The S&A Digest: Beaten Up and Smacked Around

Editor's note: Delivery of today's Digest was disrupted due to a technical problem. We regret the delay.

Beaten up and left for dead... $4 million for Guy Fawkes... Giving the establishment "the finger"... Buy Countrywide, says Miller... Level 3 portfolio sizes... Greedy?...

Yesterday, your editor was beaten up, his work was stolen, and he was left for dead on the side of the road. Well, in a manner of speaking. See our essay below.

We thought of our donation to Ron Paul's campaign as merely being the financial equivalent of a "no" vote. "No" to Democratic big government, and "no" to Republican big government. But Paul raised more than $4 million yesterday, from 21,000 different donors. What's responsible for the fundraising success? No, dear subscribers, it wasn't my mention in yesterday's Digest. It was Paul's clever Guy Fawkes Day Internet campaign (Remember, remember the 5th of November).

My favorite response to Paul's record-setting small-donor contributions comes from the National Review website, which opined petulantly "... people will donate money just to extend a middle finger to the establishment." Yes... and maybe they'll vote that way, too.

Bill Miller, famed manager of the Legg Mason Value Trust, says battered brokerage, housing, and consumer stocks present the best value for the next five years. Miller is trimming his top 10 holdings, which include Google, Sprint Nextel, Qwest, and Amazon, to make room for new positions. In particular, Miller is focusing on large-cap stocks. The one company he has explicitly targeted is mortgage lender Countrywide Financial, which he believes is worth close to $45 a share, currently trading below $15.

Always the devil's advocate, Tom Dyson said this about Gisele's renunciation of the U.S. dollar: "This has happened before. Bette Midler refused to be paid in dollars in 1978. She demanded gold. They had booked her for a European tour. Midler's fee was $600,000. She demanded full payment in South African krugerrands. The New York Times reported this story on July 3, 1978. I looked up the gold price that day. It was $195 an ounce. Eighteen months later, gold was at $850 an ounce... a 325% gain. My point is, Gisele's news may mark the beginning of the 'blow-off' stage, not the end of it."

Steve Sjuggerud tells you how to profit from a falling U.S. dollar with no downside risk in today's DailyWealth.

Level 3 assets are the "toxic waste" mortgage-backed securities that banks carry on their balance sheets. These are the assets that Citigroup and Merrill Lynch are writing down by billions of dollars. Jim Chanos calls level 3 assets "Fantasyland," because they never trade and are nearly impossible to value... a spot-on observation as we've recently seen. Let's see how much level 3 garbage big banks currently hold in relation to equity...

Oil closed at a new high of $96.21. Gold is at $823 an ounce.

New highs: Advisory Board Company (ABCO), Covanta (CVA), Exelon (EXC), Google (GOOG), McDonald's (MCD), Newmont Mining (NEM), Sigma-Aldrich (SIAL), Berkshire Hathaway (BRK-A).

In the mailbag... A fresh assortment of folks who we've angered. But it's nothing like what Kiplinger's wrote about me (see below). What's your take on our work and the surprising amount of vitriolic attention we get from our competitors? Feedback@stansberryresearch.com.

"What the hell you doing canceling my PSIA? I didn't cancel it. You might think about getting better help." – Paid-up subscriber Pat Connell

Porter comment: This, to my knowledge, is a first... I've never gotten a note from anyone who didn't want to be canceled. It's usually the other way around. We will, of course, look into the matter. (In the meantime, please help us with our customer service by contacting our office with these matters. It's simply impossible for one person – me – to handle all such correspondence personally. You can reach our customer service team at customerservice@stansberryresearch.com, or at 888-261-2693.)

"You have a bunch of idiots like Jeff Clark, Dan Ferris, etc, who find the worst stocks to encourage subscribers to buy. Most of their recommendations keep hitting new 52-week lows each day. And they brag about how good their stock picks are even as they drop 50-70%. What a joke for a track record! How can you publish such crap?" – Paid-up subscriber RH

Porter comment: If we only knew which ones would be winners ahead of time, the job would be a lot easier. I know Dan has been through a rough few months – after four years of nearly flawless picks. We believe in his methodology, and we know he is a completely dedicated researcher. Things will turn around.

"I'm getting final notices to re-subscribe to Extreme Value and I am in a quandary. Here's the deal: I find Dan Ferris' letter to be 'extremely' informative, thoughtful, and apparently well reasoned and his list of successes impressive. I envisioned a long-term relationship. After watching his picks for some time, I decided to take his advice, starting with the 'back up the truck' favorites Westlake Chemical; St. Joe; Wal-Mart; Home Depot; and Microsoft. I bought WLK in April, the rest in July, all below his recommended price points. Now I know these are not 'momentum' stocks, but so far I'm down 22.48% on WLK; down 21.56% on JOE; down 8.56% on WMT; down 24.48% on HD. MSFT is the only one who has gained, at 23.71 %. I thought I got the concept of value investing, but even if the 'intrinsic' value of a company is great, unless other investors, i.e. 'the market' agrees at some point, it does no good for me as an investor. Did his long list of winners start out as 'losers' also? Why should I re-subscribe? I have until tomorrow to decide." - Paid-up subscriber Monica Law

Porter comment: Every value investor will face similar tests. When you buy something because it's cheap, there's always a reasonable chance it will get cheaper before the market recognizes the value. Obviously, you'll have to decide for yourself about what you should do given your circumstances.

To help you figure it out, I'd recommend reading Mohnish Pabrai's excellent book, The Dhandho Investor. He has a section about managing risk and drawdowns from the value investor's perspective. One thing I like to do with positions that are down is simply repeat the analysis I did before I originally bought. What's my estimate of intrinsic value now? What are the risks to my estimates? What's the chance the company will suffer or has suffered a permanent impairment? How long do I expect it to take for the market to recognize the value I see? I know Ferris will be doing the same for his subscribers regularly.

Beaten Up and Smacked Around

By Porter Stansberry

Your editor was beaten up yesterday.

My work was stolen. I was left bruised, bleeding, and embarrassed, propped up on the curb...

The assault came at the hands of a kind-looking, balding man, who appears to be in his early 70s. It was Fred Frailey, the editor of Kiplinger's Personal Finance, who walloped me.

On the opening page of his magazine, Fred, mustering all of his ample self-righteous indignation and pointing his finger in my face, said: "Porter Stansberry will do anything to make a buck... he needs to control his greed." Fred accused us of taking advantage of "unsuspecting readers" by asking them to pay $74.50 for a subscription to our newsletter and for a copy of our report on America's Secret Investment Societies. To right this egregious wrong, Fred then named all of the investment holding companies we'd teased about in our marketing piece – effectively ruining an advertisement we spent about $1 million to produce and distribute.

What in the world did we do to upset Fred Frailey? We quoted him. Yes, that's right. That's all we did – we just quoted him. Why would quoting someone make him so angry? We couldn't have imagined...

On the front inside cover of our advertising booklet, America's Secret Investment Societies, we list five quotes from various major media outlets (Money Magazine, Fortune Magazine, Forbes, Barron's, and Kiplinger's). As we clearly state, the quotes are all about 'Secret Investment Societies' – the topic of our booklet. As you make your way through our material, you learn we're talking about publicly traded investment holding companies – though we don't name them, of course, until you've bought a subscription. That's how investment newsletter promotions work, as I'm sure you'll recall. Alongside all of the other major media quotes about these investment holding companies, is Fred Frailey's quote about Berkshire Hathaway – the most famous of these stocks.

Fred complained, "So, although I was talking about Berkshire, Stansberry makes it seem as if Kiplinger's were praising his over-wrought sales pitch."

We did?

Fred wrote Berkshire Hathaway was "Better by a mile than any mutual fund." How could a newsletter sales booklet be compared to a mutual fund? How could any reasonable reader confuse praise for an investment – something akin to a mutual fund – with praise for our sales piece about that investment? We don't know.

Fred Frailey didn't have the courtesy to call us – not even before raking us over the coals. So we called him this morning. He explained, "Oh, I knew what you meant, but I didn't like seeing the name of my magazine in your sales piece and two of our readers called us asking about it."

We sent this booklet through the mail to more than half a million people, after getting approval to do so from other publishers and after running the entire piece through our legal team – to make sure all of our facts were correct. I don't know what the two people who called Fred Frailey asked him about. Maybe they simply wanted to see if Fred would tell them the names of the stocks we were teasing about. Whatever the cause, two people with questions were proof enough, for Fred, to conclude we're greedy and trying to take advantage of the gullible public. According to Fred Frailey, our subscribers are nothing more than ignorant dupes "drooling with greed."

My favorite part of Fred's critique is when he notes the companies in our report are "easy to identify." He seems to think he's discovered the Rosetta stone or the tomb of Tutankhamen. Well, of course the companies are easy to figure out, Fred. Just like it was easy to understand how we were applying your quote. It's an investment newsletter pitch, for crying out loud, not a state secret. And... what does Fred Frailey think of our investment recommendations? "These are good companies..." So good, in fact, Fred goes right ahead and tells all of his readers their names!

Funny isn't it? Folks like us shouldn't be trusted with publishing a newsletter, but our stock picks? They're pretty good, and you can have them for free if you've paid for Kiplinger's. Also, Fred forgot to mention the last time Kiplinger's chastised us like this, it was for recommending Saint Gaudens gold coins, which Kiplinger's panned as "speculating, not investing." But that was back in 2005. As you know, those coins have appreciated quite a bit since 2005... and have proven to be a very safe hedge against inflation.

If selling what Fred Frailey apparently believes is good investment advice for $74.50 is "greedy," I have to wonder where he buys his gasoline or takes his wife out to dinner. Truth be told, we lost a large sum of money – tens of thousands of dollars – sending out more than half a million copies of that advertisement. We will only recoup our losses if our new readers are impressed enough with our work to buy another subscription.

Unlike the august Kiplinger's, we don't sell advertising to mutual funds, brokerage firms, and other financial carnivores. We only serve one audience – our paying subscribers. And, as you know well, it's what we write after you read our promotion that matters. If we don't live up to our promises, you can always ask for your money back... something our critics never seem to remember.

Regards,

Porter Stansberry

Baltimore, Maryland

November 6, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame