Saturday, December 13, 2008
One of the worst habits investors indulge in is "looking in the rearview mirror." In other words, people tend to base their expectations on events of the recent past. Stocks fall, and people fear they'll fall more and stay down for years. Stocks rise, and people expect them to rise forever.
Right now, the recent past contains the worst bear market since 1932. So inexperienced investors and other mere mortals are utterly terrified of buying stocks – a huge mistake.
I'm not talking about speculating on highly cyclical stocks. I'm talking about buying the world's best businesses at cheap valuations, sitting back, and watching them compound your capital at arm's length from the taxman, year after year, for decades. Buying world-dominating businesses and holding them should be the core of your stock market strategy.
In the latest issue of Extreme Value, out yesterday, I show you a list of six world-dominating stocks that are unlike the vast majority of stocks. The equities of these businesses are more like bonds, yielding between 10.49% and 22.91%. Five of these equities are rated triple-A... and their "coupons" actually grow.
A triple-A bond with a coupon that grows is the ultimate investment fantasy. But these six stocks are no fantasy. They're real. If you're scared to buy stocks, you'll be confident buying these six great businesses.
What does the data tell us? Right now, 2,267 companies in the U.S. trade below their net cash value. And 49 companies have a market cap of more than $1 billion, including Bank of New York Mellon, holding more cash than the value of its stock and debt. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest valuation since 1995.
Sam Zell would be proud... Europe's biggest bank, HSBC, is repurchasing its headquarters in London's Canary Wharf from Spain's Metrovacesa, 20 months after selling the building. HSBC will buy the building for 838 million pounds after selling it in April 2007 for 1.09 billion pounds – London's most expensive single-property transaction.
Metrovacesa's 800 million-pound loan came due on November 27, and lenders wouldn't extend the note due to a 32% drop in London commercial property. So Metrovacesa had to sell. HSBC will book a $368 million profit from the turnaround. You can find great opportunities when sellers are desperate.
Traders have pushed up the cost to hedge against losses on Treasuries, which recently surpassed the cost of default protection on bonds from Campbell Soup and Baxter International. With some economists predicting the government will spend $4 trillion on this bailout, thereby debasing the currency and causing rampant inflation, this fact isn't that surprising.
As Scott MacDonald, head of research at Aladdin Capital Management points out, "It's a certain absurdity, but it's also a question of supply and demand. We have another massive stimulus package coming. Does Campbell's Soup have a stimulus package coming? No."
That Campbell Soup doesn't need a bailout seems to have gone entirely unnoticed. Campbell's has lost some market share the past few years, and still dominates the industry it created, controlling 69% of the soup market.
Jim Rogers was in Miami recently, touting the advantages of commodities again. He says the fundamentals of commodities are "unimpaired," and prices will rebound when a lack of supply leads to shortages. "Commodities will be the place to be if and when we come out of [the downturn]," Rogers said. "Farmers cannot get loans for fertilizer now. Nobody can get a loan to open a zinc mine. So we are going to have some serious, serious supply problems before too much longer."
Rogers also said crude oil and agricultural commodities are the most likely to have shortages. "I haven't sold any commodities since the bull market began." And as we've been advising you to do, Rogers is still buying gold. "I own some gold, and if gold goes down, I'll buy some more. And if gold goes up, I'll buy some more," Rogers said. "Gold during the course of the bull market, which has several more years to go, will go much higher."
You may be tired of Rogers' preaching about commodities, but his conviction is part of his genius. Rogers isn't afraid to wait for a great opportunity. He's been buying commodities for years... And he's been shorting investment banks for years. When he finds a good trade, he takes a big position. As his now-famous quote in Market Wizards attests: "I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up."
Date Range:12/4/2008 to 12/11/2008
Date Range:12/4/2008 to 12/11/2008