“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.

Sincerely,
Chris Mayer
October 13, 2008

Useful Stuff, Not Inflated Debt was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Born and raised in rural Tennessee, Sir John was the first person in his town to go to college. He went to Yale during the great depression and when things got tight, his father could no longer keep him there. So he helped pay his own way through college with his poker winnings, which sort of adds to his legend. He eventually went on and won a Rhode Scholarship, went to Oxford and set up in Wall Street in 1937.

Now, you can imagine what the world look like in 1937; a lot of bad news, the Great Depression, war looming on the horizon. And in this environment of chaos, Sir John got to work.

One of his famous bets came to him in 1935 when he bought 100 shares of every stock trading for less than a dollar in the NYSE. He made four times his money in the next four years. That was sort of a pattern throughout his career. He was always an investor who was able to find the opportunity during times of market upheaval. He famously bought stocks the day after the ‘87 crash, for example. He also bought airlines after 9/11 and made a lot of money in a short amount of time. So I think he is a good investor to focus on these days because, as investors, we have so many problems to deal with in the marketplace.

I also want to say he started his famous fund in 1954 and it was incorporated in Canada because there was no capital gains tax there at the time. And during 1954–1992 he racked up an average return of 15% a year. That’s a great track record over a long period of time.

He also offered a lot of phrases that we take for granted as common sayings today. “‘It’s different this time,’ are the most expensive words in the English language” — That’s Templeton’s. Maybe his most famous saying is, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” He later added that the best time to buy is during points of “maximum pessimism.”

When I think of Templeton’s influence on me, I think of two things. One is that he was one of the first really successful investors to invest overseas. He was an early investor in Japan, for example, and he drove home the idea that a quality investment idea doesn’t have to be large, U.S. blue-chip company. He was equally at home investing in South Africa, Australia, Japan, wherever. The second thing I think of is that he had this focus on finding great opportunities even when markets seemed like a really bad place to be.

He wrote this when he was approaching his 95th birthday: “Throughout history, people have focused too little on the opportunities that problems present, both in investment and in life in general. The 21st century offers great hope and glorious promises. It is perhaps a golden age of opportunity.”

Now, you might think he’s nutty saying that. And when you look, there is a lot of bad news out there. I think the U.S. economy is probably in recession and Wall Street is a disaster. The dollar is in the tank, debts are high and taxes are going up. My state of Maryland, for instance, just passed the largest tax increase in state history last year. That is pretty amazing considering all the things people get hit with nowadays. And now we are getting hit with higher taxes too. California also had an increase in taxes by some large amount, and Sacramento already has higher taxes than NYC. So to top it all off — as if that’s not bad enough — it’s also an election year! So we have to listen to all the politicians tell us how they are going to solve our problems with a wave of their magic pen.

Today, the big issue is scarcity. When you think about how the prices of everything from food to gasoline are rising, you might think we face scarcity in a lot of things. This may or may not be the case. One thing we don’t have scarcity of, however, is paper money. The money and credit growth for the last 12 months is really incredible. The Australian dollar, the Canadian dollar, the Chinese Yuan, the euro…all these currencies are increasing at 22%, 21% 18%. The only major currencies that are not increasing at a double-digit rate are the Japanese yen and the Swiss franc. So, when we look at market prices, this distorts what we see:

For example, let’s look at oil. Every time I hear that oil is in a bubble, I think of this chart [above]. Basically what it tells you is that as money supply increase, the price of oil has increased along with it. In fact, roughly 87% of the increase in crude oil can be explained just by the increase in money supply. So when you see oil make this huge jump, you have to put it in context. This is true for all commodities. It looks like we have skyrocketing prices, but what we are in fact seeing is the collapse of the dollar. It is just another factor that makes investing difficult, another factor we have to consider.

Regards,
Chris Mayer
August 14, 2008

P.S.: Do you think John Templeton would let the current market get him down? I don’t, and neither should you. Sure, it seems like good opportunities are hard to find these days, but believe me they’re still there. In fact, I know of one investments that will actually pay you income checks. That’s money you can count on. And it may never run out

Crisis Breeds Opportunity was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.