Posted by: graemebird | October 12, 2008

The Return Of Benjamin Graham.

“Those who have knowledge don’t predict. Those who predict don’t have knowledge.”

Lao Tzu.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Not long ago I was asked the following question and was pondering what the answer is to it.

“I have some money to invest and I was interested in what you thought was sound in this day and age. I was thinking oil at one stage, but that seems to be a poor choice now. Gold seems the most obvious place, but I am very much at sea.

I used to have money in mining as a proxy for owning these commodities but I am concerned that the stock prices are like all others and vastly inflated by ponzi money. Most importantly I need to get rid of my money and wish to know the best location to shuffle it away until the ponzi scheme has collapsed and we are back to square.

Do you have any ideas Mr Bird?”

Here was my answer and I still stand by it but I’ve had more time to think about things:

“I think oil is a very good choice right now. I think its a good buy anything under 100USD. The Americans have record low gasoline reserves. The paper market appears to have cut loose from the real market. But the real market must make itself felt when the inventories run dry.

Also one reason perhaps the oil price has temporarily dipped is that the part of GDR not shown in GDP is most volatile in relation to ponzi-money.

So we see that GDP is C+I+G+X-M where I is net investment.

But GDR is C+ Gross Investment + G + X – M

It turns out that Gross investment is the biggest part of the equation. This is all business to business spending. It is a vast and unstable figure and so that resources prices can tank if the ponzi-money starts dying for awhile.

I don’t know how one goes about buying oil. But I would suppose that anything under $100 particularly is a good buy if you can hold it for a time. Because in all this fancy pants chasing after financial instruments a lot of the real investment doesn’t seem to be happening and the oil supply isn’t going to be growing a great deal any time soon.

I think small companies outside the US who have a lot of oil on the go would be worth looking into. Like if Rio had a lot of oil that would be a big plus factor. Really any non-US companies that are big in Energy should be on your short-list. Like we have a young company called Linc that works out of Chinchilla that can liquify coal. Now I don’t think its hit a profit yet. But you could probably buy it for a song right now. And there will come a time when it will be able to produce a barrel of diesel equivalent for maybe 90 when to get it from traditional sources will cost maybe 200+. So there will be many years where interest is high and its margins are very high. And I would suspect you could pick it up for loose change right now.

Some small gold and silver mining companies around the place have suffered from long-term naked short-selling. They haven’t been able to bankrupt the jackal-pack by buying their own shares back because they were in the expansion phase. Like there might likely be a couple of Canadian outfits in this category that are very much undervalued. When the naked shorts are collared and the US feds shenanigans against gold run dry some of these outfits stand to multiply their value ten times. Some of these outfits can pull an ounce out of the ground for 150USD and their price isn’t reflecting it. The central bank may no longer be able to prevent the gold runup and the naked shorters will one day have to run and hide… So some of these probably are a good thing to shortlist.”

A few problems are this. With Oil and Gold you do not know if you are getting what you are paying for. And so you are really likely to be buying into a bookie operation. But if you bought gold for holding at the Perth Mint and actually got them to physically store it for you I don’t know whether that would make you fast enough on your feet to trade very well. However I’ve been talking about the fact that we can expect very wide swings in these commodities. The ounce price of gold and the Dow ought to briefly converge. But unless some country takes gold up as its currency one cannot expect this potential near-convergence to hold. Since once the backlogs are cleared and you can take delivery immediately then the ponzi-gold will start up again and crash the market.

Now dig this. What if there was an attack of honesty and all around the world we decided to go to settlement? Than gold would have to go up even above the DOW from which heights it would drop only slowly…. or some similiar pattern. So getting rid of the ponzi things is by no means something that would crash prices. If you have the certificates, quite the contrary, it will overprice whatever it is that the ponzi-gear is getting wiped out in.

All these are things for people to consider. But the ponzi-racket in gold and silver must unravel to some extent. Because delivery is taking 3 months in gold and in silver there is more ponzi-silver around then an entire years production apparently.

Whatever you do take these things into account. But gold, silver and oil will definitely go up to record heights and they will definitely do so soon. But the problem is that you have to cover yourself by taking delivery. In which case you are likely vulnerable to the gold crashing back down again after enough months to clear the backlog. So if you buy a lot of this stuff just keep very close eye on the backlogs around the world.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Warren Buffets approach to buying shares has been called “focus-investing” Its a combination of what he learned from Graham, Fischer, and funnily enough Keynes. And of course his own thinking on matters.

Now he reveres Benjamin Graham the most. But he takes Grahams investing strategy in deeper principle rather than in actual surface prescription. I think its time to return far closer to the Benjamin Graham prescription.  Although with a more focused approach and buying less shares.

Graham emphasised book value. And buying at a discount to book value. Now this strategy probably hasn’t been possible for most of the time in between. But he took his ideas from the lessons he learned during the depression. And we have an unwinding of the sort where this approach could be highly practical.  I like Linc out of Chinchilla. I don’t think they’ve hit a profit yet.  But I just like the fact that they can produce liquified coal. Now if I was going with a discounted future estimated earnings approach well I’d have nothing to go with. They don’t have a positive cash flow yet I imagine. But in any case I’d want to see their book value in comparison with their market price.

We are in one of these periods that probably allows us to find many shares trading at below their book value. This is just not normal.  With the Buffet approach he knows his companies back to front. He’ll wait around for years to buy a company that he likes and knows well. He’ll wait years before the price is right.

But ultimately he has his system of discounting future projections of “look-through earnings” (not dividends) and he tends to use net present value in doing this. Now thats a great system. But right now you and I, who are not going to be trading around the clock, and cannot wait for companies we know perfectly, are not going to be able to activate such a great policy with the required speed on the trigger.

Plus I see a totally corrupt market now. And I see a jackal-pack that can take down companies for no good reason. I see people selling you bogus shares and you having to have the certificates right in your hands, stopping you from being too fast on the trigger.

I think we can find some very surefire industries and apply more of a Benjamin Graham approach to matters. Since the main problem is ubiquitous fractional reserve teamed up with derivatives then we can know for sure that we will have really wide swings in the prices of oil, gold, silver and other commodities. Gold and silver prices will go up in real terms and oil for a very long time as well. Now its not that the other commodities will go up in real terms. Its just that we will have these horrid price run-ups that will last months at a time for the ponzi-fractional-reserve backlog to be cleared and so we will have these very high prices for many months at a time. Think of the many months of rising oil prices late last year and early this year and realise that this simply must happen again pretty soon…….

….. So what I’m saying is we can look at a lot of these commodity companies and start buying them on a Grahamite basis. After all if the management is crap, a bigger player will soon snap them up at above book value when the next price surge comes around.

Advertisements

Responses

  1. Great Article. Graham is considered the first proponent of Value Investing, and I am a great fan of Benjamin Graham myself, I follow most of his rules, I started a site on value investing. The site mainly screens out Low PE, Low PB, High Divident Yeild. Low PB+ High Div etc.. for the India markets. I really appreciate the effort you have put in your blog. Best Wishes.

  2. He’s not a Jew, is he, this Graham?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: