The Big Secret of Investment Success

The big secret of investment success... How to continue reading Jeff Clark's work for free... The Report Card: How did we do in 2015 and 2016?... Don't miss next week's meeting... Setting your investment goals for 2017...

I (Porter) have a special announcement to make...

Before we get into today's Digest (which will feature a revealing look at the performance of my team's equity recommendations), a note about Jeff Clark and his service, The Stansberry Research Pro Trader and the Direct Line.

Jeff is a wonderful market technician and a superb short-term trader. For more than a decade, he has served our subscribers faithfully. Thousands of them have come to depend on his intraday commentary in his real-time blog, the Direct Line. Even more than Jeff's professional abilities, I've come to admire his character: He's a dedicated husband and father. He's honest, loyal, and kind. He's everything you'd want in a friend and he has been my friend for a long time.

As you probably have already heard, we've decided to stop publishing Jeff's newsletter. I don't want to comment on why we made this decision because it's our policy never to explain changes to our editorial lineup. We work in a very competitive industry. Anything we say to you, our subscribers, we're also explaining to our competitors. But in this case, it's important for me to say publicly that our decision had nothing to do with Jeff's performance. Our admiration for him is completely undiminished.

As you'll see in the coming weeks... big changes are happening at Stansberry Research, which is continuing to evolve...

I told our Alliance Conference attendees 18 months ago that I intended to get out of the newsletter business – that is, the business of marketing and selling annual subscriptions. My ultimate goal is to only provide information to Alliance members – subscribers who are willing to make a long-term commitment to our company. Their commitment has enabled us to build the highest-quality independent financial research team in the world.

As part of this change, this month we're launching Stansberry Portfolio Solutions – a dramatically better and far more comprehensive way to use our research. This isn't another newsletter. It's an entirely new kind of service, and nothing like it has ever been offered to the public before. With Stansberry Portfolio Solutions, we can do even more to help you improve your investment results while greatly reducing the time you have to spend dealing with your portfolio (or our newsletters).

And as part of this new service, we will also begin to offer around-the-clock coverage of the world's financial markets, with updates available (if you desire) every several minutes. This new Stansberry Newswire will be written by a team of five veteran Wall Street traders, working together from our global headquarters in Baltimore. This new service will keep you plugged-in and in-touch with what's happening in the markets and with your portfolio, in real time, minute-by-minute. This service will replace Jeff's much-loved Direct Line.

For our "partners" – our Stansberry Research Alliance members – I'm confident that these new services and this new approach to our business will be a substantial enhancement to your subscription. This is in keeping with our long and constant tradition of growing our lineup of products and services and, year after year, making improvements to our staff. I look forward to showing you all of these new tools and to introducing you to the newest members of our team. I know you will be impressed.

Please join us on the evening of Thursday, January 12, where we will fully describe this new product, Stansberry Portfolio Solutions, and tell you how you can participate. Reserve your spot for the meeting here.

Finally... we know that many of you would simply prefer to keep reading Jeff Clark's thoughts and trading ideas as you were before. If that's how you feel, then keep an eye on your inbox on Monday. You'll be receiving an invitation to receive an entire year of Jeff Clark's new service, for free, from his new publisher. To qualify for this offer, you must have been an Alliance member or a Stansberry Research Pro Trader subscriber at the end of last year. We wish Jeff and his loyal fans all the best.

Now... about that revealing look at our performance...

Longtime readers know that at the beginning of each year, we publish a "Report Card" where I analyze the performance of our various newsletters and analysts. I believe we have a fiduciary-like duty to make sure that our advice is profitable and safe.

We believe strongly in testing our good intentions against results. And we make the results of these examinations public because that's the best way to educate you, our dear subscribers, about our products.

No strategy works best in every market cycle. So knowing more about how each of our products is likely to perform in a given market cycle can be useful and help you make better decisions about what investment strategies to follow.

We don't believe in presenting arbitrary time periods. Nobody should care about how an investment strategy works over a calendar year... or three calendar years. You should care about how your investments perform during bull markets or bear markets or across a full investment cycle.

Therefore, we look back over the last several years and chose a time period to examine that offers a meaningful comparison. In the past, our Report Cards have covered evaluation periods of different lengths, in some cases more than three years in duration. The time frame, however, is always based on an effort to present you with most recent, meaningful comparison period.

The most recent full cycle in the stock market began in August 2015...

What's a "full cycle" in the stock market? We date bull (up) and bear (down) moves in the stock market by looking for declines of more than 10%.

The most recent correction in the stock market occurred during the fall of 2015. The correction lasted 100 days and culminated in a bottom on February 11, 2016, with the S&P 500 reaching 1,829. The second-most recent correction began in May 2015, lasted 96 days, and culminated on August 15, 2015, with the S&P 500 at 1,867.

We wanted to compare our performance across an entire cycle, so we began our measurement period at the bottom of the previous cycle, on August 15, 2015. We then tracked all of our recommendations made from that date on, through the next correction, and into the bull market that followed through the end of 2016. Thus, this year's Report Card evaluation period will cover a period of roughly 17 months.

We're still working on collecting all of the data across more than a dozen different products, but we've finished collecting the data on our flagship advisory – Stansberry's Investment Advisory. How did we do?

If you had bought the S&P 500 at its low in mid-August 2015 and held it through the correction in the fall of 2015 and through the end of 2016, you would've made 7.2%.

On an annualized basis, that's a return of 5.1%. Those are below-average returns for stocks, when measured by the S&P 500. Unfortunately, our performance in Stansberry's Investment Advisory wasn't any better. If instead of buying the S&P 500, you could have put all of your capital to work across the 38 recommendations we made in our letter, you would have seen an annualized return of 3.8%.

Our underperformance was caused by yours truly. Our analysts did a phenomenal job, both picking stocks that went up far more than the market and finding stocks to short that went down.

But I was far too bearish on the stock market in late 2015 and most of 2016.

As you will probably remember, I was very concerned about the direction of global monetary policy and the risk I believed we were facing from negative interest rates.

A global run on the bank nearly occurred in September 2016, when shares of banking giant Deutsche Bank (DB) fell to nearly $10. Falling corporate earnings, collapsing commodity prices, declining industrial production, and a decline in the transportation sector were all worrisome signs of a new economic contraction and a severe bear market in the U.S. But as we all know now, those problems didn't accelerate.

Instead, in early October, central banks around the world began to reject negative interest-rate policies. Almost immediately, bank stocks began rallying (Deutsche Bank has nearly doubled). Lots of other indicators turned around in the fourth quarter – including higher copper prices, higher oil prices, and new highs in the major stock indexes.

In Stansberry's Investment Advisory, we were actively hedging our exposure to the stock market during the last several months...

We made 21 "short" recommendations and only 17 "long" recommendations. That was a mistake – a big one.

On average, the stocks we recommended that you buy trounced the market. In fact, the average gain in these stocks was almost 9%, generating annualized returns on our "long" portfolio of an incredible 15.2%. That's about three times better than stocks, on average.

The trouble is, I spent far too much time and energy worrying about a tragic outcome that didn't materialize. By allocating so much of our portfolio – a majority! – to our short recommendations, we ended up with total returns that didn't beat the market. (The average return on our short recommendations was negative 4%.)

What did we learn?

You might disagree, but I don't think I'd do much differently next time. Think about it this way: Yes, we underperformed the market by a relatively insignificant amount: (3.8% versus 5.1%). But we were mostly short the market during the period. In other words, if stocks had declined, or if we had seen a global banking catastrophe (and there almost was), we would have been completely protected and probably still made a considerable profit.

So do I wish I would have shorted fewer stocks? Yes, of course. But I still think the advice we offered was valuable and profitable. What do you think? I'd love to know. Shoot me a note at feedback@stansberryresearch.com.

One last thought...

One of the main reasons I've been working on Stansberry Portfolio Solutions is so that I can address the allocation issue that plagued our "official" performance over the past 15 months.

I would NEVER have organized an actual portfolio to be more than 50% short the market.

In fact, in the Bear Market Survival Program that we published in early 2016, I suggested a 10%-20% allocation to your short portfolio, while recommending you keep 10% in high-quality, capital-efficient stocks (like the kind we recommend in Stansberry's Investment Advisory), 10% long "special situation" equities (like fast-food chain Chipotle Mexican Grill), and 10% in Trophy Asset stocks.

Following my advice about allocation, you would have been around 30% long stocks and only 10%-20% short stocks. This would have greatly increased your returns – far above the numbers I wrote above.

Anyone who bought that report and did anything like what we recommended has made a ton of money. Our Trophy Asset picks in that report – Transocean (RIG), BHP Billiton (BHP), Royal Gold (RGLD), Empire State Realty Trust (ESRT), POSCO (PKX), Kinder Morgan (KMI), and EOG Resources (EOG) – are way up, with average gains of 50%!

Likewise, I'm sure you'll remember in late 2015 I was urging readers to buy distressed corporate debt (bonds). Every single bond we've recommended has been profitable. And among the bonds that traded at or below our buy-up-to price – bonds where you could have entered the position – the average annualized return is 40%.

As I promised, our bond recommendations produced gains that were way bigger than the stock market, while taking far less risk. In the Bear Market Survival Program, I recommended putting at least 10% of your portfolio into these positions – just as much as you would have had in short equity positions. So if you were following our asset allocation advice last year, you would have done very well.

And I knew that allocation would be the key to success. As I wrote in the report...

The concept of "asset allocation" – how much of your total portfolio to dedicate to specific categories of investments – is the most important factor to your success as an investor...

It's 100 times more important than any stock pick. It's 100 times more important than knowing the next hot country to invest in... what option to buy... what the housing market is doing... or whether the economy is booming or busting. Not taking this idea into account has ruined more retirements than any other financial factor...

Subscribers pay a lot of attention to how the stocks we pick perform – and they should...

Good investment analysts should help you find great investments. But what I know from working with investors for years and years is that investment allocation – how much capital you put into each investment and into each sub-category of investments – is far more important to your actual results.

That's why in our Bear Market Survival Program, I shared my best ideas about how to allocate. But we can do a lot more for you...

Teaching you asset allocation is the primary purpose behind our new product – Stansberry Portfolio Solutions. With this product, we will take the entire range of our research materials and put them together for you into a complete portfolio that's allocated all the way down to the number of shares of each stock that we recommend.

We'll base everything on a $100,000 portfolio size, but we'll even provide a position-size calculator for you to use. Just enter the size of your portfolio and presto, the number of shares you should buy will pop out.

This will, for the first time ever, allow you to see exactly how we recommend building a whole portfolio using all of the research we produce.

And that's just the beginning...

As I mentioned, we're building a new team of experienced Wall Street traders to provide 24/7 information and support for these portfolios, allowing you to know what's happening with your investments in real time. You'll never have to watch the news again.

There's more, too. We're going to throw in free access to TradeStops – at its highest level of service – so that you can fully understand the internal dynamics of the portfolios we've created. You'll know their volatility. And you can see how we've shaped our position sizes using this kind of dynamic risk-management approach.

Stansberry Portfolio Solutions is the ultimate expression of all of the things we've been building at Stansberry Research for the last 20 years. I can't wait for you to see how easy it will be going forward to finally "get there" in regards to your investing. Everything will finally be organized in one place so that you can see the big picture and know exactly how to manage everything in your portfolio.

Please remember to sign up for our free meeting next week. All of us – me, Steve Sjuggerud, David Eifrig, and our entire research team – have been looking forward to this day for a long, long time. And we can't wait to show you what we've built. Again, reserve your spot right here.

Next week, we'll go over the rest of the Report Card. Here's to 2017 – and making it the best year of your entire life as an investor!

New 52-week highs (as of 1/5/17): Boeing (BA), Bank of Montreal (BMO), BP (BP), ProShares Ultra Telecommunications Fund (LTL), Shopify (SHOP), and Tallgrass Energy GP (TEGP).

In today's mailbag, big praise for the latest must-read essay from bestselling satirist and Digest contributing editor P.J. O'Rourke. Send your questions, comments, and concerns to feedback@stansberryresearch.com.

"I had never been too interested in the satiric comic relief provided by P.J. in the past. Yet I found myself drawn to continue to at least scan his writings to see why they were important enough to be included in the Digest... But beginning with his recent series on how he taught himself economics, and most importantly, his incredibly incisive and insightful article on regulatory trash, he has now made me fully appreciate his brilliant value!

"I do not know how anyone who has not had at least one first hand experience of surprisingly finding themselves in the cross-hairs of a skillful regulator, could ever possibly fathom how exactly right on-point (and with no exaggeration whatsoever) PJ's statement is that... A skillful regulator moves the law beyond the reach of the law. Government regulatory agencies become a law unto themselves.

"After spending years of my time and sending more than one million dollars of my own money up in smoke trying to fight to for truth, honor and justice, against a skillful regulator who had kidnapped the law and turned 180 degrees on its head, I know what PJ says is the absolute truth. Once the law is given from our elected lawmakers in our legislatures, to our impossible to fire 'civil servants' in our agencies, all oversight virtually vanishes (and this occurs daily at the state level, too).

"Sadly, my staunch belief in the principles of my excellent childhood indoctrination via the Pledge of Allegiance, the song America and other sources such as Rawhide and Perry Mason, made me so sure (yet so wrong) that truth, honor and justice prevails in America, and made me such a staunch defender of and true believer in those ideals, that I never would have believed what PJ wrote about the regulatory trash, if I had not had my own very hard 'won' experience to teach me otherwise.

"So now I wonder how PJ learned of these realities. Was it through his own first hand experience? If not, then I absolutely marvel at the intellect of PJ and any of his readers who can understand the absolute unvarnished and sad truth of his brilliant article, Taking Out the Regulatory Trash!!! Best regards." – Paid-up subscriber Garry

"P.J. O'Rourke hits the nail on the head again. The solution is actually simpler than one thinks... The first step is to nullify all regulations which are really laws. POTUS Trump can simply write an executive order that any regulation that has a penalty (e.g., fine or imprisonment) is unconstitutional and will be null and void 1 year from the signing of the order. Congress has 1 year to codify into law any regulation that has a penalty. He must also promise to veto any omnibus bill codifying all of them without debate. It will be impossible for Congress to restore them all. Simple. Efficient. And will do much to restore our liberty with a single stroke of a pen. Write, call and hound Trump until he does it." – Paid-up subscriber Jim W.

Regards,

Porter Stansberry
Baltimore, Maryland
January 6, 2017