Ideas that could kill you (literally)...

Ideas that could kill you (literally)... Why we don't promise to make poor people rich... The two keys to success with junior mining stocks... Cyclical stocks with terrible economics (can make you rich)... Still more angst (and semantics) about Social Security...

Fair warning… Today's Friday Digest is dangerous.

The ideas in this letter could result in large losses. They could cost you your home... or your marriage. Maybe even your life. That's right. People kill themselves because of the ideas I'm about to share with you. They are dangerous. I'm not kidding...

A security guard found him. He was sitting behind the wheel of his yellow Hummer on the third level of a Dillard's parking garage at the huge Memorial City Mall in Houston. On October 22, 2008, he'd put a 12-gauge shotgun in his mouth and blown off most of his head. His name was Robert Chaney. He was perhaps the most successful Texas wildcatter of his generation. He founded Paramount Petroleum Co. in 1986, just as the oil business was emerging from the horrendous bear market of 1985.

From 1989 to 1993, Chaney made 30 major oil and gas discoveries – some of which were very large. He sold the firm shortly thereafter and began collecting contemporary art, becoming one of the top collectors in the entire world. He also founded a new company, R. Chaney & Co., which was a major investor in junior gold stocks. Although I didn't know Robert Chaney personally, my friends in the oil and gas industry did. He was no fool.

He also wasn't the only smart man who killed himself that week. Three days later, on Saturday, October 25, Karl Hill also shot himself. Hill was an exceptionally well-educated small-town banker from Monroe County, Georgia. He knew enough about economics and finance to understand what was going to happen to the U.S. dollar as our country's debts began to balloon after September 11, 2001.

He knew gold was going to soar. So he built a huge position in Canadian junior resource stocks, beginning in late 2001. These stocks offered him the most amount of leverage to the price of gold. By 2005, Hill made an incredible fortune. I came to know his story because he was a regular guest speaker at the most prestigious investment conference in New York each spring. His death shocked me… It was completely unbelievable.

Two days after Karl Hill's death and five days after Robert Chaney's death, the AMEX Gold Bugs Index put in its most recent multiyear low, 151. If they had waited even a week to pull those triggers, they would have seen their fortunes rebounding rapidly – and they most likely would not have killed themselves. Within six months, almost all of the losses completely reversed.

As you can see in the chart below, the bull market in gold and junior mining stocks continued as if nothing happened in the fall of 2008. Within a year of the men's deaths, junior gold stocks were trading at new all-time highs – as was the price of gold itself.

These two suicides convinced me we'd seen the bottom in stocks by November 2008. I wrote about the men's deaths and explained why they signaled the best opportunity in a decade to buy these kinds of stocks. (See the November 2008 issue of my newsletter, "This Is It.") While the broad stock market didn't bottom until the following March, junior resource stocks never breached their late-October/early-November lows. The bottom was in.

I repeat this story today because I want you to understand how serious the risks are when you're investing in extremely volatile, deeply cyclical parts of the stock market. That's the focus of today's Friday Digest.

I honestly believe this kind of investing is completely inappropriate for a lot of people – maybe even 90% of our readers. And I know it can be deadly for some people. So if you have a gambling problem... or if you often find yourself taking crazy risks with your investments just for the thrill of doing so… please, don't read today's Digest.

I am completely serious when I say this to you: These ideas could destroy your wealth. They could ruin your life. And they might even cause your death. I'm not exaggerating the risks.

So... why would I write about these kinds of stocks? You might recall last week's essay where I explained why most individuals shouldn't buy stocks at all – ever. On the surface, it seemed a strange essay for me to write. But as you read it, I'm sure you saw my real purpose – to help you make better, safer decisions with your savings.

Our primary goal at Stansberry Research is to make rich people richer by helping them become better investors. We teach our readers how to value stocks and bonds. We explain the importance of allocating to value. We give our readers a "toolkit" so they can increase the income from their portfolios, minimize their losses, and from time to time, make great long-term investments. Most of all, we warn people about the risks they face from overvalued stocks, currency depreciation, and Wall Street's latest con.

What we don't do is promise to make poor people rich. We don't do that because it's almost impossible to achieve. Let's face it: The odds that you'll end up buying the right stock with enough of your portfolio to matter (assuming you're poor) and then have the guts and the foresight to hold on to it for 10 years, while it increases thousands of percent in price, is just about nil. It's not going to happen. You will never get rich trying to buy the one stock that soars 5,000% in four years.

Well... almost never… Because you see, it does happen from time to time. And there are ways of greatly increasing the odds that it will happen to you.

That's what today's Friday Digest is all about – how to actually become rich (not merely richer) with common stocks. I'm going to show you what I know about how to get rich – really, really rich – with stocks. It's not as hard as you probably think it is. It does happen. Some people have figured out how to do it regularly. And they do it time after time after time.

There's only one problem. It's extremely risky. If you're not good at limiting your position sizes and you're not able to trade in a contrarian style (buying when everyone else is selling), you will get killed… some of you even literally. This kind of investing should only be attempted by people who are centered emotionally, fanatically disciplined with their investments, and prepared to suffer total, 100% losses in these positions.

I wrote a similar essay back in February 2011. There's no point in rehashing all the points of that letter, which are easy enough to summarize. The bottom line is, I've seen people make a lot of money in small tech stocks (including biotech), currency trading (because of leverage), and junior gold stocks. These are still the three areas I'd pursue if I wanted to make my living as a speculator. They offer plenty of opportunity, in terms of high volatility.

To be successful, you have to make sure you're buying at or as close as possible to a major bottom. Then, you have to really know what you're doing because you'll have to survive tremendous volatility. That's extremely difficult to do unless you've dedicated your life to understanding those markets. Any steps you take decrease the volatility (like trailing stop losses, for instance) will greatly reduce your returns. In these markets, the excess returns you make are caused by the volatility.

Looking back on that essay now, I think it's still largely correct. I still believe the best sector of the market to focus on, if you're trying to get rich, is junior resources. It's much easier to understand than the tech sector and doesn't require you to use any leverage, like currency trading does. The junior resource sector routinely crashes 75% or more and routinely soars 500% or more. Dozens of individual stocks in the sector can go up by more than 1,000% in any given year. I know more people who have made more money in these kinds of stocks, than in any other sector of the market. But... as I pointed out with the stories above... these stocks are incredibly volatile. And if you are too exposed to them, they can kill you.

If you'd like to get involved with these stocks, I strongly recommend you do two things. If you do both of these things, the chances are good that you'll succeed – much better than 50%. Here's what I recommend you do...

First, learn as much as you can about basic geology of current leading "plays." What happens with these stocks is that one company will find a big deposit. Then, a handful of other companies will stake claims and make discoveries. These areas are known as "plays" – areas currently being heavily prospected.

You want to find 10 or 20 companies that own property in the best current plays. It's impossible to know which of these stocks will produce the big mine or the huge discovery... But one of them will.

The second thing I strongly recommend is that you learn to wait to buy until there's some kind of major blowup in the sector – like the kind we saw in 2008. It's extremely important that you understand the range of values these stocks trade in – they're typically huge. You have to make sure you're buying in the bottom 25% of that range. Or else... you'll get wiped out.

Buying these kinds of stocks when they're crashing is extremely difficult to do emotionally. Most people simply can't do it. That's why it's a great opportunity for the folks who have the discipline. The way to develop that discipline is to follow these markets, year after year. Get to know the major plays. And get to know the stocks.

Yes, all of that takes time. Did you think it was going to be easy to make 10-to-1 returns? It's not. It never is. But these stocks offer you the best chance at getting those kinds of returns. You typically see at least two major bull moves in these stocks each decade. Learning to wait for them... and then having the guts to buy near the bottom… is all it takes to make a fortune in stocks.

If you want to get started, I strongly recommend you read Matt Badiali's S&A Resource Report. Matt is a great geologist, and after writing his letter for years, he's gotten to know all of the major players in the industry. He knows about the best plays. He knows the best stocks. If you put Matt's fundamental research together with the discipline I mention above, I'm certain you can take $10,000 or $20,000 and turn it into more than $1 million over a decade. All you have to do is wait for the market to collapse, then know which of the stocks to buy during the panic. To learn more about the S&A Resource Report, click here.

The other move I suggest you make is adding Doug Casey's team to your research library. Doug is an old friend of mine. He's been a mentor to me for my entire career. He is a completely unreformed speculator and has made three separate fortunes over the last 40 years speculating in stocks. Nobody knows more about these companies. Nobody knows more people in the industry. Nobody gets better leads – not even my own geologist.

You might wonder why I'd recommend a competitor so strongly. Yes, we have a marketing partnership. But I could partner with any newsletter publisher in the world. I don't. When it comes to the junior resource sector, I only recommend one person: Casey.

The reason why isn't hard to understand if you've ever seen his letter. Casey has been doing the same thing for his entire career – studying this sector of the market. He's been trading these stocks since before I was born. His company – Casey Research – is solely focused on the resource sector and junior resource stocks. While resources are one of the many things we cover, it is all they do. Even if you only plan to dabble in these stocks, doing so without their help isn't merely shortsighted and foolish... it's downright stupid.

To help you get started, I've asked the folks at Casey Research to put together a special report that will only be available to my subscribers responding to this offer. I asked them to look across all of their portfolios – big stocks, small stocks, gold stocks, silver stocks, oil stocks, etc. – and to select a handful (I believe they picked seven) that represent their very best current ideas.

Getting these recommendations would have cost you several thousand dollars in subscription fees because they come from several different publications. But it's yours free for simply agreeing to take a trial subscription to The Casey Report for only $98. That's their flagship letter, and it normally costs $349. To find out more about their special offer, click here.

We've arranged for this special price and for this special report for one simple reason: I don't want you to have any reason not to have Doug's help as you break into this kind of investing. It can make you rich. But like anything else in life, it's not as easy as it looks. You're going to want Matt Badiali's help… and you're going to need Doug's.

Now... there's one other way you can make a lot of money in stocks. Certain industries are deeply cyclical. Commercial real estate, for example, or the market for oil drill rigs. We've made great profits buying oil drillers (Patterson Energy) when they've collapsed. Last time we bought Patterson, we were buying drilling rigs for about half what it costs to build them. It's hard not to make money when you're buying hard assets for less than scrap value... especially when you know, sooner or later, someone will pay almost any price to use that equipment.

Another classic example of deeply cyclical stocks is oil tankers. Shipping is a terrible business. There's a good reason people say if it flies, floats, or fornicates you should rent, not own. Shipping requires massive, ongoing capital investments... and then those assets literally rust away within 20 or 30 years. That's not to mention that shipping is a commodity that's intensely competitive. It's very, very hard to make money in shipping – which is why I wouldn't recommend being a long-term investor in the sector.

But these horrible economics also explain why shipping is so cyclical. You see, all the tanker companies tend to go broke at about the same time... after which, shipping rates soar again… The companies that survive can make incredible profits for four or five years before everyone is building ships and collapsing the market again.

I point this out because right now the tankers have collapsed again. Many (like Frontline) are selling for about half-book value, which values their ships for roughly the scrap price. Sooner or later, China will begin to import more oil and these ships will be in demand.

You can see for yourself what happened during the last cycle, during the 2002 economic slowdown. Frontline's stock went from $5 to $60 in about two years. Will it do it again? My bet is yes. An interesting play here would be to sell out-of-the-money puts against a few of these stocks, which would lower your cost basis even further. If the world's economy continues to slow (and I believe it will), you might end up getting put these stocks down another 20% or 30%... which would be like buying these ships for far less than scrap value. Assuming you stick with companies that don't have near-term debt maturities... it's hard to see how you can lose.

Tired of the Social Security hubbub? Apparently not, judging by the mailbag, which continues to be filled with demands for cancellations and condemnations. Our subscribers it seems are a lot like the rest of the country… They want something for nothing. And they want it now. Send us your thoughts here: feedback@stansberryresearch.com.

"I do believe you like to stir the pot on the issue of Social Security. You deliberately called people receiving SS benefits parasites, leaches, and maybe even cheaters. I'm sure you expected and were not surprised by the response. As most of these people stated and you already know, they had no choice about 'contributing' and they had no decision on how the money was handled by the government (which you know). So why would you be so deliberately harsh and insulting in your assessment. Most people do not respond well to being called cheaters, leaches or parasites. So what was the point? The only reason I can think of is to be controversial, get people angry, and present your solution.

"I don't believe that most of the people disagree with your assessment of the SS system: It's a government sponsored Ponzi scheme. What do you want people, your subscribers to do? 'Facts' are always subject to manipulation. Any set of numbers and statistics can be manipulated depending upon intent. I have no problem with your solution and believe many if not most of your subscribers would agree with you. Savings is paramount and necessary to build wealth. Savers (small) are being punished in the current environment.

"I believe your intent was to inform and educate. Your method left much to be desired. Verbally slapping most people in the face will not be appreciated. While I am within 10 years of official retirement, I understand that SS is vulnerable to collapse and may not be there. I am preparing for that event as best as I can. I value your opinion, information and especially your financial perspective and investment ideas. Your tactics leave much to be desired on this issue and make me wondered if you truly value your subscribers. If you did value your subscribers, you should find another or different method to make your point(s). I personally have a thick skin. I am not easily insulted, but others are more sensitive. I do not find you arrogant, but supremely confident in your abilities and desires. I am interested in your motives and what do you want your subscribers to do on the issue of SS. I will continue my education and hope to become a better investor from the analysis delivered by you and your analysts." – Paid-up subscriber Debby W.

Porter comment: Just to be clear, I never called anyone a leach, a parasite, or a cheater. In regards to my intentions, I believe Social Security is clearly and obviously immoral – by any standard. If any other institution in our country besides the federal government offered such a system, it would have been shut down long ago and its leaders thrown in jail.

Social Security/Medicare is clearly and openly a Ponzi scheme, except they enjoy the benefit of forced contributions. In that way, it's more like violent crime instead of merely a fraud. I want my subscribers to understand why, if they accept Social Security and Medicare benefits, they are willingly accepting benefits from something that should be considered a criminal enterprise. I recognize they have no other reasonable choice. I recognize they were forced to contribute. I'm not suggesting anyone's benefits be cut or eliminated. Instead, I want my subscribers to look skeptically at organizations like AARP, which promotes Social Security and Medicare. And I want them to look skeptically at the politicians responsible for the system. If the recipients themselves demanded reform, it would happen. If they don't, it never will.

Ideally, I'd like them to begin demanding an end to our current system and the development of a real pension program in the U.S. I don't think we should leave most of our senior citizens with no option other than being part of such a racket. I know almost everyone who receives these benefits would have greatly preferred to invest in a bona fide pension fund, rather than being forced to contribute to Social Security. I hope that we will move quickly to provide such a choice for Americans who are currently saving for retirement. I believe such a transition would be good for our people and great for our economy. Those are my motivations.

"I take tremendous offense at being accused of being 'guilty' of 'taking part in an enormous crime.' Besides, your statement is totally inaccurate. The law of the United States required that I be a participant is SS – again, as I assume you are. In fact, it would have been a crime if I somehow did not participate in the system when I was earning some of my income. I am now entitled to receive a return on what was extracted from my paycheck years ago... for me not to do so would make no sense at all, in fact it would be stupid.

"I would like to continue receiving yours (and Doc's) newsletters, but feel like I must take a stand on principle. If you feel you can send my a very short memo (1) acknowledging that I am not a criminal and did not engage in a crime, and (2) expressing a short apology for making such an assertion, then I would like to continue receiving your excellent newsletters. If not, then please cancel my subscriptions and credit me with any refund that may be due to me. Thank you very much." – Paid-up subscriber George Shupe

Porter comment (Part I): George... had you put your capital into an actual pension fund, you would be exactly correct. Unfortunately, you did not. The unpleasant fact is, the money that was taken from you years ago was never invested or saved. Instead, it was paid out to other recipients at the time. The Supreme Court actually ruled on this question back in 1960. And what the Court said was that Social Security recipients have no legal claim, whatsoever to their benefits. The "contributions" taken from you and your employers were, in fact, merely a tax.

Thus, the money you are receiving now is being taken from folks, who like you, have a false belief that they will be rewarded with a return in the future. Unfortunately, anyone with any minor knowledge of math or accounting knows that's impossible – the numbers simply don't work. And of course, that's the nature of a Ponzi scheme: it's a big con. Sooner or later, it falls apart. When it does, it makes people feel cheated and angry.

Now as you note, this con is particularly unsavory because, unlike Bernie Madoff's racket, the government runs this con. And it uses force to compel contributions. Thus, you are now accepting funds that have not merely been taken by fraud, but by force. As I've explained in my many examples, the average Social Security recipient who retires in 2010 can expect something like a 250%-plus "return" on his contribution. That is, he is going to receive roughly 250% more than he paid into the system. All of that money is being stolen from the children – and possibly grandchildren – of current recipients under a system that can't possibly return the same benefits to them, under any circumstances.

I don't think that's OK. In my eyes, what I see happening is the government pointing a gun at an entire generation of people and extorting them to pay benefits to an older generation of Americans – who yes, were similarly extorted years ago. The problem is, as with any other Ponzi scheme, it simply can't last. And we're watching it die right now, before our very eyes.

If I were in your shoes, I wouldn't willingly participate. That is, I wouldn't willingly be part of such a crime. Believe me… I have contributed massive amounts of capital into the system that's now supporting you. I contribute millions and millions of dollars annually on behalf of myself and my employees. And even though I'm smart enough to know that we will never see a penny of these "contributions," I continue to contribute because it's the law. That doesn't, however, make it right.

If you've seen what I've written about this matter over the last several days, you should know that I believe the government (and the country) should live up to everything that's been promised to our current retirees. But I don't believe we should do so by making them party to a Ponzi scheme enforced by law. Instead, I think we should do the honest thing and support the people dependent on Social Security and Medicare with tax revenue, while allowing younger Americans to contribute to bona fide pension programs. Doing so wouldn't only provide a moral choice for retirees, it would also greatly increase the savings rate in our country.

Finally... I must say... asking me to support a multigenerational Ponzi scheme that is now at least $100 trillion in debt and that will, unless it is reformed, destroy our country's economy... in exchange for continuing your subscriptions... seems like a strange thing to do to someone who is a financial analyst. I would have to be bad at finance... or immoral (or both) to agree to your request.

"Thank you for your reasoned and thoughtful reply. As you know, I agree with you nearly 100% regarding your thoughts toward Social Security and how government has used it in its general fund as a tax. I am sorry that you cannot make a distinction between the bad guy (Uncle Sam, in this case) and those of us who have been governed by politicians and policies that have taken our once proud country toward ruin. You seem to have some difficulty with what is legal/criminal versus what might be viewed as immoral/unethical or just plain irrational and irritating from a political/financial sense.

"In regard to SS, I am not a criminal and have never conducted myself in a criminal manner. Based on U.S. law, I am entitled to a retirement check. It was only that apology I was asking you to consider... not to change your opinion or irritation with what the Ponzi-like system of social security is doing to our country and future generations. I am sorry that you could not see that your use of words like 'criminal endeavor' and 'crime' was wrong... at least incorrect based on the laws of the United States, and that a short apology might be forthcoming. I assume you have canceled my subscriptions. I wish you the best." – Refunded, former subscriber George Shupe

Porter comment (Part II): If you acknowledge Social Security/Medicare is clearly a Ponzi scheme, how can you possibly justify taking any benefits from the program? In regards to the semantic argument you're pretending to have with me (criminal versus immoral), give me a break – you can't be serious. Participating in Ponzi schemes has been against the law (a crime) for hundreds of years. There's common law doctrine about it... and decades of case law in the U.S. There is no question that knowingly accepting benefits from a Ponzi scheme is a crime. That's not my opinion… It's simply a fact. Arguing about it is like arguing with a brick wall – it's not going to change anything.

That taking benefits from Social Security isn't deemed criminal today by most of the population (or by the legal system) is – in my mind – completely irrelevant. Think about it this way…

In 100 years, how do you think American history books will judge the Social Security system and the people who retired in the '50s, '60s, '70s, '80s, '90s, and 2000s, who were able to get 250%-15,000% returns on their "contributions"… versus the people who will retire in 2020 and onwards, who will receive a negative return? It's a crime folks. Sorry. There's no other way to describe it. Not accurately, at least…

Regards,

Porter Stansberry
Baltimore, Maryland
November 4, 2011