THE S&A DIGEST: How to Safely Make 20% a Year - Year After Year

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/05/2013

Border guards at the gate… Bill Miller’s reckoning day… Goldman’s big payday… How we pick stocks for the Alliance… Stolen Russian maps in Vancouver… How to make 20% a year, every year…

"Hezbollah. Uh, Hezbollah... Why do you ask me these questions at 5 o’clock?"

So responded Silvestre Reyes, a former border guard from Texas, in reply to a question about the Lebanese terror group. He seemed less than sure of himself. Previously, he’d described al-Qaeda as being "predominantly... probably Shiite." Al-Qaeda, as most fifth-graders now know, is completely, utterly Sunni.

That a former border guard knows nothing about terrorists in the Middle East is hardly news. What is newsworthy, however, is that this former border guard is now chairman of the Permanent Select Committee on Intelligence for the United States House of Representatives. The next day, Reyes sought to quell the media frenzy by assuring the American people his committee would "keep its eye on the ball." This semiliterate border guard is now one of our nation’s top defense leaders, thanks to the far-seeing wisdom of incoming Speaker of the House Nancy Pelosi.

Don’t put all of the blame on poor Nancy. Her first choice for the post, Rep. Alcee Hastings (D-FL), would have generated even more bad press. Alcee, you’ll recall, is one of only six federal judges in history to be impeached. According to the police, Alcee accepted a $185,000 bribe from Thomas Romano in exchange for a lenient sentence and the return of seized assets. He didn’t serve jail time for the charges only because his co-conspirator, William Borders, refused to testify in court, serving jail time instead.

On his last day in office, Bill Clinton pardoned William Borders, despite the fact that the House voted for impeachment 414-3 – including Nancy Pelosi and Charles Rangel. Today, Alcee heads the Homeland Security subcommittee of the House’s Permanent Select Committee on Intelligence.

Matt Badiali and Steve Sjuggerud are in Vancouver this week. No, it’s not a great time of year to be there… but one of our best contacts has organized a "walking tour" of the world’s best resource investments. Matt and Steve are literally going door-to-door and meeting with a dozen or more of the world’s top resource firms. Says Matt in an e-mail to me this morning: "The coolest part of the meeting was getting a look at a rumpled geological map with the lower right-hand corner cut off (where the company logo would be). Apparently, anything is for sale in Russia, including black-market geologic maps..."

Look for more insights about the best Vancouver firms in Sjuggerud Confidential and our S&A Gold Report.

Speaking of resource investments… Australia’s Zinifex (ZFX.AX) – a Sjuggerud Confidential and S&A Gold Report pick – and Belgian metal producer Umicore will merge their zinc smelters to create the world’s largest zinc producer. The two companies will offer shares as a new group on the Euronext sometime after the third quarter of 2007. The estimated value of the new company is $1.6 billion.

Goldman Sachs is paying its employees an average of $622,000 this year, after posting the largest earnings for any securities firm ever. The firm allocated $16.5 billion to salaries, bonuses, and benefits. (I hope Dan Ferris, Steve Sjuggerud, Matt Badiali, Graham Summers, Jeff Clark, Tom Dyson, and Rob Fannon don’t read this section. I hope Myles Norin, the CEO of our parent company, does.)

Bill Miller, the head of Legg Mason’s $20 billion Value Trust, is famed for beating the S&P 500 for 15 years in a row. Having met him, heard him speak, and watched him pick stocks, I’ve always thought he was a very, very lucky hack with a penchant for buying his own book at the end of every year to push up his December performance. Yesterday, Morningstar announced that his fund "was the worst in the entire category for the year." According to the article, 99% of his competitors beat him. His fund returned only 4.6%, compared to a 15% return for the S&P 500.

New Highs: Akamai (AKAM), Disney (DIS), Macquarie Global (MGU), Ares Capital (ARCC).

And now... the mailbag. Don’t forget to send your insights, taunts, and drunken ramblings to feedback@stansberryresearch.com.

"Maybe the next ‘green’ product will be Beano for cows." Paid-up subscriber Edward Wojton

"I’m going to assume that you know a hell of a lot more about picking stocks than you know about mail delivery... If, as you suggest, UPS and FedEx were able to drive the Postal Service out of business, what happens to the millions of people who live in the country that FedEx and UPS won’t deliver to?…As a result, many millions of people would be without mail and package-delivery service. Do you think that this is a good idea? I accept your apologies for a very dimwitted, dare I say, Kerryesque idea." Paid-up subscriber, and rural letter carrier, Larry Lancaster

Porter Comment: Yes... without the government there would be no mail, no education, no crops, no roads, no apple pie. Oh, help us, dear and wondrous government... without you we are nothing.

In response to Dan Ferris’ recommendation of Wal-Mart: "Do you think it’s a good thing or a bad thing to discriminate against women and violate labor and environmental laws? Are you pro-toxic waste? Please stick to picking stocks. You’re very good at that." Paid-up subscriber Alan Grayson

Porter Comment: Dan was picking a stock – Wal-Mart.

"Why do I pay for Sjuggerud Confidential if you give the info to True Wealth at this early stage? It looks to me like you are just pushing your stock instead of taking care of your high-end subscribers." Paid-up subscriber Patrick Klein

Porter Comment: Let me get this straight… You’re mad at us because we told a wider audience about a stock you bought six weeks ago... that was already up 30%? And you’re mad because it went up another 15% yesterday and then another 3% today? How should we "take care" of our premium subscribers?

And finally… a drunken misfit who confused our worthless stock touting for trusted investment advice: "I am a novice when it comes to the stock market. I made my very first trade exactly 4 months ago today. As of now, I am up 67% from that starting date. I would like to take the credit for this, but I’m afraid I owe it all to you guys at Stansberry Research." Paid-up subscriber Ron Putman

How to Safely Make 20% a Year – Year After Year

"Porter, I love reading your letters, but I don’t have time to follow up. I’m traveling around the world making movies. Even if I weren’t too busy, I’ve got a knack for making the worst possible investment decisions, at exactly the wrong time.

"What if I just paid you $10,000 a year to manage my account? You’re finding stocks anyways, and you’ve got a great team of researchers around you. You could put my money to work with almost no extra effort…"

We were eating at the Old Ebbitt Grill, a Washington D.C. landmark.

The man across the table was worth about $10 million, which seems like a lot of money, but really isn’t in the world of independently wealthy people. His liquid portfolio was "only" worth about $5 million. Put into muni-bonds or a similar array of safe fixed income, the man could have easily generated $350,000 a year or so in mostly tax-free income. But that wasn’t nearly enough. He wanted to earn around $1 million a year (20%) – or more.

When he tried to invest aggressively, he got burned and ended up losing $1 million. He lacked the discipline to limit his positions. He got into volatile stocks without trailing stops. He made all of the mistakes of the typical nonprofessional investor, starting with the idea that to make a lot of money you have to take big risks.

He didn’t trust brokers or mutual funds. He was smart enough to know that paying those guys $50,000 per year (1% of his liquid assets) wasn’t enough money to keep them focused on his best interests. He wasn’t going to be anyone’s top client. And he was no fool.

I wasn’t interested in his offer. But what I told him allowed him to accomplish his investment goals. And it could do the same for you…

"I don’t manage money because doing so would immediately cause me to have the same kinds of ethical dilemmas that keep you away from brokers. I mean, would I put my clients into stocks first, or my subscribers?"

"That’s not to mention that your offer is one-fifth of the average rate for sub-par, closet-indexing money managers... and probably about one-twentieth of what I would charge, were I in that business."

"Besides… you don’t need to pay me anything to get our best ideas. You’re already an S&A Alliance member. You get the S&A 16 Model Portfolio each quarter. All you have to do is follow the model portfolio, and you’ll make 10%-20% most of the time. You’ll almost never lose money."

His reaction to my suggestion brought to mind the story in the Bible about the Syrian general with leprosy.

The king of Syria sent one of his troops to the king of Israel, asking him to heal the general. The king of Israel delegated the task to the prophet Elisha, who told the general that he had to bathe seven times in the River Jordan. The general didn’t believe him. And he stubbornly refused to try it. Finally, the soldier he sent to Elisha asked the general what he had to lose by trying it. And, of course, as soon as the general went for a dip in the Jordan, he was healed.

No, I don’t think I’m a biblical prophet. I like the story because I’ve found time and time again in my life that easy solutions are the best – the only ones that really work. If you’re like most people though, you’ve gotten so tied up in complex solutions to your financial affairs that you probably don’t even know what you own, what account it is in, what it has been earning each year, or even what it is all worth.

And that, my friends, isn’t going to lead you to financial freedom... which is just the way your bankers, brokers, lawyers, and accountants want it. Because as long as you’re tied up, tied down, in a fog, and lost, you still need them.

You can manage your own money, easily. And you can be very successful doing it. It doesn’t need to consume you, scare you, or take all of your time.

Here’s what I recommend:

Take all of your savings and figure out how much you want to put "at risk." The amount should be as large as you can possibly afford, because it’s the amount of money you invest that will largely determine the amount of money you can make every year. For myself, I keep about 10% of my net worth set aside in 90-day T-bills and gold bullion coins.

This is my "lockbox." It’s enough money to support my family and me for more than a year, assuming no further income. The lockbox lets me sleep at night. No matter what happens in the world, I’ve got a year’s worth of expenses saved. That’s enough for me. If you’re already retired, your lockbox will probably be much larger – perhaps five years’ worth of expenses. Or more. You’ll have to decide what’s right for you.

Now, here’s the fun part. Look over our newsletters and others you receive. You’re going to pick 16 stocks to buy. You’re going to allocate all of your liquid investments equally into these 16 stocks. And you’re going to break down your portfolio of 16 stocks into four categories: value, growth, income and "macro." You’ll be left with a diversified group of high-quality stocks, and you won’t have so many stocks that you can’t follow them easily…

Let me show you how to do this.

The first four stocks you’re going to buy should be value stocks. You could pick these by reading the pages of Porter Stansberry’s Investment Advisory, True Wealth, Extreme Value, or Inside Strategist. Each of these newsletters carries investment ideas based on value, although only Extreme Value carries value recommendations exclusively. You only have to buy four, so make sure you understand the business you’re investing in.

Take a little note card and write down the main reasons for your investment and what you expect to happen in the business over the next year. Write down what price you’d consider selling at if the price goes up. Write down what adverse developments would make you consider selling. It should take you about an hour to do this with each stock. That’s about one weekend afternoon. Make the investments when you feel that you’re prepared and are knowledgeable about what you’ve bought and why you’ve bought.

We did this same thing last January 2006 for our Alliance subscribers. Each quarter (four times a year), we publish a new version of the S&A 16 Model Portfolio, which shows our Alliance subscribers how we’d build a balanced portfolio based on selections from across all of our newsletters.

We picked Arch Capital (reinsurance), RadioShack, Bladex (a Panamanian trade bank), and Tejon Ranch (California land). With the exception of RadioShack, all were Extreme Value recommendations. Quite frankly, we didn’t pick very well. RadioShack was sold at a loss, and Dan decided to exit the reinsurance business, so we sold Arch Capital far too soon, with only a small gain. But Bladex paid big dividends, and Tejon is up more than 25%. On average, our value picks were up 8% this year.

But let’s get back to building your perfect portfolio...

Just as you picked four value stocks, do the same thing the following Saturday afternoon, except instead of looking for value stocks, pick four growth stocks. What’s the difference? Growth stocks aren’t as cheap as value stocks (typically). Instead of buying to take advantage of a huge discount to current intrinsic value, you’re buying because you believe the company’s intrinsic value will grow rapidly, making an investment today valuable tomorrow.

You’ll find these kinds of opportunities in almost all of our publications. Again, write down your main reasons for buying – where is the growth supposed to come from? Write down the future price at which you’d happily sell and write down what adverse developments would make you want to sell. Once you’re comfortable that you know what you’re buying, make the investments.

We did the same thing in January’s S&A Model Portfolio. We picked Rayonier (timberland), Nokia, Convergys (outsourcing), and Lexmark (printers). With the exception of Rayonier (True Wealth), all of these stocks were recommended in my letter, PSIA. Even though we stopped out of Rayonier at breakeven (Florida land stocks crashed in the first half of 2006), we still did very well in this portfolio, thanks to big gains in Convergys and Lexmark, both of which were up more than 50% this year. On average, our growth stocks made 32% this year (so far).

Now... moving on to income positions...

Look through the publications you trust or websites that provide solid financial information and find four stocks (or bonds) that can provide you with rock-solid dividends (or coupons). In general, with stocks, I look for yields between 6% and 12%. With bonds, I look for coupons above 8%. Make sure you understand the business and write down your expectations for the investment. Include the dates on which you expect to be paid a coupon or a dividend so you can keep track. Once you’re comfortable, make the investment.

This past January, we had lots of good income choices available when we sat down to select our four income plays for the S&A 16 Model Portfolio. We picked KKR Financial (middle-market financing), Annaly (home mortgages), GMAC bonds (corporate mortgages), and Macquarie Infrastructure Trust. Our timing was rotten on Macquarie Infrastructure, and we ended up getting "stopped out" at the worst possible time, selling for a 6% loss. On the other hand, when General Motors spun off GMAC, we got a big capital gain, something you don’t get very often in the corporate bond market, driving our total return on these safe bonds to almost 30%. On average, we made more than 19% on our income portfolio, including the loss we took in Macquarie.

The last part of your portfolio should be "macro" ideas. All macro means is that you’re expecting the catalyst in the stock to come from outside the business.

For example, in January’s S&A 16 Model Portfolio, we picked Valhi (titanium), Japan iShares, Time Warner, and Sjuggerud’s True Wealth rare coin set. In each case, we expected forces outside the business to cause its value to appreciate – forces like inflation, corporate raiders, and Japan’s government. Typically, this is the riskiest and highest performing segment of our portfolio. Two of our macro picks lost money (rare gold coins and Japanese iShares) – making macro the only portfolio where we had two losers. However, Valhi soared as titanium prices continued to increase, and Time Warner rebounded strongly as Carl Icahn and other corporate raiders forced it to cut costs and buy back stock. Overall, we produced average gains of 15% in the macro portfolio.

If you do what I’ve recommended, and you use S&A Investment Research as your primary research tool, I’m confident that your portfolio results will be consistently between 10% and 20% a year – with almost no losing positions. This year, our S&A 16 Model Portfolio (the one I described above) is up 18.5% – trouncing the S&P 500’s 12% gain. We didn’t do anything fancy, we simply picked a diversified list of stocks based on the research we’d already published.

You can do the same.

On the other hand, if you’d rather let us "manage" your money for you, all you have to do is join the S&A Alliance and look at the S&A 16 Model Portfolio. That’s what I advised my dinner guest to do – and that’s what he’s done. If he followed our advice this year, he made 18.5% and he didn’t pay a dime in money-management fees to do it. If he’d made the same gains in a hedge fund, he would have spent $100,000 in fees and paid another $185,000 in "profit sharing." All he’s paid us this year is his $199 maintenance fee.

In January, we’ll build our next S&A 16 Model Portfolio – the 10th one we’ve published. I hope you’ll be reading... and setting yourself up financially for a great and worry-free 2007.

Best Regards,

Porter Stansberry

Cockeysville, Maryland

December 12, 2006

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