Useful Stuff, Not Inflated Debt

“If you crossed the street blindfolded, you’d probably be OK. But the consequences of being wrong are so great, it’s a bad idea.”

— Bill Bonner, Founder of Agora

The “financialization” of the American economy is an era coming to a close. It’s back to the basics of wealth creation, to the basics of owning and making useful things. Because of their intrinsic usefulness, these investments hold their value over time. In the current turmoil, the market is tossing out just about everything. So you’re getting good prices for picking up these basics. One of these basics is the ability to produce food.

I was recently in the Chateau de Courtomer, one of the last chateaux built in Normandy, France, shortly before the French Revolution. A large, old painting of the Marquis de Courtomer still hangs in the stairwell. Bill Bonner, my publisher and the owner of the chateau, told me the man lost his head — literally — during the revolution. The chateau was also a regional headquarters for German operations in Normandy during World War II.

It’s a great old building, made of sturdy brick and stone. Imagine all that it’s seen over the centuries: wars, market crashes, all kinds of disaster. Yet it still stands. It’s retained its usefulness, even after all these years. That durability is a good thing — an enviable thing — and not so common among most of our material possessions.

Durable old investment ideas are on my mind today. With the credit crisis gathering power like a hurricane over the warm waters of the Gulf of Mexico and laying waste to the stock market in the process, it seems natural to focus even more on ideas with impregnable staying power.

One night at dinner, we had an interesting discussion about what sort of assets we’d want to own during times of crisis. We talked about gold — which had very recently enjoyed its best day ever, when the price rose by $50 per ounce. We talked about silver. Dan Prescher, the editor of International Living, though, had a different idea.

“I’d own a cow,” he said. “Think about it. What would you rather own if things got really bad? Gold coins or a cow?”

I think he was onto something. A cow is, of course, a useful animal to have around. Maybe some chickens, too, and some farmland with ample water and a good stand of fruit trees. These things have always had value to mankind. We need to eat and drink. During times of crisis, people may make do with an old sweater and forgo buying a new one. They may patch up that old couch, skip the movies and pass on the latest iPod. But they always eat and drink.

I’ve been thinking more about the global food chain lately. In the last issue, I wrote to you about what I called the “topsoil crisis.” Fertile land is becoming an extremely valuable asset. And what I think will happen is that the whole food chain will become more valuable with it. It’s sort of like the oil story.

As the price of oil rose, oil reserves became much more valuable. But so, too, did the whole energy infrastructure — pipelines, refineries, companies and people who can build and repair oil rigs and such. I think the same thing is happening — or will happen — with farmland and the entire food network that feeds this hungry planet. The ability to supply hogs and chickens and grains will become much more valuable.

I’m working more on these ideas, and I’ll have some new research to share with you in your next issue. This market turmoil could create some truly awesome opportunities to get in pretty early on these emerging trends.

Also, the market turmoil has created some great opportunities within our existing portfolio. There are several names I have at “hold” that I am looking to upgrade to “buy.” Otherwise smart investors who may balk at the idea may want to consider some more advice from Templeton.

More Good Advice from Templeton

On Thursday, I shared with you some quotes from John Templeton taken from the latest issue of Outstanding Investor Digest (which I recommend).

Here are a couple more ideas worth rolling around in your head as you think about investing:

The stock selection process is complex. Remember that unlike other professionals, a prudent and wise investor cannot afford to do what other investors do. For example, if 10 doctors tell you an appropriate prescription, then it’s wise to accept that consensus. Likewise, if 10 engineers agree on the design of a bridge, then that’s surely the right way to build it. But if 10 investment analysts tell you to buy a particular stock — or gold, deutsche marks, denominated bonds or whatever — it is probably the wrong thing to do.

Investing inhabits a peculiar world. You have to walk with the minority as an investor. You have to have the fortitude to stand against the crowd. As Templeton says below, the only way to pick up bargains is to buy what people are selling:

Buy those things that are depressed. A security is depressed in price only when people are selling. There is no other reason why the price should drop to an undervalued level except the pressure of selling. So in securities markets, you have to be prepared to do the opposite of what most investors are doing if you are going to get bargains and make superior profits in the long run.

These are certainly trying times. The recent market crash will test the nerve and resolve of every investor. But there is not much to do other than wait it out. And for those who have the stomach for it — and the means — it’s also a time to pick up some great bargains.

Chris Mayer
October 13, 2008