Agora Financial’s Rude Awakening

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Laguna Beach, California

• A view from 284 days of bear market…and counting,
• The best balance sheets in the current crisis,
• The story of Odlum’s millions, and plenty more…

Chris Mayer, reporting from a bucolic Maryland suburb…

All right, this is getting a little ridiculous. Is Western civilization coming to a close or what? I look out my window and it doesn’t look like a scene out of Mad Max. Are we done burning oil? Are we going to stop eating? Of course not. But all the same, this incomprehensibly vast and complex credit crisis looks like the greatest test for our economy since the Great Depression.

I’ve been going through my library, leafing through old books in search of nuggets about investors who made a mint in the 1930s. If nothing else, it provides a little inspiration. At best, such foraging might yield some useful insight for today.

Take the story of a man with the odd name of Odlum and how he got rich in the Great Depression (brought to my attention by my associate editor, Samantha Buker).

Floyd Bostwick Odlum was a lawyer and industrialist, born in 1892. He started his investing career in 1923 with $39,000. In a couple of years, he turned that into $700,000 through some savvy investing in deeply undervalued stocks and other securities. Odlum was on his way. All told, in about 15 years, he parlayed that $39,000 into over $100 million ($1.5 billion in today’s dollars).

His big score came after the Crash of 1929. Odlum bought busted up investment trusts. As Diana Henriques writes in The White Sharks of Wall Street: “Odlum [became] a multimillionaire almost overnight by investing in the undervalued shares of 22 investment trusts decimated by the 1929 crash.”

He found companies trading for less than the value of the cash and securities they owned. So he bought them, liquidated them and then took the cash and did it again…and again. Of course, to do this, he had to have a little money at the bottom. And he did.

Odlum was either lucky or prescient, because he avoided much of the pain of the 1929 Crash by selling some of his investments beforehand. So he had some $14 million in fresh cash to take advantage of opportunities. He was also debt free. So immediately, two recurring themes surface: cash rich and debt free. It holds for individuals and companies, too. The survivors — and success stories — all had that mighty underpinning to build on.

But Odlum’s basic idea is the one I talk about in my book Invest Like a Dealmaker. You buy stocks when you find they are trading for less than they would be in the private markets. Ken Fisher, author of 100 Minds That Made the Market, had this to say of Odlum: “He basically demonstrated the ability to arbitrage the value spread between the public and private markets.”

As Odlum’s career shows, now is the time to be extra alert to new opportunities just like the ones he found in the 1930s. These investments can be the seeds of your own fortune.

In the column below, I’ll offer a couple of promising examples…

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Anti-Depression Remedies
By Chris Mayer

I recently endured a showing of Kung Fu Panda, as part of my son Calvin’s 10-year birthday party. Surprisingly, however, this made-for-kids movie contained a couple of sophisticated insights, like this one from the old turtle, Master Oogway: “Your mind is like water. When it’s agitated you can barely see clearly. But once you become quiet and are in peace, then everything becomes clear…”

Certainly, the market’s recent dramatic swings have scrambled the heads of many investors. Mostly, it’s been a nasty slide down — a history-making drop that has caused a lot of agitation and remorse. Many investors are giving up. “I just don’t have the stomach for it anymore,” a semi-retired computer programmer told the Wall Street Journal, as he moved his remaining assets into T-bills.

I share the computer programmer’s frustration and anxiety. But now is the time to really pay attention. The stock market’s history-making drop may be creating some equally historic buying opportunities.

This bear market has few precedents. Really, you have to look back to the 1930s to find anything like it. According to Barron’s, at the S&P 500’s late-November lows, the blue chip index had given back a decade worth of gains. And even after the market’s recent rebound, 2008 would still be the worst year for stocks since 1931, when they dropped 53%. In the whole of the 20th century, no decline has exceeded 50%, save for the 1929-32 bear market.

Other tidbits of interest from Barron’s: The current bear market is 284 days old. We are down almost exactly as much after 284 days as the 1929-32 and 1937-38 bear markets were after 284 days. Whether our bear market looks ultimately more like 1929-32 or 1937-38 is an open question, of course. The former went on to post a total loss of 86% top to bottom. The latter, though, rallied and made up 50% of the losses in the next six months. Another hopeful message: The average time to recoup a bear market loss has been 22 months, excluding the 1929-32 collapse. As with the big crash, so with the rebound — it will come when people least expect it.

Resource stocks look like they’ve already had their 1929-32 style crash in just the last few months. Many resource names plummeted 80% or worse from top to bottom. Even companies that looked like they were in decent financial shape only a few months ago are now scrambling to raise liquidity and stave off a financial crisis.

It reminds me of what Joe Scaminace, the CEO of OM Group (OMG:nyse), said during the company’s latest conference call: “We believe very strongly that the battle will be won and lost on the balance sheet in this environment.” I agree with him. A strong balance sheet means that financially, you are in control of your own destiny. It means you don’t need to raise money, nor do you have a looming debt coming due soon. It means you’re going to be a survivor. It’s going to come down to the survivors. The upside could be spectacular on the other side for them.

OM Group is among those with no net debt and plenty of excess cash. It’s also immensely profitable, even at these lower commodity prices. The long-term demand for cobalt-needy products, such as rechargeable batteries, provides a bright looking future (particularly as it relates to vehicles). Not without peril, of course, but I’d rather face those perils with financial strength of the kind OM has than weaker, more speculative ventures.

I also like companies like Ameron Intl. (AMN:nyse) and Contango Oil & Gas (MCF:amex), both of which have plenty of excess cash and no net debt.

Balance sheets contain the kinds of critical details people tend to ignore when times are good. But if ever there were a time to focus on balance sheet strength, it is now!

“A period of prosperity contains the seeds of its own destruction,” observed that storied investor, Phil Carret, in his book The Art of Speculation (1930). “Businessmen forget the painstaking care by which they have built up their enterprises and commit themselves to reckless plans of expansion.”

This financial calamity we’re going through now will lead to the demise of those who were reckless and stretched too thin. The benefits will ultimately accrue to those who kept a little something in reserve for just such a rainy day.

One stock in particular I would encourage you to give another look: Texas Pacific Land Trust (TPL:nyse). On Friday, it slipped below $20 per share. Texas Pacific Land Trust owns nearly a million acres of land. At Friday’s valuation, the market value of the whole company is about $200 million. The implied valuation is about $200 per acre. I don’t know that the company has ever sold acres for less than an average price of $200 per acre in the last several years. Last year, the average sale was $1,244 per acre. In the last quarter, ending Sept. 30, the company sold land at an average price of $400 per acre.

It’s hard to say what all the land is worth. The company opportunistically sells pieces over time and uses the proceeds to buy back stock. So as long as it nets more than the $200 per acre in implied value, shareholders win. So far, it’s done that easily.

Of course, that’s not all there is to this company. The company also owns a number of oil and gas royalties. In the last quarter alone, the trust generated $4.6 million in royalty income. This is nearly pure profit. The company has practically no expenses. In fact, it pays more in federal income taxes. My initial estimate put the oil and gas royalties at $20 per share, assuming oil at $70 and natural gas at $7. There is a lot of margin of safety in these royalties alone, even at currently depressed prices.

And finally, what’s great about this old trust is that it’s practically immune to the whole economic crisis. It does not have to sell land. It can sit on it and wait it out. The trust has been around since 1888. It will get through this.

Texas Pacific Land Trust is a low-risk business and a great long-term holding. Today’s market gives you a chance to add to your holdings at very attractive prices. And that, I suppose, is one thing we can be thankful for in all this mess.

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[Rude Endnote: Lastly today, a quick announcement that after four months and nearly 70 grand in development, our new income strategy is finally ready.

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Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com