Two things you'll never do...
Two things you'll never do... Proof that position sizing matters more than trailing stops... A huge pile of lame excuses...
This should be the most important Digest I (Porter) have ever written. What I'm going to tell you about below could make you more money, over time, than any other advice you'll ever receive from me or anyone else.
But that will only happen if you're willing to read carefully and genuinely think about the concepts I'm writing about. Remember, there's no such thing as teaching, there's only learning. That's especially true about what you'll find in today's Digest.
Today's letter includes two recommendations. I believe these two things will make you more money than anything else I've ever recommended before. And I'm 100% certain that the overwhelming majority of you will never do these two things.
So... do me a favor. Don't read today's Digest unless you're willing to take my recommendations or write me a note about why you're choosing not to. I'm serious. If you're not willing to do that, then don't bother reading any further.
If you're still reading, then I want you to promise that you'll send a letter to feedback@stansberryresearch.com explaining why you're not going to do these two things.
They're both utterly simple. They're both incredibly safe. And they will both make you truly huge amounts of money. But I know you won't do them. And I'd like to know why.
Let's start with the easy thing first...
What if I told you that there's a way to instantly turn terrible investors into good investors? What if I told you that there's a way to turn good investors into great investors overnight? What if I told you that this has nothing to do with what stocks you buy? What if I told you that this has nothing to do with trailing stops?
This idea is the single most amazing thing I've ever learned about finance.
It's also the hottest area of financial research among academics and top quantitative hedge-fund managers right now.
Most people would never share this idea with anyone because it's incredibly valuable. It's a secret that transforms losing investment portfolios into winners. It has nothing to do with what stocks you buy. And it has nothing to do with what stocks you sell... or when you sell them.
I'm only going to tell you about this if you promise you'll explain yourself if you choose not to use this incredible tool. I want to see you explain why you like losing money and why, no matter how hard I work to help you improve your investing, you aren't going to take even the first step in the right direction. I want to know why.
So quit reading if you're not willing to write me a note to explain yourself. Say it out loud: "I promise to send Porter a note explaining why I'm so hard-headed that I've come to enjoy losing money."
I'm talking about using risk-adjusted position sizing. Let me explain what that is and why it works so well to improve actual investor results.
For many years, I've seen in our portfolios that almost all of our best-performing investments are low-risk. That means these were investments in big, dominant, slower-growing businesses with good balance sheets and brands.
These stocks have a few standout quantitative traits aside from these qualitative basics that can help you identify them in advance. First, they pay good dividends and have a long history of growing those payouts over time. And second (and this is far less understood by most investors), their share prices aren't volatile. Their stock prices tend to move around a lot less than the market as a whole. That's because they have a stable cohort of investors who own the company – investors who are unlikely to sell.
Academics measure this advantage by comparing the daily volatility of a company's share price with the volatility of the S&P 500 Index, which is made up of the 500 largest publicly traded companies in America. (This is called "beta.") Stocks with a volatility equal to the S&P 500's average are awarded a volatility score of "1."
That is, the volatility of these stocks is perfectly correlated with the market as a whole. Stocks that move around more have higher betas. So a company that is 50% more volatile than the S&P 500 would have a beta of 1.5. A company that is two times more volatile than the S&P 500 would have a beta of 2, and so on.
Don't let the math or the Greek letter (beta) intimidate you. There's nothing hard to understand about the idea that high-quality, dividend-paying businesses, which are more likely to do well over the long term, are more likely to have dedicated investors who aren't constantly trading in and out of stocks. As a result, the share prices of these businesses will tend to move around a bit less – or even a lot less – than the average large company in America.
Sure, you can sometimes find a few – a precious few – big winners, like Steve Sjuggerud's original recommendation of Seabridge Gold. But over roughly the last 20 years, the overwhelming majority of our best recommendations have always been low-risk (and low-volatility) stocks. If you look at the list of our current "Top 10" – the top 10 best performing recommendations that are currently in one of our model portfolios – you'll find that only one has a volatility rating that's materially above the average volatility of the S&P 500.
Most of these stocks have betas that are much lower than the market as a whole. McDonald's, for example, has a beta that is roughly half the market's average (0.63). Likewise, Automatic Data Processing (0.85), Altria (0.86), and Hershey (0.81) are extremely low-volatility stocks. This is numerical proof of the steady nature of their businesses and the "wise hands" that own the shares. These are the folks you want to invest alongside.
While I've known about this concept for a long time (see our "magic" stock research), I didn't have firm proof that applying these ideas to actual investor accounts would make a substantial difference in performance. But now I do.
At our conference this week in Las Vegas, TradeStops founder Dr. Richard Smith revealed a fascinating study he had just completed using actual investor accounts. The study was done on 40 real-life investor accounts, some of which contained total assets in the millions of dollars. Richard explained...
We put together a group of 40 real-life portfolios – real buy and sell data from real investors. I asked my team to back-test all of our different stop-loss and position-sizing strategies against these real portfolios to see which of our tools made the biggest difference in performance... And I was amazed to see that there was one tool that improved investment performance more than anything else: volatility-based position sizing. If you only ever pay attention to one thing that I have to say, this is it – use volatility-based position sizing.
What exactly is volatility-based position sizing? It's using the volatility of a stock to determine how much of it you should own relative to your portfolio. The goal is to have the same amount of risk in every stock you own. To accomplish that, Richard (who went to Cal-Berkeley and has a PhD in math) built an algorithm that determines the total volatility of your portfolio and then tells you how many shares to buy of a given stock so that your portfolio is "risk-weighted," with each position carrying the exact same amount of risk.
It sounds complicated, but it's simple: The formula just makes sure you don't buy too much of a risky stock, and helps you buy more of the high-quality, safe stocks that we recommend. It allows you to buy the kind of "story" stocks that investors are always attracted to, while making sure you don't risk too much in those kinds of ideas.
To back-test the strategy, Richard took the 40 investor portfolios and figured out how much of each stock these investors would have bought if they had built risk-weighted portfolios instead of using their actual allocations. Just making this one change – just changing the amounts of shares they bought – almost doubled the average returns of the portfolios he studied.
Richard didn't change the stocks they bought. He didn't change when they bought or when they sold. He only changed the relative amounts of each investment. And just making that one change saw the average return go from 6.7% to 12%. No other form of portfolio management – not even smart trailing stops – made as big of an impact.
Why did causing investors to focus on volatility work so well? Because volatility (as measured by beta) is a great indicator of risk. Colleges still teach that in the financial markets, risk equals reward. That might even be true in a lab setting. But it's not true at all with real live human beings. Most investors who set out to practice "buy-and-hold" investing end up doing "buy-and-fold." That is, they end up selling at precisely the wrong time... when fear in the market is peaking.
Richard is building a new tool for his best clients at TradeStops – a volatility-measuring and risk-allocation function. You'll simply link your existing portfolio with his website, hit a button, and learn how risky your current portfolio really is. Hit another button and Richard's software will show you how to balance that risk evenly across all of your existing positions – telling you exactly how many shares of each stock you should own.
I firmly believe there is nothing else you can do more easily and more safely to vastly improve your actual investment performance. It might be impossible for you to get rid of all of your bad investment habits. But using Richard's risk-balancing technology can at least show you exactly how much risk you're taking... and you can manage those risks far more effectively.
Doing so is worth huge multiples of the cost of using Richard's system, which you can even join on a lifetime basis. Over time, it will render the cost essentially meaningless. This new risk-measurement and balancing tool will be operational before the end of this year… and it will initially only be available to his lifetime subscribers. It will join a huge suite of services that Richard offers individual investors, giving them the same kind of risk-management tools that professional investors enjoy, including specialized, volatility-based trailing stops. In my mind, there is no logical reason to not use these tools... unless you want to continue making poor returns and suffering terrible losses.
If I told you I could double your investment returns... even turn losing portfolios into winning portfolios... just by altering the position size of the stocks you select, you probably wouldn't believe me. But that's exactly what Richard's volatility-based position-sizing tool did.
Here's one example, No. 438. (The investor account names were hidden and each account was assigned a reference number.) This investor had $434,000 in his account. Over the period of the study, he lost 23.1% of his savings – just more than $100,000. That's a massive, horrific loss.
But using Richard's volatility tool to change the position sizes of his actual investments, his portfolio would have produced a total return of $59,494 (a gain of 13.7%). Note: This simulation did not change the stocks purchased or the timing of the buys and sells. It merely changed the position sizes by equalizing the amount of risk in each position.
Here's a simple question: Are you going to begin calculating your position sizes by knowing the beta of your entire portfolio and adding new positions only by equalizing the risk of each new stock?
If the answer is yes, the only way I know to get the tools you need is to sign up with TradeStops. Richard will make it as easy as hitting one button to know how many shares to buy, for any stock, to equalize the risk with your other positions. And he can show you the same thing across your entire portfolio so that you can rebalance to get started. Click here to get lifetime access to TradeStops for more than $500 off the normal price.
If you're not going to do this, my best advice is to stop investing on your own and cancel this newsletter. You can probably double your average returns if you'll start equalizing the risk of your investments. It's that simple. It's that easy. If you're not going to do this, I want you to take the time to try and explain why not. "I can't afford it" is not an acceptable answer. If you can't afford advice that's this valuable, you shouldn't be investing. Send your excuse to me at feedback@stansberryresearch.com.
By the way, fair disclosure: I own a small amount of Richard's company via my interests in Stansberry Research. We made an investment in TradeStops a few years ago. The amount of money in question is trivial to my net worth – far less than 1%. We didn't invest in the company because we thought we would get rich selling software to investors. (We haven't.)
We made the investment because Richard was a longtime subscriber. He was one of our first Alliance members. We knew he had a shared passion – to help people improve their investment results. We wanted the ability to help Richard build those tools so that our subscribers would benefit. And that's what's happening.
Now... for the second major take-away from our conference this week...
Again, you have to promise me that if you decide not to do what I suggest below, you will send me a note to explain yourself (feedback@stansberryresesearch.com).
If you've been reading my newsletter for any length of time, you surely realize by now that my business is associated with Agora, Inc. You might have figured that out by seeing how many times we've bombed your inbox with advertisements from other businesses associated with Agora. My old friend Bill Bonner owns Agora. It was one of Bill's companies – the now-defunct Welt Research – that gave me my first job in investment research. Later, in 1999, it was Bill who supplied the initial capital for the launch of Stansberry Research.
Agora is one of the world's largest publishing companies, with interests in almost every form of publishing across dozens of countries. It publishes the leading financial magazine in Great Britain – Money Week. It publishes the classics (Sophocles and Marcus Aurelius) in France. And it owns interests in dozens of financial newsletters, which employ a virtual army of independent, brilliant, and competitive financial analysts and economists. To my knowledge, there isn't a larger, more global, or more independent group of financial thinkers on the planet.
While Bill owns an interest in all of these businesses, he doesn't manage or attempt to control any of them. Instead, he writes his own economic journal each day (Bill Bonner's Diary) and a monthly financial newsletter (The Bill Bonner Letter). He's as competitive as the rest of us. And like the rest of us, he has his own unique views... and he looks askance at some of the things Agora affiliates publish.
One Agora affiliate, for example, is currently marketing a "cure" for cancer that's taken from advice offered in the Bible (in the book of Matthew, I believe). While that's not something I'd be interested in, I know from the results of that business that many people are in fact interested in those kinds of ideas.
Likewise, I cringe and worry when I see Agora's financial affiliates' marketing get-rich-quick schemes that involve buying options, penny stocks, or – worst of all – currency futures. In my experience, these are all excellent ways of losing a ton of money.
It's hard for some people to understand a business structured this way that operates like this, without any input or control from the top. But as Bill has proved over many decades, that's the best way to organize fiercely independent, creative thinkers. Bill is content to let our customers decide what they like and what they're willing to pay for.
Here's an interesting fact about Agora and the men and women who built it. As different as they are from one another, as competitive as they are with each other, and despite hard feelings and deep rivalries between some of them, there's one particular investment many of them have in common. It's an investment that over 100 of our best subscribers have made, too.
It's an investment that has been underwritten since day one by Bill Bonner personally. He continues to be the largest owner in the deal. I'm proud to say that my interests in this particular deal sit adjacent to his, too. You can't normally invest alongside me... or Bill... or any of the other "Agorans" heavily involved in this deal, such as Mark Ford, Doug Casey, Addison Wiggin, Tom Dyson, Mike Palmer, Agora CEO Myles Norin, and Agora's top lawyer, Matt Turner.
I've seen massive amounts of appreciation in this deal. Our own Steve Sjuggerud was an early investor. He put in $20,000. Assets like his have recently been selling for between $150,000 and $220,000. But honestly, financial gains aren't the reason that I continue to hold a trophy asset in this deal. I'm holding for safety. This is a valuable asset that lies outside the U.S. And most important, I do not have to report this asset to the United States government. What kind of an investment is this?
I'm talking about Rancho Santana. It's one of the finest "second home" communities in Central America. It's exceptionally well-financed (thanks to Bill and Agora). Like a low-risk, blue-chip business, Rancho Santana is primarily owned by wise, patient investors, most of whom know us personally and want to be involved in this deal because of their relationships with us.
Rancho Santana is a big community – yes, it's a community. There's a school, a brand-new hotel, a world-class restaurant, and some of the best and most secluded surf spots in the entire world. The only way to truly understand the attraction we all have to this place is to visit it and see for yourself... But you won't.
You won't go because you think it's a scam. You're assuming that we bought a bunch of cheap land for next to nothing and now we're making a mint by selling it for hundreds of thousands of dollars to "suckers."
Nope. In fact, Bill has continued to reinvest every penny of profit the Ranch has earned back into better and bigger facilities. Mark Ford has invested millions into local charities in the neighboring villages – building schools and sports arenas for the local kids. The Oxford Club, an Agora affiliate that has marketed the Ranch for years, has spent millions supporting the only local health clinic, a facility that treats both guests and locals for whatever they can afford to pay.
There's nothing about the commitment we've made to this part of the world that's based on greed or a desire for profit. Everyone I know who is involved in this deal is dedicated to building a beautiful, safe, and prosperous community. And that takes a lot of time, money, and vision.
The uniqueness of what we've built has recently been getting a lot of attention. You can read about Rancho Santana in any number of major travel and destination publications, including Forbes, Fortune, Travel + Leisure, and Food & Wine magazine.
But you'll never understand it unless you see it for yourself. And there's a key reason you must do this now. The things that make this property affordable (roughly 80% less expensive than similar properties in Costa Rica) are its remoteness and the fact that few people consider Nicaragua as stable or safe as Costa Rica.
The truth is, however, that Nicaragua has far less violent crime than Costa Rica does. In fact, Nicaragua is one of the safest countries in all of Central America. The country, which was once completely off the radar for American tourists, is becoming popular. The phrase you hear more and more is that Nicaragua is the "new Costa Rica." That won't be true for much longer.
The other factor is even more important. About 10 years after Bill and his partners bought Rancho Santana and began to develop it, the richest man in Nicaragua, Carlos Pellas, bought a similar large plot of land right next door. He has invested hundreds of millions of dollars building a luxury community – Guacalito de la Isla – that features a "six-star" hotel and a golf course that is already attracting the world's pros. Major PGA golfers have begun using this facility during the winter.
This area, long famous with surfers from around the world, is now beginning to attract more and more of the global "jet set." The prices at Guacalito are typically 50% to 100% higher than Rancho Santana, a factor that should allow the prices at Rancho Santana to appreciate strongly over the next five to 10 years.
One more thing... As real estate investors know well, one of the key factors to massive appreciation in real estate is convenient access to a major airport. Ever since I started surfing at Rancho Santana back in the late 1990s, the primary hurdle to getting there were the "roads" from Managua. I put "roads" in quotes because the first time I went there we had to drive down riverbeds.
Over the past 15 years, the roads have gotten better and better. The major investment in the new resort at Guacalito saw almost all of the roads to Rancho Santana get paved. And this month, the first private jets will arrive at a brand-new airport just 15 minutes from Rancho Santana's front gate. You can read about it here.
There are all kinds of promises that foreign real estate promoters will make when you visit their properties. They will promise you that an airport is coming soon. They will promise you that wealthy and successful people are building next door. They will promise you that the roads will soon be paved, that the hotel will soon be built, that your friends and neighbors will soon be buying at higher and higher prices. My advice is simple: Don't believe any of it. Instead, come to Rancho Santana this winter and actually see all of this for yourself.
Rancho Santana is my favorite place in the western hemisphere to vacation. I love the surfing, the friendly people, the laid-back environment, and the great weather. I also love having a place that's truly "mine." I know my neighbors and the other guests.
This isn't just a resort. It's a community of people that my partners and I have built from scratch. I own a beachfront lot adjacent to Bill's house at Los Perros. It sits on a huge crescent-shaped beach that's three or four miles long. There are three world-class surf breaks here – including the famous "Panga Drops" and "Colorados." But my favorite break sits right behind Bill's house. It's a right point break – perfect for guys like me who surf "regular-footed." We call the break "Uncle Bill's."
Look, I understand. You're never going to buy a lot or even visit Rancho Santana. I know, you have got dozens of reasons. But let me tell you this: If you're going to build a second home anywhere in the world, you shouldn't do it until you've compared the opportunity with Rancho Santana. I'm confident you will get far more for your money, see far more appreciation, have far more asset protection, and enjoy being in this community more than you will anywhere else in the world. If you're considering building a second home... come see Rancho Santana.
If you're in that position and you're interested in buying, let me show you around personally. I'm going down there in January. Come with me. I'll even take you surfing (if you want to go.) Or we can just have some great dinners and tour the beautiful homes that have already been built. If you're interested, e-mail Rancho Santana's director of sales, Marc Brown, at marcb@ranchosantana.com or call (530) 563-8558.
If you aren't in a position to buy, put Rancho Santana down on your list for your next vacation. There's a wonderful hotel that Forbes recently wrote up. And I promise... it's a wonderful thing to spend your time in a nice place filled with other like-minded folks. Most of the people you'll meet at Rancho Santana read our newsletters and share our unique worldview. I know you'll want to come back.
Those are the two best ideas that came out of our conference. Believe me, I know that almost none of you will begin using risk-adjusted position sizing. Even less of you will invest in or visit Rancho Santana.
You might even cynically believe that I've only written these things because I am being paid to do so. But that's not the case. I've never taken a penny in commission for any of the land in Rancho Santana... and I don't plan to start now. It's simply a place I love, and a place I'm helping build. If you're interested in being a part of it, I hope you'll take action. Do it now. Do it before that airport starts taking international flights directly.
New 52-week highs (as of 10/15/15): Activision Blizzard (ATVI), Expeditors International (EXPD), McDonald's (MCD), and Altria (MO).
We've gone on long enough, so no mailbag for today. As always, please send your e-mails – and tell me why you won't do these two things – to feedback@stansberryresearch.com.
Regards,
Porter Stansberry
Baltimore, Maryland
October 16, 2015
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