A Repentant Braggart
“When you feel like bragging about a stock, it’s probably time to sell.”
– John Neff
I need to learn to keep my mouth shut.
Late one recent afternoon, I was talking to Pirateinvestor founder and friend Porter Stansberry. I told him, with glee in my voice, that I had some real money in gold since last August. Yipee! Hooray! Good for Me!
As soon as I hung up the phone, my first thought was, Uh oh, maybe it’s time to sell. (See above quote by John Neff for further clarification.)
Fortunately, most of my conversation with Porter focused on small, beat-up stocks in industry, technology and retail. On balance, I think our surmises about what to buy next more than compensated for my bragging about what I bought last year. No need to sell.
Close call, though…
Casualty Insurers: Not Hoping for Extremes
With growing numbers of investors focusing on gold, and with my unwilling flesh momentarily getting the better of my diehard spirit yesterday on the phone…the yellow metal is the last place I feel like looking to find value wallowing at extremes of price.
Yes, if gold goes to some never-before-seen extreme like $1,000, as friend and fellow speculator Doug Casey and your own Daily Reckoning editor Bill Bonner both muse that it could, then today’s prices under $400 will indeed look – in 20/20 retrospect – like an extremely good buy.
But that’s the way of extremes, relative as they are to the moderation that helps define them.
The goal of a conscientious (read: cheapskate) value investor is not to catch prices at a moderate level and pray for the ascension. Rather, the quest is to find valuable businesses and assets trading at extreme lows in price. A bet on the natural tendency of such extremes to moderate back to from whence they came seems the soundest of all speculations. At $370, or thereabouts, with many gold stocks trading above their reasonably ascertainable net asset values, I must be content to listen for the din of a gold market top and look elsewhere for value.
To find elsewhere, imagine a slingshot. Value at my personal favorite extreme of price (low) resembles the slingshot pulled back, ready to slam its cargo forward.
The force that stretches our proverbial sling backward, i.e., that fells an equity issue’s price, is usually bad news. That’s what keeps most investors away from the best stock market investments, same as most of us keep away from eccentric characters wielding prehistoric weapons like slingshots. Makes sense. Nobody wants to get hurt. But if you stand out of the way, it’s a safe bet that, when you let go, that slingshot will unstretch.
That’s what value is all about. That’s why I like companies whose books carry things like virgin coastal land on the Gulf of Mexico at $2 an acre. That’s also why I like companies with the financial wherewithal to buy back all of their own outstanding shares, if the spirit so moved them.
Casualty Insurers: What Don’t You Want to Buy?
Betting on what happens to the projectile after our metaphorical sling unstretches is analogous to the guessing and hoping in which most investors indulge. Again, that is what gold looks like to my crotchety ilk at the moment.
What don’t you want to buy right now? What haven’t you heard much about lately? What wouldn’t you touch with a ten-foot pole?
Those are questions you ought to ask yourself if you want to identify the great opportunities – which buoyant gold prices, Colin Powell, U.N. weapons inspectors, Michael Jackson and reality T.V. are distracting you from.
There’s no uniform answer. There are only different folks and their different analytical strokes. For example:
James Grant, editor of Grant’s Interest Rate Observer, likes property and casualty insurers. They’re languishing at the bottom (?) of their very own private 25-year bear market. (Sound familiar? Like gold two years ago?) The P&C companies are now flush with cash, and turning an occasional profit. Grant makes a good case, including the paradoxically persuasive observation that nobody knows exactly what goes on inside these companies, which helps keep prices in check (for now).
Rick Rule, friend and founder of Carlsbad, California’s Global Resource Investments, writes from New Zealand to express interest in small, low-priced U.S banks, and the odd merger arbitrage play. (The Dollar?! What the…?!)
Me? Well…I haven’t heard much about all those beat-up energy merchants lately. Yet, there they are, trading at 3 or 4 times earnings, and one-tenth of book value. Most of them are mired in debt, and loaded with other problems: litigious shareholders, regulatory inquiries…a real mess. Doesn’t sound very appealing. Probably quite a bit of opportunity there somewhere.
I would imagine that all three of these ideas sound about as exciting to you as…well…gold two years ago.
for the Daily Reckoning
February 17, 2003
P.S. Rick Rule’s interest in small, low-priced banks sounds good to me. Everyone is touting the dollar’s fall. I wonder what’ll happen after the gold bubble bursts? I wonder which financial institutions are the most conservatively run, and are now trading at low enough prices to attract my money?
Here at the Daily Reckoning, we seem to be consistently bewildered by modern technology.
With Bill still enjoying the ‘perfect weather’ of Nicaragua, I woke early this morning, fully intending to bring you the latest scoop on the markets…only to have my computer erase my work just as it was nearly finished. And to top it off, it’s STILL snowing up a storm here in New Hampshire.
But at least Eric Fry is still on the job (and his computer is cooperating)…
Eric Fry, reporting from the Big Apple…
– Well, well, well…Old Man Market still has a bit of life in him after all. His dispirited, iron-deficient behavior early in the week yielded to a revitalized, youthful élan late in the week. The Dow Jones Industrial Average gained a sprightly 158 points Friday, lifting the blue chip index to 7,908 – a 44-point gain on the week. The Nasdaq Composite added 2.1%, to 1,310.
– Gold, the stock market’s alter ego, responded to the upbeat action on Wall Street by tumbling more than $18.00 to $352.20. The gold market’s retreat and the stock market’s revival both seemed to be reflecting the possibility that President Bush may not get his war in Iraq after all. Here in New York on Saturday, Viet-Nam-War- protester-wannabes were out in force waving their peace flags during a 100,000-strong protest march near the U.N. After the march had concluded, your co-editor observed many members of this motley crew strolling around Midtown, still toting their various flags, signs and banners. One aging hippie carried a sign that read: “Duct tape Bush’s mouth!”
– We doubt that the global protest marches served to alter anyone’s opinion. But we don’t doubt that they reflect a growing public opposition to an invasion of Iraq. The geopolitical significance of this phenomenon is debatable. But the financial market significance seems all but certain: a rally is likely to ensue.
– The shifting tide of global public opinion against an Iraqi invasion coincides nicely with extreme bearish sentiment readings toward stocks. Taken together, these twin phenomenon make the prospect of a trading rally a better-than-ever possibility…We wouldn’t be surprised if the stocks-bounce-gold-stumbles (SBGS) market continues for a few more days. But what do we know?
– The U.S. and the U.K. share a number of interesting similarities these days. WE want to bomb Iraq; THEY want to bomb Iraq. WE’ve got a record current account deficit; THEY’ve got a record current account deficit. WE’ve got a stock market (the S&P 500) that has fallen 46% from its bubble-era peak; THEY’ve got a stock market (the FTSE 100) that has fallen 47%.
– Britain’s unshakeable alliance with the United States against Iraq is widely known. Less well know is the fact that Britain’s got a great big trade deficit, just like we Yankees do. “Britain last year notched up its worst trade deficit since records began in 1697,” the Guardian reports, “as falling demand from the struggling global economy squeezed exports. The trade gap expanded to an unprecedented £34.3bn in 2002…Britain first started totting up its trade balance in 1697,” the Guardian explains. “Eight years after the Glorious Revolution brought William and Mary to the throne, the board of trade recorded commerce in wool, silk and spices from Britain’s colonies.
– “By 1697, the Bank of England had already been in operation for three years…to help regulate the public debt needed to pay for William of Orange’s costly continental wars…William made his peace with France in 1697, signing a treaty with Louis XIV, in which he was recognized as legitimate king of England.
– “On the catwalk,” the Guardian quips, “flounces were in. Restoration dandies were kitting themselves out with ribbons, feathers and petticoat breeches.”
– Ahh yes, your co-editor remembers that former life very fondly…and what dandies they were!
– But what about the British stock market? Jim Grant recently contemplated an almost-bullish stance toward the FTSE 100. Says Grant: “The London stock market didn’t go as high as the S&P 500 in the post-1995 bubble (88% vrs. 148%), but it’s fallen as low in the bust…Although not statistically undervalued, neither is it any longer overvalued. According to Andrew Smithers, London-based financial economist, it’s probably at fair value. What does ‘fair value’ look like? Americans wouldn’t know.”
– But the British might know, says Grant. “We should be wary of committing too soon to a market that probably hasn’t finished going down,” Grant cautions. “However, we should not be too fine about it.”
– British stocks may not be an outright “buy,” Grant allows, but they are certainly closer to being a buy than U.S. stocks, at least on the raw numbers. “Whereas approximately 24% of the FTSE 100 companies trade below book value, only 13% of the S&P 500 do. About 61% of the FTSE companies trade at less than 15 times earnings, while only 48% of American companies do.”
– We aren’t exactly sure what an investor ought to do with this information. But it might not hurt to keep a wary eye out for British values.
Back in New Hampshire…
*** While Eric was watching aging hippies protest in New York, others were equally impressed by the European versions of Saturday’s marches. Jennifer Westerfield, a colleague in Paris, sends the following note:
“As I got out of the metro Saturday afternoon, I saw people marching with an American flag…it was torn and singed and had a swastika painted on it, along with words to the effect of ‘down with American commercialism, hegemony & belliegerence!’ They carried pictures of George W alongside Hitler as well…
“I’ve had a lot of anti-American sentiment blown my way in the time I’ve spent here in Paris…but yesterday, I almost started tearing up on the street. And I don’t tear up easily. It was all very surreal.”
*** Computer willing (and snow notwithstanding), I’ll be back with more news for you tomorrow.
The Daily Reckoning