The S&A Digest: The Real Scam Artists

Sjuggerud called it, again… The best way to buy Canada… Will you help me with my MBA?… Who's a fraud?…

Yesterday, we reported that True Wealth pick BHP Billiton (BHP) was evaluating a takeover of aluminum producer Alcan (AL), though nothing was confirmed. The company today announced that it hired Merrill Lynch to advise on the $40 billion takeover.

Extreme Value pick Home Depot (HD) will sell its contractor supply business for more than $10 billion to a private equity consortium consisting of Bain Capital, the Carlyle Group, and Clayton Dubilier & Rice.

Extreme Value pick American Express (AXP) is in the final stages of selling its private-banking division, which hasn't been meshing with its credit-card and travel-planning divisions. The company has identified several buyers and will choose one in the next few weeks. Analysts estimate that the bank, with $20 billion under management, will fetch $1 billion to $2 billion.

The big money is headed to Japan. The Financial Times reported today that foreign investors raised their stake in the Japanese stock market to a record 28% in March. Sjuggerud warned us that a wall of money would be headed toward Japanese assets, specifically prime Tokyo real estate. Tokyo real estate prices are so depressed and so cheap, Sjuggerud calls it "the 15-year one-way bet."

New highs: AutoZone (AZO), Southern Copper (PCU), Sunoco (SUN), ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP), BHP Billiton (BHP), PetroChina (PTR), Taiwan Fund (TWN), Covanta (CVA), EnCana (ECA), Grey Wolf (GW), Petrobras (PBR), Occidental Petroleum (OXY), Pozen (POZN), Royal Dutch Shell (RDS-A), Seabridge Gold (SA).

No kidding, last night I dreamt that I was speaking on the phone with George Soros about his political beliefs. That means it's time to move on to another touchy subject. If you have any suggestions, send them our way… feedback@stansberryresearch.com.

"TD Ameritrade offers online trading in Toronto-listed stocks similarly to Fidelity. You use the 5-letter US OTC symbol to place the order, and the trade is automatically routed through a Canadian broker to be placed directly on the Toronto exchange. At TD Ameritrade, the commission is the same as for any online trade. If you cannot find a 5-letter OTC symbol for the stock, you must call a broker for assistance.

"Of course, if you use a limit order, you have to first check the current price in Canadian dollars (which you can look up on the TSX website), and then do a currency conversion, because the limit price you specify is in US dollars. If you're interested in knowing the price at which your trade is executed in Canadian dollars, you can look it up on TSX using the Canadian ticker symbol; the most recent 10 trades for a stock are listed, delayed about 20 minutes.

"Two other online brokers that offer Canadian trading are PennTrade and Interactive Brokers. With PennTrade, you can place a limit order in either US or Canadian dollars. Beginning in July, E*Trade will offer online trading in six foreign markets, including Canada. Man Securities also offers global trading, but not online.

"Another option is to use a full-service broker who specializes in natural resource stocks, such as Global Resource Investments or First Securities Northwest. Two Canadian brokers with expertise in resource stocks, who accept high-net worth US clients, are Scott Hunter at Haywood Securities and Cam Currie at Canaccord Capital. Some people feel that the benefits of working with a full-service broker far outweigh the disadvantage of higher commissions, in the specialized sector of junior resource stocks." – Paid-up subscriber David Edwards

"I use Bank of America Investing Services as my broker. I called them to buy the Toronto Exchange Gold Stocks. The agent asked me what I pay for trades. I replied that I pay 0, nada, zilch so he told me that he would charge me 0, nothing. He looked up all of the symbols, spent about an hour, called me back with all the purchases. Not bad!! eh?" – Paid-up subscriber Robert Ogden

"In Steve Sjuggerud's June 15 Growth Stock Wire issue there is a reference to a biofuel plant known as... jatropha. The one symbol noted (i.e. no discernible company name) was IOI. The closest non-quotable symbol (using the Yahoo World Stock Symbol Search) that I found was IOIPF.PK (IOI Properties). Could you please tell me (us subscribers) where it is traded and how could I (we) get more informative information on this potential investment vehicle?" – Paid-up subscriber Michael Morra

Goldsmith comment: Michael is referring to Tom Dyson's Daily Wealth article, "The New Magic Bullet." IOI Group, which was mentioned in a Bloomberg excerpt, is a big palm-oil manufacturer. There are currently no direct plays for jatropha, but if you re-read the article, you may get some ideas.

"I have read with increasing interest Ian Davis' work. The smorgasbord newsletter approach I have been using (being an Alliance member, I have more ideas than I can digest) is serving me well, I know that if I truly want to make money, and a living, in the markets, I need to develop a system. The Max Value strategies are very intriguing to me for that reason. Is there a chance Ian will be writing a 'primer' on how to take advantage of these strategies?" – Paid-up subscriber Sonny Holbrook

Ian comment: Thanks for your interest in the Max Value strategy! A primer is a great idea and one will be available to my Quant Trader readers shortly.

"I'm sorry I can't offer you the criticism that you so love to receive in your newsletter. I haven't the experience nor the expertise that any member of your team has attained, and therefore would not know even where to begin criticizing a single one of you. I am, however, a rookie investor looking to catch up to the learning curve. Doing so from Afghanistan, where I've been deployed since early this year, makes things a bit more difficult for me. I've been reading, along with your newsletter, books on investing guru Warren Buffet, and have come up with a beginner question for you. Buffett repeatedly speaks of the 'intrinsic value' of a company and an investor's need to not only analyze, but understand that value before buying a single share in a company. I was curious whether or not this 'intrinsic value' has a formula, so to speak, or if it is simply one's interpretation of a company's earnings, cash flow, and necessary capital. On an entirely different note, thank you for publishing a newsletter so user-friendly for not only us rookie investors, but seasoned veterans alike." – Paid-up subscriber Josh

Ferris comment: Buffett says it's the discounted value of all the cash that can be taken out of business for the rest of its life. He got that from John Burr Williams.

Intrinsic value is just the idea that a business has a value that somebody somewhere can figure out by examining the business, its assets, its management, the owners/board members, the industry, and whatever other factors are important.

In general, the greater certainty you can have about a company's future earnings, the more accurate your intrinsic value estimate should be. It should be easy to figure out the intrinsic value of Moody's or Coke, whereas a wildcat mining company might well be impossible to value accurately.

"I signed up for the S&A Alliance, and am enjoying all the commentaries from your staff. This year I also signed up for an executive MBA program, which was a little more expensive than the subscription and I will probably have more homework there as well. I was just wondering if you or any of your staff will be able to help me out with my homework, and will that be included as part of the deal with the whole Alliance purchase? Classes start in 3 weeks, and I already have some Excel questions I want to run by you." – Paid-up subscriber J

Goldsmith comment: Sorry, J, can't help you on that one. But I've always believed you can learn more by reading Warren Buffett's annual letters than from any MBA program.

Good investing

Sean Goldsmith

Baltimore, Maryland

The Real Scam Artists

By Porter Stansberry

"In your recent free mailing, you guys say that you are in the business of selling newsletters. Shouldn't it be that you are in the business of disseminating extremely useful information to the investing public, and thereby selling newsletters as a result? I think you should take a long hard look at your business mindset. I think you guys are a scam and a fraud."

– Paid-up subscriber Geb Rault

People throw that word around a lot – and it has certainly been sent in my direction over the years. My best definition for fraud is manipulating people using an artifice (a lie) to receive benefits that you don't deserve.

I would suggest to you that most mainstream financial services companies are frauds. They charge you a percent of your assets to provide you a pitifully low level of service. Other options, like hedge funds, are even worse. There, you pay a percentage of your assets... plus a percentage of your profits. The financial service provider, meanwhile, lives off your capital without taking any risk. In my view, these people are manipulating the public by playing toward their greed, then charging huge amounts of money in a way that's mostly invisible to the consumer.

For example, mutual funds advertise by showing their track records over the last several years – typically over the last 10 years. Any fund that's done well will attract billions more assets. The asset manager will get rich... But as everyone knows, it's nearly impossible to maintain a high rate of return when you're managing a huge pile of money. The asset management company knows full well that they can't deliver anything like historical rates of performance when they're managing $10 billion compared to when they were managing $500 million... Nevertheless, they advertise that track record as much as they can. They also pay "commissions" – otherwise known as "kickbacks" – to any broker who can pile still more money into the fund.

So... let's say you're one of the poor suckers who puts his $100,000 into a fund like this. Independent studies of actual mutual fund performance show that investors make about 5% a year in funds, on average (which is far less than you'd make in bonds, never mind value stocks). But... let's assume you pick a "good" fund. There, you will probably earn 7.5% a year. In 15 years, your account will be worth $275,000, and you'll think you've done great. Meanwhile, the fund company will have earned $32,647 – without taking any risk while delivering mediocre performance. Best of all (for the fund company), you never see a $32,000 bill for its services, so you hardly notice it's fleecing you.

What we do, on the other hand, is show people investment ideas that demonstrate the value of our independent research. Sure, we have to doll up the ideas the first time you see them. We know that before you buy something with your hard-earned dollars, you've got to get excited. And for you to notice our ideas in the sea of media, we've got to grab your attention. But then... assuming you buy... we do something unlike almost all other businesses. We offer you all of your money back after you've had time to evaluate our service and our products. If we don't live up to the promises made in our marketing, you can get every penny back. Try asking your broker for your commissions back. Try asking your mutual fund for your asset fees back. Try sending back anything after you've used it for a month.

You can think whatever you'd like about our business, our marketing, and our products. But certainly no reasonable person could conclude we're trying to defraud anyone. In fact, we know a consistent percentage of our customers will routinely "test drive" all of our products, get all of our information, and then demand a refund. That's fraud.

Regards,

Porter Stansberry

June 19, 2007

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As of 06/27/2013