No more hedge-fund madness

No more hedge-fund madness... Target vs. Bud... Wanna buy a stock tip?... The MLP opportunity... Taking the blame... They're waiting to send you money...

How much would you pay for a single stock tip, dear subscriber? We ask not to sell you such a thing (believe it or not), but to marvel once again at the absurdity of the world's investment lemmings. We have never understood why anyone in his right mind would pay 2% of his assets and 20% of his investment returns to a hedge-fund manager. You can get Buffett for free via Berkshire shares. Plus, a handful of great investors run reasonably priced mutual funds, which cost about 1% per year. So why would anyone agree to pay so much? And why would any investor agree to a fee arrangement that encourages risky trading? If you stood to make 20% of the gains using other people's money, how much risk would you take? Heads, the manager reaps an incredible windfall. Tails, the manager gets a nice payday and, in a few weeks or months, starts a new hedge fund.

History will gaze back at the hedge-fund era and shake its head in wonder. But rarely is anything more popular than a bad financial idea. In June 2007, investors were willing to pay $35 per share for hedge-fund operator The Blackstone Group (now trading for about $8). And in that same month, Bill Ackman raised $2 billion for a new kind of hedge fund. Rather than actually managing the money, Ackman promised to buy only one stock! So instead of waiting to see which stock it was and buying it themselves for free, several hundred people voluntarily paid Ackman $40 million (2% of the total capital) to buy one stock for them – Target. And they agreed to give up 20% of whatever gains this investment in Target might accrue.

As you might recall, we speculated the stock Ackman would buy was Budweiser, our favorite stock at the time. And what if you had paid $149 for my newsletter (instead of $40 million) and followed our advice to buy Budweiser instead of buying Target? See the chart below.

So what do you do when you've sold a stock tip for $40 million and it's down 40%? You improvise. Ackman is trying to get Target to spin off a separate company to manage its real estate. How will separating ownership of the stores from ownership of the real estate make Target a better retailer? It won't, of course. But, like mesmerizing children with bright colors and flashing lights, Ackman is convinced investors will bid up Target's stock simply because it's changing its structure and spinning off its real estate. According to Ackman, the combined companies' shares will be worth $83 within a year of the REIT spinoff, up from Target's $40 share price today. If you believe that, I've got a hot stock tip I'd like to sell you. It's cheap, too. Just $40 million.

Fidelity's flagship Magellan Fund is diving into financials... Harry Lange, manager of the legendary Magellan Fund, raised his stake in Bank of America from less than $19,000 to $834 million and increased his JPMorgan position ninefold to $523 million. He also added a new, $225 million position in Wells Fargo. At the same time, Lange dumped his positions in Merrill Lynch, Morgan Stanley, Wachovia, and reduced holdings of Goldman Sachs.

Loews Corp, run by the legendary Tisch family, will spend $490 million on 21.2 million common shares of Boardwalk Pipeline Partners. The company plans to use the cash to expand its pipelines. Loews already owns 70% of Boardwalk Pipeline. Shares are down 31% from their 2007 highs and currently yield more than 8%.

Following the Tisches into a trade is usually a surefire way to make money. They are among the best capital allocators alive today. And we strongly agree with them on the pipeline sector. These companies have incredibly steady cash flows; they earn cash based on the volume of oil and natural gas pumped through their lines. And they've been beaten down with the market. You can collect yields nearing 20% on some companies. Tom Dyson, editor of The 12% Letter, recently released a research report covering his four favorite MLPs. All four companies have enormous and secure dividends. And by buying now, you're almost guaranteed large capital gains to boot. To receive Tom's report, click here...

New highs: none.

In the mailbag... Something I've been waiting for – the angry letters. Normally in bear markets when we get near the bottom, we start getting dozens of really angry letters. When people finally throw in the towel and sell, they blame us for their losses. Never mind our advice about trailing stop losses (25%), reasonable position sizes (4% maximum), or making sure to buy the safest recommendations first. A surprising number of investors are unwilling to take any responsibility for the risks they took.

We don't manage anyone's money or make anyone else's investment decisions. (I won't even tell my own mother what she should do with her finances. It's too much responsibility.) We publish research on investments. Our subscribers choose to follow our ideas when they agree with us. Nevertheless, when things go bad, some readers claim it's all our fault. Fire off your accusations here: feedback@stansberryresearch.com.

"Dear Friends at Stansberry Research... After almost two years as a paying subscriber of several of your services I can report it was a disastrous experience. From your TMA recommendation that lost more than 90% of its value since you recommended it, to your AGQNF recommendation that lost 80%, to stupid Islandic bonds idea... two mention a few. Not sure if your researchers are incompetent or just careless. Do they realize they are playing with people's lifesavings with their superficial, unprofessional work? You should at least publish a list of your worst recommendations in addition to your (mostly irrelevant and obsolete) list of your best recommendations published in every Peter's Digest. That way subscribers, or should I say suckers, can at least see what can happen to their investments if they follow some of your advices." – "Soon-to-be a former" paid-up subscriber Mike Zivkovic

Porter comment: Mike, I am keenly aware of the huge responsibility we owe our subscribers – none of whom is a sucker. Our subscribers are smart people, who want to do better with their money and who rightfully don't trust anyone else to look after their fortunes. I worry about our readers constantly – which is why I spend so much time writing The Digest, why I've done so much work to highlight the dangers of buying certain stocks like GM and Goldman Sachs, why I organized a conference call (free) two weeks ago, and why I launched a special new product to help us recoup our losses (which, by the way, is working very well). I've also been very aggressive in eliminating the products that weren't doing a good enough job serving our readers.

In evaluating our performance, I don't think you can simply ignore that U.S. stocks have fallen, from peak to trough, about 50% on average. Given this massive bear market, we would expect most of the speculative stocks we've covered in our newsletters to get wiped out. In fact, even our best and safest ideas are down significantly from their highs. It's not possible to completely avoid any investment losses in this environment. And that's why we spend so much time explaining that to invest safely in stocks, you must limit your position sizes and be prepared to cut your losses.

In regards to our worst recommendations of all time, I agree completely with you. We do publish that list too, from time to time. More importantly, at the end of every year, I personally write a "Report Card" on all of our newsletters and tell our subscribers how all of their recommendations have performed. I've invited all of the other newsletter publishers I know to do the same. So far, no one else has.

Also... it's a small point... but my name is Porter, not "Peter."

"Found money for my mother. It still had her Pennsylvania address and she has had that address since 1980. I looked up some client's and one is getting back $1,600.00 and is taking me out to dinner when the money arrives." – Paid-up subscriber John Cito

Porter comment: Our report on "lost money" has been a huge success. We've gotten dozens of e-mails like the one above – folks who are getting substantial sums of money returned. We estimate about 50% of our subscribers have at least some money waiting to be sent to them, but don't know it yet. See this to learn more.

Regards,

Porter Stansberry

Baltimore, Maryland

October 31, 2008

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