The Report Card Part II: Grading Sjug and Doc

The Report Card part ll... The most important metric in evaluating us... How sticking with the Bernanke Asset Bubble worked for True Wealth... Nobody's perfect... The best, most consistent way to generate income for your portfolio... World-class results in a challenging and fascinating market... One of the most gratifying letters we've received...

Today is part two of our annual Report Card series...

As I (Porter) mentioned last week, the purpose of this annual review is to compare the results of our work against different market cycles. There's always a spirited debate about which time frame is appropriate to measure against (longer is better and more meaningful) and how such measurements should take place.

Over the years, I've developed a philosophy about these measurements and choices. In addition to understanding what the numbers are, I hope you'll take the time to understand what the numbers mean (and don't mean).

To me, the single most important metric is the win percentage. When a subscriber puts his trust in us and takes our recommendations, the most important thing is to simply not lose money. But that's hard to avoid in a bear market or a market correction. In the period we're measuring (the last 17 months), the stock market went through two declines of more than 10%. That has a big impact on any analyst who uses trailing stop losses (like we do). These kinds of quick downward moves will cause some of his portfolio to stop out – potentially at a loss.

The next most important number is the average return. The average return doesn't tell you how much money you will make following an analyst's recommendations. (I'll explain why not in a second). But it does tell you something meaningful: It tells you, if you decide to take a few of his recommendations, what kinds of outcomes you should expect. Does the analyst make slow and steady choices (with a high win rate and smaller average returns)? Or is he a "gunslinger" who might win less than 50% of the time, but still puts up very impressive average returns because his winners are big and his losers are small?

Why doesn't the average return tell you much about how much money you really make investing?

Well, consider this scenario...

Let's say you had $100,000 and you invested, fully, in three investments. The returns were: -10%, -10%, and +100%.

Your winning percentage is 33%. That's not very good.

Your median return is -10%. That's terrible.

And your average return is 26.7% – that's great.

But, if you made these trades in real life, in any order, your $100,000 would have turned into $162,000. You would have made a 62% return on your portfolio, but you'd never know that by looking at annual returns.

That's why we use average annualized returns as our benchmark against the market. It's the best way to get as close as possible to an approximation of what you could have made, in real life, using our work.

Most people consider the annualized results to be the most important number. But I don't...

Most of the time, people want to know the annualized returns so they can compare them with the stock market's average return, as measured by the S&P 500 index. But I think that's a fool's errand. In a bull market, trying to chase returns to beat the S&P 500 every year will, sooner or later, lead you into disaster. Just ask Bill Miller, the famous (and the infamous) leader of Legg Mason's Value Trust fund. He beat the S&P 500 year after year by buying the dips... all the way down. It worked great until 2008. And then it didn't work at all.

What's important to me is earning good returns (above 10% annually), year after year, without taking much risk. That's the goal. And yes, in good years you will beat the market by a wide margin with this approach. And in bad years, you might not beat the market, but you're unlikely to lose much either.

Do that for an investment lifetime and you'll die very, very rich – without any stress.

So... how did Steve Sjuggerud (who leads our True Wealth franchise) and Dr. David Eifrig (who leads our Retirement Millionaire franchise) do this year? (You can review the grades I gave my franchise in last week's Friday Digest.)

Let's take a look…

True Wealth: B+

In True Wealth over the past eight years, Steve Sjuggerud has held steady to one main investment theme – the "Bernanke Asset Bubble." Sjug (as we call him) saw that central banks around the world were prepared to do whatever it took to "reflate" the asset bubble of the early 2000s in real estate and in the stock market. And no matter what clouds appeared on the horizon, whether it was the European debt crisis of 2011 or the U.S. high-yield collapse in the fall of 2015, Steve stayed with his main idea. Steve has stuck with this theme for so long, his investment strategy lasted longer than the Federal Reserve chairman it's named after!

Sjuggerud deserves an immense amount of credit. He's the only market analyst I can think of who both warned explicitly of the top in 2000 – when Steve called the Internet bubble the biggest financial bubble of our lifetimes – and then turned around and bought at the bottom in early 2009.

If you put your trust in Steve over the last 15 years or so, you've earned about 15% a year in stocks (according to our internal audit of long-term results), while taking very little risk. That's about 100% better than the market's average annual return. It's a long-term performance that's unmatched by just about any other hedge fund or newsletter in the world.

And over the past 17 months, Sjug stuck to his main theme, the Bernanke Asset Bubble, as it continued to drive the financial markets. Many years ago, Steve noticed a trend in asset bubbles – about five years after the bottom of the stock market, they begin to "leak" into gold prices and other commodities. He calls this the "five years 'til tragedy rule." And once again, it played out...

You might recall that the previous big correction in stocks was in the summer of 2011. Well, five years later, as if on cue, gold and gold stocks began forming a bottom in the summer of 2015 and then simply boomed during the first half of 2016.

Steve caught this move almost perfectly in his newsletter, earning big returns buying a slew of different exchange-traded funds ("ETFs") associated with mining and precious metals. These big wins more than offset a larger-than-normal number of losers (thanks to the whipsaw action of those 10% declines), producing annualized returns of more than two times the market.

A lot of subscribers, I'm sure, are going to complain about Steve not being awarded an "A." After all, he was right on his main theme. He followed it almost perfectly into the gold sector. And he produced impressive annualized results. How is that not an "A"?

Well, Sjug's method depends on cutting your losses. He tends to be early into big trends. He'll get "dinged" once or twice before the trend gets started. I don't think you can give an A grade to an analyst whose advice turns out to be wrong (at least in the short term) almost 50% of the time.

There's no doubt that Sjug's method works. And there's no doubt that he's produced better results than I have over the years. There's also no doubt that by cutting his losers quickly he's not actually taking big risks. But to earn an "A," Sjug needs to fine-tune his timing to avoid making so many mistakes.

True Wealth Systems: C

True Wealth Systems is the product of Steve's massive computerized research tools. These are the "raw materials" of the way Steve perceives the market. He follows dozens (or hundreds) of different models – statistically proven ways of anticipating major market moves.

This approach works best when the markets are trending strongly. When the markets are choppy, as they have been over the past 17 months, this approach is much less effective. All the quick corrections – or "whipsaws" – trigger lots of stops before the main trend begins.

Thus, over the past 17 months, True Wealth Systems has suffered a majority of losing positions (almost 60%). But by cutting losers quickly and letting its winners run (especially in gold), the service produced annualized results that were equal to the market. That's not good for a trading service.

But consider this... since the resumption of a stronger, bullish trend (since February 2016) True Wealth Systems has performed very well, with an annualized return of more than 14%. If this bull move continues, I'm confident that True Wealth Systems will be one of our top-performing products in 2017.

[Of course, Steve also publishes our True Wealth China Opportunities service. The portfolio has done well recently. But since we didn't introduce the service until this past September, its track record isn't long enough to be evaluated fairly.]

Retirement Millionaire: C

It finally happened...

For the last nine years, Doc has consistently earned an "A" or better (A+) in each annual Report Card. I'm sure he'll argue he deserved the same this year, as any longer evaluation period would have included his significant fixed-income positions, which have performed very well and would have boosted his annualized returns to a market-beating level.

However, as I've explained, we chose the last 17 months specifically because they were a very difficult period in the markets. And in this short evaluation period, Doc's Retirement Millionaire performance wasn't very good – nothing at all, in fact, like his previous performance.

During the period, Doc recommended more losers than winners – something he's never done before. And his average return was negative, too. On an annualized basis, however, his results were breakeven. Even so, these results lagged far behind the market.

Doc's outstanding performances prior to this year's Report Card were driven by a very idiosyncratic approach. Doc combines great fundamental analysis with his decades of experience on Wall Street. The result is a portfolio stuffed full of America's greatest companies, companies that Doc knows well, having followed them for 20 years or more in virtually every case.

But during this evaluation period, Doc was too bullish and not cautious enough when it came to companies that were pulling back. He suffered unusually large losses with pharmaceutical company Gilead Sciences (-24%) and energy infrastructure firm Chicago Bridge & Iron (-30%) when their earnings disappointed and their shares sold off. Instead of bouncing back, both stocks have continued to slide.

With only 10 recommendations made during the 17-month evaluation period, Doc couldn't do anything to recover from these unusual, sharp losses.

But Doc deserves a lot of credit for big gains in both the commercial real estate giant CBRE Group (CBG), which was up more than 30%, and almost 20% gains in the PowerShares High Yield Equity Dividend Achievers Fund (PEY). These are classic Doc investments – Super-safe, huge, and market-beating.

Nobody's perfect, Doc. But I wouldn't bet against you next year.

Income Intelligence: A

One of the biggest secrets in finance is also one of the most obvious: If you're trying to make double-digit returns safely, then focusing on high-income paying securities (both stocks and bonds) is hard to beat.

It baffles me that more individual investors don't focus on fixed-income securities that offer double-digit or near double-digit yields (like mortgage REITs, discounted corporate bonds, preferred shares, and a handful of rare, high-yielding stocks).

In our upcoming Stansberry Portfolio Solutions product (which takes all of our publications and then builds full, allocated portfolios), I've spent a lot of time working with Doc to incorporate high-yielding positions into our portfolios. These unique securities make up more than 30% of our allocation. There's no better way to produce "ballast" – a secure foundation for your wealth that will limit volatility – while at the same time helping you to achieve double-digit returns, no matter what happens in the stock market as whole.

I think most investors believe stocks that pay large dividends and high-yielding bonds will only drag down their results. But the truth is the opposite: Just look at Doc's results in Income Intelligence.

Here Doc's focus is on finding high-yielding, safe income across the entire capital structure. Some of his positions are simply high-yielding stocks, like amusement-park operator Cedar Fair (FUN), which pays a solid 5%-plus dividend and has a simple, but growing business. Total returns: 23%. Other positions are pure fixed income, like his Western Asset Emerging Markets Debt Fund (EMD), which was up more than 17% (and trounced the S&P 500's 10% return over the same investment period).

The wonderful thing about income – whether from a bond or a reliable divided-paying stock – is these securities will almost always provide at least some positive return no matter what happens to stocks in general. And that was exactly the case here, with Doc making money on more than 60% of his recommendations, producing average gains of 6.4% and annualized returns in excess of 10%, easily outpacing the market's return (6.1%) across the same investment period.

Doc makes it look easy to beat the market. And I'd wager you'd find your investment results improving dramatically if you would build your portfolio on a solid base of income-producing securities. If you want to learn how to do it, then check out our new Stansberry Portfolio Solutions offer.

Retirement Trader: A+

Doc's trading service is designed to help retired investors generate large amounts of income, using safe options-trading techniques.

Most people associate options trading with very risky trades that either make a lot or lose a lot... But that's not the kind of trading that Doc endorses. Instead, he is looking to make safe bets that quickly generate a small amount of income.

The key is, Doc is recommending which options to sell. Selling options allows you to generate a profit by accepting risk that other investors don't want to bear. I don't want to get into the details of the strategy here, but as you can see from Doc's results, knowing what forms of risk to sell and when to do it can be extremely lucrative and safe.

Doc's option trades (primarily selling puts and covered calls) generated a win more than 85% of the time. The average returns on these trades were a little less than 6% – which might not sound like much. But when you're flipping through these trades every 100 days or so, the annualized returns are incredible – greater than 40%.

And the best part? These are virtually all cash profits. There's some share appreciation here, but most of these gains are in the form of option premiums, paid to you in cash. If you're looking for a way to boost your income in retirement, I'd urge you to read Doc's Retirement Trader. It's the best, most consistent way to generate huge amounts of income from your portfolio.

After all, if you can make 40% a year... with profitable trades 85% of the time... why would you ever invest any other way?

(Please note, selling options requires a fairly large brokerage account, typically more than $25,000, and some experience buying and selling options. But for investors with the required account size and experience, it's an incredible strategy that closely mimics the way big trading houses – like Goldman Sachs, where Doc used to work – generate consistent profits, day after day.)

DailyWealth Trader: C

DailyWealth Trader made a profit on more than 60% of trades – that's good trading. And it handily beat the market over the comparative time period. So why am I giving editor Ben Morris a "C" instead of an "A"?

Because, with average returns of only 1.3% and annualized returns of less than 5%, I just don't see the point of doing all of this trading. I know a lot of people like to trade as a hobby, and I know they want something new to do every day. For folks like this, DailyWealth Trader is a great tool to help them follow the market and find profitable trades.

But, to me, I'd much rather make more money while doing far less. And it's not hard to beat these results in fixed income. So... why bother with all the trading?

My advice to Ben Morris is going to be: Trade less. Trade only your top conviction ideas, when you have a realistic chance to make at least 20% returns. Ignore the other opportunities. Doing so gives you a chance at earning annualized returns of 30%-50%, something that makes the effort and the risk of trading worth it.

Stansberry Research Resource Report: A

It was a fascinating and challenging period in the resource markets (gold, oil, copper, etc.). Gold, base metals, and oil finished their long slide and bounced back powerfully... only to see most of the gains erode over the last six months.

As a result, the main commodity indexes are flat for the period.

Matt Badiali, on the other hand, continued his long tradition of outstanding results by producing winning recommendations more than 70% of the time, with annualized returns of 17.5%.

These are world-class results from Matt, and I congratulate him on successfully navigating a very challenging period for resource investors.

New 52-week highs (as of 1/26/17): Apple (AAPL), Boeing (BA), Bank of Montreal (BMO), CONE Midstream Partners (CNNX), Corsa Coal (CSO.V), Microsoft (MSFT), PNC Financial Warrants (PNC-WT), and W.R. Berkley (WRB).

In today's mailbag, one of the most gratifying letters we've received in a while. Send your notes to feedback@stansberryresearch.com. Good or bad, we read them all.

"I am not an Alliance or any other special member, as I have limited resources to use to subscribe to these. I know that it's best to be one, but making ends meet does not yet allow me to take advantage of all of your offerings. I trade an IRA that was left from a former employer. I had been taking losses for two years (while with your service) before my hard head finally 'got it.' There 'is no teaching, only learning.'

"With the help of only a few of your offerings, I've turned the corner after being a hard-headed fool and I am realizing that being successful takes patience and following stops even if a position is red, but not stopped out and trusting my core positions. The patience I've learned has finally given me the results that I have been striving for. I truly believe that the people who trash Stansberry are people like I was, who didn't follow what you are teaching and were expecting [to get rich quick]. I didn't quit and finally I have a feeling of control and have taken emotion out of the trade. My learned patience has finally paid off.

"I have a beautifully balanced portfolio and Steve's calls are usually right and very profitable. If he misses one, I stop myself out immediately at the point he gives even though my mind says stay in, 'it will come back.' My core positions are steadily adding dollars, and my more speculative positions are killing it more often than not.

"Finally, my hard head has come to the realization of what I hadn't been learning. Now I am. I'm confident and committed in what positions I take, and have the patience to wait for the win or stop. The win is always larger than the loss on the stop.

"I haven't made a fortune, but I am seeing superior results even in this difficult market. I feel totally comfortable with taking profits (and smaller losses) when the time comes. I don't need to tell anyone I made hundreds of thousands. I only have to know that I'm winning.

"One day I'll be in the position to go for all that you offer. Until that time comes, I'm doing just fine with the lessons I've learned. Thank you for taking me from a rank novice to a confident investor. Thank you." – Paid-up subscriber Marty S.

Brill comment: Thank you for the note, Marty. We're always thrilled to hear when a subscriber finally "gets it." Unfortunately, like you, most folks struggle for years – and sometimes give up – before they do.

This is one of the biggest reasons we created Stansberry Portfolio Solutions... This new product is designed to make following our advice as simple, easy, and affordable as possible... and help our subscribers "get there" faster. We've prepared a short Q&A with all the details right here.

Regards,

Porter Stansberry
Baltimore, Maryland
January 27, 2017