Chris Mayer

Let me tell you the story of Timothy Bancroft. It’s a good one, and if you haven’t heard it, I think you’ll like it.

Bancroft was a smart and shrewd investor. He dodged the Panic of 1857, which he said was due to “easy money policies” and “overconfident speculation in the railroads and farmlands of the Western states.”

Instead, Bancroft said you should “buy good securities, put them away and forget them.” He thought the best investments were those “dealing in essential commodities that the Union and the world will always need in great quantities.”

When Bancroft died, he left an estate of $1.3 million. As Adam Smith (George Goodman) points out in his book The Money Game – from which this tale comes – “If you remember that those are untaxed mid-19th-century dollars, and that a full eight-course meal at Delmonico’s cost less than a dollar at the time, that is quite a fortune.”

What did Bancroft own? He owned good stuff from the earth. He owned Southern Zinc and Gold Belt Mining. Hard assets. (Although he did own a couple of questionable things that, I am sure, seemed like good ideas at the time, like American Alarm Clock.)

Sounds smart, right?

It wasn’t. And here is where Bancroft erred.

He made it so his heirs couldn’t touch that portfolio for a time, because he wanted them to hold onto these investments. By the time they could access the estate, it was worthless. Zero. Zip. Nada.

Bancroft’s tale reminds us that nothing is a good idea all the time.

Commodities in the ground are worthless…unless there are people that can extract them and sell them at a profit. It is men and machines that give commodities their value. Commodity businesses should be treated as businesses first and commodities second. And no business is immune to market forces, which, at times, can smash them to smithereens. Poor old Bancroft seems to have forgotten this when he socked away his gold and zinc companies.

The point is that you must stay flexible on your thinking. Fall in love with no commodity. And no matter how much you like a commodity, before you invest in a producer, be sure to think hard about whether it is a good business or not.

Natural gas makes the point as well as any commodity. Natural gas has been, for the most part, a lousy investment during the last few years. In fact, it is the only commodity in the CRB Index of commodities to post a negative return during the last 24 months.

But natural gas might be on the rebound…

Two weeks ago, Chevron came out and said US gas prices need to rise. The Financial Times reported: “George Kirkland, Chevron’s head of oil and gas exploration and production, said the industry needed prices ‘in the $6s and $7s’ in the long term to cover the cost of investment.”

I agree with him. In fact, I’ve been saying this for a couple of years, and I’ve been wrong about natural gas for a couple of years. I would’ve thought it would be in the $6s and $7s already.

Contango Oil & Gas (AMEX:MCF) is a stock I recommended to the subscribers of Capital & Crisis back in January 2009 when gas was in the $5s. The stock has not set the world on fire, but it has done pretty well considering the fact that natural gas prices have been going nowhere but down.

I still consider Contago an excellent play on a natural gas recovery. The company would mint money if gas got into the $6s and $7s.

In the meantime, Contango is a good enough business that it can still do all right at low natural prices. I am currently looking at new natural gas ideas for our portfolio. Compared to nuclear, natural gas looks real good. That’s where the private money is going.

Natural gas utilities are much cheaper in upfront costs. The payback on your investment is much quicker. They are perceived as safer. Natural gas is also a clean-burning fuel. We also have lots and lots of cheap gas in North America.

Finally, as I’ve written a lot about before, the global LNG trade is set to expand greatly over the next several years. LNG is liquefied natural gas. It’s what will take natural gas from being a local commodity to a global one. The long-term opportunity is tremendous for North American gas producers. They can sell nat gas in Europe or Asia for prices more than double what they get at home.

The LNG story is already out and unfolding, as shown by the 156% rise in the stock price of Chart Industries (NASDAQ:GTLS), which puts together the Erector Sets of the LNG trade. But North American natural gas itself remains a cheap commodity against a backdrop of solid demand and the opportunity of exporting it in large quantities in the future.

It’s time to buy natural gas, again. Natural gas may not hit $13 again for a long time, but $6-7 natural gas prices seem a likely scenario, and there are a host of stocks that will be worth two or three times the price at such levels.

Also, as our experience with Contango shows, the downside is low if you pick stocks that are low-cost producers and that make money even in a low-price environment. No matter how I feel about the commodity, I always come back to looking at these things as businesses. They have to make sense as is, or no dice. Preferably, without government support.

And I always remember the tale of Timothy Bancroft. In markets, nothing is good enough to put away and forget. An investor must keep his head in the game. When the facts change, so must his opinion.

More soon…

Regards,

Chris Mayer
for The Daily Reckoning

You May Also Like:


Inflationary Tortillas

Richard Daughty

Consumers are suffering because the stupid European governments boosted spending for a decade or more, the money financed by debt, and it is all of this spending that has made the purchasing power of the euro to fall. How do we fix this? The Mogambo has an answer. The biggest laugh I had all week […]

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents. 

Recent Articles

How Historic Lows in Housing Will Set You Up for Incredible Gains

Greg Guenthner

First, we’re dealing with the tightest real estate market in a very long time. Homebuilders haven’t been building for the past decade. And the rental market? Crazy. Rents are sky-high and the rental market these days is tight as a snare drum. I reminded you back in June that the average rates for rental houses have risen by more than 13%.


Infographic: The Cybersecurity Boom

Jeff Desjardins

Jeff Desjardins explores the thrilling (and scary) prospects of cybercrime and cyberterrorism after a year full of high-profile cybersecurity incidents, including the U.S. government and the country's largest bank...


Matt Insley: “If It’s Sunny, WE’RE Makin’ Money”

Matt Insley

George Soros, Steve Cohen, Israel Englander, Leon Cooperman, Michael Platt, Daniel Loeb, James Dinan, Stephen Mandel Jr., Larry Robbins and David Einhorn… That’s a list of billionaire fund managers that have a stake in the solar sector. Indeed, the solar sector is continuing to warm up with big money…