Answering the Hardest Question in
Investing: When to Sell

Dear A-Letter Reader,

And then there were two…

GM is kaput. But let’s be honest: the company had a good run.

When it began, it was one of thousands of American auto companies. While most were falling by the wayside, GM lasted more than 80 years—most of them profitable. And GM managed to last until there were only three major automakers left in the US.

So what was the best way to profit from the automobile industry in the past century? The answer may not be buying this stock or that one… but selling the sure losers…

As Warren Buffett puts it, it’s often, “easier to figure out the losers.”

Talking specifically about the automobile he points out that—though it was perhaps the most important invention of the 20th century—it was very hard to make money as an investor in the industry. Thousands of upstart automakers failed. So the easiest money to be made was on the short side…

“There was, I think, one obvious decision back then. And of course, the thing you should have been doing was shorting horses…There are always losers.”

Today, we’ll talk about “losers”—companies that likely have much more downside ahead of them than upside. We’ll see how it is often easier to spot these than the next winners—especially in a market with so much head wind against it, like today’s market.

Then, we’ll also look at selling some of your former winners. These are stocks that may have made you good money but are getting long in the tooth and beginning to show signs that you’re better off selling them than holding them.

It all boils down to the Number One Question in Investing: When to Sell. As you’ll see, there are some major red flags you can use to get out of a long position… and go short a stock you don’t own, as well…

Red Flag # 1: High Valuations without High Growth

If you had the foresight to buy a small coffee chain named after an obscure literary character, you rode through some fantastic profits. All through the 1990’s and even through the tech-bust, it seemed like Starbucks would never cease to open more stores.

Around the time a Starbucks started opening across the street from another Starbucks, though, it was time to get out. Their growth prospects have been hammered. Other coffee chains are after their alluring market share. Even fast food chains have entered the fray

Today the balance sheet looks like a train wreck. Let’s slow down and take a look:

With a trailing P/E of 127, the company fails to pass an analyst’s first evaluation of a company’s value by a country mile. The profit margin is less than 1% and the operating margin is 5%. Debt is three times cash. Return on equity (ROE), one of my preferred valuation measures, is 3.5%. And I rounded up.

If you’re not certain what these measures mean; let’s just say they’re all very bad. Clearly, yesterday’s winners can become today’s losers.

Red Flag # 2: Technological Changes Taking Away
a Former Competitive Advantage

Change is the only constant in investing.

And technological changes can make an entire company or industry’s products obsolete. That doesn’t necessarily mean to go long the new technology—you should just avoid the obsolete one, or even short it as it dies off (the above example of shorting horses during the rise of the automobile).

Within the auto industry, we’ve seen technological changes that are partially responsible for the sad state of the American automakers. Toyota Motors was the first to market with hybrid vehicles— namely its flagship Prius. The rest of the industry has been playing catch-up ever since.

Sure, foresight is imperfect, and entrenched interests kept American automakers from fully adapting to this threat. But the solution wasn’t to go long Toyota; it was to stay away from General Motors, Ford, and Chrysler. Add in their uncompetitive cost structures, and it’s clear who the losers are in this industry.

Red Flag # 3: The Company Begins to Use Questionable Accounting

Reading those boring financial statements may tell you if you’re invested in the next Enron or Worldcom. Bad companies try to hide poor performance with financial gimmickry…

One of the biggest things I’m looking at in the current investment environment includes companies reporting profits in excess of analyst expectations.

If such gains come from cutting costs, like firing employees, then the numbers being reported aren’t going to be sustainable over time. It’s the opposite of real sales growth—it’s a way of hiding a decline. A lot of service-based companies are guilty on this count in recent quarters, from retailers to restaurateurs.

Think of it as mold that people mistake for green shoots. It’s just too toxic to invest in.

The other major accounting areas to look at in this earnings environment are receivables and inventories…

If Accounts Receivable (AR) is rising, there could be a problem with a customer’s ability to repay. Or there’s a problem with lax lending to customers to buy products. Either way, it’s one of the most obvious red flags you can see without the assistance of a CPA. Eventually, toxic AR has to be written off. And the imaginary gains have to become real losses.

Rising inventories are even more problematic…

A store offering this year’s fashions at 50% off may be able to post some good sales numbers, but over time it’s a recipe for disaster. Deeper and prolonged sales shorten the life of the business as lower margins choke off cash flow. Think Circuit City, Linens and Things, Mervyn’s and a host of other retailers. It’s not over in retail by a long shot.

Red Flag # 4: Burning the Furniture for Heat (Divestiture to Meet a Cash Crunch)

Companies worth owning for the long- term don’t need to issue new debt right now. They certainly don’t need to go to the capital markets and issue stock to shore up reserves, either. While this clearly applies to all the household-name financials, other companies have quietly been raising capital in the midst of this bear market rally as well.

Any company that has to sell off assets or divisions right now is one worth reevaluating. Even in the absence of the worst credit crunch of all time, it would still be a red flag.

Within this category I’ll also mention insider selling— it’s a form of raising equity, only it benefits management, not the company. And certainly not the shareholders. Combined with other red flags, it’s the closest thing to a leading indicator I’ve seen that a stock is going to fall.

Be especially aware of multiple insiders selling en masse.

Red Flag # 5: Key Related Industries Are Suffering

There’s more than one way to make a profit. In investing, the term ‘pin action’—stolen from bowling—means that if one industry is on fire, related industries will benefit as well. The same thing applies when it’s time to sell.

Not to flog the dead horse of American automakers, but there was more than one way to profit from their demise. A whole host of supplier companies are likely to go the way of GM…

Their biggest problem was concentration. Making a product that’s only bought by one customer means that when the customer goes out of business, so does their monopoly supplier. The stock of Lear Corp., a supplier to GM, took the same, long decline in the past year. Now that they’re finally defaulting on their bonds—it’s already too late to short the stock, which declined over 90% in the past year.

Investing by Semaphore: Watch the Flags

Take a good long look at the positions in your portfolio, and the major positions in any mutual funds you own. If your rationales for buying no longer apply or if any of the changes listed above are occurring, you might want to take some money off the table.

After this run-up, now is the perfect time to rebalance your entire portfolio—to reduce risk by getting out of toxic assets and into better ones. When the market comes crashing down again, you’ll have more capital preserved to invest in companies that are innovative, growing, diverse, and ethical—and still have some left over to short the losers.

Secrets and Lies and More

 LIes 

Can you blame CEOs for lying to prop up the price of their shares?

OF COURSE YOU CAN.

Someone has to pay for their lies. And it's usually the shareholders.

CEOs who disguise the shortcomings of their companies... hide their misdeeds... and make claims that simply aren't true used to be the exception. Sadly, that's no longer the case.

Have you seen the CEOs of GM and GE recently? They can't open their mouths without breaking into a nervous sweat.

These smooth talkers live by the  "Never let them see you sweat" Wall Street code. Something sure is bothering them...

Ah yes. The economy is in the dumpster.

Their problem. NOT YOURS.

By spending the next five minutes reading this SPECIAL REPORT, you could make over 100% gains from your ex-favorite blue chippers pretty much whenever you want.

How does a powerful blue chip company get on your bad side and become an ex-favorite? By saying one thing and doing another...

These Lies Led to 105.6%

Gains

For example, on August 22, 2007, a powerful banker said of his new acquisition, the country's largest independent mortgage lender, that he...

"Believes that in the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets... ."

With Countrywide's mortgage business cutting corners in every imaginable way (about 83% of the lender's mortgages were either low-doc or no-doc), he later swore "We are making every good loan we can find."

A little too late for that, don't you think?

I had seen enough. In October, I made my move. Less than six weeks later, my readers pocketed a profit of 105.6%.

When the Truth Gets Lost, I

Find 103% Gains

Here's another example of a company saying one thing and doing another...

On August 5 last year, a well-known financier said that his bank was...

"Probably 75%, 80% kind of hitting on all cylinders, if you will. So I think things are ramping up nicely. The market is very attractive."

The following month, the bank threw in the towel and told shareholders they'd be getting less from the company. I was expecting this about-face and knew exactly what to tell my readers.

Less than seven weeks later, I showed them a 102.7% profit.

The New Way of Making Money in an
Upside-Down Investment

I have in my briefcase a list of 340 companies that said one thing and did another. In 90% of the cases, their shareholders got nailed to the wall.

One of them will be getting its comeuppance on April 21. Shareholders will scream and shout. But I can't wait. It's going to be a big payday for me. And it can be a big one for you too.

Shareholders can avoid their losses and double their money from the very same companies.

How do I know?

Over the past half-year, I've been racking up one 100%-plus winner after another with these fakers. In just the last three months, this is what I've closed out on in my portfolio...

• On January 12... a 100.93% gain
• On December 11... a 148.48% gain
• On November 19... a 105.57% gain
• On October 28... a 102.73% gain

It all became possible when credit dried up and our investment world turned upside-down.

But so what? You adapt. You move on. And instead of setting the bar lower (which is just plain giving up), you set it higher.

So I adapted. It took me six months of intense research and testing to work out a new strategy. At the end of the six months, I knew I had something special.

Now I'm showing my readers the kind of life-changing opportunities I always knew were possible - bigger gains and more consistent profits - coming in month after month. And I'm doing it with some of the most boring companies out there...

Utilities, insurance companies, materials companies, cellphone companies... the very same "steady-as-she-goes" companies that don't like risks and pursue conservative cash strategies.

By now you must be wondering how the heck I do it. Fair enough. I have nothing to hide. In fact, I think it's very important for you to understand my strategy.

I want you to fully appreciate just how powerful this strategy is. So when you've finished reading this SPECIAL REPORT, I'm going to hand you an incredible opportunity to pocket a big gain within days - AS SOON AS April 21.

Blue Chippers Aren't What

 They Used to Be

Many of the blue chip "solid-as-Sears" companies have become downright dangerous.

One day you love ‘em because they're so reliable and predictable...

The next day you hate ‘em because their sweaty, overpaid CEOs decided to throw shareholders under the bus.

For example, owning Verizon and Pfizer was almost like having pet dogs. You knew what they could do. And you knew you could depend on them to do their little tricks to please you. For Verizon and Pfizer, it was giving you dividends every quarter... without fail.

Then, before you knew it, they turned into teenage children. Now you NEVER know what they're up to. And whatever they say, you can almost count on the opposite being closer to the truth.

Check Out These

 Whoppers

Do They Know the Truth

Can Make YOU Rich?

As you can see, truth is just another commodity to CEOs - to be bought, sold, marked down, traded, and packaged.

The unadulterated truth about these companies would scare most investors. But in a minute, I'm going to explain to you why it's just another chance for a 100%-plus profit investment.

So guess which company is now acting like a rebellious teenager?

It's none other than the venerable Dow Chemical, lead by sweet-talking Andrew Liveris.

Liveris has actually done some pretty smart things with Dow. It's not his fault that demand for Dow's products has dried up. But it is completely his fault for misleading shareholders.

This is what he said at the beginning of January...

"Dow is the only company in the Fortune 200 to have paid its regular quarterly cash dividend without reduction or interruption since 1912. That is 388 consecutive quarters. I have said it before, but I want to say it again, we will not break that streak. Not Dow, not on my watch."

Inspirational words, yes? Sort of like Jack Bauer saying, "Damn it. I will not let you destroy the United States. Not on my watch. Not in the next 24 hours."

I watched that little speech (Liveris's, not Jack's). He was sweating the whole time. And here's why...

DOW COULD NO LONGER AFFORD ITS DIVIDEND.

DBDs May look Like the

Real Thing...

The next dividend payment shareholders get from Dow will be borrowed or "stolen." Some unsuspecting division manager will discover that his budget has been cut in half...

Or Dow will dip into some revolving line of credit...

Or it'll find a new bank to borrow from.

Listen, if a company as big as Dow wants to find that money, it will.

In my book, that dividend isn't real. Real dividends come from a company's revenues that are left over after costs are paid. DBDs (debt-backed dividends) come from borrowings. They're completely fake.

Less than two months after making that heartfelt "not on my watch" promise, Liveris caved. He announced a dividend cut.

And, by the way, he was sweating up a storm.

So why was Dow trying to convince shareholders that a "fake" dividend was better than a smaller one or no dividend at all?

Why 99% of Investors Get the Right
Signal Wrong

I have 340 case histories that say Dow was wrong. "Fake dividends" are worse than useless. They give shareholders false hope...

Dow's shameless CEO is simply doing the same "two-step" dance that many other sweaty CEOs are doing these days.

First step is denying that anything is wrong. Cue the appearance of a "fake" dividend.

The second step is the actual dividend cut or suspension. This is where we jump in to make our 100%-plus profit.

You see, I've developed a patented strategy. Nobody else has this strategy but me...

It uses "fake dividends" to tell me exactly when stocks can be expected to slip, and for how long.

Most folks who notice "fake dividends" do the wrong thing. They get scared. And they flee the company like the plague. The faster they get out, the better they feel.

First off, that's not how you make money. That's how you try to keep your losses down.

Second, fleeing is not a strategy. It's using your 50,000-year-old "flee to safety" reflex. And that creates the same problem you would have had 50,000 years ago. If you're not running as fast as the guy next to you, you could be someone's dinner.

Listen, if you don't know this, you should...

Whenever you can predict which direction the herd will go in, you can make serious money from it. In this case, you can at least double your money.

And you do it by following the market's BIGGEST AND MOST BASIC TREND. The market is going down. And that's the way you should invest.

Betting that the most vulnerable companies are going down in a bear market is exactly the same as betting that the strongest companies are going up in a bull market.

It would be foolish not to invest with the odds overwhelmingly on your side, don't you think?

And here's the best thing. If you know where to look, these companies find you. In fact, there's...

ABSOLUTELY NO

GUESSWORK INVOLVED

I don't recommend taking any action until a company itself exposes its dividends as fake.

And when I do make my move, I make it by myself. As far as I know, no one else is using this strategy. Everybody else is concerned with what a company with a "fake dividend" will do in the next 24-48 hours.

I couldn't care less. Let it soar. Let it dive. Let it go sideways. It's all the same to me.

I have my eyes on a later date. It's too bad investors haven't noticed what happens to these companies a few months down the road. If they really looked (not just taking a five-second glance but searching for money-making patterns), they'd be astonished.

It's like there's a pot of gold waiting for you. All you have to do is pick the right moment to scoop it up.

But with the passage of a few months, nobody cares about fake dividends.

I care. And you should too. Because I've discovered a way to make big profits just by waiting.

As I said, the waiting period is almost over for our next big payoff. And you can still take advantage of this amazing opportunity. Interested? You should be.

But maybe you want to know more about how all this works. So let me give you a couple of examples...

Bank of America

 Bites (the Dust)

On October 6, Bank of America CEO Kenneth Lewis announced a dividend cut of 50%. On October 7, I wrote to my readers...

"Bank of America (BAC) decided to cut its third-quarter dividend by half yesterday evening because... well... you can't give out what you don't have.

"It's clear that Bank of America has bitten off more than it can chew. Making big acquisitions followed by a dividend cut is highly unusual. Companies usually don't use money intended for dividends on acquisitions. It shows a worrisome streak of shortsightedness on the part of management. They saw themselves as one of the winners of the crisis... a company with enough cash to clean up... not get taken to the cleaners".

On the same day I made a bet that the company's share prices would go down, this happened..

Bank of America Dropped 90% After Dividend Cut

Share prices dropped, then went up, then fell before rising slightly. Then they made a sheer drop before recovering and going up. Then another sheer drop. Finally, they bottomed.

But through it all, I was 100% certain that our position would make big money.

Shares had dropped 78% from when Bank America cut its dividend. Overall, on these two drops, our profit was 103.25%.

Capital Source's Luck and Money
Finally Runs Out

Capital Source is a REIT. It provides financing for commercial development and healthcare facilities.

On September 9, it cut its dividend by 92%. On September 10, I told my readers that I found another "fake dividend" company...

"Capital Source's substantial exposure to increasingly troubled sectors plus its dividend cut makes it an ideal candidate..."

CapitalSource Dropped 91% After Dividend Cut

Shares went up before they began their long journey down.

On October 1, when the market was rallying on news of an impending bailout of banks, I wrote to my readers...

"The bailout package will not turn around the financial sector or, for that matter, Capital Source. It will merely prevent the worst scenario from happening - which is the wholesale collapse of the banking sector. Banks will continue to write off bad debt. They will continue to be strapped for cash. Their earnings will continue to be depressed."

I was right. Banks and financials, including Capital Source, continued to fall. On October 24, I wrote...

"We are sending this closeout to lock in profits of 100%... And more good news is on the way. The Dow is down again today. As it should be.

"Everywhere you look, economic fundamentals are worsening by the day. People are starting to talk about markets closing for a week or two. I'm not saying it will happen. But the fact that such predictions are getting into print means that they're not considered outrageous. But when the market drops, chances are very good that your investments in the Red Flag Insider get better. Don't expect these downward trends to stop soon."

On December 11, I asked my readers to lock in the rest of their profits...

"Now is the time to sell the remaining half of your position. By closing out now, you are locking in profits of approximately 148%."

Macquarie Infrastructure's Dividend
Backed by Pennies

Macquarie Infrastructure has the biggest fixed-base airport operations in the U.S. and operates gas stations for private jets to gas up, get de-iced, and receive other services.

On November 7, I told my readers that Macquarie had...

"...just slashed its dividends for the first time to 20 cents from 64.5 cents last quarter. That's a substantial two-thirds reduction and reflects the company's concern over the global economic meltdown. The company should be playing it cautiously. The sectors that it is in are very vulnerable to the dramatic slowdown in economic activity we're seeing. In its second quarter - the last quarter it reported on - it disappointed analysts with earnings of $498,000 or a penny per share.

"With money tight, the last thing the company wanted to do is dip into its cash reserves or increase its debt. So now you know..."

Companies hate "fake dividends" as much as investors do. But the only way to avoid them is to reduce or suspend quarterly dividends. That's a "damned-if-you-do" and "damned-if-you-don't" proposition for shareholders.

In all scenarios, the company goes down.

Take a look what happened to Macquarie when it announced its dividend cut...

Macquarie Dropped 91% After Dividend Cut

Less than a week later, on November 14, I told my readers...

"In less than a week, you have made 57%. Go ahead and cash in half your position in Macquarie. Keep the other half."

Three months later, those who kept the other half were told to cash out. They made an even bigger gain -- 72.5%.

Every Company in the S&P 500 That Made a "Fake Dividend" Announcement for the First Time Last Year Saw Lower Share Prices Within 90 Days

It's obvious to everybody except certain pampered CEOs...

Stocks can't be expected to shine in the middle of a recession.

Once you accept this one simple truth, EVERYTHING BECOMES EASY.

All of a sudden you're swimming with the tide. And the tide is bringing in one 100%-plus winner after another. You can see for yourself on April 21. That's when our next winner is expected to hand us another huge gain.

Betting against crappy companies in a struggling economy makes perfect sense. It's the mirror image of betting on the best companies in a healthy economy.

But some people are uncomfortable betting against companies. If you're one of them, you can stop reading right now. What I'm proposing isn't for you.

Every now and then (less than two out of every 10 times!), investors give "fake dividend" companies a break. Don't ask me why. But I will tell you two things about investing:

1. No strategy can correctly anticipate the market's every move. If it looks like it does, you know you're doing something illegal or you've been hooked into some Madoff-like scam.

1. The market acts irrationally at times, and there's nothing you can do about it.

So building redundancy into a trade strategy isn't a luxury. It's a must.

It's why 99% of investing strategies don't work and have win rates of less than 50%.

Our win rate? It's 90.5%. Our portfolio boasts a win rate of 90.5%! I've even shown my readers four 100%-plus winners in the last several months.

I know of no other strategy with as good a win rate. (This may sound like boasting, but I'm just stating the facts.)

Why CEOs Hate Me

CEOs cringe at the sight of me. Investor relations hacks hang up on me. A good friend told me they call me "Professor Doom" behind my back. (Yes, I was a professor. And a company CEO. And an international financier.)

They hate me because when I place a bet on their company, there's an 90.5% chance that the company will go down.

And not just down... but WAY DOWN.

Do I mind having company executives hang up on me? Naw...

What I mind is CEOs feeding investors a pack of lies...

• The CEO of SunTrust, a big "fake dividend" distributor, said cutting dividends is "the responsible thing to do."

• The CEO of Zions Bancorp, which tried to shore up its "fake dividend" with a 26% payment reduction, said, "This modification to our dividend will allow us to further strengthen our capital base."

• The CEO of Washington Federal "categorically" denied that the company would use the U.S. government's $200 million handout for its "fake dividend" payments. In the meantime, the company took money from its capital reserves, not from its real cash profits, to pay its "fake dividend."

• GE is trying to avoid giving out "fake dividends" but is fighting a losing battle. Moody's said, "Incremental borrowing or reduction of existing liquidity levels to meet the dividend would be uncharacteristic for a firm with an Aaa rating."

But sweaty CEO Jeffrey Immelt doesn't seem to know he's in a lose-lose situation. His recent statement...

"Our objective is to maintain our Triple-A rating but we do not anticipate any major operational impacts should that change. We expect to deliver on the 2009 financial framework that we outlined last week."

THEN WHY DIDN'T I MAKE GE PART OF MY "FAKE DIVIDEND" PORTFOLIO?

The other shoe hadn't yet dropped. "Fake dividend" companies always drop their dividend payments. It's just a matter of time.

So when GE finally slashed its dividend in late February, I was ready.

We don't anticipate it. We don't try to "time" the market. AND WE DON'T RECOMMEND THAT YOU RUSH INTO THE MARKET AT A MOMENT'S NOTICE.

You don't have to beat the crowd. You don't have to be super-fast. But you do have to be patient. Take a look at this...

Another Dividend "Faker"

There's an 90.5% chance that this dividend faker will take another major leg down. And when it does, we'll be in the perfect position to rake in ANOTHER 100%-PLUS GAIN.

It's pretty easy to understand, right?

There are over 7,000 dividend paying companies across the market that may choose to cut their dividends at any time. Last year, at least 340 "fake dividend" companies cut theirs. 125 of them were banks.

I can promise you that this year there will be many more than that.

For most of them, this is the beginning of a long fall. Having chosen the right option could have bagged you an average of 102% gains.

I'm 55 years old. I've followed and evaluated hundreds of investing strategies in my life. I really believe with all my heart that this is the best of all of them.

This strategy (quite literally) is made for this market. It's the perfect strategy for what is going on in this market RIGHT NOW.

So it's hard for me to understand that...