Revealing the Annual Report Card

Revealing the annual Report Card... How we chose a time frame... Who did well... And who didn't... Reader feedback: Have we reneged on our promises to you?...

We believe that good intentions should always be compared with actual results...

Often times what people believe will help simply doesn't. And so, at the beginning of each year, we strive to produce a careful review of our work.

How do we measure our results?

Well, first and foremost, we strive for accuracy. That means we need to establish a fair and firm price for both our entry and our exit prices. We're attempting to measure the value of our research (not your actual results, which are impossible for us to track), so we use the closing price the day before our information is published to establish our entry price. And we use the closing price from the day after we publish our sell recommendations or hit our trailing stop.

We have grown accustomed to the "howls" of certain subscribers who believe this methodology is unfair...

Their primary complaint is that these policies lead to results that cannot be achieved by our subscribers. I (Porter) will concede that often a security will trade higher than our entry price immediately after our publication.

However, far more often than not, the price of that security soon drifts back into the same range it was trading in before our initial recommendation... sometimes even lower. (Many subscribers never seem to remember these circumstances.) Thus, it is also true that patient subscribers often achieve entry and exit prices that are vastly more favorable than ours.

In any case, our goal is to measure the value of our recommendations, as if we are investing our own portfolio. We believe that's the only track record we can measure accurately. We use closing prices because that's a fixed point in time that's recorded and widely acknowledged as a "real" and attainable price.

There are, however, occasional exceptions to this closing-price policy. Some of the securities we recommend are fairly illiquid (for example, an equity option or corporate bond that has traded infrequently). In these cases, the most recent closing price may not be meaningful when compared with the current bid for that security. In these cases, we simply estimate (conservatively) what we would have paid to purchase the security for our own portfolio based on current market conditions and the existing bid/ask spread.

Our editorial staff compiles and audits these track records. The effort is led and managed by our executive editor, Carli Flippen. There may, of course, be errors. But the work is done carefully and objectively. (And I personally have nothing to do with this accounting. It's always best to keep the bean farmer away from the bean counter.)

The next question is what time period we should measure...

I don't believe measuring our results against a 12-month period is meaningful at all. In such a short time period, the average holding period of our recommendations is likely to be six months or less. Results measured across such a tiny window are hardly more meaningful than chance. Much longer periods are more meaningful.

However, if we were to simply pick a period like 2011-2014 (a raging bull market), such an evaluation wouldn't be very meaningful. Everyone is a genius in a raging bull market. Using longer durations makes it easy to pick a period where we performed well.

What is far more meaningful is to pick time periods that measure our performance against an entire market cycle, or against specific bull or bear markets.

The markets have been "choppy" lately, which offers us a difficult comparison period.

Stocks hit a bottom on August 25, 2015. The S&P 500 closed that day at 1,867.61, down 12.4% from its previous high. The market then rallied briefly before suffering a 13.3% correction that lasted through February 11, 2016, when the S&P reached its most recent bottom at 1,829.08. In total, these two corrections took the market down a little more than 14% from its previous high.

As you know, the market then rallied through the rest of 2016. The S&P 500 ended December 30 at 2,238.83.

Given the turmoil in the markets, it has been difficult to draw meaningful conclusions about all of our services when the market has been so volatile in such a short period of time. We've seen both periods of extremely high volatility and nearly record-low volatility. It has been an unusual and difficult time in the stock market.

In fact, the last three years have seen the worst three-year performance on record for major hedge funds, which engage, as we do, in "non-correlated" investing (investments that are based on far more than simply buying and holding stocks). According to the Barclay Hedge Fund Index, which is based on the results of more than 2,000 of the world's biggest hedge funds, non-correlated investors saw average returns of only 2.88%, 0.04%, and 6.18% in each of the last three years, respectively.

In today's Digest, I will review the results from our flagship "Stansberry" franchise, which includes Stansberry's Investment Advisory, Stansberry Alpha, Stansberry Venture, Stansberry's Credit Opportunities, and Stansberry Gold & Silver Investor. We won't put our newest product, Stansberry's Big Trade, through this evaluation process, as its portfolio is still less than 90 days old.

I'll also review the results from Extreme Value, as Dan Ferris' investment philosophy (bottom-up, deep-value investing) is most similar to my own.

Next week, I'll review the rest of our publications, including all of the products managed by my business partner Steve Sjuggerud (True Wealth, True Wealth Systems, and True Wealth China Opportunities) and Dr. David Eifrig (Retirement Millionaire, Retirement Trader, and Income Intelligence).

One last bit of explanation...

In the data boxes below, you'll see that our primary comparison is made against something we call the "Weighted S&P Return."

This is what you could have earned if you had bought an index fund instead of buying our recommendations. We have to measure this way because unlike a stock index or an actual portfolio, our recommendations occur across the entire time period, not all at the beginning and through the end.

The different timing of each product's recommendations means that each product will have a different "bogey," as the timing of each recommendation produces a different outcome for the S&P 500.

Here's how we did...

Stansberry's Investment Advisory: C-

As you already know from the Digest I wrote two weeks ago, the performance of my newsletter over the past 17 months was heavily influenced by my desire to hedge against the risks posed by the world's central banks and their disastrous negative-interest-rate policies.

We opened 12 short positions out of a total of 26 recommendations.

Attempting to hedge these risks led us to recommend almost as many short positions as long positions during this period.

That produced an asset allocation that wasn't representative of our overall portfolio. I would never recommend that an investor hold almost half of his portfolio short. In our Bear Market Survival Program, we specifically recommended a maximum 20% allocation to short positions. So I have no doubt that someone following our actual advice (not just the stocks we recommended during the last 17 months) would have experienced far better performance.

My frustration with this evaluation led directly to the development of our Stansberry Portfolio Solutions product, which will allow our senior analysts to do a far better job of showing you the specific allocation amounts we recommend for each of our recommended investments.

But our grades are strictly based upon the performance of the measured period. And on that basis, our results aren't good. If you had simply bought an index fund instead of the recommendations we made over the entire period, you would have produced annualized returns of 13.8%. Our choices, on the other hand, only produced annualized returns of almost 4%. Worse, our "win rate" was abysmal – only 30%, the lowest of my career.

Frankly, these results stink.

So toss a tomato if you want. But you should also know that as the market changed course, so did we. If you measure our performance since the new bull market began (from February 2016 through the end of the year), our recommendations have beaten the market by a wide margin. Since the new bull market began, we've made 15 recommendations that have produced annualized returns in excess of 20%. That's because we stopped hedging and began to get progressively more long the market.

I'm also proud to tell you that the other products in my franchise category, some of which we launched to take advantage of specific opportunities in the markets, all beat the S&P 500 by a wide margin.

Stansberry's Credit Opportunities: A++

We launched Stansberry's Credit Opportunities in the midst of a growing storm, while default rates on corporate debt were soaring along with credit spreads and interest rates.

Almost all of our subscribers thought we were nuts. Never before has any new product received so much criticism from our subscribers. It was almost impossible to explain that our core strategy – buying corporate bonds when they're in distress and can be purchased at a big discount from par ($1,000) – often leads to outstanding results.

Most of the time, bonds don't default. Even during the worst periods in this market the annual default rate rarely exceeds 10%. Thus, reasonably diligent analysts can often find outrageously mispriced bonds during periods of distress, like we saw from late 2015 through early 2016.

And happily, that was true for our team.

During the evaluation period, we saw 10 of our recommended corporate bonds trade below our buy-up-to prices. All 10 of these investments rose substantially, for a 100% win rate. The simple average return was 24.4%. That's more money than most people make in stocks during a bull market!

The annualized return of these 10 investment recommendations was almost 40%, compared with a return of about 13% in the S&P 500 on a comparative, annualized basis.

Given the timing of this product's launch and our spectacular results (nearly 40% annualized returns without a single losing position), I have to say that this product is the finest research we have ever published. If you took the plunge with us into these investments, congratulations! You now know why I always say that if you knew how much money you could make safely in corporate bonds, you would never buy a stock again.

By the way, if you have enjoyed these recommendations, I would greatly appreciate hearing about your experience. Have you ever bought bonds before? Were you nervous about doing so? Were the returns better or worse than you expected? Was it easier or harder to buy these securities than you expected? And how would you rate your overall experience with this product? Don't worry, I won't publish your full name, but getting positive notes from subscribers is very motivating to our staff. So please, if you've done well with us, let us know at feedback@stansberryresearch.com.

Finally, one word of warning. When we entered this market, the average yields on high-yield corporate debt were approaching 10%. We had many opportunities to buy relatively high-quality bonds offering double-digit total returns at a broad discount from par.

Those market conditions have changed dramatically. Today, it's much harder to find such opportunities. As a result, both the number and the frequency of our recommendations have diminished. Sadly, we cannot force other investors to do stupid things with their money. We can only report when they do. So please be patient with us.

Stansberry Alpha: A

Stansberry Alpha is a monthly advisory that follows a little-understood market anomaly: Most investors fear loss more than they desire a gain. This is a principle of human psychology, and it occurs all the time in the markets. During periods of widespread fear, this trait becomes even more noticeable. And that drives the price of put options (which can serve as portfolio insurance) much higher than the price of call options (which are generally used to speculate for bigger gains) on the same stocks.

We use this so-called Alpha anomaly to build positions that offer investors less risk and much higher returns when used in conjunction with a margin trading account. Investors are only required to post 20% of the potential payout cost when they sell a put option to another investor seeking insurance against a potential decline in a stock price. If the stock doesn't decline, the put seller gets to keep 100% of the premium he received.

Selling puts on safe stocks when volatility is high and premiums on puts are expensive is a fantastic way to safely generate income from your portfolio, especially if you can use your broker's capital in the process (via a margin account). In Stansberry Alpha, we add a "wrinkle" by spending some (but not all) of the premiums we receive in these trades to purchase call options.

We only do these trades on stocks we're happy to own at prices we're happy to pay. Doing so allows us to generate solid amounts of income without taking on any extra risk. And using that income to finance the purchase of a call option allows us to seriously increase the returns.

Over the past 17 months, we've made 15 different Alpha trades. Almost 70% of them were profitable, with the average return against the margin required of 16%. We don't hold most of these trades for an entire year. As a result, our annualized returns were 23% during the period, a result that nearly triples the comparable results you would have made buying an index fund.

This strategy is an excellent way – the best way we know – to maximize the value of your margin account.

Stansberry Gold & Silver Investor: A

We launched our franchise's first gold and silver investment advisory in the middle of the first big bull move in gold since 2011. We based our efforts on a carefully constructed (and allocated) Hard Rock Portfolio, which we gave investors access to immediately during the product's launch.

Thus, unlike our other products, we can track the actual weighted results of the complete portfolio. We've compared these results with the VanEck Vectors Gold Miners Fund (GDX), which holds a basket of gold stocks, rather than the S&P 500, for obvious reasons.

Our Hard Rock Portfolio was up 12.5% since inception through the end of 2016. If you'd purchased GDX instead, you would have only made 4.2%. That's a significant amount of outperformance, especially considering that fully 20% of our portfolio is the metal itself, which has gone down in value since we launched the Hard Rock Portfolio.

Gold has been a difficult sector of the market since 2012, but our team (led by analyst Bill Shaw) has delivered great results, with less risk.

Stansberry Venture: A

David Lashmet and John Engel have the toughest editorial job at Stansberry Research by far. They captain our small-cap growth research efforts, looking mainly at emerging tech and medical tech companies. These are firms that typically have zero revenue and weak balance sheets. But they are also firms whose share prices can absolutely soar.

Here's just one of many examples: On June 7, 2002, Dave sent out a report on a company that practically nobody had ever heard of, Illumina (ILMN). This was a tiny company that was building a new, fully automated gene-sequencing machine.

Nobody could have known for sure what Dave figured out – that Illumina's technology would be the driving force behind the genomic revolution in medicine for the next several decades. The stock, recommended at $2.82 per share, would later soar to around $240 per share by early 2015, producing gains (at least, on paper) of around 8,400%.

We're not claiming such an outrageous return for our track record, of course. We closed the position long before the big gains arrived. But the point is, over the course of Dave's career, his research has identified more than a dozen companies whose groundbreaking technology eventually drove their share prices up 10 times or more.

I hope you'll understand that for situations like these, what happens in the short term – like the last 17 months – is essentially meaningless. Most of the companies Dave is following will require at least five years or more to reach maturity. This kind of investing requires an extremely high tolerance for risk and volatility. For every Illumina, three or four companies (at least) won't make it. In those situations, the resulting losses will be substantial. So anyone following this approach must diversify.

In any case, over the past 17 months, the Venture Technology portfolio has done about what we'd expect. Half of these new recommendations have gone up and half have gone down. The annualized return is 13.1%, which is far better than the market's return.

By the way, you might have noticed that I referred this product as Venture Technology in the paragraph above. That's because we've grown more and more impressed and interested in this kind of "swing for the fences" long-term investing. For anyone who simply bought Dave's recommendations over the past 18 years and held on, the results would have been outstanding.

So we're going to launch an extension of this publication this year, beginning a new portfolio under the Venture banner. Instead of looking for small-cap stocks with great new technologies or drug targets, we're going to look for small-cap stocks with excellent capital-efficient business models – like high-quality, small insurance companies, for example. We'll call this portfolio of stocks Venture Value.

Extreme Value: F

It has been a tough period for deep-value investors. Expensive stocks like Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), and Tesla Motors (TSLA) have continued to go higher and higher (taking the major stock indexes with them), while most stocks have gone nowhere.

For a more apt comparison than the S&P 500, I'd suggest using the Sequoia Fund (SEQUX), the legendary mutual fund that sprung out of Warren Buffett's private asset-management business in the late 1960s. Over our 17-month evaluation period, the Sequoia Fund has seen a substantial decline, down 35%.

So you might argue that awarding Extreme Value an "F" is unduly harsh. Dan Ferris' average losses in the period (-6.5%, or -14.5% annualized) are far less than other deep-value investors. And as every experienced value investor knows, returns like this aren't unusual when value goes out of favor, as it typically does at the end of a long bull market.

Ordinarily, I'd accept those considerations and award Dan a "gentleman's 'C.'" I'm certain that over time, Dan's diligent efforts and strategy will provide market-beating returns, as Extreme Value has done for years.

Unfortunately, Dan compounded the headwinds he faced in the market with a profound mistake. Right at the bottom of the market last February, Dan chose to reverse a previously held long position in IBM (IBM)... by shorting it.

His timing couldn't have been any worse. From the moment he reversed his position in the stock, the company's performance began to improve, and stocks in general began to move higher. The result was a devastating loss (-44%).

It's that poor result that prevented Dan's portfolio from rebounding along with the rest of market in 2016.

We don't hand out failing grades lightly, but with a portfolio that simply hasn't performed well and with Dan's "unforced error" in shorting IBM... well... if we're honest, that's the grade we believe is most appropriate.

New 52-week highs (as of 1/19/17): Auryn Resources (AUG.TO), CONE Midstream Partners (CNNX), short position in Hertz Global (HTZ), and Shopify (SHOP).

In today's mailbag, a troubling issue... Some of our Flex Alliance members have accused us of reneging on our obligations. I've taken the time to respond in full to these concerns. I hope you'll read carefully and share your opinion on this matter. What do you think is fair and reasonable? Let me know at feedback@stansberryresearch.com.

"Hi Porter, it's been a long road... I was listening to Alex Jones one day and he had a guest, he always has interesting guests, this one was not the usual guest since he was talking about finances, yes, you got it. It was you Porter...

"I bought a subscription. You started the Premier Radio show with Brabs. I was with you from the beginning, in fact if you were to check you would probably see that I was one of the first subscribers, you asked for paid subscribers and I picked up the phone and subscribed right away. I learned a lot and enjoyed the radio show very much, I felt much more connected to Stansberry via the radio show, I sure miss it. I kept on with Stansberry because I liked your character and Steve's, all your partners are great really. What moved me the most is your honesty, and principles. You stand by your word and contracts. You want and enjoy making money but not by sleazy means. Because of that I finally ponied up and became a life long member of Stansberry, now I wish I was in the position of being an Alliance member, but simply I was or am not, I did the second best I could and bought a Flex membership.

"I couldn't justify the extra $9000 to become an Alliance since I am the only bread winner in the home and spending that amount would over extend my family. But looking at what the Alliance offered vs the Flex the flex was a better fit anyhow. I had a hard enough time keeping up with just 3 of the subscription so having 5 at one time was plenty for me...

"When I was looking at Alliance vs Flex the only real difference was that Flex would be limited to only 5 subscriptions at one time but all the Stansberry subscriptions were available just like Alliance. You could subscribe to any five at one time as often as you wanted no limitation to the amount of times you could close and open them...

"Portfolio [Stansberry Portfolio Solutions] gets unveiled, I'm on the conference call. The product sounds great, it is what I was expecting all along with some of the higher cost subscriptions. Alliance gets mentioned and I was thrilled to hear that all Alliance members automatically get all three portfolios. I'm thinking that must mean Flex must get The Income Portfolio since it is the closest match. But to my dismay I don't hear any mention of flex, so I post the question and it got answered but I was crushed by it. Flex does not get access to Portfolio. I don't understand!

"[I recall] there was an incident with a subscriber that was really taking advantage of the Flex membership. They were going in and out of all the subscriptions frequently, you were quite disturbed by this activity and posted about it. I remember how I felt about it at the time, although the member was certainly taking advantage of it, the fact was there was no rule stating you could not do this... Now when I first got the membership I was going in and out so that I could visit all the different letters and subscription in order to find out which ones matched my comfort style and experience, but once I found them there really isn't much need in jumping back and forth. To my disappointment the end result was all Flex subscribers were punished for one greedy member, now we must wait 24 hrs before we can switch subscriptions.

"Porter I feel you have reneged on your promise the spirit of the Flex membership. You are now offering the Flex members a trade for our Flex membership for The Income Portfolio plus we pay the higher maintenance fee. I don't think you would ever do that to an Alliance member.

"This trade is not a fair trade at all. We made a commitment to you and you have thrown us under the bus... Certainly The Total Portfolio since it includes all subscription information would be above Flex membership so I don't expect to have access to it, however The Income Portfolio is in line with Flex.

"Perhaps having access to Income as one of our subscription is a bit generous, but what if we were to use all 5 of our subscriptions in order to switch to The Income Portfolio? Better yet why not allow the other 4 subscriptions to be available when you choose The Income Portfolio...?

"Porter I really feel Flex members have been wronged here, I hope you will take a closer look at this and reconsider your decision." – Paid-up Stansberry Flex Alliance member Anselmo

Porter comment: Anselmo, thanks very much for taking the time to write in and share your thoughts about our Flex Alliance program and our new Stansberry Portfolio Solutions offer.

I want you to know that I've read your letter carefully. I've thought about the points you make – and I've been thinking about these issues for a long time. Our entire staff has debated these same concerns. So where do we stand today?

Well, first, please know there's no intention on our part to do anything to take away any of the value of the Flex Alliance subscription. We remain just as dedicated to providing all the value you purchased several years ago – and a whole lot more.

In fact, I'm certain that if you consider the mix of products we offer you today compared with the lineup of products we offered when you subscribed, we have done an admirable job of continuing to increase the value of what you paid for. In just the last couple years, we've added several new and elite information products – including Stansberry's Credit Opportunities (3,000 a year), Stansberry Gold & Silver Investor ($2,500), Stansberry's Big Trade ($3,000), and True Wealth China Opportunities ($3,000). These products have provided excellent analysis and delivered very good results to our subscribers.

You, of course, have had access to these new products at no additional cost.

(Ironically, one of our biggest customer service tasks this year has been refunding Alliance members who didn't expect these new products to be included with their subscriptions. Alliance members routinely buy our new products, not realizing that we've already included them, for free, in their subscription package. Likewise, over the years, we've had to answer thousands of e-mails from Alliance members who have expressed surprise and even dismay that they're entitled to receive every new product we produce.)

I think our constant dedication to continually provide far more service than we promised speaks highly of our business and the personal integrity with which we go about our work. I'm certain that if we were to calculate the value of what we've provided you with access to since you purchased your Flex subscription, the total value of what we've provided would be nearly $40,000 more than what you've paid.

I can't think of any other business in the world that delivers this kind of massive, ongoing service without charging any additional fees. But despite our unflagging service and continual improvements to our product lineup (all of which you have access to at no additional cost) some of our Flex Alliance members begrudge us asking you to wait 24 hours before switching your "annual" subscriptions.

Just imagine me shaking my head.

But despite that bump in the road, we have steadfastly continued to meet our promise to you, which was to provide unlimited access to any five of our products.

That promise did not and will not include access to multiple-subscription programs that provide access to bundled subscriptions, or information from bundled subscriptions.

That's not a new policy. Your Flex Alliance subscription didn't include, for example, free access to the annual Alliance Conference. That's a benefit limited to the full Alliance program because, during this conference, we discuss recommendations made across all of our products.

Likewise, it did not include access to our Stansberry 16 Model Portfolio, which provided "new money" allocation ideas about portfolio construction to our Alliance members. Nor does it include access to our weekly Stansberry Alliance Executive Summary briefings that highlight any new recommendations made across all of our products over the last week.

None of these products were included as choices in your Flex Alliance membership because they contain information sourced from across all (or virtually all) of our products. Clearly, giving you access to these products isn't the same as giving you access to a single monthly newsletter or daily e-letter service.

As you hopefully know, our new Stansberry Portfolio Solutions offer includes access to the recommendations from a wide number of our core subscription products. Giving you access to this program is tantamount to giving you virtually everything we publish, forever, for free.

Specifically, at the level you suggest would be appropriate (The Income Portfolio level), you would have access to the recommendations from eight different subscription products, not including our new 24/7 investment newswire service, the Stansberry Newswire. That's a total of nine products, not including the portfolio-allocation advice. Going to my calculator, nine products is about 80% more than the five products you were promised.

It troubles me that we seem to have inadvertently attracted subscribers who believe they're entitled to everything we do, at any time, even though we clearly only offered access to any five individual products at a time. It seems to me that by trying to make our products more affordable, we've ended up disappointing a lot of people... which is disappointing to me.

However, I have always endeavored to remain on friendly terms with every partner, every customer, and every employee – no matter what.

And so, as we always have, we will continue to honor your right to receive any five of our products, including Stansberry Newswire, which will provide you some insight into the goings-on of our model portfolios (but not complete access). The Newswire is clearly a new product. And, even though it will follow the news and events of our portfolio products closely, you will have the right to select to receive it, at no additional cost.

If that doesn't satisfy your needs, I'm happy to provide you with a 100% credit based on whatever you paid to join our Flex Alliance program.

Flex Alliance members can apply every penny you've paid so far toward the retail price of joining any of our new, multiple-subscription Stansberry Portfolio Solutions levels. That's like getting everything you've ever gotten from us so far, for free.

Furthermore, you should know that any money you've ever spent with us can be applied toward a full Alliance membership. We've recently upgraded our full Alliance program. (Folks who join the Stansberry Alliance going forward will have access to the Venture portfolios.) As part of this upgrade, we're going to include everything you've ever spent with us toward the subscription price. Normally, as you know, membership in our Alliance program is by invitation only. But in this case, we're happy to extend an offer to join us at that level to anyone in the Flex Alliance who would like to upgrade.

So to summarize, we're going to continue to provide access to any five individual products that you want, including our new Stansberry Newswire. That's what we promised and that's what we're going to continue to deliver.

But should you determine that the Flex Alliance is no longer suiting your needs, we'll apply 100% of what you paid to join the Flex Alliance toward the purchase of our new Stansberry Portfolio Solutions product at whatever level you decide is best.

Should you decide that at the end of the day what you really want is everything we publish, we will include every penny you've ever spent with us toward the purchase of a full Alliance membership. How can we do more to deserve your trust and respect?

I sincerely believe that over the last 18 years, our company has set new standards of both quality and customer service in the independent financial-publishing industry. I think our actions in this matter reflect the integrity of our efforts. I know we've provided far more than anything we ever promised our Flex Alliance subscribers, and I know we're going to continue to create even more value for these customers for many, many years to come.

Likewise, I will go to bed tonight resting easy. I know, at every turn, I have strived to treat you even better than I would have expected you to treat me, if our roles were reversed.

If you have any further concerns, please don't hesitate to continue this dialogue. It's certainly possible that I don't have a full understanding of all of the issues involved and, if the facts change, I'm always willing to change my mind.

Thanks again for your long interest in our company and your substantial financial support. It isn't taken for granted.

Regards,

Porter Stansberry
Baltimore, Maryland
January 20, 2017