The S&A Digest: Spineless Stansberry

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

As of 06/26/2013

Spineless Stansberry... Foreigners buy the U.S.... Dividend investing works... Introducing our latest – International Strategist... Track records, stock policies, and politics...

The most important financial trend you've probably never thought about? The growing wealth of the rest of the world, relative to America.

Our dependence on foreign financing, our lack of savings, our obscene military expenditures (more than the rest of the world, combined), and our declining level of investment are changing the global economy. Buffett warned of this coming "megatrend" in his 2005 annual letter:

The underlying factors affecting the U.S. current account deficit continue to worsen, and no letup is in sight. Not only did our trade deficit – the largest and most familiar item in the current account – hit an all-time high in 2005, but we also can expect a second item – the balance of investment income – to soon turn negative. As foreigners increase their ownership of U.S. assets (or of claims against us) relative to U.S. investments abroad, these investors will begin earning more on their holdings than we do on ours.

While Dick Cheney says, "Deficits don't matter," ledgers and balance sheets say otherwise. As you read this, the world's premiere assets are slowly but inexorably being purchased by foreign buyers... and slowly... over many years... this will have a catastrophic impact on the standard of living in America.

Consider this fact: Worldwide mergers and acquisitions are on pace to hit a new record of $3.57 trillion this year... but it's not American firms doing the buying. Constrained credit markets have sidelined American private equity powerhouses like Blackstone and KKR. And foreign buyers have replaced them. International buyers will spend more on M&A advice this year than ever before, and the pace will probably not slow with the prices of U.S. stocks – at their lowest in 12 years – and the cheap dollar. Some dominant international buyers include Indian billionaire Ratan Tata and Dubai's Sultan Ahmed Bin Sulayem.

I've long resisted publishing investment letters focused primarily on foreign companies because it has been my experience as a publisher that Americans will not buy these companies. But... even if it meets with resistance from our subscribers... I don't think we can avoid writing about the best foreign companies. We write about money and how to make it. The world's balance of financial power is shifting. We have to follow the money. We can only hope that you'll join us.

It is expensive and difficult to do good research on foreign companies. Information on these firms is typically not available in America. So you have to travel. You have to put "boots on the ground" to judge a company's assets firsthand and to look its managers in the eyes. Luckily for us, one of our more experienced analysts, Graham Summers, loves to travel. For the next several years, I'll be sending him overseas – on long flights – each month. And he'll be reporting his findings to our subscribers in our new journal, S&A's International Strategist. We've posted a few "beta" issues on our website, which feature Graham's insights from recent trips to Singapore and Dubai. These issues are available to S&A Alliance subscribers now. And we'll soon make the product available on an individual subscription basis.

"In the 1990s, people thought dividend investing was for wimps... Not any more," says a recent Barron's article. That's not news to us – or hopefully to you. In fact, since 1926, roughly 4.3% of the S&P 500's 10.5% annualized returns have come from dividends (according to Ned Davis Research). And shares of dividend-paying companies have significantly outperformed other stocks in the past 25 years. Barron's specifically mentions 12% Letter pick McDonald's (MCD), which boasts a five-year dividend growth rate of 35%. The company is also expected to boost both its earnings and payout over the next three to five years.

12% Letter subscribers can find more information on how to invest in McDonald's as well as four of Tom Dyson's other top dividend-paying stocks in his June 2007 special report "How to Build a $1,000,000 Retirement with U.S. 801(k) Plans." To learn more about the 12% Letter, click here.

In the mailbag, we saw lots of letters asking about the same three issues. We constantly find ourselves answering these three questions (track record calculations, editor stock buying policies, political views). We answer them, again, below... with as much patience as we can muster. If you'd like to take a whack at the dead horse (or, perhaps, a live one), e-mail us here: feedback@stansberryresearch.com.

"I take issue with your return calculations for correction opportunities. The first four (VVR, MFA, QCC, and AACC) were recommended on Friday August 17, via e-mail that didn't reach subscribers until after the markets close... The first opportunity people had to act on the recommendations was Monday August 20, when prices for these four securities were considerably less attractive. A more reasonable accounting for return would use the closing prices from Monday (or perhaps the mid-point of Monday's high-low range). That's a significant difference and one I don't expect you'll highlight – after all, it's easier to sell newsletters when you quote the inflated 11% return in two weeks' time. I believe this difference and this lack of openness in score keeping is a huge contributory factor to the general belief that you are no different from the average 'huckster' trying to sell newsletters. By the way, comparing against the return of various benchmark indices shows you're still doing OK, so there's no need to 'juice' the returns." – Paid-up subscriber Patrick Broderick

Porter comment: First... considering that we gave away our correction opportunity report ideas for free in these pages, I beg you to at least consider the notion that the way we calculate track records has nothing to do with our "huckster" tendencies. We publish track records (many of our peers don't) to demonstrate the value of our ideas. We calculate them – accurately – on that basis and that basis alone. We have no control over the returns you might achieve using our advice and, as a result, we don't model our track records on the basis you assume is fairer. (We don't think it's fair at all; we think it handicaps us significantly, especially considering, most of the time, our readers can get much better pricing by simply waiting for the horde to pass.)

In any case, we can only track the returns we would have made if we were investing for our own account instead of passing along our ideas to you. Imagine if we had bought those four stocks on Friday morning; clearly we might have done so – we didn't "owe" any subscriber any additional investment ideas. If we had, our returns would have averaged about 11%, as we showed you. Of course, given that these were smaller stocks with less float, the returns don't look as good if, as subscribers might have done, you had to buy along with a bunch of other readers on Monday.

Unfortunately, that's the reality of reading an investment newsletter versus, say, paying 2% of your assets each year to be in a managed account. On the other hand, it wouldn't have taken too much creativity for you to figure out other companies very similar to the ones we recommended, which could have surely been purchased at less inflated prices on Monday.

"My, my, Porter, Aren't you becoming the angry young 'honest' (but spineless) Ron Paul libertarian. Does it have anything to do with your slew of poor rec's lately? I suppose that's George Bush's fault too. By the way, we are spending as much now as we did during WW2 for the exact same purpose. Like it or not, we are in WW3, a war against men as evil as Hitler, Mussolini, Hirohito. Fascist, unconscionable muslim terrorist rats, determined (they've said so) to destroy you, me, our children and our way of life. Take care of the new addition. Your child has to live here too. I'm a Korean Veteran. I know what I was fighting for. Do you? Ron Paul sure doesn't. What in the world do core libertarian beliefs in limited economic and social constitutional government have to do with the war in Iraq? A great many Libertarians want us to win this war because all Americans would then be safer. Defeat would greatly strengthen those who have declared war on us." – Paid up subscriber RM

Porter comment: I think war is a terrible thing, which has life-changing consequences for the people who have to suffer carrying it out. I think we should be extremely reluctant to use military force. I think our stated policy of "pre-emptive" war is the height of madness – as all of the events in Iraq have proven in spades.

I don't think a large standing army is compatible with a Republic (and neither did our founding fathers). I think our attempts to be the world's policeman will bankrupt the next three or four generations of Americans. I think it's spineless the way our troops are routinely committed to battle without any declaration of war from Congress. And, most importantly, I think a military that's made to be all things to all people won't be able to handle the true threats we face.

Eisenhower first warned us about the creation of a powerful military industrial complex. Imagine what he would say today. How many lobbyists does the war machine employ? Finally, I think it's sad that anyone who questions the wisdom of our political leaders or who questions our nation's hyperactive foreign policy has to endure being called "spineless."

"I see where you say you will pick one stock for yourself each year, put 10% of your income into it and keep for 20+ years... Now that sounds like something I as an 'Alliance' member would like to know about... but am unlikely to be informed of due to the 'Stansberry Policy' of 'I don't tell you to invest in what I do, because I might get in trouble... and of course I recommend the best for you and take second best for myself...' I would think you can find a better way to 'align' your subscribers' interests with your own... i.e. your money and my money... that way, I personally would have a lot more confidence in such recommendations... If it's good enough for Buffett and Pabrai to be invested with their 'followers' then how about Stansberry doing more of it... I find as you often point out... talk is cheap and actions speak volumes..." – Paid up subscriber SC

Porter comment: The policy you reference regarding editors not being able to invest in companies they write about is in place to ensure our role as disinterested publishers of financial research. We must maintain a completely independent approach when we either recommend a company or when we recommend a company should be sold. While there are sound legal reasons for our position, we also know the investment newsletter industry is rife with accusations of "pumping and dumping." Our policy guarantees we cannot be accurately accused of such practices.

The investors you mention – Mohnish Pabrai and Warren Buffett – manage money for their customers/shareholders and follow a single, narrow investment strategy. We do not. We publish information about a wide range of investment strategies, which our customers then choose to follow (or ignore) based on their own needs.

Finally, our "no buying" policy applies only to those stocks that an editor has personally covered; i.e., if Sjuggerud has recommended a stock, Sjuggerud cannot buy it. It does not preclude editors and other employees from acting on research that's published by our company – after waiting an appropriate amount of time to buy. Or, in other words, Stansberry, Ferris, Dyson, etc. may purchase recommendations that Sjuggerud makes and vice versa. Your question seems to presume that we never buy any of the stocks our editors have recommended; that's not so.

Regards,

Porter Stansberry

Baltimore, Maryland

September 4, 2007

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