Issue #7, Volume #1
Plus, a Story About Merrill Lynch You Haven’t Heard
Our Annual Conference Is Wednesday, Here’s a Preview
Three Things You Need To Know Now:
1. How paper money fails. We’ve been writing, for more than a decade, that our paper-money system would continue to enrich asset owners (and people with extensive access to credit) at the expense of wage earners. One sure sign of this is soaring home prices around the world, in every economy that relies on the U.S. dollar-backed, global financial system. Today, the median U.S. home price is 7.2x the U.S. median household income. That’s an all-time high. Houses are now more expensive in the U.S. (and in places like Canada) than they were at the peak of the 2008 housing bubble. If you’re looking to understand the transmission mechanism between monetary inflation and the collapse of social order, this is where you should start: people who can’t afford a house have a much harder time building a nuclear family or identifying with traditional American values.
2. Will there be a soft landing? Economists will tell you that since 1980, the Fed has “engineered” only one soft landing (when sluggish economic growth does not lead to a recession). That one success was in 1995, when technology boomed and when asset prices were moderate. Today, technology is booming, but asset prices are at all-time highs. And 80% of the fund managers polled by Bank of America say that a soft landing will happen. In other words, a soft landing is “priced in.” We think that we’re heading for weak economic growth, propelled by government spending, and higher-than-expected inflation, which will hurt market multiples. That’s why gold is rallying. And that’s why oil and energy should be in your portfolio too, despite their recent weakness.
3. More and more manipulation to keep the system working. We think it’s important to recognize that an inverted yield curve doesn’t exist in free markets. Nobody would agree to pay more to borrow money for two years than they could for 30 years. Inverted yield curves are purely a function of the government’s intervention into the system. And we’ve just experienced 565 consecutive market sessions of inversion, breaking the previous record of 410 set back in the 1970s. The economic policies of the 1970s didn’t work. At all. So, we figured in 2011, let’s try ’em again and see what happens! What happened? Lots of inflation and an inverted yield curve for an even longer period.
And one more thing…
We’ve got serious egg on our faces. We badly miscalculated the annualized returns (not the total returns) of our Porter Permanent Portfolios. A sharp-eyed subscriber alerted us to the deficiency of our math. The junior analyst involved has been beaten. And your editor is embarrassed he didn’t notice the error. Saving grace? Our adjustments to the portfolio strategy still work great, over time. The corrected numbers are below. (And, for those of you coming to our conference, we will be passing out rotten eggs to throw…)
Beat The Market – And Build Wealth Over Time
In the spring of 1928, a young stockbroker did something no one on Wall Street had ever done before… and probably hasn’t done since.
He advised his clients to sell the stocks they owned on margin. And to get completely out of debt, even to the point of not owning any corporation that was in debt. This advice, if his clients followed it, would surely put him out of business, because at the time, the primary business of a brokerage firm was selling stocks on margin. Telling people to get out of margin debt was tantamount to telling them to close their brokerage accounts.
The letter he sent his clients began with what he was doing with his own money:
We think you should know that, with few exceptions, all of the larger companies financed by us today have no funded debt. This situation is not the result of luck but of carefully considered plans on the part of the management and ourselves to place these companies in an impregnable position.
The advice we have given important corporations can be followed to advantage by all classes of investors. We do not urge that you sell securities indiscriminately, but we do advise in no uncertain terms that you take advantage of present high prices and put your own financial house in order. We recommend that you sell enough securities to lighten your obligations or, better still, to pay them off entirely.
He repeated this advice month after month for more than a year, until the market crashed in the fall of 1929. His persistent advice saved the fortunes of many of clients.
It also cemented his reputation as a wise and honest financier who cared deeply about the welfare of his clients – even more so than his own firm’s profits.
The young broker’s name was Charles Merrill. And, as you have probably guessed, the firm he went on to build was Merrill Lynch. What happened to his firm 75 years later is also worth considering, but, put a pin in that question for now – we’ll come back to it at the end.
I bring up Charles Merrill because when I got my start in financial research, my oldest friend, Dr. Steve Sjuggerud, and I dreamed of doing the exact same thing. We wanted to figure out how to beat the markets, not because we were “manor born” and dreamed of becoming wealthier – but because we wanted to prove that we could do a much better job for our clients than major Wall Street firms. And we thought we could, because nobody on Wall Street acts like Charles Merrill did.
We thought, perhaps naively: if we simply try our best and are always honest with our subscribers, it shouldn’t be too hard to beat the crowd, because Wall Street’s incentives are so screwed up, most of the time they’re not even trying to help their customers.
And, I’d like to think that over the past three decades, that’s what we’ve done. But I am a firm believer in measuring good intentions!
So at Stansberry Research, at the end of every year, I insisted on an internal audit of every publication, analyst, and strategy we were publishing. We’d release the summary data, showing average returns, holding periods, and win rates – so that our subscribers would know how we’d done. And I then assigned an A-F letter grade, based on how well I thought our analyst had performed. We did our best to pick sensible time periods based on the market cycles. Sometimes we measured five years. Sometimes more. We tried to capture periods of both bull and bear markets, to give our analysts the opportunity to shine. And frequently they did.
At Porter & Co., we haven’t been publishing long enough to have both a bull and bear cycle in the mix, as we launched operations only two years ago, and, apart from a few down months right at the beginning, the market – and especially big tech – has been on a huge move higher, almost in a straight line. Beating the market in this period wasn’t easy – especially if, like us, you weren’t willing to pay up for expensive but fast-growing tech stocks.
Before we go through the numbers, a quick explanation for how we perform our comparisons. As we’ve been compiling a recommended list of stocks over the last two years, there isn’t a model portfolio to compare to the S&P 500. Instead, what we’ve done in this report card is to determine how each recommendation has performed compared to buying the S&P 500 at the time of the recommendation. In other words, every time we recommended a stock, you could have either bought our recommendation… or you could have bought the S&P 500.
So, looking at our results that way, across all of our recommendations, the average return for The Big Secret on Wall Street was 13.1%, with an average holding period of just over a year (379 days). The average return if you’d bought the S&P 500 over the period was 26.3%. That’s to say, on average, you would have made twice as much money in stocks over the last two years buying the S&P 500 as you would have made buying our recommendations in The Big Secret on Wall Street.
I’m pretty sure that’s the worst relative performance of my career. And you can, of course, judge me harshly for it. But I don’t. I give our performance so far a B. Here’s why.
First, we’ve done a good job picking winning investments. Our win rate is 53%, meaning more than half of our recommendations are up in value.
Second, and far more important, our highest-ranked opportunities (those with the least risk) far outperformed the market. Our #1 ranked recommendations returned 45% on average, compared to their matching S&P returns of 35.5%. (Remember, each group of stocks in these comparisons will line up against a unique set of S&P results, because for each individual recommendation there’s a different S&P 500 purchase date to measure against.)
Was that luck? Maybe. Except, as you study our results you’ll discover something quite extraordinary… our average returns line up perfectly according to our risk rating.
Our #2 ranked opportunities (that is, which were more risky than those with a risk rating of 1) returned 31% – and beat their matching S&P 500 results handily.
Our #3 ranked opportunities performed well (up 17.6%), but not well enough to beat their matching S&P 500 results.
And our lowest-ranked opportunities (ranked #4 and #5) did poorly, up 10.2% and down 58% (!), respectively.
Across the different categories, we performed best in Property & Casualty Insurance, which isn’t a big surprise as that’s been an area of focus for years. And we performed well in our Battleship Stocks, where our returns (28%) matched the markets. Again, not a surprise. We’ve spent the last 20 years studying “power law” winning businesses. We have also done well with our Energy & Commodities recommendations on average (up 27.7%) – but not well (so far) with what I still believe is the best energy company in America, EQT (NYSE: EQT).
We’ve done poorly with our Forever Stock segment of the portfolio (up 4%), despite the outstanding results from Domino’s Pizza (NYSE: DPZ). You can crucify me for recommending a slew of the world’s greatest businesses – Deere & Co. (NYSE: DE), Diageo (NYSE: DEO), Nike (NYSE: NKE), and The Hershey Company (NYSE: HSY) – that haven’t performed… yet. I think the poor performance of these stocks is reminiscent of the last tech boom (in the late 1990s) when investors ignored quality stocks like these, driving many value investors out of the markets. When will the mood of the market change? Long before Hershey stops selling more chocolate every year.
In one segment of our portfolio, High Yield, we’re not trying to beat the market. We’re trying to find high yield in safe vehicles. The average returns there (13%) are quite good on that basis, but of course, can’t compete with a rip-roaring bull market. Including these stocks in our overall results is a big drag on performance. And, to be fair, we also shouldn’t continue to keep Philip Morris International (NYSE: PM) in that portfolio. It is rightly a Forever Stock.
But our worst performances came in our Exponential Growth segment of the portfolio, where the average results have been negative! On average, we’ve lost 24.5% on these stocks, where taking big risks, like with natural-gas producer Tellurian (NYSE: TELL), didn’t pan out. And expecting further exponential growth, like with energy-drink maker Celsius (Nasdaq: CELH), hasn’t either.
What’s all of this tell you? It’s a lot of proof that we’re pretty darn good investment analysts – when we stick to what we know best. And, kinda like everyone else, when we decide to take big risks, we usually learn a hard lesson.
But we hope you won’t judge us too harshly. After all, in January 2013, I gave myself an F on my report card for 2012 because so many of the great businesses we’d recommended hadn’t taken off… yet. Those included: Microsoft (MSFT), McDonald’s (MCD), W.R. Berkley (WRB), American Financial (AFG), Chubb (CB), Union Pacific (UNP), Targa Resources (TRGP), and Cheniere Energy (LNG)… all of which went on to become Hall of Fame-worthy investments.
Investing takes time. And wisdom. But it’s awfully easy to beat yourself in this game, when instead of buying the things you know will make you rich over time, you insist (over and over again) on buying those things that promise to make you rich tomorrow.
The One That Got Away
By far, our biggest error since beginning Porter & Co. was not holding onto homebuilder Hovnanian Enterprises (HOV), which we recommended in June 2022. We sold Hovnanian out of the misplaced fear that higher mortgage rates would decimate its backlog and threaten the stability of the company, which, at the time, was still digging out under a debt load from the last big housing crisis. Lesson: Never, ever sell a great business unless its actual results decline.
Getting back to our story about Charles Merrill… Ironically, Merrill Lynch itself was finally done in by this same kind of get rich quick mentality. You may remember in 2006, Merrill Lynch’s CEO, Stanley O’Neal, pushed the firm into subprime mortgages, buying 1st Franklin Financial for $1.3 billion. By the end of that year, Merrill was the proud owner of $113 billion (!) in subprime mortgages. Less than two years later, it had written off $50 billion in losses, dooming the firm to insolvency, until Bank of America (BAC) came along and (stupidly) bought it. Stanley O’Neal was the only CEO of Merrill who hadn’t started with the firm as a broker. He never understood anything about Charles Merrill or the firm’s heritage. And he destroyed Merrill in about three years. But, hey, he got $161 million in severance, so I guess in a way, it worked for him.
The Porter & Co. Conference Is This Week
As many of you know… on Wednesday and Thursday this week, I’m hosting our second annual Porter & Co. Conference at my farm in Stevenson, Maryland, featuring two days of insights from brilliant investment minds, gourmet food, and the fantastic company of Partner Pass members. (Last year’s conference featured one day of speakers, and this year we are upping the offering with two.) I love hearing from our members – from the people who Porter & Co. exists to serve. If you’re at the conference, please say hi.
And if you’re not there, our Big Secret on Wall Street subscribers and Partner Pass members will have access to the complete video footage of the conference, including copies of every presentation.
I’m thrilled about this year’s roster of speakers. We’ll have special live recommendations from our own analysts Ross Hendricks (who works with me on The Big Secret), Marty Fridson (Distressed Investing), and Erez Kalir (Biotech Frontiers). We’re hosting Doomberg, the mysterious energy expert behind Substack’s top independent finance publication (but don’t expect to see his face)… we have Dave Lashmet and Bryan Beach from Stansberry Research, breakthrough writer and investor George Gilder, and Compounding Quality founder Pieter Slegers, who will also be our Black Label Podcast guest… and as an extra treat, luxury sommelier Peter Wood from French Paradox Wines will share some of his favorite labels. (Plus, many others.)
And I’ll be talking too… and – on Wednesday at 2 pm – I’ll be unveiling a secret project I’ve been fine-tuning for a long time, which I’ve recently written about in these pages…
It’s a proprietary portfolio designed to compound at upwards of 14% per year with minimal risk. It’s inspired by legendary investor Harry Browne’s four-part Permanent Portfolio, which includes equal weightings of stocks, bonds, cash, and gold, all designed to hedge each other. But my portfolio is designed to produce better returns as Harry’s – without any additional risk. Or, if you’re comfortable with a bit more risk (but still far less risk than the stock market), there’s a way to allocate for 2x Harry’s annual returns. Either way, using my strategy will produce much larger returns over time.
This is a project I’ve been working on for years. And our Partner Pass members – many of whom will be in the audience in person – will get the chance to see exactly how this portfolio works on Wednesday, to judge for themselves.
For obvious reasons, my schedule will be a little hectic midweek, but I still plan to publish the Journal. I’ll send you a “dispatches from the front lines” piece on Wednesday that gives you a sneak peek at a few of our conference presentations… I hope you enjoy it.
Good investing,
Porter Stansberry
Stevenson, MD
P.S. In this week’s Porter & Co. Spotlight, we brought you a second piece by Tom Dyson, who Porter calls “the greatest investor you’ve never heard of.” In it, Tom talks about how to best prepare yourself for what he believes will be an upcoming cascade of crises… and he passes on a way to insulate your portfolio from weakness in the U.S. dollar. Read more here.
Mailbag
We appreciate all of your feedback, suggestions… and even taunts. Please let us know how you think we’re doing… and it’s usually more entertaining if you’re angry. Send your notes to: [email protected]
Discovered you in 2012 (wish it had been a decade earlier) and have been a subscriber ever since. My financial literacy has improved many fold as a result. I’ve learned that when you say “horse, meet water,” I need to take it seriously. Two questions on your recommended portfolio strategy:
Would you consider including a small percentage of silver (gold’s more volatile second cousin) in the 25% gold/Bitcoin allocation?
Would you consider gold stocks (i.e. royalty and mining companies) as part of the 25% gold/Bitcoin allocation or the 25% general stock allocation?
Many thanks for the continued education.
– Paid-up subscriber, Tim P
Porter’s comment: Thanks for your many years of support. You’ve given me the career of my dreams and I’m very grateful.
1. Obviously, the more volatility the assets in that bucket, the more “oomph” you’ll get from that portion of the portfolio when that particular macro scenario has its day in the sun. It’s possible that using silver rather than gold would allow you to allocate a smaller percentage to that bucket (maybe 15% instead of 25%) to provide the needed diversification (because silver is more volatile). The downside is, of course, that volatility works both ways: silver will decline more during its off years than gold will. I’m not 100% sure these figures are correct, but looking online I find that the five-year (monthly) beta (volatility) for GLD is 0.11 while the same figure for silver is 0.75.
So, I suspect – and this is just a guess, I haven’t run all of the numbers – that gold is a better way of hedging the portfolio because it’s going to greatly reduce the overall portfolio volatility.
But… using silver at certain points in the cycle wouldn’t be a bad idea from the standpoint of trying to add some alpha through active management. (Also… this is a minor point… but SLV is slightly more expensive at 0.50% from GLD’s 0.40%).
2. Just wait until you see the fully allocated “Porter version” of the All Weather portfolio approach.
Your portfolio idea is appealing, especially if starting with a major market correction. One question, you mentioned earlier in the report that biotech will be one of the better sectors going forward. Where would biotech stocks fit in with the portfolio allocations as listed? They certainly are not in the equity ETF you suggested. Thank you.
– Paid-up subscriber MLM
Porter’s comment: The question about biotech is a very good question, and I’ll answer it. But first, I want to push back on what you’ve said about how establishing a “permanent” portfolio would be better during a market correction. I doubt that’s true.
The whole idea behind this kind of allocation is that, in virtually every market condition, one part or another of the portfolio will be performing well. This internal hedging is designed to allow you to hold comfortably, no matter what happens in the markets. So, for example, if you study Harry Browne’s Permanent Portfolio, you’ll find it did poorly between 2011 and 2014. That’s because of its large (25%) allocation to gold. Likewise, during the big bond market decline of 2022-2023, Harry’s portfolio did poorly because it allocates heavily to bonds. But, on the other hand, those bonds protected investors during the big stock corrections in 2000-2001 and during the 2008-2009 Great Financial Crisis.
We will, of course, have to see whether my ideas about improving these allocations by using insurance companies instead of bonds, and by adding gold streaming stocks and Bitcoin to the gold allocation, helps to improve performance. But I have little doubt that in a stock market correction, on a relative basis, the portfolio I’ve built will perform great.
In regards to biotech… in my humble opinion, biotech doesn’t belong in a “permanent” portfolio. When it’s done best, biotech investing is very cyclical. You want to buy when no one else is interested (like right now). And get out when the bulls come charging in. Biotech is also an extremely high-risk, high-return game. That means putting a lot of small investments into 12 to 24 businesses during periods, like now, when companies with plenty of capital and great prospects are available for less than the cash they’re holding. As we’ve been “pounding the table” on biotech since January, this year has seen a great opportunity to buy biotech when no one was interested. We’ve gotten great results in our Biotech Frontiers publication, as I wrote on Friday. And, I suspect, there will continue to be good opportunities here for the next one to three years, or at least until the huge gap between tech and biotech closes again, as it always does.
I don’t doubt you for a second. I moved $100,000 to my Schwab account to place four trades on Monday: I put 50% into Invesco KBW Property & Casualty Insurance ETF (KBWP), 25% into iShares MSCI USA Quality Factor ETF (QUAL), 12.5% into the gold ETF (GLD), and 12.5% into Franklin Templeton Digital Holdings Trust (EZBC). I have plenty of cash, own over 20 Bitcoin in a hard wallet (TREZOR), and have a stash of gold and silver: 100+ ounces and 100+ pounds, respectively. I’ve been a subscriber since about 2011 or possibly earlier. I have always been intrigued by your recommendations, and your dedication to the amount of time you must allocate to research and learning of the financial markets to make them. It makes the price of admission a no-brainer. This is exactly why I became a partner. You simplify my life and help to make me more money than I’ll ever know what to do with. Thank you.
PS: My average cost for my BTC was about $600 per coin. I got in kind of early. I am a HOD’Ler of course.
– Paid-up subscriber John L
Porter’s comment: Thanks for your support, John. It’s extremely fulfilling to know there are a lot of people around the world who get a lot of value from what we do. I’m eager to show you my fully allocated version of this portfolio approach.