The annual Report Card, Part II

In Part II of our annual Report Card, we will review the performance of our trading advisories. While our monthly newsletter products sometimes contain risky speculations, our trading products are designed to focus only on high-risk/high reward setups and opportunities. Although we broke out their performances primarily for time and space reasons, discussing the two types of products separately makes sense for a fundamental reason, too. I don't think you should evaluate a trading product the same way you'd evaluate a newsletter. Let me explain why...

Our investment newsletters primarily serve people who want a fairly safe vehicle that's going to make them a reasonable sum of money over one to two years (sometimes longer). That's why my evaluation of our investment newsletters put such emphasis on winning percentage (the number of stock picks that go up) and risk. What really matters to investors is not losing money and not wasting a year or two in an investment.

The ideal investment newsletter portfolios look like the results we've seen for years in True Wealth, True Income, Retirement Millionaire, and The 12% Letter. These letters recommend low-risk stocks and bonds. Their win percentages are consistently near or above 90%. Their average gains are near 20% or greater. Their portfolios dwarfed the return you would have earned with matching S&P index investments. And if you look at their average holding periods, you'll discover they're not jumping into and out of a lot of positions. They are doing "plain vanilla" investing, but they're doing so at an incredibly high level. We are enormously proud of these letters and rightfully consider them, along with the "long" side of Extreme Value, to be the crown jewels of not only our business, but the entire newsletter industry.

On the other hand, with our trading advisories, we accept more risk than, say, buying shares of Wal-Mart or ExxonMobil. We're often looking for the smallest unproven stocks... which should quickly soar. We're trading in options and other derivatives, which add volatility to those portfolios. In these situations, you should normally expect a much lower win rate (because of the additional risk) and a much shorter holding period.

In a trading portfolio, what really matters isn't the win percentage, but how quickly you cut your losses and how many trades you "hit out of the park." In a trading portfolio, the primary measure of quality is annualized return. I warned readers last week about how annualized returns in the context of a monthly newsletter portfolio are inflated above reality. You can't efficiently reinvest your capital immediately across an entire newsletter's portfolio. But frequently, you can with our trading advisories, which have fewer open positions. As a result, while annualized returns in a trading advisory are still inflated, they are much closer to reality than the simple average return. That's why I pay so much attention to annualized results when I measure our trading performance.

One last caveat... I don't suggest you try to compare our trading advisory results to our investment newsletter results. Why not? Because the amount of capital in your trading positions is normally much, much smaller than the capital in an investment position. Typical position size in a trade - using naked options, for example - is perhaps 1% of your portfolio. But an investment in a big, blue-chip stock might represent 4% to 6% of your portfolio. Comparing the percentage gains you make from trading a small amount of your portfolio with the percentage gains you make from investing the majority of your capital doesn't make much sense.

With this in mind... How did we do?

Key

Time period measured is March 1, 2009 through December 31, 2010, which corresponds to the beginning of the ongoing bull market. See last year's Report Card for a bear market evaluation.
Win % is the percentage of recommendations that went up.
Average Gain is the simple average of all percentage gains and losses.
Ann. Gain is the annualized average of all percentage gains and losses.
Days is the average number of days each position was held.
Grade is our subject appraisal of each services' performance.

Note: Both the S&A Grail Trader and True Wealth Systems are "quantitative" trading systems that work on statistical models. We have been developing these systems for the last year. While these trades are real... we did not publish them to any subscribers. We include them here purely for reference. You will have the opportunity to use these systems this year, and we wanted you to know how they would have stacked up against our other products. Because we did not make these public, we did not give these new products an actual grade.

Special recognition must be given to Jeff Clark's S&A Short Report. As you can see, his annualized returns dwarf our other advisories. That's because Jeff is, hands down, the best trader I have ever met. He is so good at what he does, he makes the rest of us look like children learning to ride a bike.

Lots of people who have heard me say this over the years naturally assume I do so because Jeff works for me. But that's simply not so...

In the first place, Jeff chose us... not the other way around. After reading one of my Report Cards from several years ago, Jeff approached me and asked me to publish his trades. Until that point, Jeff's trades were only available to the clients of the brokerage firm he founded and owned. To say Jeff doesn't need an employer is a gross understatement. Jeff wanted a publisher who could document his amazing talent for short-term trading and cared deeply about the quality of the advisories. That Jeff Clark decided to publish at Stansberry is probably the best endorsement we've ever received.

If you want to make money trading - especially in options - the finest "school" you could ever attend is waiting for you in the pages and the online updates of Jeff Clark's Short Report. Much like True Wealth delivers nearly perfect investment performance, Jeff Clark's Short Report produces nearly perfect trading performance. Jeff makes quick (less than three weeks) trades that are highly profitable, averaging 27% gains. The annualized result is difficult to believe, unless you've been reading him for years. If you want to trade options, make sure you're reading Jeff Clark.

To learn more about Short Report, click here.

The next-best performance came from our newest trading advisory, Junior Resource Trader. Until recently, we only made JRT trades available to our S&A Alliance members. While its results are real and impressive, so far editor Matt Badiali has made only three since we officially launched the advisory in December.

Phase 1 is our most expensive advisory and the only product not included in any of our Alliance packages. We hold it outside the rest of our business because it focuses on the smallest (and we mean tiny) opportunities and the earliest-stage companies. Phase 1 is not really a trading service, though it takes trading-service-like risks. In bull markets, Phase 1 offers you the opportunity to make enormous trading-like gains on investment-sized positions. You can see how different this product is by looking at the average days held (217). Achieving average gains in excess of 50% and making money on almost three out of four recommendations is a remarkable achievement. While all our analysts contribute ideas and suggestions to Phase 1, the portfolio management responsibility is Frank Curzio's. He has done a masterful job and deserves our highest grade. Frank, just remember one thing: Everyone looks like a genius in a bull market. We want to see how you perform when times get tough.

Now... earlier, I went to great lengths to explain why our trading services will typically have a lower win percentage than our newsletters and why trading services intentionally take on more risk. There's one notable exception to this general approach: Dr. David "Doc" Eifrig's Retirement Trader. In this advisory, we've asked Doc to bring us the best of both worlds: high annualized returns with extremely low volatility and risk.

We know retired investors don't have the risk tolerance to withstand many losing positions. Doc uses the techniques he learned as a proprietary trader at Goldman Sachs to give you an unmatched advantage in the markets. Doc has delivered truly amazing results to his readers over the last three years. In both his newsletter (Retirement Millionaire) and trading service (Retirement Trader), Doc has almost no losing positions. Almost none. This is precisely the kind of performance a retirement investor must have.

If you've never traded before, Retirement Trader is the first advisory you should read. Doc is so good at what he does (very low risk trades), you might decide to never upgrade to Jeff Clark. For retired traders, I can't imagine a better or more useful product.

To learn more about Retirement Trader, click here.

Now... I want to make sure you understand why I included both the S&A Grail Trader and Steve Sjuggerud's new project, True Wealth Systems. We did not publish these trades, so we did not award these products a grade. But these are system-based trading advisories that use computer models to identify statistically significant aberrations in the stock market. We will be talking a lot about these products over the next few months, and we thought you'd want to know how these models performed during the same period.

Understand, these trades are "real." But we simply didn't publish them. We have begun to distribute the S&A Grail Trader to our S&A Alliance members. We will begin circulating True Wealth Systems shortly to the same beta audience. We will make both products available to the public later this year. They are designed to perform well in either bull or bear markets.

Lastly... This isn't Lake Woebegone. Not all trading advisories are better than average. Some are much worse. We had a major malfunction at the helm of Penny Trends. The previous editor was unfortunately convinced a return to deflationary conditions was imminent. He allowed this bias to influence his trade selection and portfolio management decisions. The results, while not catastrophic, were quite bad in the face of a massive inflationary bull market. That the founder of S&A Research (me) was so decidedly in the inflationary camp made the situation all the more frustrating.

As you probably already know, the editor in question, whom we personally admire in every way, decided to take on a new challenge that doesn't require him to excel at short-term trading. We wish him all of the best in his new endeavor.

So... what will become of this product? As you know, we don't tolerate this kind of performance. Our normal course of action would simply be to move the subscribers over to Jeff Clark's product and do our best to help them recoup their losses. But... something interesting has been going on here since September. Our editor in chief, Brian Hunt, was convinced there was nothing wrong with this advisory's approach... the problem lay with the former editor's deflationary bias. So Hunt offered to take on the responsibility personally.

Since changing editors last September, the portfolio has been extremely profitable. Hunt has gone five for six, with average gains of 30% and an annualized return of 191.5%. I have no doubt this product can be effective for our subscribers - as long as we have the right editor in place. I've begged Brian to continue... but he seems unmoved by my efforts. Perhaps a huge wave of new subscribers would convince him not to simply kill this product.

How many times do you think we've been asked this question: "If I'm only going to read one newsletter, which one should I read?" We truly cannot answer the question. That's not because we don't have our own favorites. We do (Extreme Value, True Income, Short Report). We can't answer the question because our letters are designed to serve specific niches and types of investors. We can't know which letter is going to be just right for you. For example, if you're retired, you should read both of Eifrig's letters. He intentionally produces the lowest-risk product we offer. And with Doc, low risk won't mean low return, as you can see from our report cards.

Likewise, if you're a relatively wealthy investor, I would beg you to read both True Income and Extreme Value because these letters offer the most sophisticated insights with the best long-term results. If you're a trader, please read Jeff Clark's Short Report. You'll be a much better trader in a matter of days. If you're concerned about the future of America and you want a "crisis-proof" portfolio, you need to read my newsletter, Stansberry's Investment Advisory. Bottom line: There is no one "best" letter to read. It depends on your goals for your portfolio.

However you choose to do business with us, please accept my sincere thanks. You've helped me build a world-class advisory business filled with brilliant analysts, dedicated staff members, and thousands of loyal customers from around the world. You all have given me the very best job in the entire world. Thank you.

While our annual report card is a useful, objective review of our advisories, you're probably curious how our actual subscribers performed over the year. In today's mailbag, you'll see two outstanding performances. How'd your portfolio perform in 2010?... feedback@stansberryresearch.com.

"Below are the full calendar year 2010 results for my account on a monthly basis. A hedge fund would be judged not just by the absolute return but by the volatility investors experience. I opened this account in late 2008 at OptionsHouse and have traded and invested almost exclusively on Stansberry Research picks. Monthly numbers were calculated by Penson Financial Services, clearing agent for OptionsHouse.

"I will also include absolute dollar amounts. We previously discussed Porter's need to see how your firm's work affects a real world portfolio and investor. These results do not include gains on junk bonds using the True Income newsletter. Most of the True Income picks are held in a separate account at a full-service broker. These results also do not include my gains on bullion and collectible coins.

"I will note that on a month end basis the account never was at a loss. In late May or early June the account did go slightly negative for the year, but by only $20,000. The return numbers may be just slightly off because I deposited money into the account during the month of January." - Anonymous

"I have been an Alliance member for several years, and looking back now see the costs of membership as the most well-spent money ever to leave my wallet. My 401(k) is a self-directed brokerage account, with my trading limited to NYSE, AMEX, and Nasdaq-listed securities (I cannot buy from foreign exchanges or the pink sheets, and I am not allowed to trade options or establish short positions). I read and enjoy all of your publications (including the political and social commentary), and select from among your recommendations those that sound most interesting and that I am able to purchase in my account.

"On March 1, 2009 my 401(k) was worth $102,500. On December 31, 2010 my account had grown to $310,000. While that 202% increase included about $30,000 in salary-deducted contributions, it still was one HELLUVA 22-month return! I can't thank you enough. Keep up the great work." - Anonymous
Regards,

Porter Stansberry
Baltimore, Maryland
January 21, 2011In Part II of our annual Report Card, we will review the performance of our trading advisories. While our monthly newsletter products sometimes contain risky speculations, our trading products are designed to focus only on high-risk/high reward setups and opportunities. Although we broke out their performances primarily for time and space reasons, discussing the two types of products separately makes sense for a fundamental reason, too. I don't think you should evaluate a trading product the same way you'd evaluate a newsletter. Let me explain why...

Our investment newsletters primarily serve people who want a fairly safe vehicle that's going to make them a reasonable sum of money over one to two years (sometimes longer). That's why my evaluation of our investment newsletters put such emphasis on winning percentage (the number of stock picks that go up) and risk. What really matters to investors is not losing money and not wasting a year or two in an investment.

The ideal investment newsletter portfolios look like the results we've seen for years in True Wealth, True Income, Retirement Millionaire, and The 12% Letter. These letters recommend low-risk stocks and bonds. Their win percentages are consistently near or above 90%. Their average gains are near 20% or greater. Their portfolios dwarfed the return you would have earned with matching S&P index investments. And if you look at their average holding periods, you'll discover they're not jumping into and out of a lot of positions. They are doing "plain vanilla" investing, but they're doing so at an incredibly high level. We are enormously proud of these letters and rightfully consider them, along with the "long" side of Extreme Value, to be the crown jewels of not only our business, but the entire newsletter industry.

On the other hand, with our trading advisories, we accept more risk than, say, buying shares of Wal-Mart or ExxonMobil. We're often looking for the smallest unproven stocks... which should quickly soar. We're trading in options and other derivatives, which add volatility to those portfolios. In these situations, you should normally expect a much lower win rate (because of the additional risk) and a much shorter holding period.

In a trading portfolio, what really matters isn't the win percentage, but how quickly you cut your losses and how many trades you "hit out of the park." In a trading portfolio, the primary measure of quality is annualized return. I warned readers last week about how annualized returns in the context of a monthly newsletter portfolio are inflated above reality. You can't efficiently reinvest your capital immediately across an entire newsletter's portfolio. But frequently, you can with our trading advisories, which have fewer open positions. As a result, while annualized returns in a trading advisory are still inflated, they are much closer to reality than the simple average return. That's why I pay so much attention to annualized results when I measure our trading performance.

One last caveat... I don't suggest you try to compare our trading advisory results to our investment newsletter results. Why not? Because the amount of capital in your trading positions is normally much, much smaller than the capital in an investment position. Typical position size in a trade - using naked options, for example - is perhaps 1% of your portfolio. But an investment in a big, blue-chip stock might represent 4% to 6% of your portfolio. Comparing the percentage gains you make from trading a small amount of your portfolio with the percentage gains you make from investing the majority of your capital doesn't make much sense.

With this in mind... How did we do?

Key

Time period measured is March 1, 2009 through December 31, 2010, which corresponds to the beginning of the ongoing bull market. See last year's Report Card for a bear market evaluation.
Win % is the percentage of recommendations that went up.
Average Gain is the simple average of all percentage gains and losses.
Ann. Gain is the annualized average of all percentage gains and losses.
Days is the average number of days each position was held.
Grade is our subject appraisal of each services' performance.

Note: Both the S&A Grail Trader and True Wealth Systems are "quantitative" trading systems that work on statistical models. We have been developing these systems for the last year. While these trades are real... we did not publish them to any subscribers. We include them here purely for reference. You will have the opportunity to use these systems this year, and we wanted you to know how they would have stacked up against our other products. Because we did not make these public, we did not give these new products an actual grade.

Special recognition must be given to Jeff Clark's S&A Short Report. As you can see, his annualized returns dwarf our other advisories. That's because Jeff is, hands down, the best trader I have ever met. He is so good at what he does, he makes the rest of us look like children learning to ride a bike.

Lots of people who have heard me say this over the years naturally assume I do so because Jeff works for me. But that's simply not so...

In the first place, Jeff chose us... not the other way around. After reading one of my Report Cards from several years ago, Jeff approached me and asked me to publish his trades. Until that point, Jeff's trades were only available to the clients of the brokerage firm he founded and owned. To say Jeff doesn't need an employer is a gross understatement. Jeff wanted a publisher who could document his amazing talent for short-term trading and cared deeply about the quality of the advisories. That Jeff Clark decided to publish at Stansberry is probably the best endorsement we've ever received.

If you want to make money trading - especially in options - the finest "school" you could ever attend is waiting for you in the pages and the online updates of Jeff Clark's Short Report. Much like True Wealth delivers nearly perfect investment performance, Jeff Clark's Short Report produces nearly perfect trading performance. Jeff makes quick (less than three weeks) trades that are highly profitable, averaging 27% gains. The annualized result is difficult to believe, unless you've been reading him for years. If you want to trade options, make sure you're reading Jeff Clark.

To learn more about Short Report, click here.

The next-best performance came from our newest trading advisory, Junior Resource Trader. Until recently, we only made JRT trades available to our S&A Alliance members. While its results are real and impressive, so far editor Matt Badiali has made only three since we officially launched the advisory in December.

Phase 1 is our most expensive advisory and the only product not included in any of our Alliance packages. We hold it outside the rest of our business because it focuses on the smallest (and we mean tiny) opportunities and the earliest-stage companies. Phase 1 is not really a trading service, though it takes trading-service-like risks. In bull markets, Phase 1 offers you the opportunity to make enormous trading-like gains on investment-sized positions. You can see how different this product is by looking at the average days held (217). Achieving average gains in excess of 50% and making money on almost three out of four recommendations is a remarkable achievement. While all our analysts contribute ideas and suggestions to Phase 1, the portfolio management responsibility is Frank Curzio's. He has done a masterful job and deserves our highest grade. Frank, just remember one thing: Everyone looks like a genius in a bull market. We want to see how you perform when times get tough.

Now... earlier, I went to great lengths to explain why our trading services will typically have a lower win percentage than our newsletters and why trading services intentionally take on more risk. There's one notable exception to this general approach: Dr. David "Doc" Eifrig's Retirement Trader. In this advisory, we've asked Doc to bring us the best of both worlds: high annualized returns with extremely low volatility and risk.

We know retired investors don't have the risk tolerance to withstand many losing positions. Doc uses the techniques he learned as a proprietary trader at Goldman Sachs to give you an unmatched advantage in the markets. Doc has delivered truly amazing results to his readers over the last three years. In both his newsletter (Retirement Millionaire) and trading service (Retirement Trader), Doc has almost no losing positions. Almost none. This is precisely the kind of performance a retirement investor must have.

If you've never traded before, Retirement Trader is the first advisory you should read. Doc is so good at what he does (very low risk trades), you might decide to never upgrade to Jeff Clark. For retired traders, I can't imagine a better or more useful product.

To learn more about Retirement Trader, click here.

Now... I want to make sure you understand why I included both the S&A Grail Trader and Steve Sjuggerud's new project, True Wealth Systems. We did not publish these trades, so we did not award these products a grade. But these are system-based trading advisories that use computer models to identify statistically significant aberrations in the stock market. We will be talking a lot about these products over the next few months, and we thought you'd want to know how these models performed during the same period.

Understand, these trades are "real." But we simply didn't publish them. We have begun to distribute the S&A Grail Trader to our S&A Alliance members. We will begin circulating True Wealth Systems shortly to the same beta audience. We will make both products available to the public later this year. They are designed to perform well in either bull or bear markets.

Lastly... This isn't Lake Woebegone. Not all trading advisories are better than average. Some are much worse. We had a major malfunction at the helm of Penny Trends. The previous editor was unfortunately convinced a return to deflationary conditions was imminent. He allowed this bias to influence his trade selection and portfolio management decisions. The results, while not catastrophic, were quite bad in the face of a massive inflationary bull market. That the founder of S&A Research (me) was so decidedly in the inflationary camp made the situation all the more frustrating.

As you probably already know, the editor in question, whom we personally admire in every way, decided to take on a new challenge that doesn't require him to excel at short-term trading. We wish him all of the best in his new endeavor.

So... what will become of this product? As you know, we don't tolerate this kind of performance. Our normal course of action would simply be to move the subscribers over to Jeff Clark's product and do our best to help them recoup their losses. But... something interesting has been going on here since September. Our editor in chief, Brian Hunt, was convinced there was nothing wrong with this advisory's approach... the problem lay with the former editor's deflationary bias. So Hunt offered to take on the responsibility personally.

Since changing editors last September, the portfolio has been extremely profitable. Hunt has gone five for six, with average gains of 30% and an annualized return of 191.5%. I have no doubt this product can be effective for our subscribers - as long as we have the right editor in place. I've begged Brian to continue... but he seems unmoved by my efforts. Perhaps a huge wave of new subscribers would convince him not to simply kill this product.

How many times do you think we've been asked this question: "If I'm only going to read one newsletter, which one should I read?" We truly cannot answer the question. That's not because we don't have our own favorites. We do (Extreme Value, True Income, Short Report). We can't answer the question because our letters are designed to serve specific niches and types of investors. We can't know which letter is going to be just right for you. For example, if you're retired, you should read both of Eifrig's letters. He intentionally produces the lowest-risk product we offer. And with Doc, low risk won't mean low return, as you can see from our report cards.

Likewise, if you're a relatively wealthy investor, I would beg you to read both True Income and Extreme Value because these letters offer the most sophisticated insights with the best long-term results. If you're a trader, please read Jeff Clark's Short Report. You'll be a much better trader in a matter of days. If you're concerned about the future of America and you want a "crisis-proof" portfolio, you need to read my newsletter, Stansberry's Investment Advisory. Bottom line: There is no one "best" letter to read. It depends on your goals for your portfolio.

However you choose to do business with us, please accept my sincere thanks. You've helped me build a world-class advisory business filled with brilliant analysts, dedicated staff members, and thousands of loyal customers from around the world. You all have given me the very best job in the entire world. Thank you.

While our annual report card is a useful, objective review of our advisories, you're probably curious how our actual subscribers performed over the year. In today's mailbag, you'll see two outstanding performances. How'd your portfolio perform in 2010?... feedback@stansberryresearch.com.

"Below are the full calendar year 2010 results for my account on a monthly basis. A hedge fund would be judged not just by the absolute return but by the volatility investors experience. I opened this account in late 2008 at OptionsHouse and have traded and invested almost exclusively on Stansberry Research picks. Monthly numbers were calculated by Penson Financial Services, clearing agent for OptionsHouse.

"I will also include absolute dollar amounts. We previously discussed Porter's need to see how your firm's work affects a real world portfolio and investor. These results do not include gains on junk bonds using the True Income newsletter. Most of the True Income picks are held in a separate account at a full-service broker. These results also do not include my gains on bullion and collectible coins.

"I will note that on a month end basis the account never was at a loss. In late May or early June the account did go slightly negative for the year, but by only $20,000. The return numbers may be just slightly off because I deposited money into the account during the month of January." - Anonymous

"I have been an Alliance member for several years, and looking back now see the costs of membership as the most well-spent money ever to leave my wallet. My 401(k) is a self-directed brokerage account, with my trading limited to NYSE, AMEX, and Nasdaq-listed securities (I cannot buy from foreign exchanges or the pink sheets, and I am not allowed to trade options or establish short positions). I read and enjoy all of your publications (including the political and social commentary), and select from among your recommendations those that sound most interesting and that I am able to purchase in my account.

"On March 1, 2009 my 401(k) was worth $102,500. On December 31, 2010 my account had grown to $310,000. While that 202% increase included about $30,000 in salary-deducted contributions, it still was one HELLUVA 22-month return! I can't thank you enough. Keep up the great work." - Anonymous
Regards,

Porter Stansberry
Baltimore, Maryland
January 21, 2011