Our 2013 Report Card, Part I: Monthly Newsletters

The history behind one of the most dominant companies in any sector...

Many Digest readers recognize Van Simmons as one of our go-to sources for information on the coin and collectibles markets.

In today's Digest Premium, he shares the story of how he helped launch a grading service that revolutionized the coin market...

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

Our 2013 Report Card, Part I: Monthly Newsletters...

This is my favorite essay of the year.

Why? For one thing, it's the only essay I (Porter) write that none of my competitors tries to copy...

If you've been reading financial newsletters for any period of time, I'm sure you've noticed that our worthy competitors frequently copy (or try to copy) everything we do here at Stansberry & Associates.

When we introduce a new product or service... when we have a marketing campaign that's working well... even when we switch the design of our publications or adopt a new font... it's only a matter of days (or even hours) until several of our competitors are publishing "knock-offs," designed to be nearly indistinguishable from our work.

Thus, there are now "Alliance" offers from our friends across town in Baltimore. There's "Real Wealth" from the wizard of Jupiter, Florida. And one competitor even began publishing a daily "Digest" recently. Once, a former professional baseball player built a successful career with another publisher by simply copying every stock Steve Sjuggerud recommended. (He's in jail today, by the way...)

Yes... we're flattered... But we wonder what their subscribers must think. How do their customers feel when they realize they've been purchasing rehashed thinking (or the outright copy) of another man's work?

You won't be surprised to learn that no competitor yet has copied this yearly ritual – our Report Card. It's not hard to imagine why. Most publishers are not eager for you to see a real evaluation of their products.

They have two reasons for this...

The first reason is economic. Publishers have discovered through years of marketing that the editor (and his track record) makes almost no difference to the short-term financial results of any particular newsletter advertising campaign. Such marketing results have taught my competitors that there's no point in bothering with hiring someone smart and experienced – or even in keeping accurate track records. They figure they can make even more money hiring cheap, inexperienced folks and then telling them to simply copy us.

This works for a while... until eventually, the subscriber stumbles onto our newsletters and sees the difference in quality. That's usually when we get a new S&A Alliance member and the subscriber dumps a lot of second-rate newsletter subscriptions. This is how we've become by far the largest independent financial publisher in the world. And this is why we don't cry (too much) about everyone always copying us. If our competitors want to sow the seeds of their own destruction, that's fine with us.

The second reason most financial publishers don't spend a lot of time evaluating track records is a bit more complex...

Do you know why magazine covers – like Time's 1979 cover "The Death of Equities," or the Economist's 1998 cover "Drowning in Oil," or the 1999 Financial Times piece on "The Death of Gold" – make such valuable contrarian indicators? Publishers who want to sell large volumes (which is every publisher) are forced to cater to the crowd. Large-circulation media, by definition, must report the news in a way that makes sense to the vast majority in the marketplace.

You're not going to sell many magazines by putting an idea on the cover that's completely out of favor. Nor will you sell many newsletters by advertising an idea, trend, or strategy that the investment public hates.

The sad thing is, to be a successful investor, that's exactly what you must do: You must adopt the idea that's wildly out of favor because that's the idea that's likely to be safe, cheap, and at the beginning (instead of the end) of an uptrend. So you're very unlikely to find a great investment idea in a newsletter promotion, no matter the integrity or good intentions of the publisher.

This is the core paradox, the core conflict, of financial publishing. What's typically good for the publisher's business – the trend or investment concept that the crowd has wildly embraced and will buy in the form of a newsletter promotion – is almost never good for investors.

That makes it difficult for publishers to compile great track records while also maintaining successful marketing campaigns. And publishers who are mostly focused on marketing will typically continue to promote an idea that sells newsletters even if it's bad for investors.

I vividly remember one competitor's promotion in 2001. It was a so-called "single stock" promo, which uses the story of one company to interest investors in buying a newsletter. You know the deal: Buy the letter, get the whole story on this incredible opportunity. The promo worked great. It was pulling in huge numbers of new subscribers. It was working so well that many other publishers began to "knock it off," to produce very similar newsletter promotions. My partners wanted to know why I wasn't doing the same.

Simple reason: The stock they were using to promote their newsletters was Enron. And I wouldn't recommend the now-notorious energy trader to our subscribers because it was hemorrhaging cash every quarter – regardless of the "earnings" it claimed. As you surely know, Enron was bankrupt by the end of 2001.

This paradox of newsletters explains why a wide dichotomy often exists between the ideas we use to sell our newsletters and the investments you'll find in our model portfolios. Our marketing pieces, no matter how carefully we vet them, must sell ideas that appeal to the mainstream. Our newsletters, on the other hand, offer conservative, safe, and contrarian investment advice. Subscribers who figure this out do very well.

Now... a word about how we compile these track records.

It's impossible to directly and accurately compare any given newsletter with an investment index or a mutual fund. That's because a newsletter's track record is formed by a series of investments made through time. An investment index or mutual fund is "fully" invested from the beginning of any period being measured.

To compensate for this difference, we show you the average and annualized results of our newsletters. And we compare that figure with the "weighted" return of the S&P 500 stock index. This is the annualized result you would have achieved if you'd bought the S&P 500 each time we made a new recommendation. It's the best apples-to-apples comparison we can make. (Please note that the weighted S&P 500 return is going to be different for each product because our newsletters make recommendations at different times.)

I believe the three most important stats in evaluating a newsletter's track record are winning percentage, average return, and average holding period (or "duration").

The No. 1 thing you want to avoid is losses. To me, an editor's ability to pick winners is the single most valuable factor.

Likewise, the higher an editor's average return, the more likely you are to have a favorable outcome when you buy his recommendations. That's why I base my grades on average return, rather than annualized return.

To me, duration is the least important factor. I don't care if it takes me 200 days or 300 days to make a good return. I am more interested in not losing money. And I'm not in a hurry. I've found that the safe money usually moves slower.

Duration, however, makes a huge difference in the annualized results we report. Obviously, if you're able to make money faster, that's going to lead to better real-world results because your winnings will compound. That's important to the traders we serve. But it's not very important to me, personally.

So... how did we do?...

We selected a two-year evaluation period – December 21, 2011, through December 31, 2013 – for this year's Report Card.

We did so because it was in late December 2011 that the European Central Bank (ECB) began to mimic the U.S. Federal Reserve's quantitative-easing policies. This set the stage for a massive bull run in stocks around the world. We warned subscribers this would occur. And many of our editors began to recommend more aggressive investments, knowing that the massive wave of liquidity would push stock prices higher and bond yields lower.

This evaluation shows how well we did during a massive bull market.

Please understand... we have in the past (and surely will again) also offered evaluations during mixed markets and during bear markets. We chose this evaluation period simply because it's the most recent dominant market movement. We also believe longer evaluation periods are more valid than short ones, so we prefer to measure periods greater than one year.

During 2012 and 2013, we recommended 219 different securities across our nine monthly investment newsletters (Stansberry's Investment Advisory, True Wealth, The 12% Letter, Small Stock Specialist, Retirement Millionaire, S&A Resource Report, True Income, Extreme Value, and Income Intelligence.) These recommendations were profitable 64% of the time. Altogether, including winners and losers, they produced an average return of 10.4% and an annualized return of 13.1%.

In my view, these overall returns are worthy of a "B." They outpaced inflation by an amount around 10% a year, which is our goal as investors. We did not outpace the S&P 500, however, which was up 17.6% on a weighted basis. (Again, that's what you would have made if instead of buying our recommendations, you'd bought a S&P 500 index fund instead.)

The S&P 500 had its best year since the 1990s last year. When the market goes straight up, it's unlikely that our recommendations, taken altogether, will outperform. As you'll see, there's a lot of hedging that takes place in our portfolios – buying bonds, buying gold, shorting stocks, etc. These strategies, which protect us from down markets, will always impede our performance during a raging bull market. That's fine with me. It's the smart thing to do... and will pay off when the market inevitably turns.

Here's how the letters did individually:

Income Intelligence launched in late 2013, creating too small a sample size for a fair evaluation as an individual publication. We will include it in next year's Report Card.

As you can see, I'm not grading our performance simply by the annualized results, which best approximates what an investor could have made (pretax) by following our advice. Instead, I'm grading on a "curve," with winning percentage ranked highest, followed by average gain, followed by annualized return.

That's why I only gave my team and me at Stansberry's Investment Advisory a "B."

You might argue that making 20% annualized over the last two years (and beating the S&P 500 handily in the process) is deserving of an "A" or even an "A+". But in my view, when only 63% of your recommendations are winners, you don't deserve an "A," no matter how exceptional the average return.

Likewise, The 12% Letter deserves an "A" because its recommendations were profitable more than 80% of the time and, on average, produced outstanding results (17.1%). That these results on an annualized basis didn't beat the weighted S&P 500 return is irrelevant: It's still outstanding investing, world-class in every way.

If you disagree with my methodology, no problem. I've given you the data on each letter so that you may assess and decide on your own.

A further discussion of each letter's performance is below, starting with the unbelievable ongoing performance of Dr. David Eifrig in our Retirement Millionaire newsletter.

Retirement Millionaire: A+

As you can see, nearly all of Doc's recommendations made money for our readers.

In fact, Doc didn't have any losses greater than 10%. (And those may yet turn out to be winners.) This unbelievable consistency allowed Doc to achieve the highest average return out of all of our newsletters – more than 20%.

This performance – no matter how exceptional – is routine for Doc.

He is the only analyst on our staff with "straight A's." Doc has earned an "A" (or better) in each annual review since we began publishing his letter in 2009. In every annual evaluation, Doc has produced winning picks more than 80% of the time. And he's averaged double-digit percentage gains.

In short... Doc hits for both average and for power. And he never strikes out.

Over the past two years, Doc's recommendations were exceptionally low-risk. He recommended short-term bonds, bond funds, covered-call funds, and radically safe blue-chip stocks, like national payroll processor Automatic Data Processing, aerospace technology firm United Technologies, banking giant Wells Fargo, and pharmacy benefits processor Express Scripts.

As a result, the volatility of Doc's portfolio was incredibly low. Despite taking such low risks, Doc's returns were exceptional.

In my view, this is exactly what every retired investor should be trying to do with his money. If you know anyone who needs safe and solid investment results and wants to sleep soundly every night, you've got to get them to read Doc's letter and follow his advice.

You may be wondering... why can't all of our analysts do such a great job?

We certainly try... but you should remember that Doc has more experience than anyone else on our staff. He worked for a decade in Wall Street's most prestigious proprietary trading desks – at Goldman Sachs, Chase Bank, and Japan's Yamaichi. That's before he "retired" for the first time, managing his own account and going to medical school. There aren't many people who had good Wall Street careers in the '80s or the '90s who Doc doesn't know. These contacts and many decades of experience give him a truly valuable investment edge.

If you're not reading Retirement Millionaire, you're simply making a huge mistake. There's no better investment advisory available in the world today – in any form, at any price.

The 12% Letter: A

In The 12% Letter, Dan Ferris has delivered nearly a perfect performance over the past two years. The secret: Focusing on the highest-quality businesses, trading at reasonable prices, that have demonstrated the ability to consistently pay and increase their dividends. Dan made outstanding profits with super-high-quality companies, like retailer Target, semiconductor maker Intel, food distributor Sysco, and gun maker Sturm, Ruger. This is an exceptionally safe approach to wealth-building.

How safe? He had only two losers in the portfolio, and the biggest loss was only 5%!

Generating annualized returns of almost 16% with essentially no losses deserves an "A." Congratulations to Dan Ferris on an outstanding job.

True Income: A

The last "A" goes to our bond newsletter, True Income. In what was a very tough market for all types of fixed-income investments, editor Stephen Smart did a fantastic job for his subscribers, earning double-digit returns on a wide number of corporate bonds. The True Income model portfolio had almost no losing positions. None of Stephen's four losses were greater than 5%. His picks made money more than 80% of the time.

Given the very low yields available in bonds, his annualized double-digit return is simply world-class. His outperformance reflected great security selection – including a 63% return in NextEra 7% bonds and a 58% return in Unisys 6.25% preferred stock. These kind of recommendations give credibility to our claim that more often than not, individual investors would be far better off in fixed income (which offers far less risk) than in common stocks.

Extreme Value: B

In Extreme Value, Dan Ferris has a far different mandate than in The 12% Letter.

He's not looking for merely good returns... or relatively cheap stocks. He's looking to shoot the lights out by following only the companies the market has left for dead... or never heard of in the first place.

Normally, that includes holding a bunch of small, unknown stocks... But since the global financial crisis wiped a lot of excess out of the market, many more high-quality names have been trading at Extreme Value prices. That allowed Dan to focus almost exclusively on stocks like Apple, IBM, and Brookfield Asset Management – the highest-quality stocks in their respective sectors. The returns have remained strong, too.

Dan barely missed another "A" here. His portfolio didn't have any real losses, only two stocks whose shares are down (both less than 10%). These names are likely to move higher. Still, we don't give "A's" for anything other than the most exceptional performances.

True Wealth: B

Steve Sjuggerud had several huge winners – recommendations like private-equity firm Blackstone (up 141%) and the iShares Biotech Fund (100%). He has "pounded the table" on these trades for most of the last two years. Unfortunately, he also had a few notable losers, like real estate investment trust SilverBay (-21%) and the India Small-Cap Fund (-33%).

Overall, the result was in line with Sjug's history of excellent performance over the very long term. He gets a "B" this year, though. The batting average just wasn't high enough for an "A."

Small Stock Specialist: B

Editor Frank Curzio has his work cut out for him in Small Stock Specialist... These stocks are volatile, and it's difficult to keep from stepping on a "land mine" eventually.

He did step on one land mine... video-game publisher Take-Two Interactive lost 46%. But in general, Curzio did a great job staying on the right side of almost every trade. Making money more than 70% of the time in this market is incredible.

The only thing Curzio didn't do over the last two years was hit any balls out of the park. There were a few very good returns – like private-equity firm Kohlberg Kravis Roberts (up 88%) and natural-gas-powered engine maker Westport Innovations (a 44% gain). But when you're investing in these small stocks, you need a few triple-digit winners to offset the inevitable losses. Small-stock investing can be very lucrative, but it's also a lot of work. Curzio is as good at this game as anyone I've seen in the markets. But over the last two years, his best efforts were worthy of a "B."

If you're looking to add some real "sizzle" to your portfolio, you want to keep your eye on this letter. Curzio is due for a huge winner... and I know he'll find it soon.

Stansberry's Investment Advisory: B

In Stansberry's Investment Advisory, we have a team of analysts – Bryan Beach, Brett Aitken, David Lashmet, and Edwin Tucker. This allows us to follow several different major, wealth-building trends at the same time.

Currently, we're focusing on the build-out of computer technologies that generate better-than-human sensory perception (our "Sensory Masters")... major changes to the world's energy markets – including propane exports from the U.S., new major oil discoveries in the Gulf of Mexico, and the shale revolution... the insurance sector (which was trading as cheaply as it ever had in history two years ago)... and the rise of a new, permanent underclass in the United States (which was behind our investments in discount retailer Dollar General and home-rental firm American Homes 4 Rent).

Over the last two years, we had our best success in the energy space.

We made huge gains on Chicago Bridge and Iron (up 132%), which is building out liquefied natural gas (LNG) facilities in the U.S. and around the world; Cheniere Energy (an 88% gain), which is a leading American LNG export company; and Targa Resources (up 86%), which is a leading U.S. propane export company.

Our subscribers enjoyed these gains because we figured out long before most other investors that America was going to produce a huge energy glut. While a lot of other investors were preparing for "Peak Oil" – the irreversible decline of domestic oil and gas production – we were predicting an American energy renaissance.

The winners in the new energy business are the companies with the resources and the legal right to export America's newly found cheap energy into the world's markets. This trend is very likely to continue for at least the next decade.

Nearly all of our losses (like our short of Salesforce, -30%) were related to efforts to "hedge" our portfolio against the risk of a bear market or the return of much-higher-than-expected inflation. We got killed trying to buy gold stocks (Newmont Mining, -22%) and trying to short stocks (Hewlett-Packard, -23%).

Without these attempts to hedge our portfolio and without our decision to sell many of our expensive stocks last June, our results would have been much better. If we had avoided about half our losing picks, I'd estimate that our annualized results would have been two or three points higher.

But... we still earned 20% annualized over two years! And we were the only newsletter at Stansberry & Associates Investment Research to beat the S&P 500 on a weighted basis. Buying our recommendations – including our shorts and our gold stocks – crushed the market's average return. We're happy with these results. Losing a few points of total return to produce a portfolio that is designed to safeguard your wealth is well worth it.

We're happy to make 20% annually (and beat the S&P 500) with a hedged portfolio. And we hope you feel the same way. Nevertheless, the grade awarded for this effort is still a "B."

At Stansberry Research... "A's" are hard to achieve. There's no grade inflation here – not even for the boss.

(By the way... in our most recent issue, we did a six-year study of our results in my Investment Advisory. We found, over the last six years, the average annualized result was 17.7% – very close to the 20% we earned over the last two years. These are great long-term results. If you've taken our advice over the last several years, you've done great.)

S&A Resource Report: B-

Our S&A Resource Report was the only newsletter we publish that had a negative average return over the last two years.

While we never like to produce negative results, it's not surprising that our resource letter would have struggled. Gold, silver, base metals, and most agricultural commodities are all down substantially over the past two years. Given this environment, Matt Badiali has done a good job producing some winners and cutting his losers quickly – producing very small losses overall.

Comparing Matt's results with the 20%-plus decline in the SPDR Gold Shares Fund (GLD) over the same period shows the importance of having a good analyst... and of following trailing stop losses.

On the basis of the relative outperformance of his benchmarks, I'm giving the S&A Resource Report a "B-." I'm sure those of you who have lost money following this newsletter will howl and complain... But the fact is, you would have lost a lot more money than you did if it weren't for the good job Matt has done here over the last two years.

These resource bear markets can't last forever – not with the growth of the emerging markets and the Fed's reckless monetary policy. I'd bet that next year, it will be this portfolio that's posting the largest gains.

That's Part I of our annual Report Card. Next week, we'll tackle the returns of our trading services.

New 52-week highs (as of 1/16/2014): Alcoa (AA), Altius Minerals (ALS.TO), Aware (AWRE), ProShares Ultra Nasdaq Biotechnology Fund (BIB), Blackstone Group (BX), CF Industries (CF), EnerSys (ENS), Energy Transfer Equity (ETE), Gladstone Capital (GLAD), Corning (GLW), iShares Nasdaq Biotechnology Fund (IBB), SPDR International Health Care Fund (IRY), Ligand Pharmaceuticals (LGND), ONEOK (OKE), Penn Virginia (PVA), Sturm, Ruger (RGR), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), and United Technologies (UTX).

In today's mailbag, one happy Alliance member writes in... and another subscriber responds to Doc Eifrig's advice for investing beginners. Send your questions or comments to feedback@stansberryresearch.com.

"Doc, I have to say I have told so many people 'all you have to do is get started.' I have told them that you can afford to put one dollar in a savings account. Or like you said $25 a month. It has always pained me greatly that they just never do that. Thanks for always putting this out there.

"Maybe we can get some of them to actually do that and become financially free." – Paid-up subscriber Jeff Spranger

"I wanted to send you a short note to tell you how thrilled I am to be a new Alliance member. I am inundated with so much excellent information. I feel like a kid in a candy store. My task now is to sift through it all and develop my own investment strategy.

"Income, growth, international, trends, speculation, resources, etc. It is all there. The trick (and fun) is to determine how to apply these elements (updating as circumstances change) to put my family on a path of financial security and independence. Thanks for providing such a great product. Also, I am excited to visit the Ranch next month. I just may want buy some real estate there. Who knows?" – Paid-up subscriber Rob Carskadden

Best regards,

The history behind one of the most dominant companies in any sector...

Editor's note: Many Digest readers recognize Van Simmons' name. The co-founder of Professional Coin Grading Service is one of our go-to sources for information on the coin and collectibles markets.

Van recently appeared on Porter Stansberry's weekly Stansberry Radio podcast. Today, we'll excerpt a portion of that interview (episode 124), where Van describes how he and his business partner, David Hall, launched their grading service... and how that revolutionized the coin market...

Van Simmons: We first started in the collectible coins market in 1981 with the first "buy/sell spread" in the market... We would [tell clients] here is what we're paying for coins. Here is what we'll sell them for. They just had to meet our grade.

By 1984, the business was very strong, and [my partner] David came to me and said, "What do you think about starting a grading company?" We went back and forth. And it took us a couple years to start it.

In '86, we opened our doors and called ourselves the Professional Coin Grading Service, or PCGS. I think so far we've graded 25 million-26 million coins. It was funny because we didn't how well it would do. But we were in the black the first week and never looked back. I mean it just continued to be profitable and is still very, very profitable... It revolutionized the market.

A lot of very wealthy people sit at home and want to buy something. But they don't want to get taken. So we established a grade for collectible coins. PCGS doesn't buy and sell coins. It just grades and certifies coins. It's like a third-party authentication service, sort of like they do with bonds and everything else.

What we didn't expect to happen is for ultra-rarities to take off, where there was a big demand for really, really, really rare coins once people felt secure in what the actual grades were.

Porter Stansberry: It led to a huge bubble actually in rare coins because they became essentially securities. They became securitized because people could know exactly what they were buying. Do you remember what the peak premiums were for a highly traded coin, like a MS65 Saint-Gaudens?

Van Simmons: If you took a Saint-Gaudens in 1990, an MS65 was probably $4,500 to $5,000. And a MS66 was $14,000 to $15,000. Meanwhile, the spot price of gold was less than $300 an ounce. [Editor's note: Today, a Saint-Gaudens graded MS65 sells for around $2,100, with the spot price of gold at $1,250.]

So the premium went up quite a bit. Certain areas get real hot in all collectibles. It's like, they do what they are supposed to do. They move up and then they tend to go higher than they are supposed to. The highs always usually surpass the past highs. And when they come down, they usually get hammered pretty hard. But the lows are always higher than the past lows in most cases.

So... everything continues to move up. But I think the Saint-Gaudens is a good commodity coin for you to talk about because it is a very volatile coin that trades up and down based on demand.

Editor's note: Van appeared on the subscriber-only Premium edition of the Stansberry Radio podcast. On each premium episode, Porter invites many of our most successful friends and associates to talk about their best current investing ideas. To learn more about Stansberry Radio Premium, click here...

The history behind one of the most dominant companies in any sector...

Many Digest readers recognize Van Simmons as one of our go-to sources for information on the coin and collectibles markets.

In today's Digest Premium, he shares the story of how he helped launch a grading service that revolutionized the coin market...

To continue reading, scroll down or click here.

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 01/16/2014

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)