investing" can make you rich. But what's the actual reason this investment style works?
As I wrote in the October 16 Digest...
These stocks have a few standout quantitative traits aside from these qualitative basics that can help you identify them in advance. First, they pay good dividends and have a long history of growing those payouts over time. And second (and this is far less understood by most investors), their share prices aren't volatile. Their stock prices tend to move around a lot less than the market as a whole. That's because they have a stable cohort of investors who own the company – investors who are unlikely to sell.
I explained that academics measure this advantage by comparing the daily volatility of a company's share price with the volatility of the benchmark S&P 500 Index – which is composed of the 500 biggest publicly traded companies in the U.S. This is called "beta." As I noted...
Stocks with a volatility equal to the S&P 500's average are awarded a volatility score of "1." That is, the volatility of these stocks is perfectly correlated with the market as a whole. Stocks that move around more have higher betas. So a company that is 50% more volatile than the S&P 500 would have a beta of 1.5. A company that is two times more volatile than the S&P 500 would have a beta of 2, and so on.
In other words, these high-quality companies are more likely to have dedicated, long-term investors. They're not trading in and out of stocks. As a result, the share prices of these businesses move around less than the average publicly traded company.
I've long suspected buying these types of businesses would lead to outperformance in our readers' investment returns. But I wasn't able to prove it until I saw a presentation from Dr. Richard Smith at our annual conference last year in Las Vegas. From the stage, Richard explained...
We put together a group of 40 real-life portfolios – real buy and sell data from real investors. I asked my team to back-test all of our different stop-loss and position-sizing strategies against these real portfolios to see which of our tools made the biggest difference in performance... And I was amazed to see that there was one tool that improved investment performance more than anything else: volatility-based position sizing. If you only ever pay attention to one thing that I have to say, this is it – use volatility-based position sizing.
Don't let the term "volatility-based position sizing" scare you away... It's simply using the volatility of a stock to determine how much of it you should own relative to the size of your portfolio. Ideally, you'd have the same amount of risk in every stock you own.
The concept is simple, but implementing it is a bit tougher. That's why this type of strategy has long been largely exclusive to the world's best banks and hedge funds. Luckily, Richard – who studied math at Cal Berkeley and went on to get his PhD – solved that problem for the individual investor. He built an algorithm that determines the volatility of your portfolio, and tells you how many shares to buy of a given stock (any stock) so your portfolio is "risk-weighted," meaning each position carries the same amount of risk.
More simply... The program keeps you from loading up on risky stocks and helps you buy more high-quality, safe stocks like the ones we recommend. You can still swing for the fences with the "sexy stock du jour"... you just do so with much less risk.
Let me share the details of the study Richard conducted. From that Digest...
To back-test the strategy, Richard took the 40 investor portfolios and figured out how much of each stock these investors would have bought if they had built risk-weighted portfolios instead of using their actual allocations. Just making this one change – just changing the number of shares they bought – almost doubled the average returns of the portfolios he studied.
As I explained, Richard didn't change the stocks, purchase dates, or sale dates of these portfolios. He only changed the relative amounts of each investment...
Just making that one change saw the average return go from 6.7% to 12%. No other form of portfolio management – not even smart trailing stops – made as big of an impact.
Why did causing investors to focus on volatility work so well? Because volatility (as measured by beta) is a great indicator of risk. Colleges still teach that in the financial markets, risk equals reward. That might even be true in a lab setting. But it's not true at all with real live human beings. Most investors who set out to practice "buy and hold" investing end up doing "buy and fold." That is, they end up selling at precisely the wrong time... when fear in the market is peaking.
The result of Richard's study is a new tool he created for his best clients at TradeStops. You link your existing portfolio with this software, press one button, and it shows you how risky your portfolio really is. Press another button and the software shows you how to balance risk across all of your existing positions – and exactly how many shares you should own of each stock.
Linking your portfolio to this software and pressing two buttons will be the easiest and most profitable thing you do in your investing career. There isn't a single other thing you could do – certainly nothing as easy – that will so drastically improve your investment performance.
Nobody is perfect. We all swing for the fences from time to time. And sometimes it works – just look at Steve Sjuggerud's Seabridge Gold recommendation atop our Hall of Fame. But Richard's software will allow you to do so with much less risk. And it will vastly improve your long-term returns.
Here's an example of one portfolio Richard examined during his back-testing study...
No. 438. (The investor account names were hidden and each account was assigned a reference number.) This investor had $434,000 in his account. Over the period of the study, he lost 23.1% of his savings – just more than $100,000. That's a massive, horrific loss.
But using Richard's volatility tool to change the position sizes of his actual investments, his portfolio would have produced a total return of $59,494 (a gain of 13.7%). Note: This simulation did not change the stocks purchased or the timing of the buys and sells. It merely changed the position sizes by equalizing the amount of risk in each position.
What would you pay for access to a system that basically guarantees to vastly improve your investment results? Whatever the cost, you would make it up with your investment gains. People are already seeing great results from Richard's program...
"I love you guys, I feel a lot calmer about my stocks, I feel like you are an insurance company that helps me not lose my hard earned money. I feel much safer with you on my team, keep up the great work. You guys are mathematical geniuses." – Theresa H.
"I have been a subscriber to your service for several years and I am delighted with it. You keep on improving the software and as they say in the service 'you go above and beyond the call of duty.' Thanks!" – Tom C.
With Richard's TradeStops, you just hit one button to know how many shares you should buy of any stock to equalize the risk in your portfolio. You can also use it across your existing portfolio to rebalance it with the proper risk.
This is just one part of a complete set of tools Richard has designed to give individual investors access to the same systems professional investors use – systems that drastically reduce your risk and improve investment performance.
If you invest in stocks, you should absolutely be using Richard's service. It's simple to implement. It will improve your investment results. And it could be the single most profitable decision you make.
Editor's note: If you're ready to learn more about volatility-based position sizing – in addition to other tools that will make your portfolio much, much safer – be sure to join us for our first-ever live TradeStops training event...
Tomorrow night, Wednesday, May 4 at 8 p.m. Eastern time, Porter and Richard will walk folks through Richard's complete TradeStops system, LIVE on camera.
See for yourself how TradeStops can simply and easily double your potential investment returns, without taking on more risk or changing any of the stocks you already own.
This special event is absolutely FREE for all Stansberry Research subscribers... But if you'd like to attend, you must claim your spot before tomorrow, May 4 at 8 p.m. Eastern time. Click here to reserve your spot now.
New 52-week highs (as of 5/2/16): Deutsche Bank Gold Double Long Fund (DGP), OceanaGold (OGC.TO), Prestige Brands Holdings (PBH), Regions Financial – Series B (RF-PB), Sysco (SYY), and ExxonMobil (XOM).
In today's mailbag... Several readers share their experiences with Richard's TradeStops system. Are you a TradeStops subscriber? Tell us how it has improved your investing here: feedback@stansberryresearch.com.
"I really wish you'd stop... letting people in on the invaluable secret of risk-adjusted position sizing (risk parity)... Let them refuse to become great. Let them refuse to pay the paltry fee for access to TradeStops. I'm happy to take their money, but you keep giving away the secret sauce!" – Paid-up subscriber Rich B.
"I am a real life [TradeStops] example that you can use. I was very busy when I was younger and depended on professional managers to one extent or another. I have had some very real losses, at one point losing $26,000. This doesn't sound bad until you consider I was living in an apartment complex so dangerous that EMS would not send an ambulance without a full SWAT sweep first. I did this because the apartment was close to the hospital where I was working 110 hours/week and taking home less than $1000/month, and it was relatively cheap. I managed to use my 401k to save $52,000 with my employer match and lost half.
"Next, I worked for myself in private practice, had professional management, and had no clue that they were charging about 2.5% all in and underperforming the market. Next, I went back to training, professional management again, big fees again, and I had to tell the advisors to sell everything and go to bonds in front of the 2008 debacle. I still lost about 5% not counting the management fees. Finally, I left medicine and subscribed to Stansberry Research as an Alliance Member. The upfront cost was hard to swallow, but it has been more than worth it. It is the single best educational experience of my life including four years at Princeton, four years of medical school at Wisconsin, residency and two board certificates. It is that good.
"I was having trouble firing my last advisor because they were cheap (0.9%), had a good reputation, and would take small clients. One of the reasons I couldn't bring myself to take the jump was the work involved in calculating trailing stops, position sizes, position risk, and portfolio diversification (how much risk does the whole shebang actually have?). I tried to do it myself, but I am a math idiot (better to admit what you can't do than suffer from repeated, avoidable disasters), have limited time, am in the process of starting a small business, and did I mention I am a math idiot?
"I looked into TradeStops. The tools they had to offer all in were much less than the cost of my portfolio management under the advisor group, and I took the lifetime membership. Using position sizing tools gave me the confidence to take larger positions in stocks with low volatility, and tiny positions on super risky speculation. All told the volatility in my portfolio is way down, I am able to make some very high-risk speculations with appropriate position sizes, and most importantly I am starting to show a little profit. I was so confident that I fired my wife's management as well.
"The combination of your advice, information on how to evaluate investments, what books to read, and TradeStops helped me cut the cord with the advisor industry once and for all, with much less risk. Thank you." – Paid-up subscriber Jon L.
"When I was introduced to you by Ron Paul late last summer I was excited and anxious to read what you folks had to enlighten me about! Since then I've felt like I've won the financial information 'Powerball'!!! Kudos to the team & always sharing so much beneficial info; thank you for all the 'learning' moments. Porter's contagious enthusiasm roped me in like a calf; those webinars helped me get my head turned around & think rather than follow the cattle's path to the slaughterhouse...
"Our reserves weren't great as I understood the end of last year's messages; we persevered & bought some hard assets in early April. My wife likes shiny gold things but I prefer subdued silvery tones... Richard's expose from October stayed with me and when 'Sjug' gave it another spotlight recently I knew we had to follow your advice. We've given birth to a small portfolio while contacting Richard's group for the best tools available! Funny thing is that last night I reviewed his methodology and realigned our positions before markets opened today; Eureka! The timing was very 'lucky' as overly aggressive positions would have produced negative results... That's our excuse for following your learnings & generosity." – Paid-up subscriber Marc
Regards,
Justin Brill and Porter Stansberry
Baltimore, Maryland
May 3, 2016
The Bankers' Brilliant, Can't-Lose Business Model That's Totally Insane
Central banks are not where I usually go for comedy. But negative interest rates are hilarious.
Banks want to pay you to borrow money from them. Even Bernie Sanders hasn't come up with anything this ridiculous.
It's as if you're walking down a dark street and a mugger steps out of an alley, holds a gun to your head, and demands that you take his wallet, iPhone, and car keys.
Except you aren't laughing. Somebody's still holding a gun to your head – no matter what he's telling you to do. It must be some kind of rip-off. And it is.
Central banks don't really want to pay you to borrow their money. What they want is for you to pay a fee for lending your money to them.
You make a deposit in a bank. The deposit is a loan to the bank. Your deposit earns negative interest. When the bank repays your loan – that is, when you withdraw your deposit – you get back less than you put in.
We're all familiar with this business transaction. At my house, I call it "loaning money to my daughter."
It's a brilliant, can't-lose business model for banks. The only problem is, it's insane. No rational bank customer would willingly accept negative interest rates.
(Except, me, maybe, in the very unlikely case that my 16-year-old daughter becomes chair of the Federal Reserve.)
Whenever you encounter a business model that's insane, you can be sure that government is involved.
Government is the one part of existence that doesn't take place in real life. Government can do whatever it likes. Government can pass a law requiring every business to provide each of its employees with a unicorn, a flying pony, and a candy-flavored rainbow.
If you don't think so, you haven't read all 1,190 pages of the Affordable Care Act.
Negative interest rates are a political policy, of course. Who else but politicians would have an idea this crazy? The mugger who steps out of an alley, holds a gun to your head, and demands that you take his wallet – that mugger is government.
Why is government acting crazy?
Well, what makes insanity truly insane is that it always follows a certain comical logic. For example, let's say you get a crazy idea that the CIA is broadcasting brain-control waves from fire hydrants. If you're truly insane, you will drive around town smashing your car bumper into fire hydrants – it's only logical.
The crazy idea that government has is "debt is good." Debt will stimulate the economy. Debt will prod capital investment. Debt will spur productivity. Debt will fuel trade. Debt will increase consumer spending. Debt will raise the price of assets. Everything is possible with the miracle of debt.
Debt is good. Government should encourage good things. Debt is so good that government will subsidize it. Government will pay you to go into debt.
Like I said, there's a certain comical logic to it.
Negative interest rates also penalize you for having cash – that is, penalize you for not going into debt.
Negative interest rates are a way for central banks to suck cash out of an economy that has been swamped with cash by those same central banks.
This is like finding out that your Roto-Rooter man has a night job flooding your basement.
This is also where my head is about to explode.
Government has been printing cash with wild abandon since the 2008 fiscal crisis. And that cash is debt. Currency is nothing but a promissory note issued by government and backed by... um, government promises.
(Consult American Indians for a further discussion of government promises.)
The crazy idea that government used to have was "printing cash is good." Printing cash would stimulate the economy. Printing cash would prod capital investment. Printing cash would spur productivity. Printing cash would fuel trade. Printing cash would increase consumer spending. Printing cash would raise the price of assets. Everything was possible with the miracle of cash rolling off the printing presses.
This didn't work.
This didn't work for a simple reason. "Printing cash is good" was a crazy idea. Stimulating the economy by printing cash is as effective as stimulating new-car sales by printing pieces of paper saying, "Give me a new car."
But don't worry, negative interest rates will fix the problem. Negative interest rates will get rid of the government-issued promissory notes. Cash will go away and be replaced with subsidized central-bank debt, which won't be backed by empty government promises. It won't be backed by anything at all!
In a sane world, government would quit trying to stimulate the economy. Economies are stimulated by people, not political policies. Government is a henhouse, not a hen. The barn doesn't lay the eggs, the chickens do.
Government could start by cleaning out the barn. Shovel up all the government economic stimulus political policies and dump them on the politicians.
What government should be doing is protecting its citizens, defending individual liberties, guarding property rights, providing rule of law, and keeping taxes, regulatory burdens, and trade barriers low.
If that – and only that – were what governments were doing, the free market would take care of the rest. The economy would be so stimulated... So stimulated that I can't think of a PG-rated metaphor to do justice to the stimulation we would be experiencing.
And if we had a real free market in currencies and debt, government couldn't print cash with wild abandon and central banks wouldn't have any choice about what interest rates they charge.
In a sane world, the next time global central bankers got together for the Federal Reserve's annual August retreat in Jackson Hole, Wyoming, they'd have nothing to do.
Maybe, if it rained, they could go mud skiing.
Central bankers would be a joke. Which is what they are now. Except it's a bad joke.
Regards,
P.J. O'Rourke
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