Join us on Friday.

Join us on Friday... At Grant's next week... No takers for the Put Strategy Report... Rick Rule on the collapse in junior resource stocks... China's stock portfolio takes a beating... Coke shines... Why buybacks are rarely good news... "I was too scared"...

Please note: I'll be hosting a conference call on Friday. Our three most experienced equity analysts will join me on the call: Jeff Clark, Dan Ferris, and Steve Sjuggerud. We'll talk, in detail, about our current best ideas.

The call is free. We sent out an e-mail earlier today with the details. But you may also register by clicking here.

A recording of the call will be available to you for several days. You can listen at your convenience. Finally, if you'd like to submit a question, please send it to our feedback address, which you'll find in the mailbag section, below.

Next week, Goldsmith, Ferris, and I are attending the Grant's Interest Rate Observer conference at the Plaza in New York. This year's speakers include Seth Klarman, Jim Chanos, and Leon Cooperman. Grant's recently reopened its conference, you can sign up here. If you come, please be sure to pull us aside and say "hello."

"What is a put, why would I want to sell one, and what happens if you're wrong...?" Apparently for most of our subscribers, the strategy, logic, and relative safety of my new publication, Porter Stansberry's Put Strategy Report, weren't compelling... or even understandable. I think the handful of people who actually subscribed were all friends and relatives. And they bought because they felt sorry for me...

We've never had a new product sell fewer subscriptions – ever. But like Extreme Value, some publications are worth publishing, not because they make money for us, but because they're exactly what people ought to do with their money. It's one of the great ironies of financial publishing: The most popular newsletters are the ones most likely to have a poor track record in the future. The market is a contrarian game. That practically nobody in our entire subscriber base wants to sell puts is an extremely bullish endorsement of my strategy.

Meanwhile, the prices on our recommended puts were so high, the underlying stocks would have to fall an additional 37% for us to lose money, even temporarily, on these transactions. We're selling catastrophic insurance on solid companies, whose shares have already been wiped out. It's like selling hurricane insurance after the hurricane.

Why should you sell puts instead of simply buying the stocks? If you're uncertain about how long this bear market might last, selling puts allows you to earn cash immediately, even if the stocks don't move at all. And the yields available now from selling puts are incredible. You can make 48%, on an annualized basis, selling puts on our current top recommendation. That's more money than you're likely to make owning stocks in a single year, ever.

The secret to selling puts successfully is to find situations where you'll make around 50% annualized on the premium and where the strike price (the amount you would buy the stock for if the put is exercised) is significantly below the company's intrinsic value.

For example, one of our recommendations was offered $26 per share this year in a takeover bid. Our strike price on this put is $10 per share – that's a 61% discount to fair value on the stock. And about 80% of this company's assets are cash. There's no legitimate risk here for us. And our entire obligation will expire on January 16, 2009. Unless the company practically goes bankrupt before then – which is impossible thanks to its top-selling products and huge cash cushion – we'll make a lot of money.

In all my years in the markets, I've never seen a safer, more lucrative way to make money quickly. That's why I put my name on the product. And that's why I'll continue tilting at windmills, trying to get you to read it. Horse, meet water.

There are a few good primers on the Internet that go over the basics of writing (selling) puts. Yahoo's primer is here and Wikipedia's is here.

If you want to get involved (and you should), make sure to have a discussion with your broker. Yes, you'll actually have to pick up the phone and call someone. You must be approved for selling options. You're selling insurance. Your broker has to certify you're good for the obligation.

Also, if you've never traded options before, it's important for your broker to explain the wide spreads between what you'll get for selling an option and what it costs to buy an option. And he can discuss using limit orders to minimize the effect of the spreads. It's not hard once you've done it once or twice, but it's a lot different than simply buying a stock. Let someone help you do it the first time or two.

We spent more than an hour on the phone last night with Rick Rule. Rick is a 30-year veteran of the junior resource markets and one of the most successful investment bankers in the world. We know many investors who have made millions by investing in Rick's partnerships over the years. Rick has an uncanny ability to buy at the bottom and sell at the top – which, in those highly cyclical markets, is a recipe to make a fortune.

Personally, I greatly admire Rick, not merely for his investment acumen, which is legendary, but even more so for his character and his intellect. He's one of the finest people I've ever met. I've been waiting for several years to invest with him. Longtime readers might recall the subject of my December 2006 issue of PSIA: You're Either a Contrarian or a Victim. I warned everyone of an impending top in commodities after seeing Rick Rule being mobbed by investors at the New Orleans Investment Conference.

Now after the resource sector has been in a massive five-year bull market, Rick Rule is a rock star at conferences. Everywhere Rick walked, more than a dozen investors crowded around him. It was as if they were trying to touch the hem of his robe... I am not an expert in resource investing. But I've been around the markets a long time and I know this for certain: When thousands of individual investors are all convinced of the certainty of any given investment idea, it's best to avoid that idea... The first big break hasn't happened – yet – in resources and it may not for several more years. But as Rick Rule says about investing in the resource markets, you're either a contrarian or a victim. And right now, it's not contrarian to be long oil, uranium, gold, silver, etc.

What must happen usually does: Resource stocks have been completely murdered, especially the small stocks Rick specializes in trading. The TSX Venture exchange index has fallen from more than 3,000 to 1,000 this year. So what is Rick doing with his money?

Right now, he is buying "cash boxes" – firms that were designed to do deals that don't make sense right now and are sitting on piles of cash raised at the top of the market. You can buy these things at about a 30% discount to net cash. He's waiting still to buy oil and gas firms at a 50% discount to existing cash flows. And he's waiting to buy deposits at prices down 80% from their peak.

Rick says only about 5% of the existing junior resource stocks are viable. There's a lot of carnage to come. But Rick is very bullish on the long-term prospects of the energy complex – especially uranium deposits.

A follow-up on our observation that sovereign wealth funds are horrible investors: China Investment Corp, China's sovereign-wealth fund, invested $5.6 billion in Morgan Stanley last December and $3 billion in Blackstone Group in June 2007. Both stocks are down more than 50%. Incredibly, the fund also made an investment in the Reserve Primary Fund, the first money-market fund in 14 years to "break the buck."

What's the best way to beat inflation, compound your wealth over time, and grow fantastically rich? Simple: Buy the world's best businesses when they're cheap and hold on. One example, Coca-Cola. The world's largest soft-drink maker increased earnings to $1.89 billion this quarter from $1.65 billion a year earlier – beating analyst estimates. Sales rose to $8.39 billion from $7.69 billion. Meanwhile, its nearest competitor, Pepsi, is struggling.

S&P 500 index members repurchased $89.7 billion in shares in the second quarter, a 44% decline from last year. The government recently allowed companies to repurchase up to 100% of their shares' average daily trading volume – compared to no more than 25% previously.

Why would companies buy less stock now, when shares are vastly cheaper? Because most CEOs are terrible capital allocators. Like investors everywhere, they buy their own stocks when times are good (and stock is expensive) and refuse to buy in bad times (when stock is cheap). Although you can find a few notable exceptions, returns for investors overall would be higher if the board of directors of every public company in America refused to permit management to buy back stock. That's something to keep in mind when you're looking at your next investment.

Here's a new way to hedge against rising energy costs... firewood and wood pellets. In the northeast U.S., huge firewood demand is causing shortages ahead of home-heating season. Customers are paying up to $250 for a cord of green wood, which hasn't been sufficiently dried for burning – up from $100 two years ago. And if you can find seasoned dry wood, a cord costs at least $350.

Wood pellets, used in pellet-burning stoves, are also on the rise. The average price for pellets is currently around $300 a ton, up from $190 two years ago.

This about market losses from the dean of the newsletter business, Richard Russell:

My family has had its confrontations with stock market loss. My grandfather owned the biggest jewelry store in Washington D.C. Grandpa shot himself in 1907 after the Panic of 1907 wiped him out. My uncle Irving jumped out of the window of a New York hotel in 1929 when he lost most of his inheritance... Losing a lot of money can be terribly painful. For some people, it can feel like losing both legs, for others it can feel like death itself. What's the plus side of losing a fortune? For one thing, it makes you think. But there's a positive side of loss. The positive side of the tragedy of loss can be appreciation.

I look back over my own life, and I marvel at how or why I've lived to the age of 84. I grew up during the Great Depression. I've been held up at knife-point twice, once in Harlem, N.Y., and once in San Francisco on Market Street. I had a severe mastoid infection when I was 8 years old and almost died during the operation – this was before antibiotics, when surgeons literally had to cut out the infection. I lived through World War II, and I had a painful double hernia operation. I suffered two heart attacks and a quintuple by-pass operation. I recently suffered a stroke. I lived through a big motorcycle crash and a number of narrow motorcycle close-calls (I rode cycles for 45 years). To put it succinctly, I appreciate and am amazed by the fact that against all odds, I'm still here and still alive.

It's funny. I well remember one incident during WW II as if it was yesterday. I was huddled in the nose of my B-25 bomber, and I had just released our bombload. I could see black puffs of flak exploding all around us. Some of the fragments were bouncing off our plane, and they sounded liked stones hitting sheets of metal. I was scared out of my mind, and although an agnostic I suddenly said to myself, "Please God, get me out of this one alive, and I'll never ask for anything again."

Today if I suffer a loss, I think back and appreciate the fact that I'm still alive. Against great odds, I'm still here. And today, I'm not hurting. If I were to lose everything I own, I would still be here. I know I'm a lot better off now than I was when I was having a heart attack, and I'm a lot better off than when I was flying missions during WW II. Appreciation, it's the antidote to the sorrow and pain of losses that you might have taken in the stock market or somewhere else. Remember that word – appreciation. It's the way out of depression and pain.

Richard Russell is a national treasure. I'll never forget when I was out of work, just before I started this business, I wrote him a letter and asked him for a job. He was kind enough to send me a handwritten note in reply telling me he wasn't hiring, but wishing me the best and complimenting me on some of my previous work. That kind of grace is almost a lost art.

New highs: none.

In the mailbag, it's my fault our subscribers were too scared to sell the puts we recommended... How have we let you down, dear subscriber? Count the ways: feedback@stansberryresearch.com.

"I read and reviewed your various articles on selling Puts against the already beaten up stocks [Porter Stansberry's Put Strategy Report]. And yes it appears it has worked out well, BUT what if it hadn't! As I sat there with 65% of what I had a couple of months ago, my willingness to enter into those very lucrative looking trades shriveled. What if the downturn had continued? No one really knew where the bottom would be and the risk was huge if those people who were buying those Puts thoughts became reality. To me, you guys passed on advice that carried as large a risk as it did a reward yet no mention of the risk was really provided, or more importantly, no strategy to get out of what could have been large debts to cover the positions. Forget about hindsight, what basis did you use for expecting us to strap on huge balls and dive into these trades?" – Paid-up subscriber Pam

Porter comment: I thought you'd make the trades because I expected folks who were savvy enough to join our Alliance or subscribe to my Put Strategy Report to be smart enough to see the logic underlying these recommendations: These are the safest, most lucrative anomalies I've ever seen in the stock market.

It's a situation that only occurs maybe once every 30 years. As I've carefully explained in my report and in Tuesday's update, we're selling puts at strike price levels around half of intrinsic value and only a fraction above liquidation value. In the worst-case scenario, if these stocks fell another 40%(!), yes, we'd have to buy shares. I don't believe that will happen. But if it does, it doesn't mean we'll lose any money because we would be converting (paying for the stocks) at very near their liquidation value.

You've allowed your fear of what has already occurred to paralyze you. You're mistaking past volatility for risk. It's not the same thing. We have almost no risk of capital loss in these recommendations. I'm sorry you can't be more rational... but it's because most people have the same fears that the rest of us get this opportunity. By the way, two of our three current recommendations are back in our buy range. They won't be for long.

Regards,

Porter Stansberry

Baltimore, Maryland

October 15, 2008

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