UniCredit collapses...

UniCredit collapses... Secrets of long-term success... A book you should read... Dividends matter... A 100%-guaranteed way to get rich without working... Buying Iraqi dinar?...

It's Friday. And that means I'll try to provide some specific financial insight you've probably never seen before. But please... don't assume I'm trying to teach you anything. Nothing's worse than a blowhard who condescendingly explains a few new facts and considers himself a great "teacher."

I don't believe in teaching. Or as I say, "There is no teaching, only learning." My hope is that at least some of our readers will put forth the energy to learn by reading these Friday Digests carefully. If nothing else, I hope you find them useful.

Before we get to that part of today's program, I want to circle back to something I wrote about last week. It's important. And it might be very important… Last Friday, I told you I believed the world's credit markets were heading back towards "crisis conditions." I warned about one bank in particular, Italy's UniCredit…

Sadly, it appears I was right. UniCredit's shares had a terrible week, falling almost 10%. Trading in the shares was halted briefly on Milan's stock exchange today because of the volatility and rumors of an impending effort to raise new capital for the bank.

Impress your friends with this bit of trivia: When was the last time shares of UniCredit stopped trading because of volatility and rumors? October 1, 2008… just before the worst part of the financial crisis of that year.

In March 2010, I wrote an entire issue of my newsletter, Stansberry's Investment Advisory, about why I believed UniCredit would eventually collapse. I explained why the failure of this particular bank would be such a big problem for the global monetary system. UniCredit is the largest bank in Italy, and it owns other large banks in Germany, Austria, and Poland. The Italian government cannot afford to bail out UniCredit's depositors, many of whom reside in other countries. The pan-European nature of the bank will politicize its failure, making it harder to manage.

These same factors, ironically, led to the failure of big bank Credit-Anstalt in May 1931. The bank's failure knocked Europe off the gold standard and directly led to the Great Depression. Credit-Anstalt is the predecessor of UniCredit.

The past is prologue in this case. UniCredit's failure will lead directly to the collapse of the euro currency as it finally dawns on the Europeans that their savings are not safe in the current system.

I've been writing about this for more than a year. Yet nobody in the mainstream press has picked up on this story. I'm sure most investors know nothing about UniCredit or the role it played in causing the Great Depression. Likewise, most investors have no concept of the risks now coming to the surface because of the ongoing sovereign debt crisis.

Therefore, I'd like to give you my permission to share my research on UniCredit – the March 2010 issue of my newsletter – with anyone you think should know about these issues. To access the report, click here.

Now... on to something new about finance. A few weeks ago, I hosted my annual Spring Editors Conference. I've held this meeting every spring since 2003. I personally select the guests to this invitation-only event. Only our best writers and best business contacts are invited. We hold the event at the nicest resorts on the East Coast, like Amelia Island, Florida, and the Nemacolin Woodlands Resort in Pennsylvania. I've spent nearly $1 million hosting these meetings. I pick up the tab for most of the attendees (40-60 people) and pay for the associated travel costs, etc.

Why would I spend so much money on a meeting every year? Because the right financial idea is worth tens of millions – or even hundreds of millions – of dollars. In today's Digest, I'll share with you one of the best ideas I learned at our last meeting, held about two weeks ago.

One of my favorite attendees is Mebane Faber. In the parlance of Wall Street, Meb is a "quant." His approach to investing is incredibly rigorous and based on quantitative analysis. Steve Sjuggerud introduced me to Meb two or three years ago. Steve and Meb share a passion for the kind of certainty they believe their quantitative models provide.

Steve has built quantitative models for almost every market in the world, as subscribers to our own True Wealth Systems already know. Meb wrote a great book about his core model – The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.

Meb recently launched an exchange-traded fund (ETF), which allows the public to invest in his model for a reasonable fee. The fund is called Cambria Global Tactical.

I recommend reading Meb's book. And if you like the outcomes of his model, you should invest in his ETF. Just to be clear, I don't get paid a penny for saying this. I have no business relationship whatsoever with Meb. He's never even bought me dinner. I simply pass along this information because Meb is a smart guy, and most of our subscribers would benefit from understanding why his approach to investing works.

(Note... If you're a money manager or a research analyst and are interested in attending our editorial meetings or being written about in our pages, don't send me Broadway tickets, gold coins, or offer your house for the weekend in Cabo. That will only guarantee you aren't included. We're building a community of peers that's based on the free exchange of high-quality ideas. If you want to be part of our world, share your ideas not your wallet. We're not for sale.)

Here's how Meb blew me away this year… He showed a chart that compared four simple investment strategies...

Strategy No. 1 was simply buying the S&P 500, as you can do today through dozens of different index funds.

Strategy No. 2 was buying all the stocks in the S&P 500 in equal amounts, instead of buying the index, which weights stocks according to market cap.

Strategy No. 3 was buying only 20% of the stocks in the S&P 500 – the top cash dividend payers.

And Strategy No. 4 was buying the top 20% of companies in the S&P 500 as measured by combined cash dividend and share buyback, something I call "synthetic yield" and Meb calls "net payout."

Meb measured the outcomes of these strategies by looking at the years 1972-2010. When you're evaluating a system's performance, it's critical to examine the years in question. Pick the right years, and any system will look profitable. Meb's selection of 1972-2010 is a long enough period of time to eliminate any short-term effects.

Here's what he discovered: Strategy No. 1 worked pretty well – average annual return of 10%. That's just buying a plain ol' S&P 500 index fund.

Strategy No. 2 works a little better because more of your capital goes into faster-growing smaller companies. The average annual return was a bit greater than 12%. Focusing on dividend payers paid off even more… The average annual return for Strategy No. 3 was greater than 12.5%.

And not surprisingly, focusing on total payouts (cash dividend and share buyback combined) worked the best. The average annual return for Strategy No. 4 was almost 16% a year.

Keep in mind… most of the world's professional mutual-fund managers don't beat the S&P 500. Most actual mutual-fund investors end up making less than 5% a year because they buy when stocks are high and sell when they panic at the market lows. Wall Street has sponsored an entire generation of academic research that "proves" individual investors can't beat the S&P 500... And yet, Meb's research shows three simple ways to beat the index, by simply doing things that are intuitive and rational.

How can you put this to work in your portfolio? I suggest a rule of thumb: Never buy a stock unless the company is returning more capital to shareholders than it consumes.

Compare the amount of share buybacks and cash dividends each year with the investments and the capital expenditures the company makes. Never buy a stock that's consuming more capital than it's paying to its owners.

How can you find this data? Just use Yahoo Finance. Look at the cash flow page. Add up stock dividends paid and the purchase of the stock. Compare that amount with capital expenditures and investments. Make sure dividends and purchase of stock add up to more than capital expenditures and dividends paid.

Here... let's look at one together. Click here to pull up RadioShack's cash flow numbers at Yahoo Finance.

Over the last three years, RadioShack has bought back $465 million of its own shares. It's paid out almost $90 million in cash dividends. Combine those two numbers, and you can see RadioShack has spent roughly $550 million on its shareholders in the last three years. Considering the company's total market value is only $1.3 billion, it's returned a huge amount of capital. That's a synthetic yield of more than 13% a year.

What did the company spend on itself? Almost nothing. It doesn't make any investments and only spends about $80 million each year on capital expenditures. Does this mean you should run out and buy RadioShack? No, not necessarily. It's simply an example of a company that treats its shareholders the right way. To buy the stock, you'd also have to figure out if it's a good, sustainable business with a solid balance sheet and some kind of an economic moat.

If you do this... if you focus on owning good businesses that treat their shareholders generously, there's no doubt you'll do well over the long run as an equity investor. The best part about owning good businesses that have high payout ratios is it's easy to deal with stock price volatility. If you're earning 10%-13% a year on your capital and the business is still growing, you can be relatively immune to price action. That's how you can comfortably own companies for decades. And that's how you make really big money in stocks – long-term compounding.

Find good companies with reliable, solid businesses. Buy the ones that treat shareholders generously. Buy them when the yields are so big you've got plenty of room for error in your market timing. And buy companies you're happy to hold through bear markets. Reinvest the dividends. Wait 20 years. You will retire rich. Congratulations. It really is that easy. And anyone can do it.

New 52-week highs (as of 6/23/11): Annaly Capital Management (NLY).

In the mailbag... Me, arrogant? This hard-working scribbler? I suppose I've been called worse... Plus, will the Iraqi dinar save the west?

If you haven't noticed, we take our mailbag seriously. No, we can't (and don't) respond to questions individually. There's too much liability (we don't know what the SEC will construe as "personal investing advice") and not enough time. But I personally read every e-mail sent to our mailbag. If there's something you want me to know, good or bad, just send me a note here: feedback@stansberryresearch.com.

"I would like to nominate Todd Selle for president for his thoughtful and detailed response to 'paid up subscriber' Kris's angry comments. I enjoy Porter's newsletter and Digest writings but he can be infuriatingly (and entertainingly) arrogant and I don't always agree with his politics. Yet his arguments are always very sound and worth considering.

"Mr. Selle's response made a more diplomatic and palatable case for a departure from current insanity in economic politics. You certainly don't have to be a country club republican to respect Mr. Stansberry's economic expertise and point of view. As a Green Party member in Germany I am a good example of that. The services that you guys at S&A provide are outstanding, just the newsletters I subscribe to are worth much more than I pay for and I enjoy the Digest immensely. Thank you for an excellent all around product." – Paid-up subscriber Rudolf Martin

Porter comment: Most readers compliment me on my thick skin, my patience, and the kind way I deal with our critics, who are often quite vicious. But from time to time, some subscribers like Rudolf, complain about a perception of arrogance.

Perhaps in my desire to convince my audience that the things I see in our financial situation are real and important, I overstate my case... and come across as arrogant. That's certainly not my intention. And besides, I'm always willing to change my mind, when the facts change. The financial markets will make everyone humble before long.

"Porter, I immensely enjoy your writings and they have gotten me to the point that I recognize, I am not mainstream anymore. First thing every morning I re-read the Digest before I read any other, including the [Wall Street Journal]. This allows me to be in a correct frame of mind to assess other writings. I have found your writings to be factual and substantiated far beyond any other. Many thanks for assisting me in learning to think and look outside the box. Please keep writing." – Paid-up Subscriber, Jerry Mobley

Porter comment: Having your eyes opened to a new world of ideas is intellectually invigorating... but incredibly irritating to most of the other people in your life. Treat them gently.

"I make these comments with all due respect your knowledge and experience. I have been invested in the Iraqi Dinar for a few years. I have studied this investment more than ANYTHING I have ever researched and I find it a little odd at this stage of the game, with this investment about ready to happen that I haven't heard a word about this in your or anyone's newsletters.

"This will create such a massive worldwide financial impact unheard of before, I'm wondering what gives? This will have incredible impacts on income taxes, housing and gold prices. Countries that are in financial ruin, Greece, Ireland, US and those on the brink of ruin, will be able to use the Iraqi dinar revaluation as a crutch to heal their ailing economies.

"There are now over 3,000,000 US citizens that hold Iraqi dinar at an average of 1.2 million each. Even revaluing at usd $1.00 would have an enormous impact on this country, plus what the US government holds, rumored in the billions. I would like to hear your opinion on this. Thank you." – Paid-up subscriber Matt

Porter comment: First, let me admit my nearly complete ignorance. I know nothing about the relative value of the Iraqi dinar. Nor do I know anything about the rules that govern its convertibility or exchange. However, given the tone and the frequency of e-mails to my office about this matter… given the fact that hundreds of websites advertise Iraqi dinar… and given the fact that Iraq is, at best, highly unstable… I would advise anyone thinking about it to use extreme caution.

The history of the dinar might be instructive. In 1959, the dinar became convertible into U.S. dollars at the rate of 1 dinar to $2.80. Following the oil boom of the 1960s and early 1970s, its value rose to 1 dinar to $3.37. Then... disaster struck in the form of the war with Iran. By 1989, the market exchange rate was 3 dinars for $1 – essentially a complete inversion of the historic exchange rate. After that, we had the even more disastrous Gulf War with the U.S. and its allies. By 1995, the dinar was almost worthless, trading at 3,000 dinars to $1.

Following the 2003 U.S. invasion, the Coalition Provisional Authority issued new dinars. Today, these dinar are currently trading at 1,200 dinars per $1 U.S. and have been widely counterfeited – which might explain the prevalence of websites offering to sell them. Anyone who believes "revaluing" the dinar will save the world's economy is simply a fool.

Regards,

Porter Stansberry

Baltimore, Maryland

June 24, 2011