Where Have All the Value Investments Gone?

"I'd rather be approximately right than precisely wrong..."

-- Warren Buffett

With all the energy I've been putting into denouncing Treasuries and the dollar, you might think that I, as an investor, tend to focus more on broad asset-classes and indexes rather than individual securities, but nothing could be further from the truth. In fact, until recently my interest in more general markets -- commodities, currencies, or indexes was a minor part of my research. At heart, I am a dyed-in-the-wool value/growth investor of the "never sell" ilk. I like to buy great companies and hold them forever. Or, at least I always have... until now.

If it has to do with value investing, you name it and I've probably read it -- from the entire collection of Berkshire-Hathaway's (BRK.A) annual reports (several times), to every piece of literature by or about Warren Buffett, Charlie Munger, Philip Fisher, and Ben Graham, among countless others. I pride myself on my ability to roll up my sleeves and discover a company's ability to create wealth -- using little or no debt -- through the generation of free cash. I have spreadsheets I have been building for almost 20 years, so complex that I have to order special memory so that my computer will run them. From 1998 to 2006, I even ran a small private fund that outperformed 90+% of money managers in the world.

I've received a lot of emails over the last few months from friends, colleagues, and readers asking my thoughts on equities in this environment. And my response has surprised them almost universally: I no longer hold any U.S. equity positions -- nor have I for some time. In fact, I even liquidated some positions I had held for 15 years. I am very scared of this market.

Yes, I know. Price-to-earnings ratios and dividends are more attractive than they have been in decades. And yes, I also recognize that the classic bear market represents an average of about a 40% loss from the top to the bottom, and that we've already covered that in this retreat. Further, I am reminded daily by any number of gurus, analysts, and reporters on CNBC that this may be the buying opportunity of a lifetime. And who am I to say it isn't? I have been wrong before, and I will be wrong again. But this little voice in the back of my mind keeps reminding me that, somehow, things are different this time.

Make no mistake about it: when I run the numbers on any of the companies I have followed for the last two decades -- names like Cisco (CSCO), Nike (NKE), Harley-Davidson (HOG), and Microsoft (MSFT), to name a few -- I see bargains I have never seen before. And I'm not looking at earnings, which are too easily manipulable; I'm calculating free cash flow and shoving it into numerous classic price and profitability ratios, like return-on-equity and net-profit-margin, for example. I won't tolerate phantom numbers, and thus, my analysis gets me as close to the truth as humanly possible -- the downside of which, unfortunately, is that most of the time companies which otherwise might seem like bargains are generally exposed as fairly-, or even over-valued.

Lately, however, when I stare at the monitor, my mouth starts to water. I have spent my whole career looking for precisely this type of opportunity, always wondering if one would even appear in my lifetime. And suddenly, here it is.

Or is it?

I have lived through several recessions and market corrections, and while they were painful, I always remained optimistic. I saw the dips in stocks as excellent entry-points, and I availed the markets of their gifts. Likewise, if I held positions going in, I maintained them, or added to them. I never, ever sold. But those downturns seemed more like a function of the normal business cycle, whereas this time, the system seems broken. Banks are failing all over the place, and despite the fact that the government is dumping trillions of dollars of stimulus into the economy, it can't seem to stem the tide. And it's not just happening in the United States; it's happening everywhere.

It is this seemingly systematic failure that has caused me to shift the bulk of my research from individual firms, to the macro-economic conditions that have gotten us where we are today. in the last six months, I have spent countless thousands of hours studying the historical trends of everything from gold, to oil, to stocks, to inflation, to interest rates and fixed-income yields. I feel like an expert of every major financial and economic catastrophe of the last 120 years: from the mid-1880s, to the Great Depression, to the 1970s. I've compared scenario after scenario, and frankly, the future doesn't look very good for U.S. stocks -- or, for that matter, the economy as a whole.

Yes, it's true -- based on historical metrics, equities are cheap right now. But you might find it interesting to know that after the initial stock market crash in 1929, stocks were equally "cheap," or perhaps even "cheaper" -- measured by price-to-earnings ratios and dividend yields. Unfortunately, as the economy buckled and ultimately collapsed, earnings and yields collapsed with it. And, of course, lower profitability and yields inevitably led to a multi-year decline in stock prices. From top to bottom, the averages lost 90% of their value from 1929 to 1933.

I've written much recently about the $8.5 trillion in stimulus and programs to which the U.S. government has committed itself over the next 24 months. I don't think most people are aware of the magnitude of that sum; yes, it sounds big, but if you look at it in a historical perspective, its implications are staggering. Basically, the United States government has borrowed and printed -- or will borrow and print -- more money, in real dollars, than ever before in history. But who will continue to lend to a government that is essentially bankrupt? If you look at a chart of the U.S. monetary base published by the St. Louis Fed (here's a longer-term graph), it becomes almost vertical in the past year. How will our currency absorb the shock of that sort of inflation? We've never been here before, and I fear for the solvency of our nation.

I say this in the context of this article to make a point: I still believe in the innovative and productive capacities of many companies in this country. I don't believe, no matter what happens, that Microsoft is going to stop making Windows (although I hope the next version is better than Vista). I don't believe Cisco will stop building networks. I don't believe Nike will stop making apparel. I do, however, believe that the currency on which they base all of their business is going to fail, and that the prices of the shares of those companies are going to suffer -- probably immensely -- before it is all over. In fact, I believe every business in the United States is going to have to face the coming currency crisis, and they will all have to make very tough decisions about how to conduct themselves profitably.

As a final thought, I should disclose that I have never been a conspiracy theorist. I have always believed in the American Spirit. I am not only a student of Constitutional history, I am a deep, passionate admirer of it. I count Thomas Jefferson among the most important people ever to have lived, and I believe he would be appalled at what his dream has become.

Until recent years, I believed the United States would lead the world in innovation and productivity for the distant future, but I didn't think it would do so in co-operation with the bloated, inefficient federal government at its core, but rather in spite of it. Unfortunately, the mother of all Ponzi schemes that started with the Federal Reserve's inception in 1913 -- and all the profligate policies it has implemented in the decades since -- has finally reached a crescendo. There is only one solution to the mess we are in, and that is a rapid and relentless reversal of government spending, taxation, and money-creation. Alas, at the very moment we need these things to cease most, our government is issuing more record debt and currency, while initiating unprecedented spending programs.

For the first time in my career, I am betting against the United States and the dollar. The last place I want to put my wealth is in the equities of companies denominated in U.S. dollars. Will I ever buy U.S. stocks again? Undoubtedly! If I'm correct about what's coming, there will be a lot of pain. But at the end of it, there will also be almost unfathomable opportunity.

My objective is to survive, and to benefit.

Disclosures: Paco is short U.S. Treasuries through the Proshares Ultra Short 20+ Treasuries ETF (ticker: TBT). He is long physical gold, and the Proshares Ultra long gold ETF (ticker: UGL). He holds no positions in the equities mentioned in this article.

Copyright 2009, Paco Ahlgren. All Rights Reserved.

Comments

[fizzexman:]

Money must have physical backing or the market is free to get out of equities and into vapor based money. That exodus from the markets causes them to collapse, while everyone retreats to "safe money", unattached and unsupported by the real wealth of the economy: stocks bonds and commodities. ONLY a non-monopoly in money (federal reserve), i.e. competitive notes issued by a free private banking system, driven by the forces of the market's demand for value can save us now. Until we understand the need for a market place in money the pain is going to be massive.

Jan 18 01:13 AM

[Paul Price:]

Most people agree that the printing of trillions of dollars will ulitmately cause massive inflation. The question is how to play it.

Unfortunately, most other developed countries seem to be following the same diasterous route as our inept politicians. Their currencies are going to go down the tubes too.

Owning shares of commodity producers or companies that can readily adjust their prices for inflation seem like the only answer. Avoiding the dollar to get into other countries' bad paper may be fruitless.

Holding physical gold [that has no intrinsic usefullness to most people], may not be effective. In a true financial crisis who will be able to buy it from you and why would they want it?

Jan 18 07:12 AM

[studiophoto...:]

The article is certainly a good read. However, what concerns me in this environment is the group think that is taking place. What this author conveys I've read or heard, in part and in whole, everywhere from the WSJ to ESPN [ok, a bit of a stretch but you get the point]. Let's face it, everyone can't be right and there are very few around not talking catastrophic tidings...I'm highly suspect when all roads lead to Armageddon. Who among us are brave enough to be THE contrarian in a lifetime where we have seen, on at least 3 major occasions, that the crowd was wrong? Maybe a better question; is the crowd ever really right?
I said recently to a friend, these are very difficult times to be living through, but could they be more interesting and offer more opportunity?

Jan 18 09:36 AM

[BlueOkie:]

With all the money being printed, I say buy International Paper IP

Jan 18 10:58 AM

[Paco Ahlgren:]

Certainly some people agree with me that things are about to get bad, but do you really think its a majority? I point to the policies Washington is implementing -- or plans to implement. Obama has the support of the nation and the world; the vast majority of people believe these bailouts will work, that Treasuries are "safe," and the dollar is the ultimate bastion of value.

No, I wouldn't say I'm running "with the crowd" in any sense of the phrase.


On Jan 18 09:36 AM studiophototrope wrote:

> The article is certainly a good read. However, what concerns me in
> this environment is the group think that is taking place. What this
> author conveys I've read or heard, in part and in whole, everywhere
> from the WSJ to ESPN [ok, a bit of a stretch but you get the point].
> Let's face it, everyone can't be right and there are very few around
> not talking catastrophic tidings...I'm highly suspect when all roads
> lead to Armageddon. Who among us are brave enough to be THE contrarian
> in a lifetime where we have seen, on at least 3 major occasions,
> that the crowd was wrong? Maybe a better question; is the crowd ever
> really right?
> I said recently to a friend, these are very difficult times to be
> living through, but could they be more interesting and offer more
> opportunity?

Jan 18 12:01 PM

[consumerons...:]

SELL!SELL!SELL! YES! SELL! SELL! SELL!
I was only recently able to start investing, so all of you!!
SELL! SELL! SELL!!! Thank you thank you thank you!! For the opportunity of a lifetime! Now SELL! SELL! SELL!

Jan 18 06:36 PM

[Glen Bradford:]

I commented your last article. Where is the value? Based on the stocks you just pointed out, they have some value. But --- you're truly missing out if that's your list of "value." There are crotch rocket stocks out there priced like they're a pile of old rusty parts.

That said, I still agree with your short treasuries. Not shorting treasures, aka, being long treasuries is absolutely ignorant of the forces at play.

Jan 18 07:44 PM

[ArtfulDodger:]

Mr. Ahlgren:

No doubt this is a tough economic atmosphere. No doubt more banks, retailers, and individuals will go busted.

No doubt this addiction our government has to fiat money is a negative, and to me even worse is the American people's addiction to more and more government is a bigger negative.

No doubt more scams will be uncovered in companies and by individuals.

And you're dead right about Jefferson (and especially Madison): he would hate what we've done to his government and his country.

But you've put all this work into creating what you believe are excellent ways to find good investments, and at the first sign of really severe trouble you toss your work to the side and swallow every negative you've heard, as if each one is a word from the heavens.

By looking at your picture, trust me when I tell you I've been around much longer than you have, and I can promise you that everything you're hearing now was said in the late 60s, after the 73-74 bust out of the Niffty Fifty, after the small stock crash of 83, after the downturn in 79-80, after the DOW crash of 87, after the 92-93 downturn (after Papa Bush's and Clinton's huge tax increases nearly ruined the economy), after the Asian Tiger crash of 96-97, after the Dotbomb explosion of March 2000, after 9-11, and after numerous banking & S&L bust outs over the last forty years, but well-managed businesses kept booming along, growing, bettering their product lines, building equity, and rewarding investors.

Pessimists abound after every crash. Eternal pessimists come running out seeking their rewards. If the media can't find bad news after a crash, they'll dream it up.

And each time before they stop moaning and groaning, stocks will have moved up to they point that they'll then start hollering this: another Bull Market is at hand. How long before the DOW reaches 100,000. (By then, of course, it's almost time to sell!)

And yes, crashes wash scumbags like Bernie Madoff (if he did what the media claim he admitted doing) right up onto the shore in plain sight. This is scarry in itself, right? That someone could con so many people for so long.

You think this time is different?

You know what they say about advice, don't you? Wise people don't need it; fools won't heed it; and only idiots offer it.

Well, this from an idiot: cut the finanical news off. Stop reading financial articles for a couple of weeks. Consider what sectors are best suited to profit if things happen to turn out better than you think, and which ones can best take a continued downturn.

Sure, own some gold and short TNs if you like.

But by all means, go back to your own work and trust it.

And I'm going to this trouble to tell you this because not many people are doing what you're doing. Most have gone to schools that hoot at balance sheets, real earnings, and profit margins. They don't even know debt exists, and they don't care. Charts and graphs rule every bet they make, and I say bet because they don't hold anything long enough for it to be an investment.

If indices are going up, then they are long. If they're going down, then they're short.

We need you. Don't desert us!

With all respect.

Jan 18 07:55 PM

[Paco Ahlgren:]

"But you've put all this work into creating what you believe are excellent ways to find good investments, and at the first sign of really severe trouble you toss your work to the side and swallow every negative you've heard, as if each one is a word from the heavens."

This certainly isn't the "first sign" of trouble! :-) Give me a little credit (for my age)! I stuck with my investments through a lot of turmoil -- most notably the explosion of the dot-com bubble, followed immediately by the 9-11 tragedy... No, this time really is different...

I understand what you're saying about the '60s, and especially the '70s, but you have to remember that we were a creditor nation back then, with a strong manufacturing base! But even with those factors in place, Volcker BARELY stopped inflation...

No, things are very different now. Keynesianism is a disease that can come back again and again. And it has. But eventually, it will run its course, and then... it's time to pay for our sins. No, we can't spend our way out of it this time. The dollar's back is broken, and I don't want to be anywhere near U.S. equities.

I told my assistant last night that I would absolutely LOVE to be wrong! I'm not immune to this collapse, and some of my assets would benefit hugely from a return to the salad days. PLEASE God, let me be wrong!

But I'm not. Not this time. I hope Warren Buffett is keep his cash dear; the opportunities have not yet appeared (nor will they, I fear, for another 40% or so).

I'm sorry to be so gloomy. I'm a nice person! Really! Please don't kill the messenger!

Jan 18 08:13 PM

[studiophoto...:]

>>>Certainly some people agree with me that things are about to get bad, but do you really think its a majority? <<<

There's no doubt in my mind that, currently, the consensus opinion is that things are about to go from bad to worse. It is a majority opinion in any venue you examine. Honestly, I don't know what you are looking at for your sentiment readings.

>>> I point to the policies Washington is implementing -- or plans to implement. Obama has the support of the nation and the world; the vast majority of people believe these bailouts will work, that Treasuries are "safe," and the dollar is the ultimate bastion of value. <<<

Sorry, I completely disagree...most people have no idea whether the Obama plans will work, but that doesn't stop those same people from hoping they will work. That's a big difference from people "believing" they will work, being bullish about the plans and committing equity to their belief..
As far as treasuries, those instruments may have attracted the safety crowd but it is rare to hear any financial adviser/analyst not talk about the treasury bubble.
The dollar discussion has been much more evenly divided with some talking about the dollar being the currency of last resort.

>>> No, I wouldn't say I'm running "with the crowd" in any sense of the phrase. <<<

I believe you need to be more aware of your surroundings. I'm not saying you're not making a case for great concern re: the economic environment worldwide, I'm just saying that you are seeing and saying the same things as most every "respected" analyst, economist, academic, and financial adviser.
Some small percentage are saying to buy equities now and "in 5 years you'll be glad you did", but "hope" that future policies will work is not bullish sentiment, I see very few experts encouraging continued investment in Treasuries, rather they are warning of the impending treasury bubble, and dollar mega bulls? No way.

So that puts your views right smack in the middle of the crowd. Just take a look at the SeekingAlpha Home page and tell me what the sentiment is there...it's obvious your sentiment has a lot in common with that front page. Ultimately, you and all the other pundits could be right, but as I stated in my first response, "Is the crowd ever right?".
Best regards

Jan 18 08:46 PM

[happysoul77777:]

The economists, accountants, strategists, and regulators need to step outsied of the box and think!

The destruction of wealth and value was caused by the FASB 157 (Fair Value accounting rule, naked short selling, repeal of the uptick rule, uncontrolled derivatives (CDS, leveraged ETFs). Sub-prime loan was the catalyst, but the above-mentioned sustaning factors have caused serious problems around the world.

Jan 18 09:24 PM

[ArtfulDodger:]

Mr. Ahlgren:

You took me wrongly if you think I was "shooting the messenger."

I really sympathize with you, because this is not an easy time to invest—that’s for sure. Personally, I think there’s a short time frame to make any serious capital gains this year—and that I believe will take place before mid-summer. But I don’t spend much time trying to predict whole markets. I’ve found it folly at its height.

Perhaps you’re a (former) Buy-and-Hold-Forever Buffetteer investor. If you are (were), you should take the context of the time Buffett and Munger developed that concept—it was when capital gains tax rates were punitive and trading expenses were murderous. (I once bought 1000 shares of Atlanta Gas & Light for about $25,000 and it cost me $925. In 1977, I went to the brokerage house where I traded to cash in a big win I had, and a friend asked me how I was going to enjoy paying the approximate 75% federal tax, and the 7% state tax. It was a Buy-and-Hold-Forever era for sure.)

I’m not a Buffetteer. I sold out in late February 2000 (and still have my receipts to prove it), and I sold out this past summer and just recently got back into equities in late November. I went short for the first time in my investment life back in September. My stock picking wasn’t too great last year, but the shorting helped me to finish the year ahead—not that I count my investments by months and years.

In my view, Mr. Ahlgren, the crash is over. We’ve now got to settle in for the aftermath of that crash and, as always, there are plenty of winners to be found after the crash when the media are yelling “the end is near.”

Did you know that over 2000 banks and S&Ls and thousands of real estate and construction companies busted out from 1987 through 1993? That was part of the aftermath of the 1986 tax reform, the DOW Crash of `87, deregulation of the S&Ls, and huge tax increases.

But look how many companies did over that time. I think, as best memory serves, the DOW was at 2200 in October of `87 when it dropped 500 points in one day. That's about a 20% drop in one day; I don't think the DOW dropped that much in one day after 9-11, did it?

Granted, it’s my view that you are right about printing money and borrowing: it’s a pyramid that some day must come crashing down. But we've got to deal with that type of economics, but that's what everyone wants.

And the Fed and its creators have another system sitting there right behind this one to put in its place. I don’t know what it is, but you can bet they have one.

As far as our being a debtor nation, I’m not sure what you mean when you say we were a creditor nation back in the 60s & 70s. Woodrow Wilson used the national debt of about $700m as an excuse to initiate a national income tax back in 1913. It skyrocketed during his term, and the nation has owed money ever since.

I’m sure it was 1971 when Nixon said, “We’re all Keynesians now.” He was right then, and we’ve been Keynesians ever since, even under Reagan.

Regarding your age, no knock intended, but I talk to pups all the time that gobble down every word the media vomit out at them. Perhaps you don’t fall in that category, but you’re certainly sounding the same message as they.

I wrote an article back in 1991 called “The Death of the Critical Mind in America.” It has not been resurrected.

And the dollar, it’s had an amazing run from its low this past summer, has it not? And it’s killed most of the Asian currencies, has it not?

One knock I will put on is, not necessarily on you, but on your generation, with all due respect, and with hope to find someone different: no amount of truth, proof, or evidence can get them to listen to one single word their elders try to tell them. They know everything about everything and it’s impossible to change on scintilla of their thinking. And I have friends all over the country that tell me the exact same thing. Yours is, I'm sorry to conclude, definitely the Know-It-All Generation!

I wish you well—as well as I do your generation—because one day I’ll be on Social Security and you’ll have to produce to give me my check.

Seriously, I hope you make (or have made, I’m sure) the right decision in your investing.

With all best wishes and respect, The Artful Dodger

Jan 18 09:53 PM

[ArtfulDodger:]

Btw, Mr. Ahlgren, I've been meaning to thank you for your work and your article. Keep it up. As I said, we need more of this type of thinking, because after serious crashes such as we've just been through, it's only right that investors question their methods.

This is not a time to give up, not that you are, but it's a time to hone your investing methods—a time for investors to ask themselves, What could I have done differently to have gotten through 2008 in better shape? What have I learned from this experience?

One thing should be, of course, is this: Never, ever buy a stock you hear touted on TV or radio by any person. (This is my first rule of investing.)

Again, thank you for the excellent article, and forgive my rudeness for not thanking you earlier.

Jan 18 09:58 PM

[Paco Ahlgren:]

Sir, I am not only listening to you, I'm hanging on your every word. I hope I don't come across as someone so dogmatic that I can't consider a more practical and experienced perspective. You make very good points; if anything, you force me to question my positions. How could that ever be a bad thing?

I understand your criticism of my generation, and if it offers you any solace, I have a hard time respecting the values of my peers -- what you said resonates with me. I haven't been immune to the excessive and profligate cultural imperatives of the last two decades, but I am penitent! :-)

I teeter on the edge of a blade... Is this '73-'74? Are we almost out? Or is it something more serious and sinister? From '29 to '33, investors were crushed by false rallies. Many of them missed the real rally at the bottom. And then, just when it look looked like happy days had really returned, 1937 killed them again. Valuations were misleading all the way through, and yet value investing would have destroyed any portfolio.

Would you ever have gotten back in the market after an environment like that? I certainly wouldn't have.

I'm not saying you're wrong, and I hope I don't miss the biggest bull market in history because of my fear. And yet my fear is rational (and critical); I'm neither a fear-monger nor a conspiracy theorist. My concern for the future is authentic.

Thank you for a very compelling and educational response. If you are ever in Austin, I would love to buy you a beer (or three). You obviously have a tremendous amount of knowledge and experience.


On Jan 18 09:53 PM ArtfulDodger wrote:

> Mr. Ahlgren:
>
> You took me wrongly if you think I was "shooting the messenger."
>
>
> I really sympathize with you, because this is not an easy time to
> invest—that’s for sure. Personally, I think there’s a short time
> frame to make any serious capital gains this year—and that I believe
> will take place before mid-summer. But I don’t spend much time trying
> to predict whole markets. I’ve found it folly at its height.
>
> Perhaps you’re a (former) Buy-and-Hold-Forever Buffetteer investor.
> If you are (were), you should take the context of the time Buffett
> and Munger developed that concept—it was when capital gains tax rates
> were punitive and trading expenses were murderous. (I once bought
> 1000 shares of Atlanta Gas &amp; Light for about $25,000 and it cost
> me $925. In 1977, I went to the brokerage house where I traded to
> cash in a big win I had, and a friend asked me how I was going to
> enjoy paying the approximate 75% federal tax, and the 7% state tax.
> It was a Buy-and-Hold-Forever era for sure.)
>
> I’m not a Buffetteer. I sold out in late February 2000 (and still
> have my receipts to prove it), and I sold out this past summer and
> just recently got back into equities in late November. I went short
> for the first time in my investment life back in September. My stock
> picking wasn’t too great last year, but the shorting helped me to
> finish the year ahead—not that I count my investments by months and
> years.
>
> In my view, Mr. Ahlgren, the crash is over. We’ve now got to settle
> in for the aftermath of that crash and, as always, there are plenty
> of winners to be found after the crash when the media are yelling
> “the end is near.”
>
> Did you know that over 2000 banks and S&amp;Ls and thousands of real
> estate and construction companies busted out from 1987 through 1993?
> That was part of the aftermath of the 1986 tax reform, the DOW Crash
> of `87, deregulation of the S&amp;Ls, and huge tax increases.

>
>
> But look how many companies did over that time. I think, as best
> memory serves, the DOW was at 2200 in October of `87 when it dropped
> 500 points in one day. That's about a 20% drop in one day; I don't
> think the DOW dropped that much in one day after 9-11, did it?

>
>
> Granted, it’s my view that you are right about printing money and
> borrowing: it’s a pyramid that some day must come crashing down.
> But we've got to deal with that type of economics, but that's what
> everyone wants.
>
> And the Fed and its creators have another system sitting there right
> behind this one to put in its place. I don’t know what it is, but
> you can bet they have one.
>
> As far as our being a debtor nation, I’m not sure what you mean when
> you say we were a creditor nation back in the 60s &amp; 70s. Woodrow
> Wilson used the national debt of about $700m as an excuse to initiate
> a national income tax back in 1913. It skyrocketed during his term,
> and the nation has owed money ever since.
>
> I’m sure it was 1971 when Nixon said, “We’re all Keynesians now.”
> He was right then, and we’ve been Keynesians ever since, even under
> Reagan.
>
> Regarding your age, no knock intended, but I talk to pups all the
> time that gobble down every word the media vomit out at them. Perhaps
> you don’t fall in that category, but you’re certainly sounding the
> same message as they.
>
> I wrote an article back in 1991 called “The Death of the Critical
> Mind in America.” It has not been resurrected.
>
> And the dollar, it’s had an amazing run from its low this past summer,
> has it not? And it’s killed most of the Asian currencies, has it
> not?
>
> One knock I will put on is, not necessarily on you, but on your generation,
> with all due respect, and with hope to find someone different: no
> amount of truth, proof, or evidence can get them to listen to one
> single word their elders try to tell them. They know everything about
> everything and it’s impossible to change on scintilla of their thinking.
> And I have friends all over the country that tell me the exact same
> thing. Yours is, I'm sorry to conclude, definitely the Know-It-All
> Generation!
>
> I wish you well—as well as I do your generation—because one day I’ll
> be on Social Security and you’ll have to produce to give me my check.

>
>
> Seriously, I hope you make (or have made, I’m sure) the right decision
> in your investing.
>
> With all best wishes and respect, The Artful Dodger

Jan 18 10:37 PM

[ArtfulDodger:]

Mr. Ahlgren:

Well, thank God. Someone from your generation that at least bends an ear. Good, this is real good news.

Yes, that’s what you’re supposed to do: check your positions; make sure they’re not emotional ones; that they’re not media driven; that even if you happen to be very bullish (and you’re not) your investments can make it through the worst of hurricanes. (You’re very smart and obviously a quick study. You don’t need my help from here on those points. You know the drill of reassessing, I’m sure.)

You wrote: "My concern for the future is authentic."

Now, as to your statement about being concerned for the future, well, jump aboard the concern train my new friend. I've been riding that rascal for quite a while myself.

I’ve been concerned about this Subprime lending since way back in the `90s—the government’s forcing lenders to lend money to people who can’t afford to repay. Nuts! (What’s wrong with renting until they can afford to own?)

And now our wonderful government just gave/lent (I don’t know which!) several billion to Chrysler to lend out at no interest. Is it not crazy? I mean, how long can such craziness go on?

I have also been writing about and concerned about the debt that keeps piling up on American companies’ balance sheets since 9-11 or thereabouts. From my work I’ve found that most companies cannot build up solid, cash-strong, low-debt balance sheets with tax rates at almost 40%—they need to be at 25% or lower. And no one is interested in cutting corporate tax rates. If, for example, you advocated that on this site in an article, the many leftists who comment here would bury you in negative comments, which I believe shows an envy and hatred of businesses.

Finally, in respect to the troubles we’re having, I don’t think they’ll stop until the government realizes that it can’t save everyone and everything. That will finally (if it ever happens!) let the poisonous puss out of this huge canker sore hanging over the nation, and then and only then can we go about healing and getting back to normal. What the government plans on doing about all the debt it’s piling up, I have no idea. Do you?

That said (and there's more to be concerned about), I still like some companies as investments right now. I like Huaneng Power (HNP), Yanshou Coal (YZC), and Netease (NTSE) in China. They have powerful businesses and really great balance sheets. None has any debt. They make money and have either large or almost whole shares of their sectors.

I like French Telecom (FTE), which pays a good dividend and is looking to come into the US; the company is huge and has no debt. Compare its balance sheet to US telecoms'.

I like Statoilhydro (STO), KHD Humbolt (KHD), Novartis (NVS), and Pfizer (PFE). All have great balance sheets, really good management, are either performing relatively well, or are hanging in at this point.

I also like Nokia (NOK), because this Finnish company is the original turtle that in the end slaughters the proverbial hare. It is a competition killer with a wonderful balance sheet and great products that it continues to improve.

I own two US Trusts in Sabine Royalty (SBR) and Dominion Black Warrior (DOM). They, of course, have no debt, pay sweet dividends, and are run by the same cat who is an excellent manager in this field.

I’m not by any means trying to get you to buy these; nor am I touting them to anyone. I’m simply trying to perk you up a little bit to get you back in the realm of thinking that companies such as the ones above will definitely make it through any hurricane that may still be coming. If one doesn’t come, they’ll continue their prosperous ways and ought to pay off well.

I appreciate your kind words. Let me tell you, experience and a good memory is mandatory in our business. The ability to reason, which everyone cannot do, helps too.

Are you a Southern gentleman? I’m an old Southern boy myself, but right now I’m in Florida where I spend winters—behind enemy lines. Ahem, if I may say so.

But because I’ve found someone of your era with a brain (and an open ear), I’m tempted to hop on a plane and scoot off to Austin. Is the “Victory Grill” still open? It was a little touristy, but the blues were topnotch. I used to go there back many moons ago in the 1970s, when I did a little traveling playing cards. Heck, a fellow had to do something to survive after the Nifty Fifty crash.

As noted, I certainly sympathize with you on two points: 1) your generation’s stubbornness and being just damned aggravating; and 2) having to face the current investing atmosphere after this last horrendous year.

I’ll tell you, though, and this may help you too, regarding point one: I had a hard time relating to most people my age back in the `60s and `70s. A lot of them are dead, but also a lot of them have come around to a piddling of what I look at as sanity.

Don’t get me wrong; it’s not that I’m so right and they were so wrong. They simply had their heads where mine was not, and my head is still in the same place, and they've moved theirs toward mine.

Again, thanks for your writing and your work. Please keep it up. I’m putting you on my watch list to read. Everyone should. You’re definitely worth a read.

The Dodger

Jan 19 12:37 AM

[Ricard:]

Mr. Ahlgren,

Reading your article was akin to mentally retracing my own steps the past couple of months, albeit with a slightly different outcome. I dollar-cost-averaged throughout October-December, at one point literally raising my hands as if I got electrocuted - the drops were so jarring and continuous.

I suppose I am lucky...I've come out slightly ahead since I started to buy. It makes me think of that soldier in "Saving Private Ryan" who got shot right in the head. He lifts his helmet, amazed that he's still alive...only to take another bullet in the head. Maybe the right response is to duck and cover...

...At this point, I will shamelessly promote ACH and CIEN as two examples that have already fallen the stated 90%, and are in no danger of insolvency. If they fall more, the better the price to get in. I've written puts that will kick in well below the 90% mark - in the meantime, 20-40% annual return on cash is too tempting to resist. If they go up, all the better for my current positions.

I'm not sure gold is the solution, though...that would be the same as playing Russian Roulette with the economy. Perhaps it is safer than a war-zone...hmm. Regarding TBT...I wish you luck on your timing. From what I've read, that ETF has "ticking time bomb" written all over it.

Thanks for sharing your thoughts. Good luck on your future investments.

Jan 19 04:34 AM

[L S:]

"This time is different". I always do a double-take when I see that philosophy pop-up, and rarely do you see someone just come out and say it. Where have we heard this before....

Tech Stocks several years ago: "Yes, valuations are just crazy, but this is the new internet economy. This time it's different". NASDAQ 5000 --> 1500.

I could repeat the argument for Housing... or Oil / Commodoties... or countless other scenarios over the years. The economy will turn. Yes, this time around the pain is more pronounced then usual, but I refuse to believe that "this time is different". On one hand, the writer mentions that it looks like this might be an opportunity of a lifetime. On the other hand, the fear of "this time is different" is going to completely keep him out of stocks.

Are banks NEVER going to lend again? Is no one EVER going to buy a new car? Are companies EVER going to hire more employees? Sure they are! It's just a matter of time, and the fact is no one can predict when that might occur.

Thanks for the advice, but I'll stick to my steady dollar cost averaging approach. I don't know when the economy and market will rise, but I'll be there to see it. I won't be late to the show, as this writer and his disciples will be.

Jan 19 08:41 AM

[consumerons...:]

SSShhhh. I'm trying to get them to SELL! SELL! SELL!!!


On Jan 18 07:10 PM dividendmachine wrote:

> Those who have read Jeremy Siegel's study in 2003 on the effect of
> reinvested dividends on overall returns understnd that now is the
> great time to buy the value stocks . 18 of the top 20 in the S&amp;P
> were either big pharma or consumer goods companies.A company like
> IBM which benefited from riding the technology wave from 1957-2003
> was TROUNCED by boring ompanies like Pfizer Pepsi Tootsie Roll and
> even the most boring Exxon. The theory of buying boring great companies
> t the right price and benfiting from the reinveted dividends either
> resonates or it doesn't.peace

Jan 19 11:05 AM

[Randy28:]

Thomas Jefferson would be appalled? A creative genius, renaissance man and all that, but.....died over $1m in debt, never paid back all his personal friends and others he borrowed from in order to live the lifestyle to which he thought he was entitled. Sadly, a major character flaw in our founding father of a hero.

Jan 19 02:04 PM

[consumerons...:]

Tomorrow's dollars on sale for today's nickels, dimes, and quarters? Dividendmachine and a few others are the only ones that see it? Really?

Jan 21 10:24 PM