Our annual Report Card, Part II...

Our annual Report Card, Part II... Mike Williams does it again, making more with bonds than you could have with stocks... Two amazing traders: Jeff Clark and Dr. David Eifrig... Systems that only lose you money... Goodbye to the Grail...

In today's Digest, we complete our annual Report Card. You'll find a detailed accounting for how our premium research products performed during the 22 months from March 2010 through the end of 2011. Why that particular time period? That's when I believe we entered the European banking crisis – a deflationary scare that reached its peak in October 2011. (If you missed Part I, you can find it here.)

Looking at how we performed during this tough period in the markets demonstrates how our different strategies and analysts handled a bear market. (You might recall that last year's Report Card examined our performance from March 2009 through the end of 2010 – a period that was dominated by the huge bull move coming off the early 2009 market lows.)

The point is, I want to see how our products perform over a reasonably long period of time and through different market action. Hopefully, you find these Report Cards useful in assessing which of our products are right for you. But before we get to the numbers... let me share with you how I think about what's important in these numbers.

There's a big difference in what investors expect from a trading service, like Jeff Clark's S&A Short Report, and a guide to safe, long-term investing, like Extreme Value or my Stansberry's Investment Advisory newsletter. When I analyze our investment letters, I want to see high winning percentages and high average returns. When you're investing for a long period of time, most of your success (or failure) comes from avoiding losses.

On the other hand, when I analyze a trading service, the winning percentage is almost irrelevant, as all good traders understand. The key to success when you're trading isn't avoiding losses (it's not possible) – it's keeping them small relative to your winning trades, which will produce a big annualized return. In trading, the annualized return is key because it reflects the average returns and the holding period. The faster your trades, the more your portfolio compounds.

Let's start today's review with our three premium investment research products: Extreme Value, True Income, and Phase 1 Investor. These letters have different objectives... but they can all be analyzed using the same basic metrics: winning percentage and average return. As a reminder, the "weighted S&P return" is a comparison that shows what you would have made (or lost) if instead of buying our recommendations, you bought a position in an S&P 500 index fund at the same times.

True Income: A

I continue to believe True Income is not only the best investment newsletter we publish, but the best independent investment advice you can buy, anywhere, at any price. I have frequently said that if I could teach investors anything that I've learned in my 16 years in this business, it would be how to value stocks, how to buy discounted corporate bonds, and how to sell put options. And of these things, knowing how to buy discounted bonds is, by far, the most valuable. Once you realize that you can make just as much money in these bonds as you're likely to make in stocks with almost none of the risk, you will simply refuse to buy stocks anymore. Or at the very least, you will demand a wide margin of safety (a very low price) in any stock you buy, because you'll find making money in bonds is such a better option.

This year our world-class bond analyst, Mike Williams, slipped a notch from his habitual position as the A+ leader of our annual Report Card. (Mike, by the way, is the most seasoned analyst on our staff. He's been investing professionally since the year I was born.) The cause? A big collapse in the shipping industry that caused larger and deeper losses than Mike expected at General Maritime – the bond is down 86% from his recommended price. When I asked Mike about what went wrong, he said: "By far my worst idea was General Maritime. Value players are often early, but it just does not work for bonds. Next time, I am going to lie down 'til I get over it."

Now, this happens – once in a while – with these bonds. That's why we always tell our readers to treat these bonds like stocks – small position sizes are key. No more than 5% of your assets in any single position. And if you look at Mike's performance in total, it is still world-class. Even with the blow-up at General Maritime, Mike's winning percentage was nearly 75% and his average return was in the double digits (10%). Once again, he trounced the weighted S&P 500 return.

And... he generated a 134% return with one of his recommendations, the Western 5.75% convertible. That's more than doubling your money with a bond! I love it. And if more people would just try this letter, they'd love it, too.

Extreme Value: B-

Now, I know what you're going to say here... How could you give Dan Ferris a "B-" when his winning percentage is less than 50%?

Well, look... sometimes, the numbers lie. In this case, the numbers don't tell the real story – at all. Two of Dan's "losing" positions are Constellation Brands and Range Resources, both of which were only fractionally down at the end of 2011 from his recommended price. Counting them as "losers" is absurd.

Additionally... and this is the far more important part... Dan doesn't use trailing stop losses, which means, during a bear market, his portfolio is going to experience more volatility than many of our other letters. The stocks that are down today in his portfolio will be the ones that rally the most during the next bull market leg. And because he typically holds his recommendations for three to five years, a 22-month evaluation during a bear market is going to give you a skewed look at this strategy.

The fact is, Dan's portfolio is loaded with value. And he successfully shorted two of 2011's most overvalued stocks – Salesforce and Netflix. He did a great job for our subscribers during this tough market. In my view, the only real mistake Dan made over the period was buying LaBranche & Company. I believe it's a value trap. Only time will tell who's right.

Phase 1 Investor: C-

Phase 1 has been a disaster lately. There's no other way to describe it. We got crushed buying heavily into startup geothermal stocks – Magma Energy, Ram Power, along with a bunch of junior mining companies, all of which were badly hurt in 2011's big commodity selloff. Unfortunately, this kind of bad performance is nearly impossible to avoid during market corrections because these small-cap stocks will always be much more volatile than the market itself. For example, one of the measures we use to gauge the trend in the market's smallest, most volatile stocks is the TSX Venture Index. This index measures the price action in small resource shares. This index was crushed last year. It fell 45% in the span of seven months. Most Phase 1 stocks got crushed as well.

I won't give the editor (Frank Curzio) a "D" or an "F" though because he did limit our losses by using trailing stop losses. And he found lots of good stories – stocks that I believe will pay off for us when the market turns. With this kind of investing, you have to be prepared to suffer losses. And you have to make up for them with huge winners from time to time. I believe Frank will deliver for us.

I'm sure a lot of people will see these numbers and swear off using this product. They're making a mistake. I believe 2012 is going to see a big boom in commodity prices, and many of these names will see gains of 100% or more. Frank will be a hero next year. That's the way it always goes with this product. Zero or hero... Nothing in-between.

Now... on to the real trading services. One of the things you can always do when the markets are super volatile, like they have been over the past several months, is trade. Volatility drives up options prices, making them much more attractive to sell (to generate income). The market's wild gyrations also open up opportunities for short-term trading. This is the kind of market that's made for a natural trader like our own Jeff Clark...

S&A Short Report: A+

Jeff Clark's investment performance is amazing to watch.

For most of my career, I'd never seen anyone else who could make money trading naked options – but Jeff does it almost all the time. Amassing an average gain of 13% in these kinds of short-term trades (typically about two weeks) is phenomenal.

Lots of people think that good trading is about racking up big, 100%-plus gains. It's not. It's about making lots of smaller gains fast. If you keep compounding your portfolio by taking quick 13% gains, you'll end up a lot richer at the end of the year – just look at Jeff's annualized results.

I don't talk much about this, but I've always thought that Jeff Clark choosing to work at Stansberry & Associates was one of the biggest accomplishments of my career. Guys who can trade like this (and Jeff has been doing it for 25 years or so) don't have to work for anyone. I'm flattered and grateful that Jeff works with us. And if you use his research, I know you're grateful, too.

A great example of the trading instincts that Jeff brings to the table was his gold trade last summer. Gold was going up – straight up – day after day. Jeff told me at the time, "This is going to end badly." He knew gold had gone up too much, too fast. He recommended buying naked puts on the SPDR Gold Trust fund (GLD) on August 17. Exactly one week later, he told subscribers to sell the position for a 141% gain.

It was one of the best trades I've ever seen. He stepped right into an extreme market move – going the other way. It was beautiful. Jeff explains…

One more thing about Jeff's S&A Short Report...

Not many know that S&A Short Report subscribers also have access to what we call the Direct Line, an instant messaging technology that allows Jeff to send notes about what the market is doing during the trading day. His thoughts are published immediately to the subscribers. (You can check this out by using our website.) As Jeff says, the Direct Line was the key to even bigger profits in the last year than we officially recorded...

Advanced Income: A

The primary strategy in Advanced Income is selling calls against somewhat speculative stocks. This generates a lot of income (which is good), but it involves a bit more risk than our more conservative approaches. I wouldn't normally endorse taking on this extra risk to gain 20%-30% more income... but in the hands of a great trader, like Jeff Clark, it works.

The result is a slight increase in the number of losing trades, but a much higher annualized gain. For many subscribers, getting 14% a year is worth the volatility. As long as you remember to cut your losses short, this is a safe way to make a lot of income.

Retirement Trader: A++

That's not a typo…

Dr. David Eifrig (or "Doc" as we call him) has established what I believe is the best trading track record in the history of the newsletter industry. Since the start of his Retirement Trader in July 2010, he has seen only three positions end up in the red – and Doc says he'll be able to trade these positions back into the black eventually.

The strategy here is to make extremely safe, short-term bets on super-high-quality stocks. For example, Doc has traded options in Microsoft 13 times in this advisory – and made money every time.

Doc learned these strategies during his days on the trading desk of Goldman Sachs, where he worked in the 1980s and early 1990s. It's a safe bet that nobody in the newsletter world knows more about this kind of super-safe trading than Doc. After all, Goldman makes money almost every single day using these same techniques.

When we created this product in 2010, I told Doc that his goal wasn't to focus on making a lot of money on any given trade. Instead, he needed to remember that his readers, most of whom are on a fixed income, couldn't afford to lose any of their principal… ever… on any trade. And while I knew that Doc would work hard to make his trading safe, I can't say I fully believed a 100%-safe trading strategy was truly possible... until he did it.

Saying thanks to Doc doesn't go far enough. There's no doubt in my mind that he's changing the lives of his subscribers by helping them make far more money with their portfolios than they ever dreamed was possible – his annualized returns are nearly 30%! By making sure his trades are safe, he's encouraging people to become more active with their investing, too.

If you want to make more money with your portfolio... but you're afraid of taking any chances, Retirement Trader is the perfect advisory – thanks to Doc Eifrig!

Now... looking at the first three trading advisories I've written about above, you might think this trading business is easy. Buy and sell. What's the big deal? Well, Jeff Clark and Doc Eifrig, who have a combined 50-plus years of trading experience, write the three advisories above. They use their instincts most frequently to trade against the dominant trends in the market. You can't teach these kinds of instincts to a computer... and they don't show up in trend lines on charts.

As you'll see, the other trading advisories we publish depend, in one way or another, on systems. This system approach only works when strong trends are in place, and these systems tend to trade with the trend, not against it. You'll notice that none of the trend-following advisories have been working. The primary reason is that there hasn't been a dominant trend in the market over the last 22 months. It's gone up and down – a lot. In fact, the markets have experienced record amounts of volatility. That environment is disastrous for trend-following systems...

True Wealth Systems: C

Out of all of our systems, True Wealth Systems did the best... because it's programmed to stop trading if there's no dominant trend in place. Thankfully that part of the system worked, which is why it gets a "C" instead of an "F" like all the other systems.

I know the amount of work and research that went into building True Wealth Systems. We spent a fortune on the programming, the computers, and buying the data. And we've back-tested it thoroughly. I know, in a trending market, it will work.

According to Brett Eversole, who helps run the system with Dr. Steve Sjuggerud, tradeable trends are now in place…

• Homebuilder Fund (ITB) is up 15.94% since December 5.
• PNC Warrants is up 4.39% since December 5.
• Health Care (RXL) is up 6.41% since January 4
• Biotech (BIB) is up 16.58% since January 4.

S&A Junior Resource Trader: F

This might be the biggest disaster of all...

I mean, one of the two stocks it got right was really only breakeven. So actually... we only made a profit here once. That's just horrible.

What the heck happened?!

Our strategy here is to buy junior resource stocks when the underlying commodities are in an uptrend. Normally, the strategy works brilliantly because the stocks are more volatile than the commodities. If they're going up, you can make a fortune. Our problem was... except for gold, commodities went down in 2011.

This service was launched at an inopportune time (at the end of 2010). Commodities and commodity stocks had enjoyed a huge run higher from mid-2010 to early 2011… and were peaking. When the markets headed down, small, riskier junior resource stocks were crushed across the board. (Again, note that the TSX Venture Index fell 45%.) But we kept recommending these companies anyway (until August). Ugh.

Furthermore, the junior gold stocks decided not to follow the metal higher – they actually went down, too.

Now... it's tempting to kill this product because it doesn't seem to work at all. But I know it can work very well. Many of the wealthiest guys I know made their fortunes by trading these stocks in the same way. I'm not going to kill the product until I get a chance to see how it performs in a bull market. My belief is that you'll see colossal gains here.

S&A Grail Trader: F

The only thing the Grail got right was cutting losses.

It did a great job of that, actually. Almost all the losses here were very small. Out of all of the losing trades, only one was significant – a 30% loss on Myrexis, where the volatility made it impossible to get out at a better price. So if people wanted a strategy for generating small losses, this really would have been the "Grail." Unfortunately, I've never seen it generate anything like results that I could be proud of.

We decided to publish it because its creators had a good reputation and an impressive track record – including money management – showing that their system worked. I'm not sorry we tried it out, and I wish its creators the best. But I've lost confidence in this particular system, and I think it's best for us to move on. We've stopped publishing the S&A Grail Trader.

So... there you have it. The experienced, contrarian traders (Jeff Clark and Dr. David Eifrig) and the careful analysis of Mike Williams in bonds (!) beat the pants off the "Grails," the systems, and the computers. It was a tough market over the last 22 months. I'm very proud of our analysts... (And I bet the systems will have their day, sooner or later.)

I hope you've enjoyed this review and maybe even learned something about our products that you didn't know before. Thank you so much for your careful attention and your business. We will continue to do our best to deserve your loyalty and trust. And I will do my personal best to make sure you are getting the information I would want, were our roles reversed.

After writing a 10,000-word newsletter this week and this detailed Report Card, I'm plum tuckered out. We'll have to get to the mailbag next week. Until then, please let me know what you think – good or bad – about this evaluation. We rely on your comments to monitor the quality of our work and to constantly improve our products. Please... don't let your subscription expire without at least telling us one way we could improve… feedback@stansberryresearch.com

Regards,

Porter Stansberry

Miami Beach, Florida

January 20, 2012