The S&A Digest: The S&A Gold Report's First Year

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

As of 06/28/2013

One black swan too few... Icahn's letter... Bearish with 1,200 stocks?... Dyson buys Detroit... A top in London real estate?... Casino politics... S&A Gold Report turns one... Only 10% per month?

Poor Nassim Taleb... It appears there was one black swan too few. Word on the street is that Nassim Taleb blew up his hedge fund. Nassim, author of Fooled by Randomness, is known for betting on extremely rare events in the market – which he dubbed "black swans." Nassim was smart enough to recognize that the statistics of the stock market are not "normal," but... assuming the rumors are true... not smart enough to figure out the only safe way to avoid black swans is to ignore them. Prices fluctuate rapidly. Values change slowly.

Dan Ferris makes an insightful point about the latest letter from Jeremy Grantham of GMO, which says the whole world is an investment bubble: "This GMO letter reminds me of Arnie Van Den Berg. Arnie will stand up... and do an hour on the generally poor quality of earnings, bubbles, potential blowups in the financial system, interest-rate scenarios, inflation, and every scary thing you can name. And then he'll say something like, 'But I don't really care about markets, because I'll buy anything that's cheap enough at any time.' GMO's most recent [SEC disclosure filing] has more than 1,200 stocks in it." (Translation: GMO owns 1,200 stocks.)

Tom Dyson, our resident ubercontrarian and sometimes online poker player, saw it coming. "Porter... it's happening just as we said it would. First, they banned online gaming and wiped out the industry, mostly based abroad. Then, Barney Frank said he'd try to overturn the law. Now... get this... he doesn't want to overturn the law, but create a system of licenses whereby the government can decide who gets to provide Internet gambling in the U.S. I wonder who they'll give licenses to... off-shore online casinos or domestic casinos operated by existing U.S. companies?"

Well, Tom, it's pretty easy to figure out. Just track down which American casinos give the most money to the Democrats. Then, you'll know who will end up with the online poker licenses. I always get a chuckle when my fellow Americans ask me what it's like to deal with corruption in Nicaragua. "It's a lot like living in Baltimore," I tell them. "But cheaper, safer, and more honest."

By the way... Dyson isn't satisfied with buying nuclear-powered icebreaking ships in Russia. He wants something a bit more contrarian to satisfy his urges. So he's going to spend a few days in Detroit, looking at $20,000 houses and other ways to buy good assets for cheap in the midst of the car bust. If you live in Detroit, know of cheap assets for sale, and would like to meet Tom, then please get in touch with us. We'd like to set up a meeting. (We told Tom to see if he can buy the Detroit Country Club. Why not? It's probably cheap, and the weather is great up there in the summer.)

Extreme Value pick Microsoft (MSFT) joined the bidding for Internet-advertising firm 24/7 Real Media (TFSM). Microsoft offered to pay around $1 billion to beat the existing bid from WPP Group, the world's second-largest advertising agency.

Carl Icahn, the activist investor seeking a seat on Extreme Value pick Motorola's (MOT) board, took out a full page ad in The Wall Street Journal today, urging fellow investors to elect him. In the letter, he refers to Motorola as "broken" and states that the company has "stumbled, and stumbled badly." For those shareholders interested in casting a vote, keep an eye out for the gold proxy, Icahn's longtime signature.

Venezuelan President Hugo Chavez will strip Big Oil of its control of the Orinoco Valley projects today. All six oil majors agreed to hand over their operations, valued at $30 billion and able to produce 600,000 barrels per day.

More on Venezuela... Chavez says he will withdraw Venezuela from the World Bank and the International Monetary Fund.

Signs of a real estate top... British bank HSBC sold its London headquarters to Spanish investors for $2.17 billion in the largest single-property deal in U.K. history. HSBC is not acting alone. Merrill Lynch and Goldman Sachs both sold their English headquarters, while Barclays sold hundreds of its branches.

We're glad it's over. No more applications to our Board of Advisors, please. We've gotten more than 1,000 applications. And we have less than 10 available spots. If you're not chosen, please don't take offense. But... if you are angry with us... don't hesitate to share your reasons here: feedback@stansberryresearch.com.

"I honestly don't understand [some] folks... I subscribed to your Alliance and got a bunch of valuable research in return and have turned a dollar or two with it. And then I got a box full of goodies in the mail for which I am very thankful. But it's all of those doofi (pl. of doofus) out there sending you folks hate mail mostly, it would appear, because you're smarter than they are. Incredible! Anyway, thanks, and keep doing it." – Paid-up subscriber Dave Burge

"I'm a new paid up subscriber, and I'm still learning about the market. One thing that I realize is that making money takes time. However, I am interested in how some are making profits rather quickly and I'd be interested also. I have purchased Dean Foods at or near the recommended price, however, I understand that one of the subscribers was able to purchase 'puts' and make 58% already. What are puts and how do I learn this new way of investing?"

– Paid-up subscriber CB

Porter comment: No, he sold puts. I'd recommend subscribing to Jeff Clark's S&A Short Report. Jeff is the only guy I trust when it comes to options.

"There you go again, exaggerating your recommendation performances. You say readers are up about 25% in less than a month on OPX... While you may count your percentage differently, stating that the reader is up almost 25% when the best the reader could have done was 21.5% is a bit misleading. However, I will give you that OPX is a pretty good pick. Even 10% in a month is okay with me." – Paid-up subscriber Richard Webster

"I read with some interest your comment on Sands Corp. building a casino on the site of the old Bethlehem Steel plant. I certainly agree that replacing a value-added industrial plant with a casino is a bad idea. I live in Bethlehem and drive past the plant site on a regular basis, and I must point out that the site has not been a working industrial plant since 1995. It's been nothing more than a vast wasteland of decrepit and decaying buildings since then. I'm not entirely convinced that a casino is the proper use for the property, and I know there are many here who are dismayed by the idea of a casino being built, but no one else has come up with any other use for the land and buildings. Perhaps the complex that will be built, which will include retail stores, a museum, and residences, as well as the casino, will be a good use of the property. I don't know. I'm willing to take a wait-and-see attitude toward it. It's got to be better than what is there now – which is, in essence, nothing. I enjoy reading your comments and analysis because, while I don't always agree with you, your perspective is always enlightening." – Paid-up subscriber William Braak

"I'm very impressed with Ian's max value strategies. If possible, I would like to see him test a percentage asset allocation strategy overweighing the cheapest of the six indices of small-, mid- and large-cap growth and small-, mid- and large-cap value. It would be interesting to see how a broad value approach to the market would compare to the narrow sector value strategy. Then, test the commodities and real estate. Eventually, he could marry all the strategies into one – total global market max value passive allocation strategy – a mouthful. This could be made available to the alliance members and tracked quarterly along with the model portfolio. Also do you know of a free source of historic P/Es, P/Bs, and dividend yields?" – Paid-up subscriber Griff Kull

Ian comment: If there is a free source for historic valuation data, then I haven't found it yet (and believe me, I've looked). The data I use come from Bloomberg and Thompson, but both of their data services are quite expensive. The good news is, I love doing studies such as the one you outlined above, and I'm always happy to listen to reader suggestions. Look for a report on my findings over the next few weeks.

"About a month ago I decided to add your Medical Investor service to my subscription. Only two weeks later, I had an identity theft situation in which the funds I thought I would have available to invest in your Medical Investor picks got compromised and tied up with this identity theft hassle. I called your subscription office and explained my situation. As promised, the refund to my credit card (which also had to be changed because of the identity theft problem) was prompt. I want to thank you for your no-hassle system, as this was one less thing I needed to cope with during a very troubling time." – Paid-up subscriber Gary Ulinskas

The S&A Gold Report's First Year

In the battle between wholly promotional publishers and folks like ourselves, who publish track records and write about investment strategies that actually work, we are destined to lose badly...

Throughout our career in this industry, we've seen how crooks, charlatans, and promoters can make a killing promising naïve investors what cannot possibly be true. I could give you hundreds of examples... but one of my all-time favorites is Wade Cook.

Cook, a former taxicab driver, self-published the book Real Estate Money Machine in 1981 and pronounced himself a financial guru. Apparently, he hadn't figured out exactly how to make the money machine work quite right... because he went bankrupt in 1987. But that didn't stop him. He kept at it, promising what no one could expect to deliver and couching his insights as divinely inspired. (Cook is a Mormon and frequently injected God into his writings and claims. There are so many crooked Mormon promoters that the SEC had to open a separate office in Salt Lake City.)

As the bull market in stocks began to build, Cook realized more people were interested in stocks than in real estate, so he began selling stock investing seminars, where he claimed he could teach you to double your money every 2.5 to 4 months. (This from someone who went bankrupt...)

Cook followed up his fantastic claims with investing strategies that appealed only to fools. Cook recommended buying stocks that were scheduled to split (even though such corporate events have absolutely no impact on the value of the stock). And he recommended taking profits quickly – as soon as they appeared in your portfolio. If you've been an investor for any length of time, you know that if you sell your profitable positions quickly, you miss out on the big gains and end up holding onto a portfolio filled with losing positions. Or, as Steve Sjuggerud likes to say, if you pick all of your roses, you end up with a garden full of thorns.

And then there's my personal favorite – Cook's so-called "rolling stocks." Looking at a historical price chart, Cook claimed you could divine a consistent pattern. Some stocks, he said, always vacillate between predictable highs and lows. See how easy it is to make money in stocks... he'd croon. Then, pointing at the past trading history, he'd say all you have to do is buy here (pointing at a low) and sell here (pointing at a high).

We found Cook's claims, strategies, and track record laughable. His company's investment fund consistently lost huge sums. Yet, Cook was the most popular financial writer in the United States when Steve Sjuggerud and I started working together in the late 1990s.

I can remember walking through book stores and having to explain to my girlfriend why I wasn't going to write a book about stocks that were splitting or "rolling stocks." She replied, "Well, he might be wrong, but his book is in Barnes and Noble and the last time I checked, yours isn't."

Today, Wade is awaiting sentencing in a tax-evasion case. He'll most likely go to prison for five to 10 years. Sooner or later, we all get what we deserve.

Steve Sjuggerud and I had the crazy idea that if we actually worked hard to teach people how to make safe investments, sooner or later, we'd attract a few subscribers. It has been a long, hard slog.

The publisher's paradox never fails. The better a newsletter is at making money safely for people, the harder it is to sell and the more likely it is to fail. Take Extreme Value, for example. The newsletter's long-term track record is unmatched in our industry over the last five years (which is since inception). It has made fewer than 10 losing recommendations, and the average annual gain is in excess of 25%, putting its editor in a class of incredibly elite investors. But try selling 25% a year when folks like Wade Cook are promising to double your money every two and a half months.

And, worse, Extreme Value is boring. That's why, even with all of its great advice, only about 13% of the people who subscribe bother to renew. For us, publishing Extreme Value is an exercise in intellectual futility. We know it's a great newsletter for anyone who's actually interested in making money... but strangely... that doesn't seem to be what people want when they buy a newsletter.

And now we have another example – our S&A Gold Report.

Nothing is more risky than buying so-called junior resource stocks. On the other hand, no other sector of the stock market is routinely so profitable for individual investors. Once or twice every 10 years – like clockwork – the junior resource market goes bananas, sending $1-ish stocks to $30, $40, $50, or even $100 per share.

When we launched the S&A Gold Report, I instructed Matt Badiali – our staff geologist and resource stock analyst – to stick to the cheapest of these stocks on a resource cost basis. We figure, if you buy the resource cheap enough, the odds of losing money are greatly reduced.

The S&A Gold Report is now ending its first year in print. Currently, Matt's recommended portfolio has 12 open positions... with only one stock down. Eleven stocks are up – 65%, 32%, 33%, 48%, 71%, 17%, etc. When we launched the marketing for the letter last June, Matt picked 11 other stocks in a special report. Out of these stocks, only two are slightly down (-4%, -9%). The rest are way, way up – 49%, 105%, 94%, etc.

Although I don't know this for a fact, I suspect there isn't a safer or more consistent mineral resource investment advisory anywhere in the world than our S&A Gold Report. So naturally, given the incredibly high quality of this publication and the publisher's paradox I described above, you won't be surprised to learn that, as of today, the S&A Gold Report has the smallest subscriber base of any letter we publish. It's essentially a hobby for us, not a real business.

And that means, if you're savvy enough to recognize a truly valuable publication when you see one, you should jump on Matt's gold picks while you can. Once a letter like this becomes known, you will have a much harder time getting your money into his best ideas.

Regards,

Porter Stansberry

Baltimore, Maryland

May 1, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame