Porter Stansberry - "There's Going to Be a Big Bill of Bad Debt to Pay" | #27

Episode 27 starts with a quick note from Meb. It’s a week of freebies! Why? Meb is celebrating his 10th “blogiversary.” (He’s officially been writing about finance now for a decade.) Be sure to hear what he’s giving away for free. But soon the interview starts, with Meb asking Porter to give some background on himself and his company, as Porter’s story is somewhat different than that of many guests. Porter tells us about being brought into the world of finance by his close friend and fund manager, Steve Sjuggerud. This conversations bleeds into Porter’s thoughts on how a person should spend his 20s, 30s, and 40s as it relates to income and wealth creation. But it’s not long before the guys dive into the investment markets today, and you won’t want to miss Porter’s take. In essence, if you’re a corporate bond investor, watch out. Porter believes this particular credit cycle is going to be worse than anything we’ve ever seen. Why? There’s plenty of blame to go around, but most significantly, the Fed did not allow the market to clear in 2009 and 2010, and it means this time is going to be very, very bad. Porter gives us the details, but it all points toward one takeaway: “There’s going to be a big bill of bad debt to pay.” Meb then asks what the investing implications are for the average investor. This leads to Porter’s concept of “The Big Trade.” In a nutshell, Porter has identified 30 corporate offenders, “The Dirty 30.” Between them, they owe $300 billion in debt. His plan is to monitor these companies on a weekly basis, while keeping an eye out for liquid, long-dated puts on them that he’ll buy opportunistically. He’ll target default-level strike prices, and expect 10x returns – on average. Meb likes the idea, as the strategy would serve as a hedge to a traditional portfolio. Next, the guys get into asset allocation. Porter’s current strategy is “allocate to value,” but for him that means holding a great deal of cash. Meb doesn’t mind, as wealth preservation is always the most important rule. This leads the guys into bearish territory, with Porter believing we’ll see a recession within the next 12 months. This transitions into how to protect a portfolio; in this case, the guys discuss using a stop-loss service. Porter finds it invaluable, as most people grossly underestimate the risk they’re taking with their investments, as well as their capacity to handle that risk. He sums up his general stance by saying if you don’t have a risk management discipline you will not be successful. Next, the guys get into the biggest investing mistakes Porter has seen his subscribers make over the years. There’s a great deal of poor risk mitigation. He says 95% of his own subscribers will not hedge their portfolio. Meb thinks it’s a problem of framing. People buy home insurance and car insurance. If we framed hedging as “portfolio insurance” it would probably work, but people don’t think that way. He sums up by saying, “To be a good investor, you need to be good at losing.” Porter agrees, pointing out how Buffet has seen 50% drawdowns twice in the last 15 years. If there’s a takeaway from this podcast, it’s “learn how to hedge.” There’s far more, including what Porter believes is the secret to his success. What it is? Find out in Episode 27.