S&A Digest: Miller wises up

Miller wises up... Jeff Clark's latest blockbuster trade... Berkowitz crushing the S&P... Sjuggerud's innovation...

 Bill Miller is finally wising up, though he's not admitting fault.

Miller, whose Legg Mason Value Trust is the worst performer among its peers this year, says financials may have hit "a capitulation low on July 15." But despite the low prices, Miller did not say he would buy financials.

From his July 27 letter, which was released yesterday:

Is it obvious financials should be bought now, having reached the most oversold levels since the 1987 Crash, and the lowest valuations since the last great buying opportunity in 1990 and 1991? Or is it obvious they should be avoided, since the credit problems are in the papers every day and write-offs and provisioning will likely continue into 2009?

When I ask what is obvious now, there is little consensus.

I wonder why he's interested in a consensus. Buying or selling based on that kind of stuff will get you in trouble.

Still, everybody in the value world (and elsewhere) is down, not just Miller. Even the "smart people" are down. Mistaking share-price quotes for up-to-the-minute performance grades is a tragic, but all-too-common flaw.

 Jeff Clark made another blockbuster trade in his Short Report... He recommended buying Motorola calls on Monday at $0.70. The company reported better-than-expected earnings today, and shares jumped almost 9%. The calls opened at $1.35, and readers made a 93% gain in two days. To learn more about Short Report, click here.

 Bruce Berkowitz's famed Fairholme Fund released its quarterly shareholder letter. The fund returned 6.16% through May 31, 2008, besting the S&P by 10.6%. If you invested $10,000 in Fairholme in December 1999, the fund's inception, you'd have $38,021 today – compared to $11,019 for the S&P.

In the most recent quarter, Berkowitz halved his Berkshire Hathaway position (though it's still the fund's largest holding), took profits on most of his energy stocks, and loaded up on health care and housing-related industries. He recently purchased WellPoint and Pfizer on the health care side, and Mohawk Industries and Sears Holdings for housing. Read the entire shareholder letter here.

 New high: Western Union (WU).

 In the mailbag: Do you prefer cash in the mattress or gold buried in the back yard? Let us know here: feedback@stansberryresearch.com.

 "I wouldn't take seriously a commentator who allocates his funds to long mattresses while declaring the world to be in a massive credit bubble. Why isn't he 100% gold, silver, oil, copper, cattle, and grain if he is 'officially scared'? If one is scared of elevated levels of currency inflation, surely one needs to be out of cash and deflatable assets?" – Paid-up subscriber El Greco

Ferris comment: Grantham is a credible source. He pointed out corporate profits were growing too fast for too long (7% a year) without reverting to their mean level (less than 6% a year). That's another way of identifying a financial bubble, a high point in the cycle. He appears to have nailed that one. Maybe we should buy gold and mattresses.

 "Porter and Dan can both relax. I just heard Jim Cramer declare the bottom of the market on his Mad Money show! Now we all can dive in head first with no concern for a 50% drop... Cramer says so." – Paid-up subscriber Charley Orr

Ferris comment: Cramer is pure entertainment.

 "You and Sjuggerud seem to have a fix on the sell at 25% off rule... but seems it is just a newsletter writer fall-back, so it cleans 'losers' out of your 'recommended' portfolios... while leaving you readers/investors with fairly frequent 25% realized losses. Now, you can cite the several times, especially recently, when the '25% rule' saved your readers from more catastrophic losses. But I say that's just a (poor) excuse for getting your readers out of something you shouldn't have put them into anyway, at least at that price." – Paid-up subscriber SC

Ferris comment: It's too cynical to believe anyone around here is merely "cleaning losers" off the back page. Steve's use of trailing stops comes from years of experience investing his own and others' real money.

Editor's note: In recent issues of the Digest, we've been discussing trailing stops and averaging down. To catch up on the debate, click here.

Steve Sjuggerud: The Greatest Innovator in

Newsletter History

By Dan Ferris

Last week, I spoke with Bill Bonner, founder of Agora. Bill hired me a little over 10 years ago. He always remains above the fray, but passionate and insightful about what's going on in the world.

Halfway through our conversation, I told Bill that Steve Sjuggerud was the greatest innovator in the history of financial newsletters. Before Steve, you never knew what you were dealing with. You never knew when some "guru" was going to tell you to ride a stock straight down to zero.

And in the old newsletter industry, readers followed their guru until one day, his "magic" wore off, and they discovered he wasn't doing any real work.

Based on his early experiences in the brokerage and asset-management fields, Steve decided, no matter what else ever happened, that was not going to happen to his readers. He wasn't going to be the guy telling them to buy all the way down.

At first, Steve fought an uphill battle about trailing stops. Nobody understood the wisdom of stops. Steve cried in the wilderness for years. But greatly to his credit, he never wavered. Eventually, it caught on, and Steve was vindicated. Everybody realized Steve was creating a much better relationship with you, our subscriber. Trailing stops are all over this industry now, thanks to Steve Sjuggerud's wisdom and tenacity. If you read newsletters and take their advice, you have Steve to thank for every loss you've avoided or profit you've protected by using trailing stops.

You might not believe it, but I've tried to model myself after Steve. Like him, I come by my advice solely by my own independent research. And I don't waver when I know I'm doing the right thing. Like Steve, I think about the best thing I can do for you, the reader.

Let me be clear about something, too. I don't take issue with those who use stops. But I'm not Steve. I'm me. I don't use trailing stops.

If I used 25% trailing stops, I honestly don't know if the Extreme Value track record would be worse or better. But I do know for certain I'd have a lot more free time on my hands. I could play my guitar more, and maybe get involved in local theater again. I could use the same quick, easy computer screens everyone else uses and not worry about what's on page 24 of the 10-Q (Lehman's MBS portfolio).

Instead of playing music and doing local theater, I spend most of my time trying to get better at my job. I try to pick fewer stocks, do deeper research, and get a real sense of certainty about what I'm doing. I figure if nobody else is doing that, maybe there's a place for me around here. So far, so good.

To make money in stocks, you must do something different. As it turns out, I do just about everything different. I don't travel as much. I don't read many financial books (99% of them are totally worthless). And I don't use trailing stops.

As far as blowups go, I've had a few. But you can't name one investor who has made big numbers over 30 years or more and hasn't had at least one big blowup. That's a simple, irrefutable, unpleasant fact that nobody who's trying to sell you a newsletter wants to tell you. Ben Graham was down 70% over a three-year period in the early 1930s, and produced a great lifetime track record. John Maynard Keynes was down 50% over a few years and did the same. Even people like Mason Hawkins and Staley Cates at Longleaf have held stocks that went into Chapter 11 while they were holding them.

I've worked for 10 years to figure out the best advice I can give you. You pay me to know what I'm doing. I work toward that end six or seven days a week, from about 6:30 a.m. until about 6 p.m., often later. If I don't get it right, there's really no excuse, and trailing stops wouldn't change anything much.

I think when great investments are down, you should buy them, not sell them. I calls it like I sees it and I stand on everything I do, regardless of what anyone else thinks, including you, Porter, Bill Bonner, and anyone else. If Warren Buffett called me up tomorrow and told me to use trailing stops, I wouldn't do it.

Like it or lump it, all you get when you read Extreme Value is me.

Regards,

Dan Ferris

Medford, Oregon

July 31, 2008

P.S. If you don't read Extreme Value, you really should give it a try. It isn't like anything else we publish, and I don't think it's an exaggeration to say it's like nothing else published anywhere in the newsletter world. Click here for more info.

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