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The Daily Reckoning | Monday, May 9, 2011 Guns, gold and other "flight to safety" trades still in good shape, Words of wisdom from the "greatest investor you've never heard of," Plus, Bill Bonner, Osama bin Laden and Obama The Decider... ------------------------------------------------------- The New Arms Race Consumers and Investors Seek Protection With Guns and Gold Eric Fry Reporting from Laguna Beach, California... Even after last week's steep selloff in the commodities markets, the "Flight to Safety" trade is still on...big time. Gold may have retreated from its all-time high, but applications to purchase a handgun continue soaring to record levels. According to the FBI, background-check applications for handgun buyers are on a record-setting pace so far this year. "In this year's first quarter," Bloomberg News reports, "the FBI's Instant Criminal Background Check System processed 4.25 million requests on prospective gun buyers - up 16% from a year earlier." If the current pace continues, the number of "gun checks" would hit a seventh straight annual record. America's gun-buying craze stands in stark contrast to the dismal trend of overall consumer spending. Bloomberg notes that spending on guns, ammo and other sporting equipment rose about 10% during the last 12 months - or more than four times the 2.5% increase in total consumer spending. Although spending on guns and ammo has been outpacing total consumer spending for more than a decade, the gun-buying trend has been accelerating during the last few months. Meanwhile, Wal-Mart CEO, Mike Duke, observes that the retail giant's "core shoppers" are "running out of money much faster than a year ago." Since many of Wal-Mart's core shoppers live paycheck to paycheck, they typically do most of their shopping at the beginning of the month...and less of it at the end. "Purchases are really dropping off by the end of the month, even more than last year," Duke says. "This end-of-month [purchases] cycle is growing to be a concern." This troubling trend is not just a Wal-Mart thing. As a retailer that averages 140 million shoppers per week to its US stores, Wal-Mart's "concern" is also the American economy's concern. Wal-Mart is, as CNNMoney puts it, "a barometer of the health of the consumer and the economy. Wal-Mart has struggled with seven straight quarters of sales declines in its stores." Maybe that's why Wal-Mart announced last week that it would resume selling guns and ammo in many of its stores - ending a five-year hiatus. (Handguns will not return to Wal-Mart shelves, but rifles and other "long guns" will, according to a recent press release). Your California editor is not certain that America's "gun boom" (pun only partially intended) means something, but he suspects it doesn't mean nothing. Roughly 14 million Americans - about one in twenty - tried to buy a handgun last year. Another 16 million will shop for a sidearm this year. These 16 million folks certainly do not share identical motives for their purchases, but they do share an identical objective: to arm themselves. They are buying handguns in record numbers because they are feeling uneasy in record numbers. It would be easy to dismiss the "gun boom" as an irrelevant cultural curiosity...if it wasn't so seemingly relevant. Investors are also "arming themselves" in record numbers. They are buying gold and silver and oil and almost any other commodity under the sun. At the same time, they are also unloading US dollars in exchange for almost any other currency under the sun. The Norwegian kroner, Swiss franc, Aussie dollar and Canadian dollar are all trading near all-time highs against the US dollar. Something serious is going on here. America's economic recovery may be much weaker than advertised, while her economic vulnerability may be much greater than widely believed. Confident citizens do not usually buy record amounts of guns and gold. The Daily Reckoning Presents “There’s Always Something to Do” Chris Mayer He may be the best investor you've never heard of. Beginning in 1975, he delivered to his investors a compound annual return of 15.2% for the next 33 years! If you'd put $10,000 with him and left it there, you'd have had $1 million by 2007. Peter Cundill was his name. His investment approach is the subject of a new book by Christopher Risso-Gill, who was a director at Cundill Value Fund for 10 years. Titled There's Always Something to Do, it is a summary of the Cundill approach. The book takes its name from a line from Irving Kahn, a doyen of investing (born in 1905) and still chairman of Kahn Bros., which manages $450 million. Kahn said, "There is always something to do. You just need to look harder, be creative and a little flexible." In my investment letter, Capital & Crisis, I have always made the study of great investors part of the regular diet, every bit as valuable (and perhaps more so) than winning stock ideas. So let's continue that tradition and take a look at what kind of thinking produced 33 years of 15% returns. Cundill was, like so many great investors, a devoted follower of the ideas laid out by Ben Graham back in the 1930s. Graham has a long list of followers and admirers, including Warren Buffett, the aforementioned Kahn, Cundill and many others besides (including your editor). While there is much to Graham's thinking, a cornerstone of the approach is the idea of a margin of safety. You buy only what is cheap and well supported by a realistic estimate of intrinsic value. It is a persnickety, unfashionable, patient approach that demands a great deal of discipline. It is one that takes more interest in what is happening in the folds of balance sheets than what is issuing from the mouths of Federal Reserve Chairmen or CNBC talking heads. "I'm agnostic about where the market will go," Cundill often wrote. "I don't have a view." His goal was to find undervalued securities. Period. The book has lots of "war stories" to show how Cundill applied these ideas in his career. But the book also has plenty of pithy how-to investing wisdom drawn from Cundill's speeches, shareholder letters and personal diaries. I enjoyed Cundill's thinking on when to sell, as he used an idea I've endorsed numerous times: "When a stock doubles, sell half - then what you have is a free position." Selling is the most difficult thing in all of investing. No one is good at it. But this seems a reasonable approach that protects hard-earned profits and helps buttress mistakes. In the pages of Capital & Crisis, I have often recommended selling half positions often after a stock doubled, but now we can give this tactic a name in honor of this great investor. We'll call it the "Cundill Sell." There are also many good insights into the investing process. Cundill notes that "99% of investment effort is routine, unspectacular inquiry, checking and double-checking - laboriously building up a web of information with single threads until it constitutes a complete tableau." I agree completely. And I think back on all the time spent doing routine stuff like listening in on quarterly conference calls, perusing 10-Ks, 10-Qs, proxy statements and the like. Unglamorous, perhaps, but necessary work. Cundill, too, did his own work. "All I really need is a company's published reports and records; that plus a sharp pencil, a pocket calculator and patience." There are other aspects of Cundill's ideas that are good to highlight. One: He had an egalitarian perspective when it came to investing. "If it's cheap enough," he wrote, "we don't care what it is." Cundill was also international in his approach. "I've traveled pretty extensively," he noted. "So I don't really see much more risk investing in foreign countries than I do investing in North America." Where did Cundill look for ideas? "You find bargains among the unpopular things, the things that everybody hates. The key is that you must have patience." He liked to look at stocks making new lows. He liked to read the news to see what was troubled. He also liked checking in to see what other great investors were doing. "You know good poets borrow and great poets steal. So see what you can find out." He was also not afraid to hold cash. Cundill often held large cash positions, sometimes as much as 40%. Many investors would do well to take a page from Cundill's playbook here. His idea that investing is a game of generals, not committees, is also one that resonates with me. "To my knowledge, there are no good records that have been built by institutions run by committees... In reality, outstanding records are made by dictators." Most of the best investors are solitary eagles, though there are, of course, some famous partnerships that work well, too. (Think Warren Buffett and Charlie Munger.) Cundill liked to concentrate his ideas, rather than spread his money out thin. "My father was a very good birdshot and he always said, 'Never shoot into the brown.' In other words, never shoot into a flock of birds without first choosing a single bird." Cundill also had the habit of traveling to the world's worst stock market. He started this practice while he was living in Vancouver and it was rainy in November. He would skip town during the grim weather and travel to the world's worst stock market to that point in the year. Sounds like a good idea that I may have to try. There was a stock screening idea in the book that I thought was interesting. It's called "The Magic Sixes." Basically, you screen for stocks trading for 60% of book value, at 6 times earnings and paying a 6% dividend yield. I ran this screen in today's market for stocks above $500 million in market cap and found one stock that met the criteria: Navios Maritime. (It happens to be in the portfolio of my Mayer's Special Situations newsletter.) To Cundill, investing is not a matter of smarts alone. "Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental truths." Another idea: "Sooner or later, the market will do what it has to do to prove the majority wrong." This is a good thought. It's important to think about what unexamined assumptions you hold. What do you take as a given? Perhaps you shouldn't. I smiled when I read the following remark from Cundill: "I'm lucky to have the kind of life where the differentiation between work and play is absolutely zilch. I have no idea whether I'm working or whether I'm playing." Cundill died earlier this year at the age of 72. This book ensures that future investors will not lose his hard-earned wisdom. A nice addition to the investment library. Regards, Chris Mayer, for The Daily Reckoning P.S. As his readers know, Chris has made somewhat of a habit out of studying the great investors and then applying their "hard-earned" wisdom in his own investment services, Capital & Crisis and Mayer's Special Situations. In many ways, his newsletters are part investing, part learning about investing, its history and associated lessons, both good and bad. If you would like to begin receiving Chris's emails, complete with detailed research, investing lessons and a comprehensive strategy for the kind of success that made Cundill and the like legends of the game, might we suggest you get on board with Chris's Mayer's Special Situations service today. In this presentation, he walks through the case for a couple of junior gold miners. One is working territory next to one of the most lucrative ore zones in history. The other is still finding gold in lands where the conquistadors first laid claim hundreds of years ago. Check it out. Bill Bonner The Case for Cash: Why a 0% Yield Is Sometimes Your Best Bet Bill Bonner Reckoning from Beijing, China... What a wild week it was! Last week, the US bumped off Osama bin Laden. Silver collapsed. Unemployment looked terrible on Thursday...and better on Friday. Stocks looked like they were in trouble...but then seemed to stabilize by week's end. And President Obama suddenly became The Decider. What do you make of it? Or, a more practical question, if you've got money to invest, what do you do with it? On Friday, gold closed at $1,491 - about 5% below its all-time high. Buy it now? Or commodities, when they too seem to be coming off record highs? Oil was down 10% last week. Buy stocks - when all the evidence shows that they are vulnerable to a big downswing...and will probably produce sub-par returns for many years? What's the alternative? Hold cash! But wait. Who wants to hold dollars (or other paper currencies, for that matter) when inflation rates are rising...and the dollar is currently losing ground at the rate of more than 7% a year (according to MIT's Billion Prices Project)? A tough situation for investors. Damned if you do. Damned if you don't. Here's our old friend Merryn Somerset-Webb, editor of MoneyWeek, on the subject: Why you should hold cash A long-term property bear told me this week that he was going to buy a flat. Why? He can't bring himself to keep his money in cash when savings rates are 3%, inflation is 5% and income tax is 40%. But he can't bring himself to buy much else either: most equities look overvalued; commodities could easily be on the edge of another cyclical peak; and there is only so much gold a man can hold. But his money "has to go somewhere". And at least property offers some kind of yield. I can see his points - holding cash in an era of negative real interest rates can feel painful. But what if it's the least bad option? Dylan Grice of Société Générale points out that while it's true cash "generally has a zero expected real return", there is at least a "near- certainty around that expected return". Mostly if you hold cash you know you won't make money, but you won't lose much either. That's not usually good enough. Most of the time, risk assets return more than 0%. So it makes sense to be biased towards equities, bonds, commodities, houses and wine instead of cash. But there are also occasions when risk assets are unlikely to return more than zero - times when the risk of losing money in non-cash assets is so high that it makes more sense to aim for a zero return than a real return. Now, says Grice, "might just be one of those times". Merryn is probably right. At least, that's what we concluded at the Family Office too. The Bonner family holds an uncomfortably large amount of its portfolio in cash. It is uncomfortable because we believe cash will soon be the very worst place to keep your money. And more thoughts... What's Bill doing in China? Ah ha! He's just trying to keep up with things...take a look around...see for himself. Dear Readers are invited to join him for a drink in Beijing or Shanghai. Darius has details: darius.m.fisher@gmail.com *** Times have changed. When governments sent out hit squads to kill someone, they used to keep quiet about it. But this time, Obama called a national press conference to claim credit. His poll ratings rose. Rarely has a killing been such a crowd pleaser. There was dancing in the streets. It recalled the happy mob that kicked around Louis 16th's head or the crowd that spat upon Mussolini's corpse. Americans were jubilant. The newspapers were universally joyful and upbeat. "Mission accomplished," said the editorials. Arms maker Berretta took out a full-page ad in the weekend USA Today to applaud the Navy SEALS who pulled the trigger. Beretta and other handgun makers typically apologize when their products are used to kill unarmed civilians. This time, they were using it to gain market share. And feeling their oats, US officials decided to try to make it two for two, with a drone attack on a "terror suspect," in Yemen. The radical cleric Anwar al-Awlaqi survived, reported the Hong Kong paper. Asked where in the Constitution the federal government was given the right to murder people, Eric Holder, US Attorney General, replied that this was certainly not murder. And not an assassination either. This was war! Osama bin Laden was an enemy combatant. US forces mounted an operation to kill him, as they might target an opposing general. Fair and square. But if Osama bin Laden were an enemy general, his was a strange army. How many divisions did he have? Where were his warships? His aircraft carriers? His submarines? Where were his tanks? And his trained legions? He had no army. No navy. No marines. No air force. Not even a few praetorians guarding his headquarters. He was almost alone. No Swiss guards, no home guard; for there was no homeland to guard. And not a single troop carrier, for there were no troops and nowhere to take them. He had no tanks. No fighter planes. No bombers. No artillery. In fact, his most effective weapon was the lowly box cutter. A fanatic with a box cutter can be dangerous; but he is no Grande Armée...no Wehrmacht...no Japanese Imperial Army. He is not a worthy opponent for the Pentagon, in other words; for there is no glory in picking on someone who's not your own size. As the week moved on, glory turned to embarrassment. The terrorist was not armed. He didn't use his wife as a human shield. He didn't live in a mansion surrounded by armed guards. Instead, it began to look like the SEALS had gunned down a sick, broken old invalid. But what an opportunity! Forget the messy court trials. Who knows how they might turn out...or what information they might reveal? The government spends a fortune trying to convict mobsters and drug pushers, for example. Why not just declare war on them, and send in hit squads? And now the SEC is laboring hard to convict a fund manager in the Galleon case. It would be so much simpler to label SEC violators 'financial terrorists' - and let drones take care of them. But wait, we're missing the biggest opportunity of all. Other countries have done it for years; why shouldn't we? Instead of defeating political enemies at the polls, why not just say you are at war with them and take them out? Take Donald Trump, for example. Here at The Daily Reckoning, we are warming up to Mr. Trump. He is our kind of politician. Too rich to steal. Too dumb to lie. But he is surely a threat to the Republic. So why not call in a drone attack? Why waste drones on Osama bin Laden? He posed no real threat to the government of the United States of America. Even in his own backyard, he was a loser. He was unable to take over a single woebegone, Muslim- drenched country in the Mid-East. There was never any question that he would be able to defeat the US. Nor was he a substantial threat to the American people. For all his box cutters and suicidal followers, statistically - according to The Financial Times - he did less damage to Americans than accidents caused by wild deer. In the 10 years following the announcement of the War on Terror, as far as we know, he was not responsible for a single North American casualty. As a general, he was worse than any we ever heard of; even Sir Douglas Haig was not that bad. Osama bin Laden didn't pose a threat to the US or its people; instead, the danger he posed was more like the danger of an interest-only, low- doc, automatically reset mortgage with a teaser rate. Bin Laden, in an early video address, announced his strategy. He could sucker the US into spending an enormous amount of money to combat him. He would not try to defeat the US on the field of battle; instead, he would lure the giant into expenses it could not afford. And lo, it has come to pass just as the bearded one forecast. According to The Financial Times, the US has spent $2 trillion on the war against terror...or about a million times more than Osama bin Laden spent. Regards, Bill Bonner for The Daily Reckoning