I recently attended a lecture at Johns Hopkins University by the director of research at Legg Mason Capital Management, which manages about $16 billion in assets. It’s always good to compare the research methods of other companies to study room for improvement. Beyond the many organizational details, I found the presenter’s take on credentials particularly interesting.
First of all, the speaker only possessed a Bachelor’s degree in philosophy and religious studies. However, he was a chartered financial analyst (CFA). Although lacking a formal business education, he passed the extremely difficult exams through his own self-guided effort. In August, I wrote about the CFA being more valuable than a college degree, and this guy proves that idea.
He also made a second interesting observation. In his research department, he often preferred analysts without a business background. His reasoning was that those who know nothing about the market have more respect for it. The analyst who’s under the illusion that he’s got everything figured out is the worst researcher out there.
On my own learning curve, I’ve followed much the same path. At first, I didn’t know anything about the market and was naturally cautious due to my lack of knowledge. After finishing undergrad, I thought that I had things figured out. And as a result, I faced my first losses in the stock market. Only after attending graduate school did I fully appreciate the majesty of the market with all of its risks and challenges. Again, I’ve become as risk averse as my younger self who knew nothing, but this time from a much more informed perspective. You can’t just open up the Wall Street Journal and find a profit opportunity. Truly undervalued companies are few and far in between.
To bring philosophy into this conversation, Socrates once said, “The only true wisdom is knowing that you know nothing.” And this absolutely applies to investing. Thousands and thousands of analysts around the world are constantly analyzing companies. And they’re no hacks, but instead some of the best and brightest from Goldman Sachs, JPMorgan, etc. On top of that, they’re not just business majors; there are doctorates of math, statistics and physics to compete with. So when one makes the assumption that a particular stock is overvalued or undervalued, that opinion contends with the consensus of extremely intelligent people.
Hence, if they believe a stock is worth $10 and you believe it’s worth $15, the dilemma becomes philosophical rather than mathematical. For every “undervalued” stock, you must ask yourself, “What do I know that everyone else doesn’t?” and “Why don’t they notice the same thing?” If you can’t answer those two questions in a reasonable way, your stock valuation isn’t particularly worthwhile.
Therefore, the director of research had an excellent point. The person who doesn’t know anything about the market is sometimes more attuned to questioning his own conclusions than the business student who has “it all figured out.”
First, Louis James will give us an update from the Prospectors and Developers Association of Canada’s annual conference. A few of our editors are down there; so maybe we’ll hear more about it later in the week. Then, the Energy Team will report on Indian steel companies wishing to secure their coking coal supplies.
NFTF: WARNING – Beware the PDAC Curse
By Louis James
Louis James here, with a quick report from the annual Prospectors and Developers Association of Canada (PDAC) annual conference on Toronto.
I've heard that registrations were over 20,000 to begin with, a record on its own, but that actual attendance is more on the order of 25,000. I'm not calling a market top, but this place is more packed with happy shoppers than I've ever seen, and that is a clear sign of "toppiness." Add to this gold hitting a new nominal high this morning (March 7) and you've got some real giddiness going on. Many company valuations – good and bad alike – bear no relation whatsoever to asset value. If the formula for success is to Buy Low and Sell High, buying anything when the market is so exuberant is clearly a very risky proposition.
I'm feeling better about our recent recommendations to take profits in the International Speculator. I don't believe we're in the Mania Phase of this market, but things are certainly feeling pretty manic. The situation begs for one of two things to happen: either things really go manic and it's off to the Mania Phase races, or we get a big correction ahead before the Mania Phase kicks in. I just can't see things continuing as they are now – not without something breaking one way or the other.
Which will it be?
I don't know, and you should run – fast – from anyone who claims they do.
That said, remember the "PDAC Curse."
That is to say, everyone in the industry knows this event is the best time to get your company noticed by investors, so every company that possibly can tries to come out with news during PDAC. The more the better, and the more sensational the better. But that can't be sustained, so there's often a lull afterwards.
By now the results from 2010 are pretty much all out, and many projects in the Northern Hemisphere haven't been drilling all winter, exacerbating the lull. Result: there is often a retreat in share prices after PDAC – the PDAC Curse.
So, if you've got high profits and can recover your initial investment in any speculative picks vulnerable to correction (which is all of them), and haven't done so yet, now would be a most excellent time to do so.
Yes, you may miss some upside, but you will eliminate risk, and you'll bank cash for buying the great bargains that may soon be available.
What if the market goes manic?
Yes, you will miss some upside, but there will be time to get back in the game and profit.
It's better to realize gains – which means that no matter what, you've made money – than close your eyes and toss the dice on a double or nothing.
Remember, we are speculators, not gamblers.
Indian Steel Eyes Coal Companies
By the Casey Research Energy Team
With coking coal prices having almost tripled in a year, Indian steelmakers are on the hunt for Australian coal mines. The head of India’s biggest coal firm, state-owned Steel Authority, is warning that his group will be “very aggressive” in buying overseas assets.
Rumor has it Steel Authority has $1.5 billion in its coffers earmarked for stakes in three mines in Australia and potentially South Africa. The company wants greater control over the prices it pays for coking coal, and ownership stakes are one way of obtaining that kind of control. The Steel Authority’s chief executive, C.S. Verma, confirmed that negotiations are ongoing.
In India, steel is a big industry. In terms of crude steel production, in 2003 India sat in eighth spot globally; in 2010 the country became the fourth largest producer, and by 2015 it is expected to move up to second spot. India is also the world’s largest producer of direct reduced iron (DRI), which is also known as sponge iron.
In terms of amounts, India’s crude steel capacity is likely to reach 120 million tonnes per year in 2012, up from 72.9 million tonnes in 2009. And a host of steel companies have lined up major expansion programs that will take place over the next few years, like JSW Steel’s US$16.9 billion, 10-year plan to increase its capacity from 7.8 million tonnes per annum (mtpa) to 32 mtpa.
But with coking coal prices having jumped from US$125 per tonne a year ago to a rumored price of almost US$300 per tonne today, India’s steelmakers are scrambling to lock down affordable supplies.
Several Indian news sites reported Mr. Verma told a news conference: “The time has come for a larger interest, as we are expanding capacity… We are at the verge of another coking coal crisis because of heavy flooding in Australia. I think it is a good time [to buy].”
The state of Queensland, in Australia, is the world’s biggest exporter of coking coal, but floods in late December and early January left 85% of its mines flooded. Across the state, 29 of 57 mines were forced to declare force majeure, a legal clause that allows suppliers to abandon contracts because of production disruptions beyond their control.
India is one of Queensland’s biggest coal customers, importing more than 20 million tonnes a year.
Steel Authority is not the first Indian company to search for Australian mines in which to invest. Last year Indian firm Lanco Infratech bought Griffin Coal Mining for $850 million and Adani Enterprises bought a mine from Linc Energy in a private deal. Several other Indian firms are also reportedly searching alongside Steel Authority, with private company Hancock Coal having reportedly received bids of nearly $2 billion for its two flagship mines (Hancock has not commented on any bids).
So why does any of this matter? Because coal provides a whole whack of investment opportunities. Here at the Casey Energy Team we believe metallurgical, or coking, coal provides a better potential for good returns than thermal coal, and the reason is straightforward: metallurgical coal has a much tighter supply/demand picture. Coking coal is used to make steel, so it is tied very closely to global growth, but there are not a huge number of good metallurgical coal deposits.
And while Indian firms may be looking to Australia right now, the west coast of North America is also an important coal source for Asia. It’s a market we keep a close eye on.
[Energy is on an upswing again – with coal deposits down under flooded and oil prices, thanks to the Middle East turmoil, perking up. Sound energy investments are a great way to balance your gold and silver portfolio, so I suggest you give Casey’s Energy Opportunities a shot. It’s only $39 a year – a pittance compared to what you can make in the sector – and gives you not only monthly stock recommendations but also a solid education in the energy sector. Try it risk-free today, with our 3-month money-back guarantee.]
Utah Takes a Step Toward Gold and Silver
By Vedran Vuk
The Utah State House passed a law last week that would recognize gold and silver issued by the federal government as legal currency. Furthermore, the bill would also exempt the sale of gold from state capital gains taxes.
The bill passed 47-26. It really makes you wonder what the case was for the other 26. What about this law seems problematic? If people want to trade with each other using seashells, I’m fine with it as long as the association is voluntary. However, some in the government have an irrational fear of gold and silver – that’s likely the explanation for those 26 votes.
The article also points out that this is a step toward a new gold standard. Well, not really. The gold standard fixed the number of dollars to be exchanged for gold on an international scale. This law is simply allowing people to trade with gold. It’s actually quite a different idea.
In my opinion, money should be backed by real tangible assets, such as gold and silver. But I don’t like the system of the past often known as the “gold standard.” The gold standard was in some ways a government-managed commodity currency – which still isn’t the ideal.
Well, that’s it for today. Thank you for reading and subscribing to Casey’s Daily Dispatch.
Casey's Daily Dispatch Editor