Stansberry & Associates' Annual Report Card for 2009

Stansberry & Associates' Annual Report Card for 2009

Dear Stansberry & Associates subscriber,

As far as I know, I'm the only investment newsletter publisher who personally reviews all of his newsletters each year and grades each analyst. At least I'm the only one who does so publicly...

Today's Digest is our annual review – the Report Card.

The Report Card is a summary of each newsletter's performance, plus a grade that I assign.

I'd urge you to read my explanation of the grades. You'll learn a bit about what I'm looking for from our analysts. That will help you understand what you can expect from our newsletters.

Now... before we get to the Report Card, let me show you the single best way to judge the value of our work.

The S&A 16 Model Portfolio

It's not easy to compare newsletter track records to mutual funds, stock indexes, or hedge funds. Unlike these entities, we don't do any actual trading on your behalf. It's impossible for us to guarantee you could invest at our recommended prices. Also unlike investment funds, our portfolios are never really "fully" invested. Instead, we add positions over time (monthly, weekly).

To allow for a more accurate comparison between our research and other investment choices (like investment funds), we began a few years ago compiling a diversified portfolio of our recommendations each quarter for our Alliance subscribers.

We call this portfolio the S&A 16 Model Portfolio.

It's four value stocks, four growth stocks, four income stocks, and four macro investments (like gold or currencies). We select these investments from recommendations previously made in our newsletters, so there's no argument about recommended prices or timing. We send these quarterly model portfolios to all of our S&A Alliance subscribers.

We believe these model portfolios are the best and most accurate way to judge the value of our work. Like ordinary investment funds, our S&A 16 is diversified and fully invested.

So... how did the S&A 16 Model Portfolio perform last year?

We did great – our best annual performance of all time.

Beyond the terrific investment returns, the most important thing we did was deliver great advice about simply buying stocks early last year. Remember, we published our S&A 16 Model Portfolio in January 2009 – right in the midst of the biggest bear market since the Great Depression.

What did we say?

You, Alliance member, need to be a big buyer of stocks and bonds right now... We're confident the buying you do now will set you and your family up for financial security in the decades to come.

If you took our advice and bought the 16 investments we recommended, you made 43% in 2009 – about 50% more than you would have made in the S&P 500, which was up 30% for the year.

Just as important, if you followed our advice, you ended up buying high-quality companies – like Intel and Microsoft. These are safe investments. We even included bonds in this portfolio – and made 244% on one of them (a Rite Aid bond). We also caught the bottom in emerging markets, getting you long China, India, and the iShares Emerging Market ETF right at the bottom. Those positions garnered returns of 105%, 85%, and 80%, respectively.

I'd happily compare our S&A 16 Model Portfolio to any other investment fund in the world.

In terms of investment quality, investment timing, and total return, our diversified portfolio was among the best anywhere.

It gets an A+ for 2009.

If you'd like to get a copy of the S&A 16 in the future, you'll have to sign up for our most exclusive membership – the Alliance. To learn more about the Alliance, give our head of sales, Mike Cottet, a call at 888-863-9356.

Now, how did the rest of our newsletters perform?

Almost of our letters did very well in 2009.

And they should have. It was a raging bull market with the S&P 500 up 30% for the year.

So rather than just show you a litany of highlights, I decided we'd make the criteria this time a lot harder...

You see, I don't publish these reports cards just for show. I want to learn from them. I want you to learn from them. And I want our analysts to know I expect them to do excellent work – bear market or bull market.

So I asked for complete track records not just from the beginning of 2009... but all the way back to March 2008. Why then?

Bear Stearns failed in mid-March 2008. It was the beginning of the financial crisis.

The question I wanted to answer this year was: If you began investing with us at the beginning of the financial crisis – during which most investors got wiped out – how would you have done?

In short, rather than showing you our results for one of the easiest years to make money (2009), I want to show you our grades from the most difficult period in modern financial markets. I asked for all of the track records from March 2008 through the end of 2009.

These numbers show you how our letters performed through the financial crisis – from the beginning to the recovery.

To succeed during this period required real investment talent. You had to be willing to cut your losses early in the crisis – and then spot the bottom to begin buying stocks again. Why put my colleagues through such a tough evaluation?

I want everyone who works at Stansberry & Associates to understand investment performance is our top priority. And accountability is our constant standard.

Every year, when I sit down to write the Report Card, I know some percentage of our readers will take a look at the grades and dump whatever letters got a bad grade. That will cost me a lot of money, as I have to refund all of those subscriptions.

But I also know a lot more people will read these evaluations carefully, understanding not every letter can have a great performance every year. These people appreciate an honest financial publisher and diligent analysts trying their best. These folks end up being long-term customers of our business. And they end up getting the most out of our letters, too.

Serving these people is the business we're in.

I hope you'll be one of them.

How Did We Do?

So how did we do in the midst of one of the worst periods in the history of the global equity markets? Pretty darn well.

Looking across the board at all of the investments (374) we recommended from March 2008 through the end of 2009, we produced an average return of 15.1%. This return is much, much better than S&P 500. In April 2008, the S&P 500 traded around 1,400. By the end of 2009, it had only recovered to 1,100 – a loss of 21%.

These numbers don't really tell the whole story though...

You see, on average, our recommendations were only in our portfolio for 164 days. Actual investors would have reinvested their capital, compounding the results.

On an annualized basis, you would have made 33.4% if you'd bought all of our investment recommendations.

How did we do so much better than the market average?

A lot of the excess return was generated with what you might call market timing. We recommended more stocks after the bottom than we did in the early stages of the crisis. But not all of our results are due to timing. For example, if you'd bought the S&P 500 instead of our stock picks at the same times and in the same increments, you would have only made 6.4%.

I'm proud of these numbers. They tell a convincing story that our analysts not only produced safe and profitable advice during the worst crisis in modern times, but we also have continued to deliver results much better than average.

So who did the best? And who did the worst?

The Grades

You'll find the report card below.

Each of our newsletters is listed below, in order of average returns (not annualized). Also, notice the grades I've assigned to each letter aren't necessarily correlated to the return rankings. I'll explain why below.

I hope you'll pay special attention to the analysts who earned A+ grades.

These men managed truly outstanding results in the midst of the most difficult stock market in living memory. These are the guys you want to trust with your retirement money. They can perform in both bull and bear markets.

When you start looking at the numbers and grades, the first question you're likely to ask is: How can you award Matt Badiali a "C" when his average return was 24.2%? David Eifrig got an "A+" with an average return of only 13.8%!

What I'm looking for in my analysts are guys who can make us money – and protect our capital.

If you followed Badiali's advice, you would have made a lot of money during the period – nearly 70% annualized gains. But it was a very rocky ride. Says Matt about the experience of being an oil analyst during the commodity's collapse in the second half of 2008:

My entire universe collapsed... Oil went from $145 to $35 per barrel. Natural gas prices went from $15 to $2. People were sure the world was coming to an end. Range Resources stopped out the same month I recommended it. By August, I wanted to stop recommending stocks and crawl into a hole... By January 2009 though, it was clear that the tide turned. Fantastic stocks lay in the rubble everywhere...

Badiali did a good job of cutting his losses... but he didn't wait long enough to jump back into stocks. As a result, 44% of his recommendations during the period led to losses. In my mind, that's just too high of a loss percentage to get a "B" or better.

I'm guilty of the same kind of performance.

I did lots of important things for investors during the summer of 2008 to prepare them for the crisis – including making huge gains on shorting Fannie and Freddie and predicting the bankruptcy of General Motors. And I timed the bottom almost perfectly, making readers more than 100% on Calpine (which I recommended at the bottom in March 2009). But we weren't patient enough on the way down. We couldn't resist buying stocks like Starbucks and eBay during the summer of 2008. As a result, I had too many losses to justify a good grade on my newsletter.

Compare these kinds of results with our all-stars.

Eifrig's average return isn't earth shattering. But the promise of his letter is it can show you better ways to be safe, healthy, and wealthy during retirement. Nobody subscribing to Retirement Millionaire is looking for triple-digit returns. They just don't want to lose any money. And out of 25 different recommendations, only one of Eifrig's picks lost any significant amount of money. Meanwhile, on an annualized basis, his advice produced gains of nearly 20%. Anyone who can make you nearly 20% a year with hardly a loss – during a market crisis – is doing an extraordinary job.

Mike Williams picked 22 separate bonds for investors to buy between March 2008 and the end of 2009. The financial crisis crushed the corporate bond market even worse than the stock market. Bonds were decimated. But Mike lost money on only two bonds. That means, he made you money 90% of the time. I don't think you'll find another bond investor in the entire world with a better track record over the period.

Or what about Dan Ferris...

About 75% of Dan's recommendations were moneymakers during the period, which on its face is pretty good. But that's not the whole story. You see, almost all of the picks that went against Dan were short sells. They were clearly labeled as speculations... and they're a little outside the core strategy of his letter, which is simply buying super-cheap and super-safe value stocks. It's not that these losses don't count – they do. But if you're like most conservative value investors and you stick with Dan's conservative buy recommendations (he made 16 of them), you would have only lost money on one pick.

That's a 94% winning percentage when it comes to picking stocks – during a horrible bear market. Who else could do that?

Nobody else I know.

The point is, to earn a good grade in our annual review you have to do more than just make money in stocks. You have to do a good job as an analyst. And nothing is more important to our clients than avoiding losses.

The same rule applies to the size of the losses, too.

I'd like to make special mention of Braden Copeland's tremendous success. He is new to our group (but comes to us as a seasoned institutional investor). He guided Inside Strategist to what I believe is our best overall track record. Copeland has delivered annualized gains in excess of 60% – which is outrageous. And he's done so with lots of different recommendations (29 in all), while only suffering four significant losses.

Looking at the numbers – as incredible as they are – simply doesn't do Copeland justice. You have to read his work to appreciate it and understand why he is such a great investor.

I promise... if you read one issue of Inside Strategist, you'll immediately grasp the power of our approach. And then, you won't buy any other kind of stock.

You see, Copeland only covers companies with significant amounts of insider buying. It won't surprise you to learn corporate insiders don't like to lose money. Plus, they know a lot more about what their stocks are worth than most people. Put these two facts together with a brilliant and hardworking analyst... and it's not hard to see why Copeland is making a killing for our readers. (Quite honestly, what Braden does for investors should probably be illegal... but it's not.)

So why did I give Copeland a "B" instead of an A+? Because one of his recommended stocks – a medical-device firm – got killed. It fell nearly 50% before we could execute a stop loss. It was a bizarre situation. The company ended up on the wrong side of a Medicare ruling – a political problem. These things happen, of course, from time to time... and you can't predict political outcomes. But the size of the loss is what kicked Copeland's grade down a notch.

A Very Good Performance for The 12% Letter

Following the initial onslaught of the October 2008 meltdown, our 12% Letter editor, Tom Dyson, played the crisis almost perfectly.

For the rest of the period, his track record is nearly flawless. And overall (including the October meltdown), his picks were winners more than 70% of the time.

He trounced the stock market for the period, with annualized gains of more than 16% – far in excess of his mandate to earn 12% a year in stocks, safely. He did an excellent job for his readers. But... I can't give him an "A" because he took a beating in October 2008, suffering seven losses in that one month.

The Other 'C'

Most subscribers, I think, would say I'm judging these guys too harshly. After all, they delivered world-class returns. Maybe so, but I'm looking for perfection.

Take Steve Sjuggerud's performance in True Wealth. Our goal in True Wealth is to produce higher average returns than the stock market – but with much less risk. Over the years, Steve has excelled in finding so-called "noncorrelated" investments – ones that don't track the stock market, but deliver great returns.

If you look at Steve's track record from the beginning of the financial crisis through the end of 2009, you can't say he did a bad job. Most of his recommendations were winners. And the average return of 8.7% was much better than the market's return (-21%).

So why award a conservative newsletter a "C" when it has accomplished its objective? Steve made just one bad decision during the entire time – but it really cost him. In late November and early December 2008, Steve became convinced the market had bottomed and it was time to buy stocks – hand over fist. (I believed the same, by the way).

He piled into real estate, emerging-market stocks, and high-yield bonds. Nearly all of these positions got stopped out when the market "double dipped" in February and March 2009. That resulted in eight losing trades – all of which would have been huge winners if Steve had hung on. The investments all soared as soon as Steve stopped out.

The situation was the best example in recent memory of why trailing stop losses aren't perfect. Says Steve of the situation:

The biggest thing I did wrong performance-wise in hindsight was sell some positions in February 2009. But I believe I did the right thing... I was cutting my losses, protecting my downside. That's what hurt my track record.

Take away these losses and True Wealth would have delivered an "A+" performance with only three significant losses and average returns greater than 20%.

To Steve's credit, he stuck with his fundamental view – that stocks had bottomed. He kept buying stocks throughout February and March 2009. As a result, he produced a good overall track record.

But... I'm a tough judge.

Phase 1 – Playing Defense in Venture Capital

As you should know, not every newsletter will succeed in every type of market. Early-stage and high-risk companies simply got killed over the last 18 months. These companies all have a high "beta" – meaning when the stock market falls, they fall even more. With the market down 21% over the period, you should have expected our venture capital/early-stage-company newsletters to suffer losses. But that's not what happened...

Our Phase 1 Investor editor, Rob Fannon, is a cautious and careful investor. He steered our subscribers through these troubled waters with remarkable skill – producing an average gain for the period of 7.2%

We understand our subscribers expect much larger returns from this publication. But any experienced early-stage investor will tell you surviving the bear markets with your capital intact is the real key. When the bull market arrives, the stocks in this portfolio will soar.

Our Only 'D'

I must award an "D" to our trend-following service, Penny Trends. In my book, its performance was simply unacceptable. Its recommendations were losers more than 50% of the time (57%). It produced an annualized loss of 10%. Yes, this is still better than the market, but it's unacceptable from a trend-following service.

Now... this newsletter is designed to produce big returns when markets are trending strongly. Obviously, 2009 was a year of big trends... so why didn't our letter perform better? Quite simply, we didn't allow wide enough trailing stops. We ended up selling our winners far too soon (and sometimes at a small loss).

Also, the service rightly got long commodity stocks midyear, but was kicked out of its positions during the June commodity correction. It didn't jump back into the trend when it reasserted itself and missed out on triple-digit winners several of its recommendations went on to produce. Getting back into this trend, by itself, would have brought the grade up to a C or B.

I know our editor in chief, Brian Hunt, and the newsletter's editor, Tom Dyson, are tweaking the strategy to produce better results. These changes seem to be working with the portfolio performing much better over the last three months.

What About the Option-Trading Services?

We don't include our two option-trading services (The Short Report and Porter Stansberry's Put Strategy Report) in the Report Card.

Why not?

There are two reasons. First, these services tend to recommend lots of quick trading. The large number of positions and their relatively short durations would seriously skew the average and annualized results because so many of the recommendations would be trading positions.

Second, we know trading positions are not the same thing as investment recommendations. Nobody is (or should be) putting the same amounts of capital at risk in these trades. Quite honestly, we just don't consider an options trade in the same light as an investment – which is why we don't count options gains in our Top Ten list or in our Hall of Fame. (If we did, Jeff Clark would own every spot in both lists with his massive 1,000%-plus gains in various naked option trades.)

But just because we don't include our options trading services in our Report Card doesn't mean we don't care about the track records.

Actually... we're extremely proud of our options trading services, which we know to be the best available from any newsletter publisher in the world.

In fact, out of all of the things I've done in my career, probably the best service I've ever given to our subscribers was Put Strategy Report in October 2008. Selling puts during the height of the financial crisis was the best trading I've done in my career and the easiest way to make a lot of money in the stock market I've ever found – before or since.

We sold 23 puts between the launch of the service and the end of 2009. We only lost money on two trades, for a win rate in excess of 90%. The average gain (based on 20% margin) was 54%. And we held these trades on average for less than 100 days, meaning we were making more than 150% annually on these trades.

But... even these huge numbers don't tell the whole story. On dozens of trades, we made close to 100% by selling puts with strike prices below the liquidation value of the common stock. We were making a killing by selling options that had zero intrinsic risk. We literally couldn't lose.

I think anyone – even my biggest critic – would award Put Strategy Report an "A+" for its performance during the financial crisis. The only thing I regret was I couldn't convince more people to try the strategy.

(It's a funny thing about newsletter publishing... the best letters, those most helpful to investors, inevitably end up the hardest to sell. I don't know why... that's just the way it is.)

As for Jeff Clark's S&A Short Report, he suffered a rare losing streak and couldn't seem to find the right side of the trades for a while in 2009. So even though he did well during the crisis... he ended up giving back all of his gains and them some, posting an average loss of a little more than -4%.

This is the first Report Card I've ever published in which the Short Report didn't produce a large (and positive) average gain. Says Jeff about his poor performance in 2009:

I underestimated the strength and sustainability of the rally off the March lows. While I called the bottom fairly accurately and I made several successful trades between March and June 2009, I started looking for short sale trades too early in 2009.

Having followed Jeff's trading for several years, I can tell you he normally follows a losing streak with a huge number of winning trades in a row. And that seems to be happening again right now.

Our Outlook for 2010

If you've been reading The Digest, you already know we're concerned about macroeconomic fundamentals right now. Around the world, sovereign borrowers are coming under enormous strains because they simply can't afford their debts.

We think these problems are serious and will be with us for a while. We can't know how it will all work out... but we think inflation will become a problem both for America and the whole world.

That's made us more cautious about our investment recommendations than we've been in a long time.

You can count on us to tell you the truth about what we see in the world... good or bad. At the end of the day, that's all we can really promise.

We appreciate your trust and your business.

Regards,

Porter Stansberry
Miami Beach, Florida
February 19, 2010

P.S. Please let me know how our top-ranked analysts (Mike Williams, Dan Ferris, David Eifrig, and Braden Copeland) have benefited you over the last two years. If you followed their advice, you made a killing while most of the people you know got killed. Please share your stories about the bear market and the rebound here: feedback@stansberryresearch.com.