The S&A Digest

It's not really Richard Wagoner... Perma-bear at his most bearish... No shorts yet... More bad news for Bear Stearns... Our Napoleon complex...

It's the big secret: Be fearful when others are greedy. Be greedy when others are fearful. The markets may continue to head south. Credit may continue to contract. But… if this sell-off continues… outstanding buying opportunities are sure to arise. Weak hands must soon give way to strong hands. It's the circle of life, Simba…

Look for long-lived, "franchise" businesses, with solid barriers to entry, that have historically produced excellent returns on assets over several market cycles. A quick look around brought up these names: Saint Mary's Land and Exploration, T. Rowe Price, Loews, Lexmark, Panera Bread Company, Abercrombie & Fitch, NVR. For the first time in many, many months, we're beginning to see great assets come onto the market at reasonable prices. Mourn your trading losses, if you have them… but celebrate the re-emergence of value.

Is it time to go short? Not according to Jeff Clark. "There's no low-risk way to enter a short-side bet. Markets that are as oversold as we're seeing right now have a tendency to snap back sharply and all but obliterate short sellers who've gotten too aggressive."

On the other hand… Jeremy Grantham, who oversees $150 billion as chairman of Grantham, Mayo, Van Otterloo, predicts credit-market declines will cause up to half of all hedge funds to close their doors within the next five years. If his predictions come true, it could be market shattering – considering the $1.7 trillion dollars the approximately 9,800 existing hedge funds control. Grantham also forecasts the demise of at least one global bank and "one or two" major private-equity players. The perma-bear has never been so bearish and believes we are in the midst of a "global bubble." Despite his ominous predictions, Grantham is still relatively bullish on emerging markets. His $13 billion emerging-markets fund is up 51% in the past year.

Support for Grantham's theory… Bear Stearns blocked investors from pulling money out of a third hedge fund (after the recent collapse of two others). The Asset-Backed Securities Fund had less than 0.5% of its $900 million in securities linked to subprime mortgages, but investors are still skittish. Also, Australian bank Macquarie announced that investors in two of its hedge funds might lose 25% of their money.

We wrote it. Did you buy it?

It's a very simple story. Retrofit your refineries to handle heavy crude, find a partner in the Athabasca tar sands, and you've got a guaranteed revenue stream for 100 years. That is exactly the plan Marathon is putting into place. Its pipelines and refineries in Detroit and Kentucky are ideally located to handle Canadian Bitumen… There is the potential for a great and innovative partnership that could catapult Marathon and its partner to Major status. Imagine, a Major oil company with domestic crude supplies! Marathon wouldn't be subject to nationalization, parasitic governments, and unfair royalty agreements. However, they would benefit from the periodic upswings in oil prices, and never fear the downswings. The strategy is simple and economically sound. However, it hasn't gotten recognized yet…

– Matt Badiali, S&A Oil Report, November 14, 2006.

Today, Marathon Oil (MRO) agreed to purchase Canada's Western Oil Sands in a $6.2 billion deal. The purchase will give Marathon a 20% stake in Alberta's oil-sands project, one of the world's largest untapped oil reserves. Marathon will dole out $3.6 billion in cash, $1.9 billion in shares, and take on $650 million in debt to pay for the deal. So far, subscribers are up around 20% on the recommendation.

Oil closed at an all-time high of $78.21 yesterday…

Early this morning, the Bancrofts agreed to sell Dow Jones to Rupert Murdoch for $5 billion. Murdoch plans to invest in the company's local operations, expand The Wall Street Journal's presence overseas, and launch a business-themed TV channel.

Company of the day: NAVTEQ (NVT) produces, updates, and licenses digital maps. If you have ever used Google Maps or a Garmin GPS system, you've seen NAVTEQ. The $5.9 billion company provides its maps to nearly every major distributor including Yahoo, AOL, Microsoft, and Verizon. The company trades for 46 times earnings, 8.5 times sales, and 6.5 times book value. NVT has $300 million in cash and no debt.

New highs: Seabridge Gold (SA) and Sigma-Aldrich (SIAL).

In the mailbag, we have more about… the value of college. We stand by our guns. You can learn more on the job and through our recommended reading list than you could ever hope to learn in school. We're busy thinking up our next hot topic… any ideas? Send them to: feedback@stansberryresearch.com.

"I get a kick out of reading the subscribers complain about the losers S&A analysts have suggested. The DJI falls 5% in one week, and they expect all your picks to not be affected. They are as happy as a pig rolling in mud when the DJI is moving higher and your picks ride along. Then they pat themselves on the shoulder and think how smart they were by subscribing to your research. They are losers not because they followed the advice of someone else but because they don't take responsibility for their actions. No one twisted their arms to subscribe, no one forced them to buy your recommendations, no one told them to invest in the market; but having done so, the least they can do is take 100% responsibility for the results. Failing to take 100% responsibility causes these people to blame someone else, not to learn from the experience, and thereby repeat the same mistake again. That's what a loser is – one who keeps making the same mistake over and over again, blames everyone else for them, and never learns from them." – Paid-up subscriber Luis

Porter comment: Yes… it's true that the only way you'll improve your investing is if you're able and willing to learn from your mistakes. But it's also true that people subscribe to our letters and follow our advice because they trust us and expect us to be responsible for the picks we make. We are responsible for our advice. We take credit for our losers, just as we do for our winners. And we learn from our mistakes – ask anyone who has read my newsletter for the last eight years. I spend a lot more time analyzing the missteps I've made in print than I do gloating over the big wins.

What we ask of our customers is to judge us accurately on our results, not randomly by either the few stocks that go way up… or the several that will inevitably go way down. While we don't manage your accounts (or provide any individual advice at all), we have noticed that the subscribers who do the best with us tend to follow our more conservative recommendations with most of their money, maintain reasonable expectations about the gains they're likely to make, are patient enough to hold our recommendations for at least the medium term, and – most importantly – follow our advice as it pertains to risk management and position sizing.

Unfortunately… what we suspect happens with far too many of our subscribers is that they buy a newsletter much like they would a lottery ticket or a casino chip. The put it all on "black"… and if it doesn't work out, they blame us. You're depending on luck, not good analysts, if that's the way you "invest."

"Porter, please allow me to weigh in on the great college debate. I have always argued that the best purpose of a college-educated population is to develop people who can think critically and have deep personal integrity. When I entered the University of Florida in 1948, there were barely 8,000 students. When I graduated in 1952, there were 10,000 students. Today, I understand the student body exceeds 50,000. Significantly, the 'Honor System' for students was abolished several years ago; it simply ceased to work. When I attended college, we DID have a core curriculum that tracked the idea of St. John's College you referred to. But that curriculum went out the window about the time the Honor System did. Today, most courses of study at the college level strike me as 'vocational' rather than 'educational.' Consequently, we seem to be producing young adults who are narrow in their scope and lacking in curiosity and flexibility and unable to analyze data. All three of our sons went to the University of Florida, as did two of our daughters in law. But I think I would urge any of our eight grandchildren, who might be inclined to seek further education beyond high school, to seek a small liberal arts college that emphasized teaching rather than research. The Great Books curriculum you alluded to would be the ideal." – Paid-up subscriber Jim Fisher

"For a couple paragraphs I actually thought perhaps Richard Wagoner had taken a few lessons from Warren Buffett. Then I realized I hadn't noticed 'by Porter Stansberry' below 'An update from GM's Chairman.'

– Paid-up subscriber Luis

"Until you learn how to act professional, keep your damn comments about General Motors to yourself. Perhaps if you had learned something in college, you might be able to make an unbiased assessment of GM. But as it is, your attempt to play Chairman and CEO strikes me as nothing more than a child dressing up in his father's clothes and pretending to be big. You are not and, as of late, your investment advice has done worse than even your assessment of GM. Step aside, polish up your golf game, do some barbecue, and let those who really have something worthwhile to say run the business. The Napoleon Complex doesn't work in the business world any better than it does in politics with Bush, Cheney, and those who cover for them. The $49 I paid for all this wasn't the bargain I thought it would be." – Paid-up subscriber Victoria Smith

Porter comment: Jeez… I thought most folks liked my mock GM letters…

"Why, why, why didn't you scrutinize AHM more thoroughly? You seem to have a lot of focus on eventually proving yourself correct on the demise of GM… and even while you've been shouting about all the credit problems in the U.S. housing industry… you go and recommend to buy the much more imminent debacle AHM… maybe you better attend college after all! On a more serious note… I simply can't believe OR understand why you let AHM go into the recently 'S&A 12 Retirement Stocks'… truly a fiasco!!" – Paid-up subscriber SC

Porter comment: We believed the company's ability to get financing from Citigroup and the CFO's decision to buy his company's stock on the open market were indicative of a solid mortgage portfolio, which had high average FICO scores. Additionally, because the company focused on adjustable-rate mortgages, we thought it would handle a rising rate environment better than other mortgage companies.

When these things changed – when the company had to go to a hedge fund for additional financing and when it had to write off even more mortgages – we followed our trailing stop loss and advised everyone to sell. It shouldn't have been a fiasco, merely a loss on a speculation that had a reasonable chance of a significant gain (100%+).

My only regret is that I didn't advise selling as soon as the company needed more financing and wrote off those additional loans. We could have saved 10%-15% of our losses. But, besides this mistake, which I fully documented in my newsletter, I have no regrets. And that the stock fell 90% after we sold it demonstrates the validity of our disciplined approach to speculation. If it was a fiasco for you… I regret that… but it shouldn't have been.

"Well I have recently subscribed to the Bulletin Board Elite. Based on the hype of the promo page, I was expecting to see the safest low dollar stocks. I know what they say, but to me anything over $2 or $3 is not a penny stock. Based on those huge percentages they promise finding of 10,000% or more isn't possible based on the price of the stocks they are recommending currently… Seeing though they only give a 30-day money back guarantee and not 90 days, it will be hard to figure out if it's worth keeping."

– Paid-up subscriber Arthur Abel

"I'm a person who went to college, didn't quite finish (one year left), and am making a six-figure income. I went to trade school, put a lot of hard work and study into my profession, and am doing very well for myself. I have friends who I tell to at least consider the route I took while they do the college thing. No one wants to, but they all comment on why they aren't where I'm at and what they need to do to get there. Kinda hard to get ahead owing upwards of 50K in loans off the bat, and it only cost me a total of 12K so far. Much higher return on my educational investment as far as money earned and time saved. It's something to at least consider." – Paid-up subscriber Kyle L.

"I take issue with Curt Whitney. It took one semester at one of the premier technical universities to convince me I was wasting my time. By age 28, I founded my own company and when I sold the business for 8 figures and retired at age 53, I was still the only stockholder. The dozens of engineers and scientists in the R&D and engineering departments, many with advanced degrees, were pleased there are people like me around to create jobs for them. I would bet the engineers at Microsoft feel the same way about a far more successful college dropout, Bill Gates. This is not to generalize that college is useless. One would not like to go under the knife of a self-taught neurosurgeon. However, in most fields, those with the intellect and drive are more likely to succeed on the basis of work experience rather than the classroom. And I might put a point on it by recalling that all of the biggest commercial disasters, the Ford Edsel, The General Dynamics 880, Worldcom, and Enron, were all at the hands of highly educated managers. College has some uses, but a prerequisite for success, it certainly is not. As a severely put-upon taxpayer, I am appalled at the waste of resources evident in the semi-illiterate product of our public high schools occupying space in colleges to no significant benefit to society."

– Paid-up subscriber SK

"Whereas the material presented in my MBA program I could have learned on my own, I cannot say the same thing for my BA program: Mathematics and Physics. Also very useful was my formal education in the Computer Sciences. Frankly, I do not see much utility in learning Greek. Chinese? Yes. Even Spanish. As to the old masters and their wisdom – I prefer the new wisdom: nanotechnology and genomics, etc. Are you thinking that a college education concentrates primarily on business, political science, social science, or football rallies? Even a ballet dancer or opera singer or musician or filmmaker requires formal education and training. Maybe you are too focused on your own little tree (investing) to be aware of the forest." – Paid-up subscriber Maria Weaver

Porter comment: Maybe so… But, the more people I meet, the more convinced I am that the only real learning takes place on the job. And that the role of college should be to provide an opportunity for learning the things you can't learn in society today – like ethics, history, etc. As such… college probably isn't for everyone.

"Regarding the guys who chewed you out for knocking modern college education, they are right as far as the practical matter of getting a job in the existing system. But, totally wrong if you really analyze it. I believe you could become a great doctor or engineer if you simply became the apprentice of a practitioner of one of those professions. You would learn everything you needed to know. You would not waste endless years learning useless crap that nobody needs. My wife just became an R.N. The amount of her time wasted by the university was absolutely appalling. She'll get her first paycheck next week, and it will be huge compared to our previous earnings. But, if she could have been in an intensive apprenticeship instead of the meandering college track, she could have learned it all about three years earlier and started getting the big pay that much sooner. That would have been preferable to running up more debt for school." – Paid-up subscriber Muir Matteson

Porter comment: Exactly.

"So stop it with the Company of the Day. How thrilled should we be that OLED went 89%+ in a day when we were not invested? Give us the Company of Tomorrow." – Paid-up subscriber Don Russell

"My name is Eli Zaken, an Alliance member. I just wanted to mention what a nice job Matt Badiali did as the only representative of S&A at the Vancouver Symposium. I enjoyed his main speech as well as the workshop. I hope Steve is feeling better and I look forward to seeing you all at the next Alliance meeting in Mexico. Keep up the great research." – Paid-up subscriber Eli Zaken

Regards,

Porter Stansberry

Baltimore, Maryland

August 1, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame

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

As of 06/27/2013