Porter Answers the Most Common Questions About Stansberry Portfolio Solutions

Are those really buys?... What about cash?... Why don't you have puts in the portfolios?... Why don't you use VQ-based stops?... And a host of other questions...

In today's Friday Digest...

I'm going to answer the most common questions we've been getting since we published our first edition of Stansberry Portfolio Solutions.

Most of the questions we've received are about trying to understand "the why" behind our recommended allocations. So the discussion you'll find below could be helpful in your own decision-making, whether you're following our new model portfolios or not.

And of course, some of the questions we received just sounded a little funny to us.

You might think that telling people exactly which 40 (plus or minus) stocks and bonds to buy today... telling them exactly how many shares to buy (per $100,000 invested)... telling them exactly what stop-loss level to use on each position (how much risk to take)... would be enough information for them to get started.

But you'd be wrong.

So let's dive right into the mailbag...

"Having used your recommendations (exclusively) over the past 12 months, my personal investment performance has been 16.77%. This seems like a pretty good return to me. I attribute this in large part to strictly following both your Trailing Stop advice as well as your Buy-Up-To advice – not paying a penny over your recommended top price. This allowed me to buy into great companies at fair prices and mostly watch my investments grow, as would be the hope of anyone starting a business to make money.

"However, I noticed this one feature of a Buy-Up-To price is not included in your Portfolio Solutions. Is this because asset allocations being 5% or smaller minimizes the downside risk anyway? Or are the Recent Prices provided to be considered the Buy-Up-To prices?" – Paid-up subscriber Mike H.

Porter comment: Well, Mike... we figured adding a buy-up-to price on the very first edition of these model portfolios would be a little redundant. We're recommending you buy these securities at current prices.

Overall, the moves in the portfolios after the first day were less than 1%. The Total Portfolio was up 0.6% after its first day. The Income Portfolio was up 0.5%. And The Capital Portfolio was up 0.8%.

None of these moves is material, in any way. The only two stocks across all the portfolios that moved more than 3% higher were two very small-cap stocks we recommended in The Total Portfolio. For these stocks, these moves are just "noise" and don't change our outlook or our rating.

Starting next month, you will see us change the ratings on these positions, including adding a "buy up to" price where necessary.

Also, it's important to note that when you're beginning an entire portfolio, you've got a big advantage in terms of the impact of price changes. If we were recommending just one stock, getting a good price would have been difficult. But because we're recommending such a wide range of securities, some went up (a little) and some went down (a little). That makes most of the changes completely irrelevant, in terms of the value of your portfolio as a whole.

In other words... don't worry about it. In some cases, you're getting a better price than we did the day before. In some cases, you're not. Across a year's worth of investing, in a diversified portfolio, those minor differences won't mean much, if anything, at all.

"So very glad you came up with the Portfolio Solution approach. Upon reading the first installment I couldn't help wondering something that I don't believe I've seen addressed yet. All along we have been learning that the price at which one purchases a stock is a significant consideration, along with position size, how it fits into overall portfolio, etc. I am curious how 'buy up to' prices fit into the Portfolio Solutions as we try to right-size current positions and enter others. I see no mention of it in the list...

"Further, I have to do a more thorough review, but upon a quick scan, I did not see any of the Big Trade recommendations in the list. Was that purposeful? I'm curious how much of a Portfolio you'd recommend committing to the Big Trade idea if that is not to be folded in to the Portfolio Solutions approach. Thanks so much." – Alliance member and paid-up subscriber Vicki B.

Porter comment: I'd reiterate that we believe all of the positions in our portfolios are trading at a fair price... That's why we recommended them. In some cases, the current prices are higher than when we originally recommended them in our newsletters. That's OK. There's a range of fair prices – though, obviously lower prices are more attractive.

But... and this is a key point... when you're buying an entire portfolio as opposed to just one new stock, the price level of one particular position isn't as important.

As I'm sure you know, one of the positions in The Total Portfolio sold off massively just before we published, which gave us a great opportunity to buy. So in some positions, you're getting a great price. And in most positions, you're getting an average price. And probably in a few, you're paying a small premium, but one we feel is deserved.

The point is, overall, the prices are very attractive. As we're recommending buying now and as we're starting an entire portfolio, we didn't feel that adding buy-up-to advice was relevant. But don't worry. As the portfolios change, we will provide continuing, position-specific advice.

In regard to Stansberry's Big Trade… as you know, Stansberry Portfolio Solutions includes three different portfolio levels. The only portfolio that has access to the Stansberry's Big Trade recommendations is The Total Portfolio. If you look carefully, you'll see that our "Dirty Thirty" list of vulnerable and overvalued companies is represented in that portfolio.

And you can bet that going forward, we will continue to add to these hedges as we move closer and closer to the credit problems we see developing in 2018 and 2019.

"I'm a subscriber of The Total Portfolio and am trying to understand the recommendations. Please help me out with the following questions:

1. Are all of the securities recommended buys at current prices?
2. Why are many of the recommendations... in The Capital Portfolio not a part of The Total Portfolio?
3. Was [an individual Chinese stock] recommended instead of [a related investment] that was recommended in True Wealth China Opportunities primarily because it holds a lot of [the individual] equity "at a discount"?
4. Why are short sales... recommended rather than buying long-dated puts on the same companies as per the Big Trade publication?
5. Why are several income funds... recommended rather than buying distressed corporate bonds from the Stansberry's Credit Opportunities newsletter?"

– Paid-up subscriber Greg P.

Porter comment: Great questions, Greg.

1. Yes, as we hoped was obvious (but apparently wasn't), we think all of the positions we listed in The Total Portfolio are "buys" at current prices (or "sells" in regard to our short positions).

2. We want each of the portfolios to have slightly different characteristics. If you look closely, you'll see that many of the names in The Capital Portfolio have similar counterparts in The Total Portfolio. You, of course, are free to mix and match as you see fit.

3. Great question. Our selection committee just wanted to keep that position "cleaner" and more focused on the Chinese stock. This, of course, is a subject of some debate. And of course, you should choose the investment that suits you best.

4. Another great question. Timing is critical with options. It's hard to ignore the value of buying puts when the VIX has a "10-handle" – when it's trading near record-low levels. But we're gambling that an even better opportunity is coming in the months ahead.

At the moment, we're content to merely be short these shares... and in very, very small amounts relative to the complete portfolio. You might have noticed a similar pullback in short allocation in December. (So far, that's been a smart move...

5. Believe me, if I were building The Total Portfolio in the winter of 2016 rather than in the winter of 2017, corporate bonds might have made up more than 50% of The Total Portfolio. But the simple fact is that it's hard to find much that's even "kinda" safe and still providing yields above 10%. There are a few. And we put a few in our portfolios. But not a lot.

In my view, our best chance at good income investments is in mortgages, an opinion that's expressed by a 25% weighting into various mortgage-backed REITs.

And... to answer your question more broadly...

In a publication like Stansberry's Big Trade, we're tasked with trying to fulfill a very specific strategy. The Big Trade is trying to capitalize on the rising number of corporate defaults and the likelihood (in our view) of a collapse in the high-yield bond market in 2018 and 2019.

We can't know exactly when those risks will become evident to other investors. We can't know when the stocks in question (the Dirty Thirty) will begin to spiral down. So in that publication, we've established four early, tentative positions. But we haven't gone "whole hog" yet.

Right now, the Stansberry's Big Trade model portfolio has two winning positions and two losing positions. So we're doing fine. I expect we'll continue to find specific opportunities that are attractive enough to recommend in the context of that strategy.

But what Stansberry Portfolio Solutions allows us to do, finally, is show you how we think that strategy fits into a whole-portfolio approach. And clearly, we think that for now, we have better ways to express those ideas.

Patience, grasshopper.

"Wow. The new Total Portfolio is a lot more than I expected. I can see the wisdom in the diversity of the recommendations and the positioning sizes... I have been following many of the newsletters for several years, and my portfolio reflects the recommendations you have made, as well as Steve, Doc, and Dan. What really is a surprise to me is how many of the recommendations in The Total Portfolio that I do not currently hold. I'm all in, so I have some work to do.

"I do have several questions. First, what about cash? There is no mention of a position size for cash. Second, why are you not using stop losses based upon TradeStops SSI or VQ? Thank you for all of your hard work." – Paid-up subscriber John H.

Porter comment: John, I don't think we're going to offer cash allocations in the Income or Capital portfolios. With just around 20 positions, we're going to leave that decision up to each subscriber. In The Total Portfolio, however, we will offer cash allocations when we think it's wise.

In the meantime, I hope you'll study the portfolio and think about how we've incorporated positions that offer cash-like security with far more income.

In regard to TradeStops VQ and trailing stops, we consider these tools when we build the portfolio, but we're not a slave to them. (By the way, I am a firm believer that if you're trying to manage an entire portfolio by yourself, you MUST have a tool like TradeStops. There's just no other way to keep your eye on the ball.)

"Congrats! The portfolios are great but I found it curious you did not include any 'buy up to' advice with any of your recommendations. Can we assume all recommendations in the Portfolios are a buy and if so, some are in conflict with advice in the individual advisory letters. For example, the last update of Stansberry Investment Advisory show Freddie Mac and Fannie May as 'Hold.' Should we be bouncing the portfolio recommendations off the buy up to/hold advice in the individual advisories letters before we buy? Appreciate the clarification." – Paid-up subscriber Dennis P.

Porter comment: We published these portfolios because we believe all of these securities in the context of this portfolio are buys. Specifically, the Fannie and Freddie positions are offset by large holdings in mortgages. So while on a stand-alone basis, they aren't as attractive as they were when we were buying them for $1.50 a share, they're still attractive enough as an offsetting special situation in The Total Portfolio.

As we make adjustments to the portfolio, we will provide all of the specific advice to manage it, including buy-up-to prices if necessary.

"Do we consider the buy up to price noted in the other newsletters for the securities listed in The Total Portfolio? If not, it would help to say so since that is a deviation from typical S&A. If we should consider buy up to price, would it not be better to note it in your one-page summary since one of the points of this new info is to make it EASIER? Given the number of holdings in the TP, if buy-up-to price is a consideration, I suspect many may not get into the trades completely and thus compromise the effects of the model portfolio. Would be very helpful to note this!!

"I have 6 different portfolios and am using the TP for a 500K one, so I really want to make sure I hold everything you state to decrease the risks and improve returns. Only getting into some of the holdings would defeat the purpose of the diversification." – Paid-up subscriber Dr. David B.

Porter comment: Doc, take a deep breath. All of the long recommendations listed in the portfolio are "buys" at current prices. That's why we picked them.

We wouldn't pick stocks that weren't buys and put them in a new model portfolio. What good would that do? "Here's a list of great stocks, but don't buy them."

That doesn't make any sense.

Likewise, why do you think we told you exactly how much capital to put into each position, down to the number of shares, if these stocks were not being recommended?

I'm at a loss. But that's OK. I can just reiterate that we believe in the context of this portfolio that these positions are all buys.

Yes, some of this advice contradicts what we've published in other letters. That's OK, too. The context is completely different. Say you've been telling people to buy a stock for $1 a share, and then it's trading at $4. You'd tell people that's a "hold" now. Even if you think the stock is likely worth as much as $20 a share, it doesn't matter in the context of that newsletter's portfolio. It was recommended at $1.

For a new portfolio, though, the fact it's worth $20 is all that matters. Likewise, by taking a whole-portfolio approach, the risk of buying at $4 is being offset by a few of the other positions that are trading at extremely attractive prices. That's how it works when you start a new portfolio: All of the ideas are attractive and some are going to be more attractive than the others.

"Is the recommendation to buy these positions now? Many of the recommendations are at or near 52-week highs and seem to go against the individual 'buy up to' prices in the newsletter recommendations." – Paid-up subscriber Jim F.

Porter comment: Yes, Jim. When we say buy XYZ stock with 4% of your $100,000 portfolio (and we give you the specific number of shares we're recommending), we're recommending that you buy the stock... and allocate 4% of your portfolio to the position.

I'm not sure how, unless we called you on the phone and told you directly, we could have been more clear.

In regard to prices, with stocks hitting new highs in all of the major indexes, we're beginning this portfolio approach in the midst of a bull market. I sure wish we were starting out back in February 2009. But back then, nobody would have wanted to buy a service like this because nobody would buy stocks. It's ironic, isn't it?

As a result, and as you've noted, a lot of the stocks we've recommended are trading at or near new highs. It's our job to make the best of the situation. And if you look carefully, you'll see that in The Total Portfolio, we're holding more than half of the portfolio in either very safe insurance companies (big piles of bonds) or mortgages (very safe, fixed income).

That large allocation to fixed-income-by-another-name is by design. Like Buffett in 1999 (when he bought a huge insurance company, General Re, to offset his large exposure to a stock market trading at crazy high levels), we're using a portfolio approach to mitigate the risk of buying stocks at relatively high prices. This should allow us to capture some of the upside that may still be left in stocks, while still positioning us to have plenty of cash at the bottom, too.

"I have been an Alliance member now for approximately 10 years, and I have no doubt it has been one of the best investments I have made. I learned to put my stocks on dividend reinvestment. I learned about capital-efficient companies like Hershey. I learned about asset allocation, the importance of noncorrelated assets... etc.

"I have tried to learn from the school of hard knocks as a commercial banker, as a fixed-income trader and salesman, as a MBS and muni underwriter and as a portfolio manager. Throughout my career I have witnessed both the importance and the fragility of liquidity from both sides as a provider of liquidity and a receiver of liquidity... You have recommended closed-end funds investing in floating rate senior loans and frankly (in particular after reading one of your recommended books: Fooled by Randomness by Nassim Nicholas Taleb) I asked if by chance you have overlooked the binary nature of liquidity in these floating rate loans?

"Regulators keep taking liquidity out of the market by disincentives to making markets by banks and brokers. One day these floating rate senior loan funds will be asked for liquidity at the very moment there is no liquidity and they will have to sell those floating rate senior loans at a substantial discount to another recommendation Oaktree Capital. It seems there is a huge one-sided demand for these floating rate senior loans caused by ZIRP and NIRP. What happens when demand turns to selling?" – Paid-up subscriber Tony A.

Porter comment: Tony, these are all good points. And no, we haven't forgotten what can happen in the midst of a liquidity crisis to closed-end funds. But with stocks hitting new highs and regulations on banks beginning to be unwound, we think we're still a long way from that moment. We'd be surprised if that position was still in the portfolio by 2019. However, at the moment, we believe it's still a great way to earn a very safe 6%, which seems worth the risk for a small portion of our portfolio. And like you clearly understand (with your mention of Oaktree), we are hedging this risk in the portfolio.

"Love The Capital Portfolio, but I have some questions since I am building this portfolio from scratch. Are all of the selected shares to be bought now, and are there any buy up to prices? Should I allocate my entire account in a single trading day or spread it out over a couple of days? Implementation advice would be greatly appreciated. Thanks for an excellent product." – Paid-up subscriber Tom D.

Porter comment: Tom, it's a portfolio. Our implementation advice is to buy the shares in the recommended allocation. In some of the positions, you're getting slightly better prices than in others. You're free, of course, to wait until better prices materialize. Or you could do something like sell a put and generate income until the price you want to pay is hit. But our advice is to allocate your capital as we've recommended, at current prices.

"I am wondering why The Total Portfolio includes bond funds like NLY (Annaly) when the Stansberry Report tonight casts a dark picture ahead for bonds. Am I understanding this right, that the price of each share of the bond fall will drop if they are correct about inflation rising, which results in the yield going up because you are paying less per share for the dividend (interest payment)?" – Paid-up subscriber Rick C.

Porter comment: Rick, I really don't understand your question about bonds. But if you're asking if rising inflation is a risk to bond yields, the answer is "yes" in general. But "bonds" can mean a lot of different things. And some bonds (low-yielding, long-duration), like sovereign bonds, are far more exposed to inflation than, say, a short-term corporate bond trading at a wide discount from par. So, without spending a few hours explaining how different parts of the bond market work, let me just address your question about Annaly.

For starters, Rick, Annaly Capital Management isn't a bond fund. It's a tax-advantaged partnership (a real estate investment trust) that owns mortgage securities that are fully guaranteed by the federal government.

If you'll click on Annaly's name in our portfolio page on the website, you'll be taken to our most recent full explanation of Annaly's business. There, if you'll just take the time to read, we explain why Annaly is a wholly different kind of investment than buying corporate debt. You can also read this explanation.

Or you could reference the "Position Overview" we published about Annaly – the one-page summary write-up we included on every single position in the portfolio. Just go to the "Total Position Overviews" portion of our website. (You'll find it under "Extra Features." Or you can click here.) You'll notice that every position in The Total Portfolio is listed alphabetically. Click on Annaly, and everything you need to know is explained in a short review (just a few paragraphs).

If you'll just take five minutes (or less), you'll learn exactly how this unusual business works. But just to make everything even easier for you, I'm happy to give you the "pay off pitch" right here:

As the current "Bond God" (investor Jeffrey Gundlach) told Barron's recently: Annaly is "a way of sidestepping credit risk while getting a yield that's higher than junk-bond funds." That's why it's a 5% position in The Total Portfolio.

I think it's fascinating that the most frequent question we received was, "Are these recommendations buys?"

After all, we promised to send a complete portfolio on February 1. And, we gave the most explicit investment advice we've ever published. We told subscribers exactly how many shares to buy!

Still, they wrote in... and called in... one after the other... And they all asked versions of the same question: Are these buys? Are you sure?

Oy vey.

I don't know, of course, what's going to happen with Stansberry Portfolio Solutions. But I do think it's going to be a wild experiment. After all, investing isn't really about reading and following instructions. It's far more about learning how to control and manage your emotions.

And nobody can do that for you.

And so, dear Portfolio subscribers, let me ask: Were we explicit enough? Did we give you enough details to implement these portfolios? Or did we let you down? Let us know at feedback@stansberryresearch.com.

New 52-week highs (as of 2/2/17): American Financial (AFG), Axis Capital (AXS), First Trust Nasdaq Cybersecurity Fund (CIBR), CommScope (COMM), Corsa Coal (CSO.V), short position in Hertz Global (HTZ), Nuveen Floating Rate Income Opportunity Fund (JRO), Altria (MO), Shopify (SHOP), and Turquoise Hill Resources (TRQ).

Regards,

Porter Stansberry
Baltimore, Maryland
February 3, 2017