Our Pandora's Box

* * * Another riddle: Why do almost all door locks open by moving the lock clockwise, as opposed to counterclockwise? Answer tomorrow.

* * * I kicked the hornet’s nest yesterday by asking how we should represent track records. Among the folks most upset with how we’ve been doing it: our own Dan Ferris. "The average return is meaningless… whether you've recommended 5,000 stocks or 50 stocks, the top 5% of your stocks will make the difference between a modest outcome and an excellent one… Finally, don't say, ‘I think they don't know enough about statistics...’ It comes out sounding like, ‘I work with idiots.’"

* * * Ironically… Dan’s mostly concerned because his average return is too high. He thinks it’s misleading. Here are the facts: If you consider every single stock Dan has ever recommended in his publication, Extreme Value has averaged 44.2% returns. Dan holds stocks for long periods of time. His average holding period (so far) is 569 days, roughly a year and half. If you look at only the open positions, the average return is 57.7%. The average holding period is 679 days (and counting). Let’s just call it two years. When you account for the differences in holding periods, the average return of open positions is roughly the same as the average return of all recommended stocks.

Why do I think these numbers matter? Because they show that Ferris, on average, picks great stocks that you can safely hold for a long time – and that’s the key to great (not just good) investing. We’re not claiming that you’ll make 57% on each pick, or that you’ll make 57% a year… it’s simply the average of what Dan has done so far. And it’s a very impressive accomplishment, which is why Ferris has the highest number of picks in our S&A Top 10 Open Recommendations.

If a portfolio manager bought all of Dan’s picks, that Extreme Value Fund would have a compounded annual return of 24.3% – an almost unheard of rate of return for common stock investing. If you’re not reading Extreme Value because you think it’s expensive ($1,000), simply consider what you would have made reading it over the last four years. You’re judging price and ignoring value – the same mistake most investors make in stocks.

* * * Of course, not everyone was mad at us. Some folks wrote nice things. Paid-up subscriber Mark Jacobsen: "I’m enjoying many of your new daily (and free) publications. Thanks for continuing to get better and better." We get so few compliments that when one arrives we always wonder… was this from a relative? Was the subscriber drinking? Is he sane…? We enjoy your feedback immensely. We argue about what you tell us. And… believe it or not… from time to time we even take your advice. Speak to us with the wisdom of Solomon here: feedback@stansberryresearch.com.

* * * Sean Goldsmith, our newest editorial prospect, tells me that Facebook, an online "social networking" company, offers all employees 31 days off per year, three complimentary meals a day, free beverages and snacks, a gym membership, free Friday happy hours, $600 per month housing subsidy, and the usual medical, dental and 401k plan. My reply: Goldsmith, you should go to work there. I took my first vacation (five days) from this job in May 2000… four years after I started…

* * * Here… at the end… I’ll give you the best tip you’re likely to get in a long, long time. Back in the August issue of our S&A Gold Report, "Searching for Gold in Equatorial Africa," our geologist, Matt Badiali, found one of the highest-quality, lowest-cost reserves of gold in the world. As I told our staff at the time, this was the single-best newsletter I’ve ever published. Now, the company that owns these reserves has soared… it’s up 26.3% over last five days. Why? A source close to the negotiations tells us a major gold company will soon buy out this junior company.

* * * * * * * * * * * * * * * * * * * *

"… The picture the Wilmer report paints is not of a greedy executive manipulating a company he controlled for self-enrichment."

– The Wall Street Journal, commenting on yesterday’s resignation of UnitedHealth CEO William McGuire, amid allegations he approved millions of illegally backdated options and lied to his board of directors about secret payments to the company’s compensations committee chairman, William Spears.

Here’s what really happened. As UnitedHealth’s chief executive, Dr. William McGuire was paid $530 million in salary from 1992 to present. Assuming he worked very long days, that’s about 40,000 hours. Ergo, his salary was about $13,240 per hour.

In addition to these wages, McGuire walked out of the company with stock options valued at more than $1 billion. He also is entitled to an annual $5 million pension – for life. His severance deal allows him to continue using the company plane, and he will be paid a company "allowance" for security and financial planning.

All of this for the man who organized a 1999 "options swap," which granted employees 2 million illegally backdated options. The strike price was set at the very lowest closing price of 1999. Even worse, normally options "swaps" require employees to surrender their earlier granted options in exchange for the new ones. But not here – they were allowed to keep the old options, too. Dr. McGuire himself received an extra 750,000 options, which are now worth $250 million as a result of this illegal grant. In effect, this guy stole $250 million dollars from the shareholders of UnitedHealth.

But The Wall Street Journal says McGuire is NOT a greedy executive and WASN’T manipulating the company for his self-enrichment? What’s going on?

I’ll tell you what’s going on. The Journal is in hot water with its customers.

When The Wall Street Journal commissioned a study of options grants this spring, it opened Pandora’s box. It has destroyed hundreds of corporate boards – the same corporate boards that approve advertising budgets. Don’t forget: The Journal is a newspaper. It generates almost all of its profits from advertising. And guess who buys almost all of the Journal’s ad space? Big companies, like UnitedHealth and Apple – the same companies that have been torn apart by this options scandal.

The Wall Street Journal is facing a tough reality: It’s embarrassed its client base.

Yesterday, the Journal ran a puff piece on Apple’s No. 2 executive, Tim Cook. It was so obsequious, you’d think it was written by the paper’s ad-sales staff. "Mr. Cook is the low-key operator making sure the company runs smoothly behind the scenes… Mr. Cook has the courtly demeanor of a Southern gentleman… Mr. Cook is analytical and detail-oriented, with a memory strong enough that he rarely consults notes when recalling minutiae from past meetings…. Known for putting in long hours at Apple, Mr. Cook, who is single, devotes much of his time away from the office to sports and exercise. He's an avid cyclist, known to quote Lance Armstrong in Apple meetings, and is typically at the gym by 5 a.m."

I’m not making that up. Those are all direct quotes. And there’s only one reason the Journal would publish such a glowing piece about Apple’s formerly invisible No. 2 executive.

Steve Jobs is leaving Apple… and he’s going to jail.

Regards,

Porter Stansberry

P.S. New feature for our Digest – the Stansberry Top 10. It’s a list of our 10 best current "open" positions. As I’ve been telling you, our Extreme Value product is by far our best performer. I’ll comment on the list from time to time, when we add a new position.

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013