Written by Dan Ferris

Sunday, 03 August 2008

Last week, I spoke with Bill Bonner, founder of Agora. Bill hired me a little over 10 years ago. He always remains above the fray, but passionate and insightful about what's going on in the world.

Halfway through our conversation, I told Bill that Steve Sjuggerud was the greatest innovator in the history of financial newsletters. Before Steve, you never knew what you were dealing with. You never knew when some "guru" was going to tell you to ride a stock straight down to zero.

And in the old newsletter industry, readers followed their guru until one day, his "magic" wore off, and they discovered he wasn't doing any real work.

Based on his early experiences in the brokerage and asset-management fields, Steve decided, no matter what else ever happened, that was not going to happen to his readers. He wasn't going to be the guy telling them to buy all the way down.

At first, Steve fought an uphill battle about trailing stops. Nobody understood the wisdom of stops. Steve cried in the wilderness for years. But greatly to his credit, he never wavered. Eventually, it caught on, and Steve was vindicated. Everybody realized Steve was creating a much better relationship with you, our subscriber. Trailing stops are all over this industry now, thanks to Steve Sjuggerud's wisdom and tenacity. If you read newsletters and take their advice, you have Steve to thank for every loss you've avoided or profit you've protected by using trailing stops.

You might not believe it, but I've tried to model myself after Steve. Like him, I come by my advice solely by my own independent research. And I don't waver when I know I'm doing the right thing. Like Steve, I think about the best thing I can do for you, the reader.

Let me be clear about something, too. I don't take issue with those who use stops. But I'm not Steve. I'm me. I don't use trailing stops.

If I used 25% trailing stops, I honestly don't know if the Extreme Value track record would be worse or better. But I do know for certain I'd have a lot more free time on my hands. I could play my guitar more, and maybe get involved in local theater again. I could use the same quick, easy computer screens everyone else uses and not worry about what's on page 24 of the 10-Q (Lehman's MBS portfolio).

Instead of playing music and doing local theater, I spend most of my time trying to get better at my job. I try to pick fewer stocks, do deeper research, and get a real sense of certainty about what I'm doing. I figure if nobody else is doing that, maybe there's a place for me around here. So far, so good.

To make money in stocks, you must do something different. As it turns out, I do just about everything different. I don't travel as much. I don't read many financial books (99% of them are totally worthless). And I don't use trailing stops.

As far as blowups go, I've had a few. But you can't name one investor who has made big numbers over 30 years or more and hasn't had at least one big blowup. That's a simple, irrefutable, unpleasant fact that nobody who's trying to sell you a newsletter wants to tell you. Ben Graham was down 70% over a three-year period in the early 1930s, and produced a great lifetime track record. John Maynard Keynes was down 50% over a few years and did the same. Even people like Mason Hawkins and Staley Cates at Longleaf have held stocks that went into Chapter 11 while they were holding them.

I've worked for 10 years to figure out the best advice I can give you. You pay me to know what I'm doing. I work toward that end six or seven days a week, from about 6:30 a.m. until about 6 p.m., often later. If I don't get it right, there's really no excuse, and trailing stops wouldn't change anything much.

I think when great investments are down, you should buy them, not sell them. I calls it like I sees it and I stand on everything I do, regardless of what anyone else thinks, including you, Porter, Bill Bonner, and anyone else. If Warren Buffett called me up tomorrow and told me to use trailing stops, I wouldn't do it.

Like it or lump it, all you get when you read Extreme Value is me.

Regards,

Dan Ferris

Medford, Oregon

P.S. If you don't read Extreme Value, you really should give it a try. It isn't like anything else we publish, and I don't think it's an exaggeration to say it's like nothing else published anywhere in the newsletter world.