The Rude Awakening
Wall Street, New York
Thursday, April 28, 2005 ------------------------- The Rude Awakening PRESENTS: This is the tale of a man who, by
making a few key investment decisions, converted a small
fortune into a very large one during the difficult years of
2000 to 2005, even when most investors were losing money in
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------------------------- A PRISONER OF PROFIT
By Chris Mayer "Every investor is a prisoner of the times in which he
lives," writes James Grant, editor, Grant's Interest Rate
Observer. However, the "incarceration" can take many
different forms. Sometimes during big bull markets, we
investors become shackled to the idea that start-up
Internet companies are worth billions of dollars. At other
times, during big bear markets, we cannot seem to break
free of the notion that America's finest companies are
worth no more than 6 times earnings, even when they are
paying 7% dividend yields. In short, every investor must operate within the times in
which he lives, no matter how nonsensical the times might
be. The stock market will respond to fundamental trends
over a long period of time, but over the short run, almost
anything goes. Often, therefore, only a few key decisions
could make you much wealthier…or much poorer. Here is the
tale of a man who, by making a few key investment
decisions, converted a small fortune into a very large one
during the difficult years of 2000 to 2005, even when most
investors were losing money in the stock market… Karl Hill turned about $6.5 million into over $19 million
in the five years between March 2000 and March 2005. Who is
Mr. Hill? He is the owner and chairman of Monroe County
Bank in Forsyth, Ga…and, evidently, he is also a very
savvy investor. Two weeks ago, Hill shared some of his insights with those
of us attending the Grant's Spring Investment Conference in
New York City. The 75-year-old Hill, despite his folksy Southern style and
modest appearance, is well educated and worldly. He holds
master's degrees in philosophy from the University of
Chicago and social anthropology from Harvard. He is an Army
veteran, former editor of the Beacon Press in Boston and an
original functionary at the U.S. Department of Housing and
Urban Development (established by LBJ in 1965). Frankly,
seeing him and listening to his speech was worth the hefty
price of admission to the entire conference. So how did this Yankee-educated Southerner triple his
wealth? Well, he did it on the basis of a few big ideas. First, Hill followed the old maxim "Keep it simple." He
talked about the verse by the Greek poet Archilochus, which
I used in the January issue of Fleet: "The fox knows many
things, but the hedgehog knows one big thing." Hill aims to
know a few big things and not get lost in the details. He also cited the famous idea of William of Ockham, the
14th-century scholastic philosopher who formulated the "law
of parsimony," commonly known as "Ockham's razor." The
basic principle could be summed up in the notion that the
simplest methods are the best. In addition to favoring simplicity, Hill favors small
companies over larger ones. He relies on the work of
Ibbotson Associates, and quotes from their 2005 SBBI
Yearbook: "One of the most remarkable discoveries of modern
finance is the finding of a relationship between firm size
and return. On average, small companies have higher returns
than large ones… The relationship between firm size and
return cuts across the entire size spectrum." So the two
cornerstones of Hill's approach are: Keep it simple; and,
the smaller, the better. Then, he basically had one big idea: The dollar is a doomed
currency…at least for the time being. Therefore, he
looked for ways to "short-sell money," i.e. to bet against
the value of paper currency versus the value of real-world
things. From this idea, he formulated a plan to invest in
tangible assets, things you can "feel and touch," as he put
it. He thought housing would do very well, because he thought
that when the average fellow looked around for a "safe"
place to park his money, he would put it in housing. So he
invested heavily in homebuilders. Second, he bought gold
and silver companies, base metal producers, oil and gas
companies and some real estate companies. Of course, you don't need to know the specifics of how
these sectors performed to know that Hill was right on
target. So what is he doing today? Well, he's sold most of the
homebuilders, he says, because he is worried that interest
rates will move higher. He has done a complete about-face
on this sector. He dismisses the housing market as a
bubble. But otherwise, he continues to play the same
general tune: The value of our paper dollar will go nowhere
but down over the long run and the value of "things" will
rise. He's taken on foreign currency exposure, like the
euro, and bought some TIPS (inflation-protected government
bonds). Hill's story is remarkable, and his investment philosophy
is similar in some respects to our philosophy here at the
Fleet Street Letter. In the April issue, we spent some time
in the back part of the letter outlining similar thoughts
with regard to the decline of paper and the rise of
tangible assets - and we used examples of great American
fortunes that endured all sorts of calamity by investing in
tangible assets that held (and increased) their values over
time. Commodities are not normally our beat at Fleet, but
as they sometimes can be bought on the cheap, we're
interested (as our exposure in timber and fertilizer
assets, among other commodities, shows). Of course we don't expect to triple our money over the next
five years, but good things often happen to folks who make
decisive, targeted investments in key fundamental trends.
If we are, indeed, prisoners of the times in which we live,
then Hill's story demonstrates how a few big ideas can go a
long way toward making our incarceration more comfortable. [Ed. Note: What is Chris Mayer's latest pick? Clue: Karl
Hill would love it! Full story here:
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------------------------- Did You Notice…?
By Eric J. Fry Have U.S. consumers finally disposed of all their
disposable income? Have they finally extracted - and spent
- the last pennies of equity from their homes? Are they now
forced to rely on their incomes - and only their incomes -
to fuel their consumption? If so, yesterday's bleak durable goods report will not be
the last. Orders to U.S. factories for big-ticket
manufactured goods plunged 2.8 percent in March, the
biggest setback in 2 1/2 years and the third straight
decline. The March drop followed declines of 0.2 percent in
February and 1.2 percent in January. "The 2.8 percent drop in overall orders was the biggest
decline since a 6 percent plunge in September 2002,"
CBSMarketwatch reports. "It was a far worse performance
than analysts had expected." Interestingly, the sharp drop in durable goods orders was
NOT far worse than the Index of Leading Economic Indicators
(LEI) had anticipated. As the chart below clearly illustrates, the LEI has
complied a pretty impressive record of anticipating U.S.
economic trends. Specifically, the year-over-year percent
change of the LEI tends to lead the year-over-year change
of U.S. Industrial Production by about five months. 
Please note that the LEI is continuing to head in a
southerly direction. In other words, don't expect Mr. and
Mrs. Consumer to break out their wallets and pocketbooks
any time soon. [Ed. Note: Economic statistics are crumbling, but Americans
are still buying things they can't afford - stocks…
houses… even cars - with money they don't have. It's like
they're speeding towards a busy intersection - without
knowing what a red light means. Set yourself apart… http://www1.youreletters.com/t/134727/4907700/775317/0 ------------------------- And the Markets…
| Wednesday | Tuesday | This week | Year-to-Date | DOW | 10,199 | 10,151 | 41 | -5.4% | S&P | 1,156 | 1,152 | 4 | -4.6% | NASDAQ | 1,930 | 1,927 | -2 | -11.3% | 10-year Treasury | 4.23% | 4.27% | -0.03 | 0.01 | 30-year Treasury | 4.55% | 4.57% | -0.03 | -0.28 | Russell 2000 | 587 | 588 | -2 | -9.9% | Gold | $432.80 | $437.12 | -$1.80 | -1.1% | Silver | $7.11 | $7.24 | -$0.17 | 4.4% | CRB | 305.88 | 309.78 | -1.41 | 7.7% | WTI NYMEX CRUDE | $51.61 | $54.20 | -$3.78 | 18.8% | Yen (YEN/USD) | JPY 105.84 | JPY 106.00 | 0.14 | -3.2% | Dollar (USD/EUR) | $1.2931 | $1.2978 | 135 | 4.6% | Dollar (USD/GBP) | $1.9058 | $1.9057 | 89 | 0.6% |
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