The Dirt on Financial Publishers

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

As of 07/08/2013

* * * S&A emerging-markets specialist Chris Hancock thinks Mexican cement giant Cemex may fit the S&A definition of a "no-risk" investment…

With a market cap of around $23 billion and roughly $2.6 billion in free cash flow, Cemex could service a bond of $31 billion. That would cover the market cap plus the company’s long-term debt under its current bond rate of 8.34%. Now, we base this assumption on the expectation that Cemex’s free cash flow will remain at current levels or better.

Kif thinks the free cash flow will remain strong since Mexico’s economy (which is now not even in the top 10) is projected to jump to No. 5, surpassing Russia, Brazil, Germany, Britain, and France by 2040. Infrastructure should play a major role in growth.

* * * You don’t have to take big risks to make big money. Just the opposite, in fact. In June 2004, Extreme Value editor Dan Ferris recommended buying shares of Carl Ichan’s master limited partnership, American Real Estate Partners (NYSE: ACP). The partnership was purchased at a 30% discount to its balance sheet, which was loaded with real estate and cash.

ACP was around $20 when Dan first recommended it. Two years later, it’s trading for $60 a share, and still worth holding onto. We’ve made more than 200% in a conservatively financed, low-risk investment… simply by buying valuable assets that the stock market has overlooked.

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Another day. Another airplane.

I found myself standing in the driving rain this morning, at 5:30 a.m., behind my house outside of Baltimore, waiting for my new puppy (Ruby, a vizsla) to poop.

By 7 a.m., my bags were packed, again. I will spend the weekend working. And while the location sounds very appealing (the Ritz-Carlton in Naples, Florida) all hotel meeting rooms look alike, no matter where you are in the world. I will be attending the Financial Publisher’s Roundtable – an annual get-together of financial newsletter publishers.

I have mixed feelings about the situation.

It’s nice to be invited (for the first time). But I know how the business of financial publishing works… and most of these guys are rogues. My intuition tells me these cocktail parties and dinners will be a lot like sitting in the beachfront bar down in San Juan del Sur, Nicaragua. There’s a reason most of the guys down there don’t go back to the States. And it’s not the cold weather.

What does any of this have to do with you, dear subscriber?

Perhaps more than you realize, for even the anticipation of spending time with other financial publishers makes me want to confess, to purge, to repent…

There’s one big problem with the business of finance, at every level. Almost all of the incentives in the business are geared toward providing you, the client, with the wrong information, the wrong advice, and the wrong investments – all at the very wrong time.

Let me give you an example.

Let’s say you are the manager of a leading tech mutual fund in the 1990s. From 1992 until 1997 you work nonstop – just to survive. Making ends meet with one $50 million fund is tough, nearly impossible. It’s a long way from the glamour you see in the movies. A $50 million fund charging 1.5% only generates $750,000 for the fund management company. After overhead, research, legal expenses, and advertising, there’s not much left for the manager. You persevere and do a great job for your investors. Your fund grows slowly, each year. By early 1999, you’ve earned five stars from Morningstar, you’re appearing regularly on CNBC, and money is pouring into your fund because tech stocks are hot. Your job is to put that money to work, efficiently and safely. But you can’t because way too much money is coming in too fast, and because tech stocks have gotten astronomically expensive.

You’ve got two choices.

Choice No. 1: Keep accepting the money, keep buying the crappy IPOs Goldman, Morgan, and Merrill are pushing on you in exchange for marketing your fund through their brokers. You’ll be sitting on a $1 billion-$2 billion fund by the end of 1999. Your management fees will soar, from less than $1 million to more than $15 million. Your fortune will be made.

There’s only one problem with choice No. 1… you’ll wipe out all of your new investors, and next year you’ll be back to square one. (Who cares though? You’ll have $5 million-$7 million in the bank!)

Choice number No. 2 is to close your fund to new investors, refuse to buy the expensive stocks, ignore the IPO calls from the big brokerage firms, and start to build cash, so that when the whole thing finally crashes, you’ll be able to load up on the best businesses for pennies on the dollar.

I challenge you to find any tech-centric fund that didn’t suffer at least a 50% drawdown between January 2000 and October 2002. There weren’t any managers who picked choice No. 2.

The same thing happens in my business. The No. 1 reason I know there’s an investment mania underway is through newsletter marketing. What were the best-selling newsletters in the late 1990s? The Gilder telecom letter and Michael Murphy’s tech letter. At one point, Gilder had close to 120,000 subscribers. Murphy was almost as big. Did they know a crash was coming? Gilder says he did… but he never wrote that in his letter. And he certainly didn’t stop sending out his marketing.

The problem, dear subscribers, is that to be successful as an investor, you must be contrarian. You have to buy high-quality assets when no one else wants them. But to be successful in business, you have to give the customer what he wants. In finance, you can be fairly certain that what everyone wants to buy now will rapidly decrease in value, almost immediately.

Consider our publication, Extreme Value. This is a bona fide contrarian newsletter, written by a genuinely brilliant analyst, Dan Ferris. Several of the world’s best investors are subscribers to this letter. I hesitate to use their names because they are our customers and have a right to anonymity. They are billionaires, and someone is always trying to use their name to sell something. But you’d certainly recognize their names. Bill Bonner, the chairman of our parent company, Agora, tells people privately that Extreme Value is the only Agora publication he actually reads. The track record at Extreme Value is simply extraordinary. Since we began publishing in 2002, we’ve recommended something close to 50 stocks. I think three lost money. And the average annual gain of our portfolio has been close to 30%. We’ve made huge gains buying what other investors didn’t want to touch: old-lady mail order, third-rate PC makers, cobalt mines, Korean power companies, scrub land, etc.

You’d think if we simply told readers, "Give us $1,000 per year and we’ll deliver totally safe investments that you can easily buy and that will earn you close to 30% a year," we wouldn’t have any problem signing up subscribers. After all, we’re offering better-than-hedge-fund returns for less than the cost of a good airplane ticket. But we can hardly sell Extreme Value. Even with our track record, our money-back guarantee, and celebrity money-manager endorsements, we sell fewer Extreme Value subscriptions each year than any other publication in our stable. In fact, I keep the letter going because it’s what I like to read – not because it’s a good business.

Which newsletters have sold well for the last few years? Oil, of course. Our oil letter has sold like hotcakes.

And I’d be willing to bet that at the meeting I’m on my way to right now, nine out of 10 financial publishers will tell me that their big idea for 2007 is to launch commodity-based letters and trading services.

Give ’em what they want.

Good investing,

Porter Stansberry

Founder, Stansberry & Associates Investment Research

P.S. For our Alliance members, we work hard to mitigate the fads and trends of finance by publishing a new model portfolio each quarter – the S&A 16.

From our coverage universe, I select four growth stocks, four value stocks, four income plays, and four macroeconomic hedges to produce a balanced portfolio of 16 stocks that any individual investor could easily manage and track.

All 16 stocks have been recommended previously in our newsletters. Thus, by building these portfolios each quarter, I’m able to produce a legitimate track record, based on the breadth of our research.

We’ve been doing this for nine consecutive quarters, so I have a track record on how our model portfolios have performed. S&A 16 Model Portfolio V, established in October 2005, is typical. It produced an average gain of 17.8% in one year, including dividends. Only two of the 16 positions suffered a drawdown. Eleven of the positions paid dividends; these produced an annual yield of 5%. Our biggest gain in the portfolio was Elan (NYSE: ELN), which gained 91% in the period.

We will send the new S&A 16 Model Portfolio (IV) to Alliance members today. It’s stacked full of blue-chip stocks, and I think it’s the highesy-quality model portfolio we’ve ever assembled.