Unveiling the 2017 Report Card
Unveiling the 2017 Report Card... A lesson from investing guru Howard Marks... The three metrics we used to grade each portfolio... Who got an A?...
It's time to see how we did...
As longtime subscribers know, we sit down each year and review the performance of each of our publications.
Over the years, many people have asked why we do it. They ask if it's smart to show subscribers everything... the good and the bad. Some years (like this one), some editors outperform their benchmarks – by a wide margin. And sometimes, not everything works out so well.
We believe in total transparency for anyone who subscribes to our work. It's a fundamental belief in our offices that we provide subscribers the information we would want if our roles were reversed. So we grade all our publications... and share the results with you, our paid-up subscribers.
As far as we know, none of our competitors do this...
Which continues to astound us. If you've been with us for a while, you will know that we genuinely want to help people improve their performance as investors. We're not in the business of selling "hot" stock tips. Sure, we make regular recommendations in all of our publications. And our goal is to make you money every single time we make a recommendation.
But we're realistic enough to know that even the best investors and analysts make mistakes... the timing could be off... you can get whipsawed out of a position before the trend continues in your favor... or any of a host of things can go wrong in the markets. But we strive to help educate you, our readers, by providing special insights about why to invest in the opportunities we present.
We've been in business for almost 20 years...
And we've built an impressive team of analysts and editors with varied backgrounds, educations, experience, and skill sets. Most of our senior analysts have been around long enough to accumulate the experience and track record that would let them work almost anywhere in the world. Fortunately for us, they want to work here because they love what we do. The one thing they all have on common is they are incredibly competitive. All of them want to win. Perhaps more important, none of them want to lose.
To keep competition strong but fair, we grade each analyst's performance over a different period each year – but always including the most recent year, in this case 2017.
This year, we chose August 17, 2015 through December 31, 2017. As you know, 2017 was a boom year for stocks. The S&P 500 Index was up 19.4% and the Dow Jones Industrial Average soared more than 25%.
For us, grading anyone's performance for anything less than a year is not very meaningful. In a raging bull market, almost any long strategy will do well. We chose this period because it includes the 11% decline we saw in August 2015, and the 12% decline from December 2015 through February 2016. Seeing how analysts do when the ride gets a little bumpy is much more meaningful.
(And it's worth noting that for last year's Report Card, we "started the clock" in August 2015 as well, so we've essentially added on the last 12 months.)
Consider for a moment one of the world's greatest investors, Howard Marks...
Marks is the billionaire co-founder of asset-management firm Oaktree Capital Management. He launched a special fund called 7B in 2007. Marks saw opportunities as the debt-fueled mania continued. He knew the bubble had to burst. So by 2008, he had amassed $10 billion for the fund – the biggest distressed-debt fund ever at the time. He aimed to buy as much debt as possible – at pennies on the dollar.
When Lehman Brothers went bankrupt in September 2008, it took the debt and equity markets down with it. And Marks started buying. He deployed $75 million a day through the end of 2008 gobbling up heavily discounted corporate bonds. By January 1, 2009 he had invested around 75% of the fund.
Then he waited. And made a fortune for his investors.
By December 2012, Marks had returned every penny of the original $10 billion back to investors, plus another $2.3 billion. In other words, they had all their capital at risk returned to them and booked a 23% profit. If you had bought the S&P 500 over the same period, you were about flat. Since then the fund generated another $9 billion to investors.
Here's why we're sharing this story...
Oaktree manages about 60 funds. Around 25% are old-fashioned open-end funds that you can buy through your broker. The remaining 75% are tied up in closed-end funds (CEFs), which are more like mini hedge funds in disguise. These CEFs are only available to certain type of investors who make it through the application process (most individual investors needn't apply). Once Oaktree accepts you – and your money – the funds are locked up for 10-11 years.
Why?
Because Howard Marks knows that you need time to achieve the results like he did for fund 7B. He can't have investors pulling their funds after a year because the results aren't in yet. So he locks these investors in. That's why he only accepts certain type of clients. They must be wealthy, yes... But more important, they must be patient.
We share the Howard Marks story for two simple reasons: First, we admire his investment acumen. And second, because it shows how important time is to creating wealth through investing.
Like Marks, we believe that patience and time are critical to your success as an investor...
Naturally, we can't lock in subscribers the way Marks does with his clients. But we do encourage you to stick with us so you can see that our strategies do work. Sure, we may hit a home run or two in any one of the several publications each year. You'll see a few of these in our Report Card that follows. But investing is not gambling. And you can't fully benefit from our work unless you stick around long enough to profit as our strategies and individual recommendations have time to play out.
This is why we encourage readers to become lifetime subscribers to our work. The skeptics might say that this is just a sales pitch so we can sell you more publications. Sure, we are in business to profit. But our lifetime subscribers – like our Alliance members – know we can genuinely help the retail investor.
Patience has rewarded many of our analysts and the folks who follow their recommendations. As you'll see today, the Report Card shows how our editors have performed over a 29-month period.
Now to the criteria used to calculate our grades...
First, we aim for complete accuracy, which involves tracking the exact entry and exit points. Please keep in mind, we are tracking our results (not yours, the reader, which of course is impossible for us to track). We are not saying these results represent the exact prices at which you could get into or out of a stock. Rather, it represents the value of our insights at the time we publish our material. We use the closing price for the day prior to publication for our entry price, and the closing price the day after we recommend closing the position or when we hit stop losses.
Next, we evaluate each publication's performance by focusing on three key metrics.
The most important metric for us is the win rate. With the exception of our Stansberry Portfolio Solutions products, our newsletters and trading services make regular recommendations – normally, each month. So their "model portfolios" are essentially a list of recommendations – not an actual portfolio where you invest in an entire pool of risk-weighted securities.
We can't know if readers act on every recommendation or try to cherry-pick the ideas they think will work out best. We bet in most cases it's the latter. The editor's ability to pick more winners than losers is the most important criterion. This tells the reader the likelihood an editor's picks will end up in the black. When you follow an editor with a high win rate, you should stick with him.
Next are the average and annualized returns. We compare how each recommendation (not the entire list of recommendations at once) performs against its benchmark over the exact period. (In most cases, that benchmark is the S&P 500, unless noted otherwise.)
Remember, newsletter model portfolios don't have a single starting point. We are making recommendations throughout the evaluation period, so you can't compare the newsletters with the S&P 500 over the same period because not all recommendations were made at the start date. That is why you will see a different number for the benchmark on each publication rather than a flat rate of return for the evaluation period.
By looking at the average gains for a publication, you can determine what kind of returns to expect from following the recommendations.
For this year's Report Card, we are evaluating all new recommendations made by each analyst since August 17, 2015. In investing, annualized returns show what would happen if you repeated a trade's performance (up or down) throughout the year. Again, given the fact that these are mostly lists of recommendations rather than an actual portfolio, and that we are evaluating trades over multiple periods – some less and some more than 12 months – we believe this is the best way we can measure an editor's returns. It also allows you to compare different strategies over different periods.
We'll start with our "Newsletters" – our most traditional monthly stock-picking services. Tomorrow, we'll review our "Trading Services" and our latest "Portfolio" products.
We did things a little differently this year. First, Porter turned over the process to me, Editorial Director Brett Aitken. So if you think we've been too easy on the editors, send your complaints to me. Second, we held a webinar last Thursday to unveil the grades. If you weren't able to tune in, don't worry... you can access it here.
With all of the details out of the way, let's get to the grades...
True Wealth: A+
Steve Sjuggerud is a legend in this business for good reason... Accuse us of hype or exaggeration if you want, but it's simply true...
Since launching True Wealth in 2001, Steve has made an average gain of 20.7% on all his recommendations for that letter. That's 16.2% annualized. Most hedge-fund managers wish they could make the same... but rarely do. Warren Buffett – the third-richest man on Earth and the world's greatest investor of the past century – has made his original investors in his financial holding company Berkshire Hathaway (BRK) 20.8% per year between 1965 and 2016 (the latest numbers available).
Steve's performance during the reporting period for this year's Report Card is among the best of his career. Over the past 29 months, "Sjug" kept to his bullish thesis. Since 2010, he beat the drum on the inflating Bernanke Bubble... and called a bottom in commodities including gold stocks in early 2016. Subscribers who took his advice on junior gold stocks and mineral resources made 72% on the VanEck Vectors Junior Gold Miners Fund (GDXJ) and 85% on iShares MSCI Global Metals and Mining Producers Fund (PICK) – both in less than a year. (PICK has pulled back a little since the end of our evaluation period, but it is still up more than 80%.)
Then last year, he said we were heading for a market "Melt Up"... and later in the year said it was going global. So far, he looks spot on. At the end of last year, he was sitting on an 82% gain in one position and showed his subscribers a "discounted" way to play one of his favorite ideas.
Last year, Steve got a B+ because a number of his trades stopped out before they played out. You see, Steve is willing to cut losses short quickly if the trade goes against him... and wait for another signal that his thesis is still in play. This method works well for Steve, as he catches the big trends well. But he is often early... so he sometimes gets knocked out of the position once or twice before he gets the "timing" right. And those "timing" issues cost him an "A" on the Report Card last year.
But this year, we added another 12 months to the time period. And a number of these trades are now playing out. His win rate soared this year from 55.6% to 70.2%. His average return almost tripled last year's, coming in at 14.6% for an annualized gain of 23.2%.
These are excellent returns and show (once again) that investment strategies sometimes take time.
Retirement Millionaire: A-
What a difference a year makes...
Last year, for the first time in nine years, Doc didn't get an "A" or better on his Report Card for Retirement Millionaire. Instead, he got a "C."
The reason was mostly due to picking more losers than winners (which had not happened before), and for an average loss of 2.4%.
So this year, we've seen Doc use his vast experience on Wall Street combined with his in-depth fundamental research to put things right.
Over the reporting period, Doc has improved his win rate to 61%. His average gain has gone from negative to 11.7% (for annualized gains of 22.4%).
This is an outstanding turnaround – especially when you consider that the losers that hurt his performance last year remain in the same period. In other words, Doc has turned losers into winners and found more outright winners to offset the prior year's track record.
His insights into real-estate services have earned his readers gains of more than 75% since he introduced the idea in 2016. As expected, time has rewarded the patient investor. Doc has shown readers how to make big profits from online and offline retail when you buy the right stocks – at the right time.
We said last year that we wouldn't bet against Doc in 2017. That turned out to be one of our best calls for the year.
Stansberry's Investment Advisory: B+
Longtime subscribers know we're as tough on Stansberry's Investment Advisory as any other product we publish. If you don't believe it, just check out the 2012 Report Card, where we slapped a big fat "F" on our work.
Last year, the newsletter earned a "gentleman's C." We had bet heavily on an end to the credit cycle and a downturn in stocks by adding heavily to our short exposure. We had made almost as many short bets as long, which meant that during last year's evaluation period, the portfolio was effectively half short and half long. Clearly, we would never do that in a normal portfolio. And we would size the positions differently, based on the risk. (This is why we launched Stansberry Portfolio Solutions – to show investors how important allocations and position sizing matter at least as much the investments you make.) Still, we don't make excuses... and the results were average.
We turned that around this year...
Over the past 29 months, we made 51 recommendations with a 55% win rate, with average gains of 12.5%. Some would say that average gain alone deserves an "A." But as we mentioned earlier, the most important metric is the win rate. We want to see our editors pick more winners than losers. We did that. But to earn an "A" in one of our traditional stock-picking newsletters (as opposed to some of our more specialized trading services), you need at least a 60% win rate. And we fell just short of that this year.
One quick comment on these results. Our "long only" portfolio for the evaluation period came in with a win rate of 72.7% (24 winners from 33 picks) and an average gain of 22% – smashing the benchmark's 12.6% for the same period. You might say we should lighten up on the short sales. And it's tough shorting stocks in a raging bull market. But we always want some short exposure as a hedge. We are comfortable earning less in a bull market knowing that our shorts will protect us from big losses in a correction or market downturn. Still, it's something for our team to keep in mind.
Subscribers who followed our advice have enjoyed some big gains during the period including 113% in a little more than three months on online retailer and blockchain innovator Overstock (OSTK). (Even after the pullback, we're still up more than 80%.) We were up 54% in just seven months on homebuilding giant NVR (NVR). We booked a huge 81% gain on leading graphics card manufacturer Nvidia (NVDA) in about nine months, and our speculation on Oprah's weight-loss brand Weight Watchers (WTW) earned us a 93% profit in just four months.
Some of our shorts paid off as well. We explained how the rental-car business really works and booked a 56% gain on the combined short position of Avis Budget (CAR)/Hertz Global (HTZ). And we were among the first financial publications to uncover the problems in the subprime-auto-lending sector back in September 2015, which resulted in a 49% gain in our Santander Consumer USA (SC) short pick.
We're proud of the insightful, quality research the Investment Advisory team produces. These are the stories (and gains) you won't easily find anywhere else.
Commodity Supercycles: D
It was a tough time to be in commodities during 2015 and 2016, but they saw a little life in 2017. Oil and gold were up slightly. But the commodity indexes remained mostly flat over the full period.
Our resource publication, which we renamed Commodity Supercycles, outperformed the benchmark on an annualized basis over the chosen period. The win rate is good given the difficult time in commodities. But the average nominal gain is simply too low. And many of our most recent recommendations struggled.
Still as you may have seen, commodities now trade at extreme lows compared with stocks, meaning we believe commodities will do well from here. We've made changes to our team, now led by Bill Shaw, who has a proven track record of his success in our Stansberry Gold & Silver Investor service. (More on that publication in a moment.) We are confident we'll see compelling returns for this publication next year and beyond.
Extreme Value: C
When darling stocks like Amazon (AMZN) trade at prices roughly 300 times earnings, it's tough for value investors like Dan Ferris to find the margin of safety that defines his strategy.
Dan is a student of value investing and has read and re-read dozens of times Securities Analysis by Benjamin Graham and David Dodd, considered the value investors' bible. He does deep-dive, bottom-up research looking for stocks where he can find intrinsic value... with a margin of safety. And he is very good at it. For the years 2012 through 2015, Dan consistently earned a "B" or better. In 2012, he got an "A+."
Stocks were cheaper then than they are today. But still... we're paid to find investment opportunities for you, our reader. And the lack of recommendations over the past couple of years has cost Dan. Over the past 29 months, Dan made just 19 recommendations compared with 50 in True Wealth and 51 in Stansberry's Investment Advisory. Having fewer recommendations makes it tough to make up any losses you incur. You can't hit a home run if you never take a swing, and even bunt singles need you to step up to the plate.
Last year, we gave Dan an "F" in part because he picked more losers than winners, and his average return over the period was -6.9% compared with the benchmark being up 5.2%. Adding to the poor performance, he reversed course on an IBM long by going short at precisely the wrong moment... resulting in a 38% loss for his subscribers.
One year later, Dan has improved his performance.
He got his win rate up to 57.9% – a major improvement. His average gain is now slightly in the black. (Keep in mind that the grading period still includes the IBM loss, which weighs on his results). And if you look at the eight recommendations he's made since receiving his failing grade, seven were winners at year end, and they were up an average of 11.5%.
Still, Dan has missed the huge run up in stocks over the past few years. And it shows with average returns of just 1.1% for the evaluation period, annualized at 7.4%, compared with the benchmark's 19.3%. Some would argue these results deserve another "F." But when we see an improved performance since our last grading, we take it into account.
We know Dan can make his strategy work. With more recommendations, we know he can improve his batting average. We're waiting on a few singles before the next home run. He recently released his "brand-new No. 1 idea." Maybe this is it.
Stansberry Gold & Silver Investor: A
We launched this publication in April 2016, so it doesn't have results from the full evaluation period starting in August 2015. But with nearly two years behind it, you can see how our portfolio has performed compared with gold and gold stocks.
It's important to keep in mind that this product takes a true portfolio approach. When we launched it, we established a full portfolio of stocks and gold bullion. And we gave each position a risk weighting. We allocated a higher-than-usual portion to the portfolio in physical gold. We felt that would lower the volatility of the entire portfolio, while still enjoying exposure to gold stocks. We included majors, mid-sized producers, and tiny exploration companies.
In its first year, the portfolio produced a 50% win rate and average gains of 12.5%, which tripled the gains seen on its benchmark: the VanEck Vectors Gold Miners Fund (GDX).
This year, gold stocks went nowhere. But thanks to editor Bill Shaw, our portfolio outperformed...
Over the past 20 months, our portfolio delivered a 63% win rate with an average portfolio gain of 24%, for an annualized gain of 14%. That's roughly double its benchmark.
If you don't have any exposure to gold stocks but want some, this is the best way to play it. We've built a low-volatility portfolio that outperforms even while gold and gold stocks remain relatively flat. And we're convinced it will outperform by a wider margin when gold takes off like we expect.
Income Intelligence: A+
Income investing is one of the most difficult things for investors to understand.
If you want to accumulate wealth from investing over time, there is no better way to do it than buying safe securities that provide annual income... and that grow their dividends over time.
The secret to compounding wealth over time is to save (and invest) more than you earn.
The dean of the newsletter business – the late Richard Russell – explained it best in his classic essay "Rich Man, Poor Man." (If you've never read it, we urge you to take a moment to do so. It's among our favorite financial essays of all time. You can see for yourself here.)
The only problem with investing this way? It's boring.
Despite all our efforts, people continually fail to see the benefits of earning double-digit gains each year in safe, dividend-paying securities. Many of our readers are more excited by the latest fad or "hot tip" that has the potential to soar hundreds of percent. That's not investing. It's speculating.
In Income Intelligence, Doc shows it doesn't have to be that way. He has earned an "A" or better since we launched Income Intelligence in 2012. And for 2017, he continues his winning streak, giving readers an impressive 81% win rate with average gains of 15.4%. Those are outstanding returns at a time that interest rates are historically low.
Doc focuses on safe, high-yielding securities with upside for capital gains. Some of his biggest winners include pharmaceutical giant AbbVie (ABBV), where readers who followed his advice earned gains of 83% over a little less than two years. (And those gains were through December. Today, the position is up triple digits.)
The great thing about Doc's strategy is he recommends stocks that will earn you something, even in a down market. That provides a tremendous amount of protection for your portfolio when a correction inevitably arrives.
If you're not already investing for income, we hope these results will make you think seriously about including it in your own investment strategy.
New 52-week highs (as of 2/9/18): none.
As we mentioned earlier, we'll be reviewing the trading services and portfolio products in tomorrow's Digest. But in the meantime, we'd love to hear from you.
Do you agree or disagree with the grades we've given so far? Let us know if we're being too harsh or too generous at feedback@stansberryresearch.com.
Regards,
Brett Aitken
Baltimore, Maryland
February 12, 2018