THE S&A DIGEST: Popular

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

As of 07/05/2013

Saying goodbye to Milton Friedman... Dell gets even cheaper... Gypsies signal a market top?

Sad news – Milton Friedman has died.

I met him in 1998 at the New Orleans Investment Conference (there’s a review of today’s events below) in the speaker’s lounge. He was a very kind man. And even though I thought his ideas about monetary policy were garbage, he was smart enough to argue convincingly that we could afford the small amount of resulting inflation. Much more importantly, Milton helped lead the country towards free markets and away from state domination of the economy. He was one of the first writers to promote school vouchers, for example. I feel sad at his passing… and wish that I could have at least one more opportunity to argue with him about sound policy.

Cisco announced it will buy back $7 billion of stock. Sounds great. But be careful here… historically, Cisco’s buybacks haven’t matched its even more generous options grants.

Dell is delaying its earnings report today because of an official SEC probe into its third-quarter accounting. The reasons for the probe have not been released. The stock, which was already very cheap, is down another 4% this morning. This is very interesting… It’s hard to imagine that whatever the SEC is digging up is worth that amount of damage to the company’s intrinsic value.

Better fence in your copper gutters… Criminal gangs have been caught stealing large amounts of copper from Italian factories, railways, and cemeteries. They’re selling it to buyers in China. So far, 22 people – Romanian immigrants – have been arrested since mid-October. Signs of a market top? Sell whatever gypsies are stealing…

Looking forward to today’s mailbag? Well, it’s short today because I’m short on time. But there will be a lot more on Monday. Don’t miss out on the fun – send me something: feedback@stansberryresearch.com.

Paid-up Alliance subscriber J.F. Joliat writes, "It would be far more helpful and honest when presenting investment returns to include: the date of recommendation, the price on that date, cumulative dividends received, current price, and total return – THEN and only then should any ‘annualized’ figure be presented, and only for positions held for a year or more. A numerical average of all recommendations with no time weighting is meaningless and arguably dishonest… I have been a professional investor for 30 years, have been a professional money manager, built, bought, and sold several companies. I am now an active VC and manager of my own assets (only) which are well into eight figures. In other words, not a novice."

Porter Comment: In our track records, we always provide information regarding the duration of each investment we recommend. It’s easy to see, for example, that Dan Ferris has much less turnover in his portfolio (and thus longer holding periods) than, say, Jeff Clark.

But… more importantly, I disagree completely with Mr. Joliat’s argument that the basic numerical average of a recommended portfolio is meaningless. It certainly isn’t dishonest – it’s simply a fact. I think it’s an important fact, because to most investors whether the recommendation lasts for six months or three years is much less important that the odds of any given investment making money. Almost all of our readers "cherry-pick" our recommendations. They buy the ones they like, or they buy the ones that come up when they have capital available. So knowing what to expect from an "average" recommendation is very important. Folks aren’t buying the whole portfolio; they’re buying a single pick. And most folks want to know what to expect.

BHB writes, "I did not subscribe to your service to read your political opinions – keep it up and I will cancel all three of my current subscriptions! I am an adult capable of making my own decisions regarding our government officials."

Porter Comment: It must be a bull market. Everyone keeps threatening to cancel...

Contrarian or Popular?

"It’s hard to be contrarian and be popular at the same time," Rick Rule told the crowd this morning, at the Marriott Hotel on Canal Street. Most of the audience didn’t understand the nuance...

Rick was speaking from experience. His investment firm, Global Resources, was one of the very few boutique investment firms that survived the 20-year-plus bear market in resource investing (aka, mining). "I knew we’d do well, as investors, as soon as Merrill Lynch left the business."

It’s no exaggeration to say that Rick knows every single important executive in the mining business, because for years and years Rick was the only person in the world who could raise a significant amount of money for a mine. Even so, back in the early 1990s, individual investors wanted nothing to do with him. He was virtually ignored at this conference in 1999. Today, though, Rick’s a rock star. Dozens of fans follow him in the hallways. They mob him after every speech. And it’s standing-room only, with folks spilling into the hallways, during his workshops.

Everything moves in cycles. The most important thing is to always avoid the crowd...

For example, back in November 2002, Merrill Lynch got out of the high-yield bond business (junk bonds). Junk bonds had been in a bear market for four years… and nobody wanted to buy them. Merrill only makes money when folks buy, when investments are popular, which means that, by definition, whatever Merrill is pushing is probably a bad idea. Merrill is the herd, as its advertising suggests with its signature bull.

The head of Merrill’s junk-bond research team, Martin Fridson, was voted the best fixed-income analyst in the world for nine years in a row. He was the youngest person ever inducted into the Hall of Fame of the Fixed Income Analysts Society. Merrill fired him as it exited the junk-bond business. As Steve Sjuggerud told his True Wealth subscribers at the time, there’d never been a better buy signal for junk bonds. Steve recommended the Debt Strategies Fund, which is a leveraged junk-bond mutual fund. True Wealth readers saw 50% gains in about a year – in bonds!

It pays to be contrarian. But it’s not popular.

What’s Merrill doing now? Last November, Merrill launched a TRAKRS product on the Chicago Mercantile Exchange to mirror the Rogers Commodity Index, making it easier for clients to buy Rogers’ basket of commodities. And this year? Merrill launched its own commodity index.

So… what did I tell the good people this morning at the New Orleans Investment Conference?

Well, first I told the audience my golf-cart story to warm them up. And then I gave them a contrarian litmus test...

"If you’re not long top-quality housing stocks, like D.R. Horton and Home Depot, you’re not a contrarian. The U.S. housing sector is without a doubt the most unpopular sector in the U.S. market… and maybe even in the world, right now. Accordingly, it’s dirt cheap. And, paradoxically, it’s safe."

In the words of the Wedding Crashers, you could have heard crickets. The audience was dead silent. Nobody was interested at all. So, of course, I kept going...

"I’ve found over the years that a sure sign of a great investment opportunity is total apathy from a live audience. The quieter you guys are, the more confident I become of the likelihood of investment success..."

The audience laughed. But I bet none of them will buy the housing stocks.

How can you make sure you stay on the right side of the contrarian-versus-popular conundrum? Read Extreme Value. Rick Rule says, "Extreme Value is not only the only newsletter most investors need to read, it’s the only newsletter they should read." And I know it’s the only Agora-owned letter that our chairman, Bill Bonner, reads.

I know Extreme Value is truly a great contrarian newsletter because of its track record. It has a 93% success rate. The average return of its recommendations since inception (September 2002) is an outstanding 48.5%. On a compound basis, the letter is earning readers who follow its picks about 24% a year – which is as good as the world’s best hedge funds.

Despite its performance, we’ve never been able to sell Extreme Value effectively, which is mind-boggling. I said to the audience, "If I told you four years ago, ‘give me $1,000 per year and I’ll give you a portfolio that will earn 24% a year with a 93% success rate,’ you would have never believed it was possible, and you wouldn’t have bought the letter. Now that we’ve done it… and continue to do it year after year… you still won’t buy the letter because it’s not covering popular stocks and popular trends. And, guess what? It won’t. Not ever. It’s contrarian. It’s safe. And it works..."

Good investing,

Porter Stansberry

New Orleans, Louisiana

November 16, 2006

P.S. Forgive me if I can’t write tomorrow… I’ve got to do two more presentations today. Tonight, I’m hosting a big dinner for Doug Casey, in preparation for his debate tomorrow with Newt Gingrich. It’s sure to be a show. I’ll probably have to wait until Monday to give you all the details because I’m flying home immediately after the debate.

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