More Munger wisdom… Eating the rich… Everyone can't hedge… Why most companies should be private… Contrarians take note: The public hates European stocks… Why I flip steaks...

"They're like brick ovens," my friend Mike Palmer explained as we were walking down Charles Ave – a main thoroughfare in downtown Baltimore. When it gets hot in Baltimore, the thousands of brick row homes and brownstone mansions turn into heat sinks. And so, dear subscribers, today we are suffering inside a brick oven (our office is a circa 1880s redbrick townhouse), writing to you. The high today in Baltimore will be above 95 degrees. We might as well move the office to Dubai...

Hedge fund managers tracked by hedgefund.net returned 2.41% in May, the best May performance since 2003. The S&P 500 climbed 3% in May. There's nothing like paying a 2% management fee and 20% of gains to underperform the market...

More on hedge funds... According to Ray Dalio, founder of $30 billion hedge fund Bridgewater, hedge funds are gaining correlation to major indexes as more money pours in.

"According to Mr. Dalio's analysis, over the last 24 months, hedge funds were 60 percent correlated to the Standard & Poor's 500-stock index, 67 percent correlated to the Morgan Stanley Capital International EAFE (for Europe, Australia, and the Far East) index of foreign shares, and 87 percent correlated to emerging market equities (unhedged). They were 41 percent correlated to the Goldman Sachs Commodity Index, 52 percent correlated to high-yield, or junk, bonds, and 42 percent correlated to mortgage-backed securities." – New York Times

We'll just eat the rich... Democrats are looking to add a 4.3% surtax for all income over $500,000, affecting nearly 1 million households. The move (they claim) would allow Congress to abolish the alternative minimum tax for the approximately 90 million households earning less than $250,000. This is the clear and present danger of all democracies – that the majority will seek to feast on the liberties of the minority.

To grab or not to grab... San Antonio-based insurer Argonaut (AGII) will pay a 5.1% $1.65 special dividend on July 10 to shareholders of record on June 26. The ex-dividend date should be June 22.

Jim Chanos, president of Kynikos – a short-only hedge fund – on the Blackstone IPO: "I think it's going to be a smart thing for them [Blackstone] to sell. It just underscores the irony of the private-equity model which, is most companies should be private, they are not efficiently run when they are public, there are too many prying shareholders, there's Sarbanes-Oxley, there [are] regulators, there [are] short sellers – take your pick – yet it's OK for them to go public at the management-company level."

Matt Badiali, our team's resident geologist, is on assignment this week in Sonoma, California. (Tough, job, huh?) He's researching geothermal power plants and: "I got to plunk around an old WWII-era mercury mine. Found some mercury ore and some native asbestos... great place. I brought the mercury ore home. Think they'll let me carry that on the plane?"

Investors are losing confidence in the European markets. Puts on the Dow Jones Euro Stoxx 50 index outnumbered calls by 1.45 times, according to Bloomberg. This is the highest ratio since Bloomberg began collecting the data in 2002.

Sign of global warming... an eight-inch snowfall in Wyoming today caused the state to close down major tracts of interstate and local roads.

Consumer confidence is at a 10-month low.

New high: BHP Billiton (BHP).

In the mailbag... we're rightfully taken to task for the delayed launch of True Income. We've got a possible solution, while we continue to search for a good fixed-income analyst (they're harder to find than a good plumber). As you know, we love your notes. Send us your thoughts: feedback@stansberryresearch.com.

"You say hedge funds are buying Motorola in size (i.e., "have increased the number of shares they own by more than 4,000%... If this is the case why are the insiders in the company selling in size? CFO David Devonshire sold over 50,000 shares on May 31 at around $18. EVP Peter Lawson sold over 230,000 shares on May 14 at around $18. EVP Daniel Maloney has sold over 160,000 shares on May 14 at around $18." – Paid-up subscriber Dennis Augustine

Porter comment: Maybe they think they'll be out of a job soon.

"Last summer I signed up for the True Wealth Alliance. One of the things that you advertised (the thing that finally enticed me to subscribe) was a new publication - True Income. It was to be started late last year. Then the start date was postponed to earlier this year. I am still anxiously awaiting its publication. It appears to me that True Income morphed into the 12% Letter, which I am not entitled to. Is that correct, or do you still plan to publish True Income?" – Paid-up subscriber Greg O

Porter comment: No, we're still working on True Income, which is going to cover bonds. The 12% Letter covers high-yielding stocks. We are running about a year behind schedule. We lost the editor who supposed to write it... and we haven't been able to find a good replacement yet. We've been looking... do you know any good bond analysts? If so, tell them to contact us. Perhaps we should simply include The 12% Letter in the True Wealth Alliance until we get on track with True Income. Let me ask about that... and get back to you next week.

"Isn't too much of this kind of [positive] feedback, which you have been getting lately the TRUE sign of the top?" – Paid-up subscriber Timo Yla

"I'm glad I went to work out of college and came across your publications. I've done the compounding savings calculations – I'll be financially independent in less than 10 years if your team keeps it up. Many of my friends my age, meanwhile, are still in grad school and won't have much money to invest for many more years. And they're in some of the nation's top schools – Harvard, MIT, Stanford, etc – and in high-paying fields like engineering and medicine." – Anonymous

"Don't flip steaks, chops, burgers, or chicken on the grill... simply place it on the grill when the coals have lost their fire and are not too hot and leave it until the juices just start to appear on the surface... turn it over for a minute and it's done to perfection... no continuous flipping... Argentina style" – Paid-up subscriber Malcolm Hutton

Porter comment: I've spent a fair amount of time in Argentina. The beef is delicious... except they always overcook it. Always. The only way to prevent your steak from being ruined is to beg the waiter to prepare the beef "welta y welta" at which point the waiter will make a flipping motion with his hand. Or, in other words, prepare it the American way. So... in my experience... traditional Argentine cooking is not the best way to prepare a steak. I prefer a very hot fire. With a thick chop, it takes 5-7 minutes on each side.

"I failed to tell you last winter, I cooked up your brisket recipe for Christmas Eve. Before I had a chance sit down for dinner my guests were already raving about the brisket. After I tried it, I had to agree with them. Several days later I got a thank-you card from two of my guests, it was addressed to me and you as well! Keep those recipes coming." – Paid-up subscriber Bob Greene

"WOW! What can I say GREAT stock education, 'buy' recommendations (I am up more with your newsletters than anyone I have followed before) and fabulous grilling recipes! Keep them BOTH coming!!" – Paid-up subscriber Ron B

MORE MUNGER WISDOM

"The safest way to get what you want is to deserve what you want." Charlie Munger was giving the commencement address last month at the University of Southern California Law School. (I found notes from the speech on a value investing blog.

The last time I extensively quoted Munger (on the topic of global warming – he's a skeptic), we got more than a few e-mails asking what bits of Munger's wisdom have to do with investing. Well... I thought it was obvious: Munger is the partner and sounding board of Warren Buffett. And, next to Buffett, is probably the most successful individual investor in history. One of the most important things I've learned about investing is that you can be too smart – but not too wise. I've met dozens of extraordinary smart people... but very few of them have the wisdom to truly leverage their aptitude.

Munger certainly has.

For example, Munger figured out that the best way to accomplish something was to think about the task from an inverted perspective. Example: If you want to find a better job, start by identifying what it is you don't want to do. Likewise, if you want to know how to become a successful investor, worry first about learning to avoid losses. Using an inverted mental process often makes tough decisions easy.

And Munger went on...

"Mozart became the most famous composer in the world but was utterly miserable most of the time, and one of the reasons was because he always overspent his income. If Mozart can't get by with this kind of asinine conduct, I don't think you should try."

"Perverse associations are also to be avoided. You particularly want to avoid working under somebody you really don't admire and don't want to be like. We're all subject to control to some extent by authority figures, particularly authority figures that are rewarding us. Getting to work under people we admire requires some talent. The way I solved that is I figured out the people I did admire and I maneuvered cleverly without criticizing anybody so I was working entirely under people I admired. You're outcome in life will be way more satisfactory and way better if you work under people you really admire. The alternative is not a good idea."

"The last idea that I found very important is that I realized very early that non-egality would work better in the parts of the world that I wanted to inhabit. What do I mean by non-egality? I mean John Wooden when he was the No. 1 basketball coach in the world. He just said to the bottom five players that you don't get to play. The top seven did all the playing. Well, the top seven learned more. Remember the learning machine. They learned more because they did all the playing. And when he got to that system, he won more than he had ever won before. I think the game of life, in many respects, is about getting a lot of practice into the hands of the people that have the most aptitude to learn and the most tendency to be learning machines. And if you want the very highest reaches of human civilization, that's where you have to go. You do not want to choose a brain surgeon for your child from 50 applicants where all of them just take turns doing the procedure. You don't want your airplanes designed that way. You don't want your Berkshire Hathaway's run that way. You want to get the power to the right people."

"Life will have terrible blows in it, horrible blows, unfair blows. And some people recover and others don't. And there I think the attitude of Epectitus is the best. He said that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea."

"Another thing I think should be avoided is extremely intense ideology because it cabbages up one's mind. You see it a lot with T.V. preachers (many have minds made of cabbage), but it can also happen with political ideology. When you're young it's easy to drift into loyalties. And when you announce that you're a loyal member and you start shouting the orthodox ideology out, what you're doing is pounding it in, pounding it in, and you're gradually ruining your mind. So you want to be very, very careful of this ideology. It's a big danger. In my mind, I have a little example I use whenever I think about ideology. The example is these Scandinavia canoeists who succeeded in taming all the rapids of Scandinavia and they thought they would tackle the whirlpools of the Aaron Rapids here in the United States. The death rate was 100%. A big whirlpool is not something you want to go into, and I think the same is true about a really deep ideology. I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another and that is: I say that I'm not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who support it. I think only when I've reached that state am I qualified to speak. This business of not drifting into extreme ideology is a very, very important thing in life."

"The highest form a civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another. That's the way an operating room works at the Mayo Clinic. So never forget, when you're a lawyer, that you may be rewarded for selling this stuff, but you don't have to buy. What you want in your own life is a seamless web of deserved trust. And so if your proposed marriage contract has 47 pages, my suggestion is you not enter."

Good investing,

Porter Stansberry
Baltimore, Maryland
June 8, 2007

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