The real crisis Al missed... Buffett's letter... A warning for credit-card investors... More about bonds... Yes, Nicaragua... Why we publish True Income and Extreme Value...
If you need a good chuckle today, try reading the latest from Al Gore. He wrote another op-ed for The New York Times. He continues to say all kinds of funny things about the environment. But now, we're not the only ones laughing at him, as nearly all of the "scientific" data he presented as fact in his movie have been revealed as either outright lies or horrendous exaggerations. The scientists he relied on have been revealed or have come forward voluntarily. Nevertheless, Al carries on, blaming everything – even massive snowfall – on global warming.
What I find particularly ironic is that the far larger danger to America isn't the long-term risk of slight changes to the environment – even if you assume it's a real problem. The far larger danger to our country is the real fiscal disaster that's been perpetrated by our politicians – among them, Al Gore. Says Gore about reducing the risk of "global warming" in Saturday's paper:
We would no longer have to worry that our grandchildren would one day look back on us as a criminal generation that had selfishly and blithely ignored clear warnings that their fate was in our hands.
Let me tell you what, Al... you're speaking the absolute truth there, buddy – but only if you're talking about how our children are likely to remember your generation of politicians, who have racked up generations of debts. Why do you think our politicians want us to worry about the small risks – like foreign terrorists, global warming, and "peak oil," while they deliberately bankrupt all of us? Well, just imagine what we're going to do to them once we figure out what they've done to us.
Warren Buffett published his letter to Berkshire Hathaway shareholders this weekend. You can read it here. And as always, Buffett dispenses plenty of investment wisdom in his usual folksy manner. One of the big lessons in this year's letter is to jump in headfirst when you see an amazing profit opportunity. Or as Buffett put it: "When it's raining gold, reach for a bucket, not a thimble."
The other big message in this year's letter is how difficult it is to be a successful lender in the United States:
And now a painful confession: Last year your chairman closed the book on a very expensive business fiasco entirely of his own making. For many years I had struggled to think of side products that we could offer our millions of loyal GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong type.
Our pre-tax losses from credit-card operations came to about $6.3 million before I finally woke up. We then sold our $98 million portfolio of troubled receivables for 55¢ on the dollar, losing an additional $44 million. GEICO's managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO's customers we would get the – well, let's call it the non-cream.
Here's what I wonder... If Warren Buffett couldn't make money lending on unsecured terms to Americans, why do investors believe highly aggressive and promotional lenders like Capital One will be able to pull it off? My advice: Bet with Buffett on this one...
If you need another reason to worry about Capital One... just consider the chart below (which we found on Mark Perry's Carpe Diem blog). Chargeoffs across all commercial banks have more than tripled from about 3% in early 2006 to a record 10.24% in the third quarter of 2009. Now, everyone expects this to be the peak for credit-card losses. But I'm not so sure...
We received several questions over the weekend about our bond-investing letter, True Income. Instead of answering them individually in The Digest, I'll address them here...
You may recall my plea two months ago for everyone to take advantage of Mike Williams' True Income newsletter and start buying corporate bonds. Mike has been analyzing bonds professionally since 1972. He is the most experienced analyst on our team and his track record reflects that. Of the 24 bonds he's recommended since working at Stansberry, he's only sold four at a loss. And his winners are ridiculous. Mike regularly produces 50% gains. He's even tripled his readers' money in bonds – an unheard of feat.
Mike's returns are so impressive because bonds are much safer than stocks, yet Mike trounces the stock market. You see, bonds are a legal claim on a company's assets. As a bondholder, the company is legally required to repay your entire investment plus interest. As a common stockholder, you're only entitled to a share of the company's profits and dividends. If the company goes bankrupt, you lose everything. But if you're holding bonds, you're first in line to get repaid.
And because bonds are valued on the underlying company's ability to meet upcoming interest payments, you can sometimes buy bonds for large discounts to the company's collateral value. These are the bonds Mike recommends in True Income. They produce the highest returns.
I truly believe buying short-term corporate bonds at a discount to collateral value is the single best strategy for part-time investors. You can earn huge returns without putting your capital at risk. If you still haven't given True Income a shot, now is the time. We are offering the service at a generous discount... But only until midnight tonight. And as always, if you're not 100% satisfied, we'll refund your money. To learn more, click here...
New highs: Berkshire Hathaway (BRK-A/B), Kinder Morgan Energy Partners (KMP), Enterprise Partners (EPD), Keyera Facilities (KEY-UN.TO), Icahn Enterprises (IEP), TimberWest Forest Corp (TWF-UN.TO), Tejon Ranch (TRC), Sequoia Fund (SEQUX), IMS Health (RX).
In the mailbag... lots of comments about selling puts and Nicaragua. We read everything you send us. Let us know what you think of our work – especially if you think we're wrong or just full of it. Direct all your ire here: feedback@stansberryresearch.com.
"I was a put seller before I became an S&A Alliance member, but your newsletters have helped me take the profitability of this strategy to a new level. Since becoming a subscriber, I have sold puts and covered calls 191 times on S&A recommended stocks. Of those, 177 made a profit and only 14 were closed for losses. That's a 93% win rate. Since joining S&A, I have had 18 straight months of profits. The picks have come from virtually every newsletter you publish. My accounts are 24% ahead of the S&P500 returns over the same period. Thanks for the great recommendations, and keep them coming." – Paid-up subscriber Lowell
Porter comment: That's a huge amount of outperformance. Congratulations. One thing I forgot to mention in my note on Friday about selling puts... I believe there's definitely a time you shouldn't sell puts on stocks. Now, in fact, is one of those times. (That's why I recommended selling puts only on gold stocks... which tend to run contrary to the rest of the market.) If you read my Put Strategy Report, you'll learn exactly when you shouldn't sell puts and when you should sell as many as possible.
"Porter's Nicaraguan comment to Erich was on the money. As a periodic visitor to Nicaragua (even bumped into our own Sean Goldsmith last month in Managua) and owner of several properties, including a lot down the street from Porter's, I too have experienced and appreciate the beautiful culture and physical charm of the country.
"Safety? My wife and I are far more likely to walk around there at night than we would be in any U.S. city. I live near Oakland, CA, and can tell you there is more daily violence in that city than in the entire Nicaraguan country.
"Politics? When Daniel Ortega was elected in their last election, I scoffed at the ignorance and stupidity of their voters, system, etc. Then I was stunned as we one-upped them with our own election in 2008. Apparently the promise of ice cream for votes is a universal plague. And how many U.S. Congressmen and Senators are either criminals or morally corrupt?
"For years I've been viewed as a lunatic for venturing south to Nica, but interestingly, always by those who have never set foot in the country. Not only are the native people wonderful, the expats we meet there are a little different cut than we generally find at home. There is some kind of self-selection process going on. The spectre of property confiscation has been there for years, but it seems that the politicos have learned it is far better to embrace the North Americans (lots of Canadians, too) than to punish them. I have no plans to move to Nicaragua but I do have a beautiful place to visit and an escape hatch if we have a complete breakdown here." – Paid-up subscriber Ron Bruce
Porter comment: Nicaragua isn't for everyone. And there are plenty of things about it I don't like. But I love the people and the culture. Plus, you can live like a king there on $1,000 per month...
"Some comments in your column recently have prompted me to write in. When you suggested spending more time with family members before they were gone it really hit home. I just lost my wife and am sitting here still in shock that she is really gone. Someone else wrote in saying they had lost their dad or granddad saying how much they missed his wisdom and company.
"I have farmed for many years and realize now that working with my wife and father on a daily basis was by far the most rewarding part. I never had any real business or investment training. We always farmed because it was the only thing we knew and we were quite happy doing it together. Now the two most important things in my life are gone, and I'm devastated.
"My wife had Lymphoma and Leukemia for years, which she fought every moment until she wasted away to nothing. It was a dreadful experience. Now, some large medical debt left behind has made it more urgent to learn how to invest. I have lost a lot of money with brokers in the past so am looking to do more myself. I've been reading and subscribing to some of your advisories for a couple years and have tried some stock investing.
"I just don't have a natural interest in doing the large amounts of buying and selling, or shorts or options. It seems like a lot of gymnastics for not much return, or it is not what I thought it would be, due to my own ignorance. It feels like I will never have enough knowledge or money to use all the ideas. I would be a whole lot more comfortable talking about farming or mountain climbing.
"Your other recent statement about if you could wish one thing for investors, it would be to understand the bond market, also got me wondering if I'm missing a better way. You have mentioned large predetermined profits with bonds, and it sounds like a lot less transactions and safer than stocks. It is very hard for me to understand what each one is before getting into it. Is there any way to find a mentor to talk to about this stuff over coffee?
"I understand you have many other more urgent and important things to deal with and there might not be an exact answer. I'm hoping you are not as obnoxious as billed and you might take a stab at pointing me in the right direction. A small fraction of what you know could easily change the rest of my life." – Paid-up subscriber Maynard Axelson
Porter comment: Maynard... We can't meet with any subscribers, and we can't give any personal advice – we're not allowed to, thanks to your friends at the SEC. I'd recommend you sit down with a financial planner, most of whom will charge you a simple fee – not a percentage of your assets. One should be able to answer your personal questions.
In regard to bonds, I also highly recommend our bond publication, True Income. Mike Williams is the most experienced analyst we have. He is very conservative. And he has written a terrific primer that tells you everything you need to know about bonds.
"I see you are running a special on True Income. Geez I hope this publication isn't in financial trouble. I'm a subscriber and love it. Mike Williams is great. It's also fun to buy his bonds through my broker TD Ameritrade and have the phone broker act like I'm crazy to be risking money on this 'B-' junk stuff. I knock on wood when I say that of course." – Paid-up subscriber Ron Martin
Porter comment: The truth of the matter is, we don't make much money (and sometimes no money at all) from publishing True Income and Extreme Value. These letters take on the two most consistently profitable areas of the capital markets – distressed debt and distressed equities. Unfortunately, few individual investors appreciate the secret that there's no such thing as a bad stock or a bad bond – only a bad price. It takes a lot of hard work and expertise to be a successful distressed debt or equity investor. But for the folks who master this skill, the rewards are truly amazing.
I know I'll never make much money from these letters – but I do make money from their advice. Meanwhile, I take an enormous amount of pride in working with these analysts (Mike Williams and Dan Ferris), both of whom are Hall-of-Fame caliber investors. One of my mentors told me a long time ago doing the right thing in business doesn't guarantee your success. It only makes you deserve it. I think publishing these letters is simply the right thing to do.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
March 1, 2010