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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Joe retired as a senior executive at Charles Schwab and Co. to found Stanford Wealth Management, LLC, in 1990. He also spent 36 years in a very different leadership... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
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  • Debunking the China Myth



    Globalization is seductive.  And data may be presented, especially beyond the pale of strong accountancy, that creates a false confidence.  In times when our own market have been more volatile, an economy like China’s is particularly seductive.  It seems to be on the straight-line progression the current generation of US investors enjoyed, and came to expect, from 1982-2000 (and now feel cheated that it ended, as all secular bull markets do.)

     

    I would advise caution in pursuing this investment avenue too wholeheartedly.  That is not to say I would eschew international diversification!  Nor that I don’t own some Chinese stocks.  Simply that I prefer to place the bulk of my and my clients’ portfolios in nations where the rule of law trumps the rule of a central committee, where physical and intellectual property rights are respected and enforced, where nepotism and favoritism are subjected to the harsh sunlight of a free press, and where entrepreneurialism abounds alongside natural and intellectual resources.  In this last I can recommend China; in the others, I fear we must tread lightly.

     

    Here’s why I recommend greater diversification: First and foremost, if the USA and the EU are the primary customers for China’s products (most of which are consumer rather than industrial products) and consumers in both the US and Europe snap their wallets shut, what will power the Chinese juggernaut?  They have virtually no middle class at home and their Asian neighbors often produce goods more cheaply than China does.

     

    As importantly, Chinese workers are no different than American workers or Japanese workers or German workers.  Each in their time had numerous laborers willing to work for a pittance so they could have a better life for themselves and their children.  Each in turn began to demand higher wages as being only fair, given the experience and talent they gained, which leads to increased productivity. 

     

    It will be no different in China.  It is actually in China’s interest to pay its workers more; doing so will create the middle class that is now missing so that in future tough times, they can rely on their own consumer base to muddle through.  Higher wages would make other nations less protectionist, as well.  But even if neither of these revelations sink in, it will simply happen because farm kids subsisting on rice and dried fish will move to the cities and happily labor for next to nothing for the first few years.  It’s new, it’s exciting, you can now afford to eat meat or poultry twice a week, maybe you and your roommate even share a motorbike.  But it is simply immutable human nature that the thrill wears off and you’d like chicken three times a week or you’d like to have your own motorbike.  The pressure to increase wages genie is out of the bottle and there’s no putting it back in. 

     

    I add to this volatile mix simmering ethnic strife; horrible air and water pollution; a lack of fresh potable water; poor corporate governance standards; the need to create 24 million new jobs a year; an aging population with no social safety net; a banking system that is used for political goals and therefore instructed to loan where politicians decide, not where responsible bankers decide; and a statist government that engenders false reporting from the hinterlands by its draconian punishment of those who fail to deliver.  With this tsunami just over the horizon, I don’t see a straight-line progression of success for China.  

     

    There are certainly some well-run companies there and I own some of them.  CNOOC (COO) seems to be a fine company that meets international reporting standards, as are many others.  I like small cap China Agritech (OTCPK:CAGC), for instance, as a fertilizer play.  I have even speculated in China – we own Shun Tak Holdings (OTCPK:SHTGY), the biggest ferry operator from the mainland to the newer, bigger Las Vegas on Macau – a play on gambling and the Chinese love of same.

    But for me, the best way to play China is via other nations that have what China wants and needs: Canadian timber, Australian oil, Singaporean markets, and US grain all leap to mind.  In these places, I can enjoy good corporate governance and the rule of law, yet still benefit from China’s growing needs by buying quality companies in nations I am more comfortable will experience significantly less upheaval.  I’ll discuss some of these firms in the coming weeks.  When you see them, see if you don’t agree that you can profit from China’s growth without taking on China’s potential problems…

     

     

    Disclosure: Long CAGC and SHTGY, have been long other China stocks in the past and likely will be again.  But prefer to play "China growth” via those companies from nations that supply China with what it needs to keep its economy going.

     

    Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

     

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

    Nov 08 9:56 AM | Link | Comment!
  • Vestas: An Ill or a Mighty Wind?


     

    I wrote my first recommendation for Vestas Wind Systems A/S (ADRs: VWDRY) back in October of 2004.  That may come as a shock to those 6-sigma commenters on SA who believe that anyone who wants to use all energy sources available, including fossil fuels, must be in the employ of the oil industry.  In fact, I was one of the earliest proponents of Vestas, not, perhaps to the chagrin of those commenters, because I believed wind power was the answer to our energy prayers, but because Vestas was a fine company in a nation with excellent corporate governance and it was to be the beneficiary of serious subsidies from various governments that virtually assured Vestas of profitability year after year.

     

    Vivian Lewis, the doyenne of  global  investing, editor  of  Global Investing (www.global-investing.com) and fellow (and highly-recommended!) Seeking Alpha contributor, discovered it first.  I kidded her that it wasn’t fair -- my  wife  is Danish-American,  we  travel  to  Norway and Denmark quite often, and since I do  research and write about  the  energy  industry, traditional  and  alternative,  you’d  think  I’d have written up Vestas, the  world’s  #1  manufacturer  of wind-power turbines, early on.  But Vivian is always looking for great companies as well, and no one has a lock on all the good ideas!

     

    Tracing  its  roots  back  to  a  blacksmith shop  in  1898  and  subsequent  steel  work  in many  industries,  the  current  Vestas began at the end of WWII manufacturing household appliances such as mixers and kitchen scales.  From  there,  they  branched  out  into  mud pumps, tankers, crop sprayers, plough shares, several  other  agricultural  products,  intercoolers for ship engines, and hydraulic cranes.  As a logical extension of nearly a century  working  with  metals,  during  the  oil  crisis  of  the  1970s Vestas began  to  examine  the  potential  of lightweight,  high-endurance  wind  turbines  as an alternative and clean source of energy. 

     

    The company's  first  attempt  resulted in the "Darrieus Turbine", which still exists at some old wind farms.  (It looks like  a giant egg-whisk.)  However,  this  turbine  design  was  not as  efficient  as  the  three-blade  model  that  we mostly see today -- mostly produced by Vestas.  In the 1980s, VESTAS began producing fiberglass wind turbine components, reducing weight and drag even more.  Their next innovation  was  pitch-regulated  turbines,  which optimize the energy output of the turbines by constantly adjusting the angle of the blades in relation  to  the  characteristics  of  the  wind.  And now the company has developed a turbine that features individual pitch regulation of all three blades,  making  it  much  more  reliable  and durable.

     

    Visitors to Denmark may have seen the offshore  wind  farm  at  Tunø  Knob  in  the Kattegat,  the  straits  between  Denmark  and Sweden.    It  is  just  south-east  of  Aarhus, Denmark, near the end of the E-45.   Or perhaps  the  eighty  2.0  MW  offshore  wind  turbines once in full op-eration at the Horns Reef site in the North Sea off  the  west  coast  of  Denmark,  near Blaavands,  just  north  of  the  Ipswich  (UK)  - Esbjerg ferry route.

     

    So why talk about Vestas today?  I still have 90% of our clients’ energy portfolios in oil, gas and coal investments – which is about right, since 90% of the energy used for electricity and transportation comes from these three sources.  But old friend Vestas has fallen on difficult times as many nations, and most European nations, realize they simply cannot afford the high cost of subsidizing wind power at a time when money is tight and greater needs beckon.

     

    Bad times, sure.  But I’m also a bargain hunter and I know that every  industry  has  setbacks and every company  has  setbacks.    I  believe  Vestas’ current setbacks are already factored  into  the  price, which has declined from 26 earlier this year to just 10.60 now – the lowest it’s been in the three years the ADRs have been available in the US.

     

    The stock is down for good reason:  the company shipped 719 wind turbines in the 3rd quarter, a decrease of 27 per cent.   It shipped wind power systems with an aggregate capacity of 1,456 MW, a decrease of 11 per cent.  Corporate revenue was EUR 1,722m, a decrease of 5 per cent.  And profits after taxes amounted to just EUR 126m, a decrease of 24 per cent. 

     

    I see no immediate catalyst to change all this but I have placed Vestas back on page 1 of our watchlists.  I  expect  Vestas to resume its growth, albeit at a lower pace.  But I imagine that growth will  come  in  fits  and  starts.    With  one  out  of every  three  wind  turbines  in  the  world, Vestas is the clear leader in providing the most technologically sound wind turbine blades.  Their backlog of orders includes buys from  utilities  in  France,  Germany,  Australia, Canada, the UK, Spain, Portugal, India, Italy, and Greece -- among others.  I have not bought yet but I will initiate pilot positions this week and next.  I see Vestas as the clear market leader, with the willingness to do what it takes to survive and thrive (they just laid off 3,000 workers at their European plants), with great corporate governance in a nation where the Danish Companies Act mandates that Members of the Board and the company’s Executive Management do not hold dual roles.

     

    At 10 dollars US and change, it is worthy of a pilot position.  Even though I see wind as but an ancillary contributor to the grid this year and next, there is no question that it will grow as long as subsidies are re-emplaced – as I believe they will be.  And If Vestas falls further, I’d be a more aggressive buyer.  If the company can rein in expenses, keep its book value intact, and learn to conduct R&D within a reduced cash flow environment, this one will be a survivor that will absolutely catch the next strong wind upwards.

     

    Disclosure: Not yet long Vestas, but will take a pilot position in the coming days.

     

    Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

     

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.


    Oct 28 9:22 PM | Link | 1 Comment
  • Timeless Investment Classics, #8: The Art of Contrary Thinking

    This is the 8th of 10 reviews of what I consider the top 10 Timeless Investment Classics that I keep within arm’s reach of my desk. My only criteria besides brilliant investing insights and accessible writing that still speaks to us today, is that, to be considered a “classic,” the book must have stood the test of time. These qualify; they were published as far back as 169 years and as recently as 43 years ago. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since... (Of course, if you want to buy my book as well, who am I to discourage you?)

     

    In chronological order of their original publication, here are the preceding 7 reviews:

    Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackey (1841)

    The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)

    Reminiscences of a Stock Operator, by Edwin LeFevre (1923)

    Security Analysis, by Graham & Dodd (1934)

    The Battle for Investment Survival, by Gerald M. Loeb (1935)

    Where Are the Customers' Yachts?, by Fred Schwed, Jr. (1940)

    The Intelligent Investor, by Benjamin Graham (1949)

     

    And now #8, The Art of Contrary Thinking, by Humphrey Bancroft Neill, written in 1954.  Some commenters have remarked how many of the books on this list changed their investing lives, and a few added other favorites.  One that regularly comes up is Contrarian Investment Strategy: The Psychology of Stock Market Success, written by David Dreman in 1980, and updated as The New Contrarian Investment Strategy in 1982, after his advice to buy bonds in the earlier book had proven devastating to those following that advice.  I prefer the later edition, though neither book qualify as having survived at least two generations of investing.  But did you know the book that all of us who fancy ourselves contrarians owe our approach to, whether we admit it in print or not, was actually published 56 years ago – and 28 years before Mr. Dreman’s fine work in 1982?

     

    The Art of Contrary Thinking is the seminal work in this area.  Have you heard the quote, "When everybody thinks alike, everyone is likely to be wrong."  That’s Humphrey Neill writing about investing more than a half-century ago.  Do not turn to this slim little volume if you are seeking a guide to building a contrarian’s dream portfolio.  Look to the other, more recent purveyors for that.  Mr. Neill’s writing style is often less than engaging and the book is comprised of a number of short essays about contrary thinking originally published by him elsewhere.  It’s a compendium, albeit slight, and that makes for some repetition of the same idea; but it is such an important idea that maybe the repetition is a good thing!  

     

    If I had to distill the entire book to just one phrase, it would be Humphrey Bancroft Neill’s own:  "The crowd is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold."  One can truly make a key piece of one’s reallocation efforts based upon those few simple words.  If that sounds like something another, more current, sage might say, it’s probably because it flows from Mr. Neill’s original thinking on the subject.  So when I hear Warren Buffett say, “Be fearful when others are greedy and greedy when others are fearful,” I hear the not-so-distant echo of "The crowd is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold."  

     

    I have featured many authors in this series who recognized the value of understanding investor psychology.  That’s because understanding and evaluating for yourself the sentiment of the crowd is key to successful investing.  Many of our selected authors, certainly including Mr. Neill, have been discussing what the academics today call “behavioral finance” before such a thing became a part of our academic lexicon.

     

    The primary premise of the book is stated quite clearly in the first few pages: “Human behavior is fully as important as, if not more important than, statistical behavior."   Mr. Neill goes on, in ensuing essays, to talk about not just “that” popular opinions are often wrong, but why this is so.  The historical examples he provides are further reminders that “this time it’s different” is a hollow phrase uttered by those who do not study history and are therefore doomed to repeat it.  And, even though it is sometimes a frustrating read to today’s readers, the genius of this book lies in the quiet insights and pieces of market wisdom spread randomly therein ((perhaps too randomly for some!)  Stick with it, however, and I think you’ll be rewarded with a reflective read of Humphrey Neill’s views on the value of patience, the assessment of risk, and the importance of asking “why?” at regular intervals during the investment process.  Do this and you will become a better investor.

     

    Finally, as one devotee of contrary investing wrote on the subject, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”  – Sir John Templeton

     

     

    Disclosure: No positions mentioned.

     

    Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

     

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.


    Tags: Macro View
    Oct 28 7:22 PM | Link | Comment!
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