Luck has nothing to do with investment performance

From Porter Stansberry in Stansberry Digest:

In today’s Digest, a topic that most investors refuse to discuss with their friends…

Or their spouses…

Today, I (Porter) am talking openly about something that most financial publishers avoid like the plague. Purple squirrels are more common than plain, open, and honest talk about this subject.

I’m talking about investment losses.

Wait until you see how many losses we’ve taken in our most important new product launch of all time. Our Total Portfolio looks like the victim of a mob shooting. It has dozens of holes in it… and blood is everywhere.

Fault us if you want, but at least we’re honest.

Read on for the full details…

Have you ever noticed that every time a friend visits Las Vegas, he always reports back that he ‘broke even’ on his gambling?

Or if he admits to losses, he explains that he has a system for managing them. Ever wonder how they built all of those huge buildings in a desert if the customers were breaking even, or if folks actually used a system to limit their losses to small amounts?

Wall Street is exactly the same way.

The stock market doesn’t exist to fund your retirement. The stock market exists because it extracts capital from the public to fund corporate America’s insatiable need for additional capital. Likewise, the wealth-management industry doesn’t exist because it can actually produce wealth for you: It’s the customers who bring in all of the wealth.

Investing in public equities is a battle for survival…

At Stansberry Research, we have never shied away from these tough realities of the investment world. It isn’t easy. Losses are inevitable. But it’s how you manage these risks that really matters.

That’s why our most strident (and repeated) advice is to start by learning how to manage risk. More than 20 years ago, we popularized the trailing stop loss strategy to minimize risk. And about a decade ago, we invested in the software company TradeStops to build out the tools you need to manage the risk in your portfolio.

These investments continue today. This year, we’ll spend $2 million developing a new set of software tools that will make it easier than ever to manage your portfolios.

This new Stansberry Terminal should be available for beta testing late this year or early next year. Think of it as a “Bloomberg light” that has been developed for individuals and small investment firms. It will incorporate all of our research, all of our Stansberry data analytics, a bunch of incredible new machine-learning applications, market data, third-party news, plus all of the latest tools we’ve built from TradeStops, like risk-adjusted position sizing and dynamic trailing stops.

Likewise, we’re still the only investment publisher anywhere who offers a comprehensive annual review (the annual Report Card) of how the published advice performed, giving a grade for each product’s risk-adjusted performance. When a product (or an analyst) doesn’t measure up, we make changes.

And boy, wait until you see the debacle we’re facing with our Total Portfolio…

It all started back in January…

Back then, our research team – about a dozen of our most experienced analysts and our three senior analysts (Steve Sjuggerud, Doc Eifrig, and me) – debated how to structure the portfolios.

We fought hard for our best ideas to be included. There were many late nights and all-day meetings. We had to make difficult decisions about every detail. Not just on which stock to buy, but allocations and risk parameters, too.

And not just regular corporate stocks. We were including all types of securities: fixed income, real estate, limited partnerships, and short sales, too. This was everything we knew… everything we could do to benefit our subscribers.

These investments, structured in this way, with these allocations, were going to represent all of our best thinking. We had spent decades building the expertise and the knowledge required to build The Total Portfolio. It was going to be our masterpiece.

And it all went to hell, almost immediately.

The losses started right from the beginning…

Under Armour (UAA), the well-known sports-apparel maker, put out a profit warning. Investors dumped the stock as the “Trump Rally” took most of the rest of the market higher. Investors feared a border-adjustment tax would hit the company hard, as it makes most of its clothes in Vietnam. Just days after launching The Total Portfolio, we took our first loss of about 8%. Not too bad. But that was just a warmup…

Next came news that Trump wasn’t going to act quickly to solve the Fannie Mae (FNMA) and Freddie Mac (FMCC) debacle. We had bought shares expecting that the government’s quarterly “profit sweeps” would come to an end, allowing the firms to quickly build up billion-dollar reserves.

Nope. The Obama administration’s decision to simply steal billions and billions from shareholders remains in place. The stocks were crushed, both falling almost 40% in a day. We took a major loss in our first quarter. We hadn’t taken a loss of this magnitude in my newsletter in more than 10 years. But it happened here almost immediately.

And then the news got worse…

One of our “safest” positions, a high-quality property and casualty insurance company, became the target of a fraud investigation by the same investigator who discovered Bernie Madoff back in 2009. The FBI was supposedly on the case, too. The stock, AmTrust Financial (AFSI), tanked, dropping almost 40%. We took another huge loss. A big loss on a stock that was supposed to be totally safe. How could this happen?

Next, we got rocked on our small-cap oil stocks. Sure, we expected oil prices to stay low, between $40 and $60 per barrel. Virtually no other firm in the entire world has written more about the ongoing oil boom in America than us. And these small, fast-growing firms in Texas’ Permian Basin were supposed to be primary beneficiaries of the ongoing production boom.

But… the idea wasn’t working. The falling prices of oil were outpacing the growth in production, at least in the minds of most investors. These three stocks just kept falling, day after day. We cut our losses – down 21%, 11%, and 10%.

The same negative sentiment on energy cost us a position in two other energy-related names – Targa Resources (TRGP) and Cameco (CCJ) – for losses of 4% and 13%, respectively. While none of these losses alone were catastrophic, the heavy allocation to the sector left a gaping wound in our portfolio.

Unbelievably, things got even worse…

We had recommended a New York commercial real estate firm that was liquidating. This was supposed to be a super-safe way to earn 10%-20% as it sold its buildings and distributed the proceeds to investors. Instead, the costs of selling were much higher than expected and we lost 11%. This one hurt the most: We believed the company’s management acted in bad faith.

Finally, the latest calamity: Chipotle Mexican Grill (CMG). We thought the fast-casual restaurant chain had tremendous value and would rebound quickly from the foodborne illness scare of last year. It did… briefly.

But as I’m sure you know, last week, more than 130 people got sick at a Chipotle in Virginia. The stock got crushed. We took losses on the two positions we had in the stock, down 18% and 23%.

Just about everything that could go wrong with our investments did go wrong…

In our first six months running The Total Portfolio, we had incredibly bad luck: Chipotle blew up. There were fraud allegations at our insurance company. These were incredibly rare events, but we suffered two of these situations in our first six months.

In several other investments, the intelligence we had simply turned out to be wrong: Trump’s team didn’t do what it promised with Fannie and Freddie; the liquidation value of the New York real estate wasn’t what we thought. And we made some mistakes, too, like buying Under Armour and putting far too much capital at risk in the energy sector.

We aren’t happy about what has gone wrong with our Total Portfolio. We wish none of these things had occurred. But even from the moment we started, we knew that these risks were possible. No… we knew that risks like these were inevitable.

After more than 20 years as professional investors, we were 100% certain that bad things would happen to our portfolio. Bad things happen in the capital markets every day. Investors are constantly exposed to risks like these.

No matter how hard we prepared, no matter what steps we tookit is impossible to run a whole portfolio and not experience losses. Sadly, it’s almost impossible to completely avoid cases of potential fraud. And if you’re human, you’re going to make mistakes. Your thinking will sometimes be wrong. And the speculations you bet on won’t always pan out.

The way to manage risk in your investing isn’t by planning to avoid it. That can’t be done. That’s like playing golf without knowing how to hit out of a sand trap. You can’t play golf and manage to never end up in a bunker. It’s going to happen. To succeed, you have to know how to get out of trouble. That’s what counts.

Altogether, we’ve suffered 24 losses in The Total Portfolio. That’s the total number of positions we’ve either sold at a loss or are currently holding at a price below what we paid – almost half of the positions we’ve established. As I’ve explained, we suffered extremely rare problems. We’ve suffered from potential fraud. And we’ve made plenty of small mistakes ourselves.

Most investors never talk about these problems. Most investment publishers act as though nothing bad as ever happened to any of their recommendations, ever. Us? No, never…

I take a wholly different approach. I always give you the information I’d want if our roles were reversed. When that’s good news, we share it. When it’s bad news, we share it twice as much. It’s crucially important that you understand that investing – all investing – carries risk. Real risk. You will suffer losses. Sometimes those losses will be big and shocking. Often they will be unfair.

Only when you understand this… when you really know what it’s like to experience these losses… can you hope to succeed as an investor.

That’s why I wrote this essay. That’s why we stress risk management above all else.

As you know, we charged a lot of money for access to The Total Portfolio

Win or lose, my company put a tremendous amount of our intellectual property (virtually all of our research) into the creation of this service. And we did our best work for our subscribers. I know that’s true. But who would pay for a service that delivers a bunch of losses?

Instead of subscribing to The Total Portfolio, you could have simply purchased an index fund based on the S&P 500. You could have simply “bought the market.” Doing so would give you a diversified investment in America’s best and biggest businesses.

Nothing wrong with that strategy, and you can buy such funds for practically zero cost. If you owned the S&P 500 this year, you’re up about 10%. That’s a solid return.

But if you invested in The Total Portfolio instead, your entire portfolio would be up 12%. That’s about 20% better than the market as a whole. And considering that we didn’t get started until February 1, you’re actually beating the market by a mile, not a yard. On an annualized basis, our portfolio is up 25%. Over the last year, the S&P 500 is up 14%.

A critic would look at our Total Portfolio and complain about the high percentage and size of some of these losses…

But remember… losses are inevitable. There’s no way to avoid them. Sure, we’ve gotten particularly unlucky. But bad luck or good luck… we still would have losses to deal with. The key question isn’t how many losses, or how big. The key question is: How did the portfolio perform as a whole?

And we’ve done great.

We’ve done better than just about any hedge fund or mutual fund you can name. We did so well by maximizing the position sizes of our best investment ideas.

In the places where we’ve had big losses, we had tiny allocations. In total, we had only 0.5% of the total portfolio invested in each of Fannie and Freddie.

We’ve beaten the market handily by having a large number of great investments – where we also had major allocations. Like our 4% position in homebuilder NVR (up 42%), our 4% position in Chinese tech giant Tencent (up 46%), our 4% allocation to social-media firm Facebook (up 28%), and our 3% position in e-commerce platform Shopify (up 77%). Likewise, we have big positions in safe, high-yielding financial firms that give our portfolio a lot of stability. We hold 5% positions in Redwood Trust (up 14%) and Annaly Capital Management (up 22%).

We’ve also taken some of the lemons we’ve gotten and turned them into lemonade. Yes, we lost money when the fraud at AmTrust Financial was first alleged. But then we did a bunch of our own homework and decided the stock had sold off too much and would probably bounce back. We bought back in and are already back up 23%.

In a newsletter, we can only recommend an investment and explain why we think it’s going to go up or down…

But in The Total Portfolio, we get to show you our entire “toolkit.” Most of the total return we’ll produce here will come from allocation decisions and from our ability to actively manage the portfolio.

In other words, when you buy and sell and how much you put into each investment tends to matter a lot more than just which stocks you buy and sell.

That’s an awfully hard concept to explain to new investors. But boy, is it true. And The Total Portfolio proves it. As a list of stocks, The Total Portfolio hasn’t done that well. But as a portfolio, it’s far outpacing the stock market as a whole.

Should you buy it?

That’s up to you, of course. If you’re an experienced investor, you can probably handle making your own allocation decisions and doing your own active management. But… if you haven’t had much success yet on your own, I’m confident that we provide far more value than the price we charge. The proof is in the numbers. Good or bad luck doesn’t have anything to do with it.

If you’re interested in learning more about The Total Portfolio, please give our Director of Sales Michael Cottet a call at (888) 863-9356 between the hours of 9 a.m. and 5 p.m. Eastern time, Monday through Friday.

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