Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Three safe deposit plays to ride out these crazy markets,
• Appreciating life’s little luxuries, while you still have them!
• Digging around for tips from those who survived the other Great Depression and more…

Joel Bowman, writing today’s Rude on the most appreciated laptop in the world…

Behold, a tale of love and loss, iGeneration-style.

Yesterday afternoon, your managing editor sauntered over to his favorite spot on the golden sands of Viet Nam’s Nga Trang beach to begin work for the day. Moments later, with our trusty laptop receiving a steady wireless Internet signal and our MP3 earbuds in their right place, we started work. Things began very well too; gold was up, the markets were down and three people had commented on his Facebook status.

Many hours later, after yesterday’s edition of your Rude Awakening had been sent off around the world, we settled in for a nice glass of wine and some fresh seafood. [If you find yourself in this neck of the woods, by the way, be sure to check out The Sailing Club for one of the finest meals in town.]

After we consumed more oysters, lobster and shrimp than $18 should ever be able to buy, a couple approached our table and asked if we would like to join them in a game of pool, partners against partners. What a pleasant way to wind down the day, we thought and gladly accepted their offer.

In the interest of full and honest disclosure, your editor is far better at eating lobster than at playing eight ball, so while the final tally escapes us at this moment, it wasn’t at all pretty. Nevertheless, a good time was had by all. We were just about to tick off another successful day when, reaching for our trust laptop bag, your horrified editor found that it was no longer where he left it. We have all heard the tales where unsuspecting tourist are liberated from their possessions, but few of us really believe it will ever happen to us.

As we made a mental checklist of items lost, about $4,000 in all, our girlfriend dutifully reported the incident to the club’s manager. Unfortunately, the man informed us, stolen goods don’t generally make a habit of resurfacing near the scene of the crime. Despondent and wondering how we would manage to continue working on the road without our trusty steed, we trudged back to our hotel.

This morning, after filing the appropriate insurance claims, we walked back to the beach club to check the lost and found. It’s a long shot, we thought, but worth one last look.

And here, Rude reader, is where our story takes a marvelous turn. With a duly satisfied smile on his face, the bartender on shift led us into the back room where, lo and behold, our laptop bag and all the gadgets and gizmos within, sat safely on the manager’s desk. Never in his life has your editor been so ecstatic to see his workbag!

The bartender refused to accept our reward money, but gladly allowed us to put an open tab on the bar for a few hours so his regulars could enjoy a few drinks on us.

So what does our little pre-Valentine’s Day tale have to do with investing, you ask? Maybe nothing, although we’re pretty sure anyone with a penny in the market right now is feeling somewhat like we were on that long, laptopless walk back to our hotel last night.

The good news here is that, while you never really miss something until it’s gone, you never fully appreciate it until you get it back again. To be sure, the safe return of your editor’s laptop was more the consequence of luck than any measure of foresight or careful planning. Had the wrong person grabbed our bag, it would no doubt be half way to Hanoi by now.

But investors who feel robbed by the criminally insane markets of the past year needn’t, and shouldn’t, rely on blind fortune to recoup their losses. Instead, they might place their hard earned dollars, pounds and pesos in the safe box of a few good companies.

In the column below, Chris Mayer explains how taking a few prudent measures during these uncertain times can not only serve to protect your wealth, but may even help to multiply it. Please enjoy…

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Carret, Rhymes with Hurray!
By Chris Mayer

With each new trading day, the nation seems to be inching ever closer towards the sequel no one wants to see: Great Depression II. But there’s always a sunny side…

At least that’s the way Phil Carret looked at things. Born in 1896, Carret (rhymes with “hurray”) was one of the more inspiring and successful investors of the 20th century. He played through all the great booms and busts of the 20th century. In fact, in the pit of the Great Depression — 1932 — Carret decided to start his own mutual fund.

Yes, a quarter of the work force was out of work. But that left three-quarters working. And the Dow did lose 52.7% of its value in the prior year, but that meant that 47.3% remained.

Carret’s Pioneer Fund went on to compound shareholder capital at a rate of 13% annually for 50 years, despite slogging through losses in the early going. After he sold it, Carret managed his own money and private accounts. He was the great endurance man of the investing world, its Lou Gehrig or Cal Ripken.

Even at the age of 100, he put in a normal work week. He was a Wall Street marvel. Old Carret was a cool hand to the end, always looking for the bright side. He turned very bearish on stocks in 1997. The Dow was 7,000. Asked if he was selling stocks, Carret said: “I’m not going to do anything about it in my own portfolio. If stocks go down, they go down. I’m 100 years old and due to conk out any minute. If I conk out at the bottom of a bear market, it would save a lot of estate taxes.”

Always looking for the bright side, indeed…

Carret died in 1998 at the age of 101. Most of the above material comes from a chapter in John Rothchild’s The Bear Book: Survive and Profit in Ferocious Markets. If you’re interested in reading a little more, there is also a nice tribute to Carret here:

http://www.oid.com/public/html/CarretMemorial/CarretMem1.html

American Home Products was another Depression-era success story – not by looking on the bright side, but by prudently capitalizing on the gloomy side of things. Started in 1926 by a group of businessman long since forgotten, AHP was a maker of household products. It started small and grew quickly through acquisitions. Nothing so unusual about the tale so far. After all, the second great merger boom in American business took place in the 1920s.

But AHP was unusual in two respects. First, it continued its acquisition spree through the Great Depression when everyone else was battening down the hatches. It could do this because its finances were top-notch and its earnings power robust. Ben Graham, that great old investment writer from long ago, gave AHP a mention in his 1940 edition of Security Analysis. He gives us an appendix with the stock prices, earnings and dividends of AHP from 1929-1939.

AHP was not immune to the Great Depression, but the stock never came close to reporting a loss. Peak earnings of $5.49 per share in 1929 fell to $3.93 in the depths of 1932. It recovered by ‘39, turning in $5.23 per share.

Investors who held it through the Great Depression did all right. The stock price bounced all over the place, as you would expect. It hit a high of $86 in 1929 and a low of $25 in 1932. But by the late 1930s, it was still humming along in the $50s and would hit $60 per share in 1939.

All the while, it paid its investors nice dividends — a total of $34.35 over the decade. Considering what happened to the rest of market, and keeping in mind the dollar held its value better then, you would’ve been happy to park some money in AHP that decade.

There is a second trait that marks AHP as an anomaly: It bought businesses in unrelated industries. It owned firms in floor wax, coffee, oil, cheese products, insecticides and much more. It was the early model of a conglomerate. In this, AHP defied the wisdom of the times, which consolidated related business. The company’s diverse platform helped it weather the Depression better than if it had only a floor wax business.

So here we have a model of survival in the worst of times. AHP was a well-financed business that did more than one thing. It was an opportunistic business in the best sense of the term. It bought firms when and where they were cheap, without regard to the lines that divide industries.

Well, maybe the conglomerates of today will also fare better in today’s harsh climate. Over the last few months, I’ve recommended a number of financially strong conglomerates to the subscribers of Capital & Crisis. Seaboard (SEB: Amex) and PICO Holdings (PICO: Nasdaq) are two that come to mind.

Seaboard (SEB:amex) is a diversified international agribusiness and transportation company that processes pork products and ships cargo. The company also merchandises commodities, mills flour and feed, farms produce and sugar, and generate electric power. For example, Seaboard operates floating power generators off the coast of the Dominican Republic. And importantly, the company’s finances are strong.

PICO Holdings (PICO: nasdaq) is another compelling conglomerate. PICO’s stock is trading for only $25 a share, but the company owns water rights, land and a portfolio of cash and investments that are worth about $60 a share. As recently as last September, the stock was trading above $47. So the current quote represents a VERY steep discount to the company’s net asset value.

Both Seaboard and PICO seem like strong candidates to continue the legacy of American Home Products – asset-rich conglomerates that can excel in the midst of economic adversity.

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[Rude Endnote: U.S. markets remained pretty unchanged yesterday. The NASDAQ Composite clocked in the biggest gain, finishing up by 0.73%. The Dow and the S&S bounced around a bit then finished more or less where they started the session.

Things faired much better overnight in Europe and Asia. Japan’s Nikkei 225 climbed nearly 1% while the Aussie All Ordinaries got up 1.1% and Hong Kong’s Hang Seng finished 2.5% higher.

Traders in Europe right now have pushed France’s CAC and Germany’s DAX up by 2.5% and 2% respectively while London’s FTSE is up about 1.3%.

In the commodity pits, a barrel of crude still lingers around the $34 mark while gold cooled off after its meteoric rise earlier in the week. Each ounce in that stash under your mattress will fetch you $937 right now.

That’s it from us today. We’re off to put our valuables in a safe place before heading out to dinner. Perhaps you might do the same when the market opens in a few hours.

Until next time…

Cheers,

Joel Bowman

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