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The Daily Reckoning | Monday, February 13, 2012 How to turn the odds on the casino...we mean, eh, the stock market, Readers weigh in on the best — and worst — times to be alive, Plus, Bill Bonner on what we can learn from the Argentines and more... ------------------------------------------------------ Offer closes TOMORROW...Feb. 14, 2012... The LAST STOCK You’ll Ever Need You’re about to witness a shocking, hidden story. This could also be the biggest market story in history But you must act on this urgent wealth creation event before midnight Tuesday, February 14th. Here’s why...! Mail Time Dear Readers offer their views on the increasing American Police State... Joel Bowman Digging through the Monday Mailbag to see what’s on our Fellow Reckoners’ minds... First up, here’s one from Reckoner Anonymous... It seems that disagreeing with government policy may now be dangerous. Now that Congress has given, and the president has accepted (by signing the National Defense Authorization Act into law on Dec 31, 2011) the same powers which the 1934 Bundestag voted to give the duly elected Chancellor of the Weimar Republic (Germany), it may be too late... The article in the link is of great importance and I hope that you read it. I don’t expect to see similar articles in the US popular media since these sorts of things don’t generally get reported (did you see much media coverage on Dec 31 when you lost virtually all of your civil rights?). The popular columnists either don’t comment (i.e. know their boundaries) or their comments are not published. Notice that, while the report is from a well-respected, American financial blog (Zero Hedge by Tyler Durden), the source of Tyler’s blog information is the Reuters news service. It seems that Reuters, the British based Financial Times, Der Speigel, and the Asian times, among others, report more of the important stuff in the US than does the US media...see the link, then complain to your congress people about this — if you dare. DR: Or we could just provide a link to the story...and hope people share it with as many friends as possible... And here’s one from Reckoner Chris W. ... To your question: I’d be happy to live my life over again from 1943 to 1968 thanks. Growing up with mom and dad and going to grammar school, high school and college were the best years for me. Obviously I can’t remember much about the politics and financial world then, but I didn’t care as much then as I do now. Right now everything seems a mess. A loose form of chaos. Everyone after the buck at the expense of everyone else. And not just at the expense of your neighbor next door, but also your town, city, county, state and country. Not sure how we might get out of this mess. Years past we worked our way out through infrastructure jobs and the industrial revolution etc., etc., etc. Now what? An über Internet that feeds us more Facebooks (with dumb IPO offerings of something that doesn’t sell anyone anything — just promises people tons of money through tons of advertising)? Bleagh. I’m going under the covers and read a good book. Maybe it will all be gone in the morning. Love your publication. Keep up the great work. And lastly, here’s one from a harassed Reckoner down in the Sunshine State... Well today marks the second day in our area of Florida that “Driver’s License checks” will be performed along our roadways. I can’t help but wonder if they’ll eventually publish the numbers of how many people have smoke blown up their asses/harassed vs. how many licenseless drivers they actually caught vs. how many illegal search and seizures were performed and people arrested for completely unrelated offenses. Kinda like how the (un)Patriot Act arrests people for mostly drug offenses and not acts of terror. How do we make it stop??? DR: Good question. Woody Allan once quipped that he wasn’t afraid of death...he just didn’t want to be there when it happened. Whether it’s the death of an individual investment, a currency or an entire empire, not “being there” is probably a good start. In today’s guest column, below, Chris Mayer explains how looking at the market differently can help earn your portfolio some runs on the board. Please enjoy... Wait until you see what could happen in America as early as this MAY... An unbelievable phenomenon is set to sweep the nation as early as this May... The railroad age... the steel age... the electronics age... the technology age — this phenomenon triggered them all. And now it’s taking shape again! Watch this special, time-sensitive presentation now for full details on how it could affect your job... your lifestyle... and your wallet. The Daily Reckoning Presents Moneyball Investing: A Simple Way to Beat the Market Chris Mayer The key dilemma around Moneyball, the book by Michael Lewis and the movie based on it (I recommend both), is pretty simple. The New York Yankees had a payroll of $126 million in 2002. The Oakland A’s had a payroll of only $40 million. How does an underfunded, outgunned outfit like the A’s compete with the Yankees? As A’s General Manager Billy Beane puts it in the movie: “There are rich teams, and there are poor teams. Then there’s 50 feet of crap. And then there’s us.” Beane realizes he can’t look at the player acquisition game the same way the Yankees do and win. He has to figure out a different way to find winning players. Fortunately, he meets Peter Brand (in real life, Paul DePodesta, who didn’t want his name used in the movie version), who introduces him to a set of ideas the rest of baseball ignores. While other teams focus on apparent athletic talent, Brand focuses on how teams actually win. Teams win by creating, or preventing, runs. Using statistical methods, Brand focuses on players that create runs — instead of how fast they run, how far they can throw, or how far they hit the ball. Of course, the A’s become winners on a low budget with overlooked players. They set an American League record winning 20 games in a row on their way to an impressive 103-win season. You can probably already sense how this is relevant to investing. Whether you realize it or not, you are in a position a lot like the A’s — maybe 100 times worse. The financial markets are probably the most-competitive field of endeavor on the planet. There is a lot of brainpower and financial muscle trying to “win.” You need to look at the market differently to beat it. Beane looked for ballplayers who created runs based on the theory that runs win ballgames, instead of focusing on obvious athletic ability, which is what everyone else was doing. Over the long haul of a 162-game season, the odds would pile up in his favor. Likewise, in the market, we want stocks that create shareholder wealth, on the theory that stock prices will follow. This is an important, if basic, insight. We don’t want to look for high dividend yields or low price-to-earnings ratios or good-looking stock charts or any of the superficial things everyone else focuses on. “Everyone else” is a lot like the old baseball scouts that focus on how fast a guy can run or how well he throws — or even if he has a pretty girlfriend. (From the movie: “He’s got an ugly girlfriend.” “What does that mean?” “Ugly girlfriend means no confidence.”) These attributes have little to do with whether a guy can create runs. In the same way, the glamour statistics and charts alone don’t really get at wealth creation. Wealth creation is ultimately measured in the ability to create cash. Cash, though, comes from all kinds of sources — rising asset values, sales of assets, earnings, dividends, etc. — ultimately reflected in stock prices. In markets, one of the best predictors of wealth creation is ownership by the people in charge. Hardly anyone focuses on ownership. Ask a CNBC talking head how much stock the CEO owns of his favorite play? He won’t know. Heck, ask most fund managers how much skin their management team has in the game. They won’t know either. They don’t look for it. And that is your opportunity. One interesting way to look at this idea was put forward by Horizon Kinetics, one of the few firms I know of that focuses on ownership. In fact, the firm created the Horizon Kinetics ISE Wealth Index, a benchmark tracking the most-successful business leaders. According to the firm’s website, the index includes: ...companies whose senior management has demonstrated a track record of skill and specific industry knowledge that has translated into high levels of long-term shareholder value creation. In many cases, these individuals have also used their respective companies as the primary means for accumulating substantial personal wealth... Due to this vested interest factor, these management teams often prioritize the creation of long-term shareholder value and, as a result, outperform the markets. And the proof in the pudding is in the table below... To get in the Wealth Index, a company must meet several criteria. One is simply that there must be a wealthy individual in a position of control (e.g., chairman, CEO). Wealthy means at least $1 billion in personal assets, as measured by public data. So the members of this index are, essentially, a list of companies with a billionaire owner-manager. You can find the 98 stocks in the index at http://www.ise.com/index. Click on “Index Options,” which is under “Products Traded.” Then scroll down the table to find the index (the ticker is RCH), and then click “View.” Not surprisingly, the index includes six current holdings in my Capital & Crisisnewsletter, including Federal-Mogul (FDML), which counts legendary investor Carl Icahn as its majority shareholder. I think it’s going to be one of the market’s top-performing stocks over the next few years. Having owner-operators with a track record is critically important if you are a long-term investor. As Warren Buffett pointed out, “After 10 years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.” Talk about having an impact! Buffett, too, is a big believer in what he calls “the biblical standard” (quoting Matthew 6:21: “For where your treasure is, there will your heart be also”). He wrote in his 2004 annual letter that every director of Berkshire Hathaway was a member of a family owning at least $4 million in stock. None of them acquired shares with options or grants. “Charlie [Munger] and I love such honest-to-God ownership,” Buffett writes. “After all, who ever washes a rental car?” It’s a simple thing, yet nearly all the financial world’s eyes focus on everything but this. By focusing on this pool of Wealth Index companies, you vastly increase your odds of success — as the table above shows. In Moneyball, Beane succeeds because he focuses on those basic odds. “We are card counters at the blackjack table,” Beane says. “And we’re gonna turn the odds on the casino.” You can do the same in the stock market by limiting yourself only to companies that exhibit one of the chief characteristics of wealth creation: significant ownership by the people in charge. Regards, Chris Mayer, for The Daily Reckoning Editor’s Note: Chris’ insights are among the most valuable and time- tested we can think of. Subscribers to his Capital & Crisis newsletter know that better than anyone — it has one of the highest renewal rates of any Agora Financial publication. That means when people sign up for Chris’ advice they aren’t just taking it...they’re keeping it; knowing they can rely on it when they need it most. Click here now to find out why they find this service so invaluable. Make “Big Oil” pay for your retirement Oil fat cats got rich on $4 gas. Now how’d you like to make them pay you back? This little-known “loophole” let’s you collect up to triple the retirement income most stocks or bonds pay... without touching the stock market... and all while “Big Oil” gets stuck with the bill. Click here now for all the details. Bill Bonner How to Ruin Your Economy and Influence People Bill Bonner Reckoning from Rancho Santana, Nicaragua... We can learn a lot from the Argentines. When it comes to messing up an economy, they’re Numero Uno. They’re Olympians of financial legerdemain and masters of the old false shuffle. In 2001, the country was deeply in debt. The government was out of money. And the currency was losing value fast. What did the Argentines do? First, they broke their promise to investors and savers, cutting the peso loose from the dollar. Then, they seized control of banks and bank accounts. People had been saving money in US dollar accounts in order to avoid problems with the peso. But the Argentine feds forcibly converted their accounts to pesos, just as the peso was losing 2/3rds of its value. The next thing was to take the reserves in the central bank and use them to pay current expenses — which caused the head of the bank to resign in protest. And finally, a few years later, they took over private pension funds — to protect them for the pensioners, of course. What are they used for? To fund the country’s deficits! But the Argentine feds are not just scalawags, they’re the pacesetters for the rest of the developed world. Here’s The Financial Times with a warning: Watch out as sovereigns eye company cash piles By David Bowers Much has been written about how the developed world must tackle its structural budget deficits. But the link that remains to be properly recognised is that the counterparts to those ‘unsustainable’ public- sector budget deficits are equally ‘unsustainable’ corporate-sector surpluses. The conventional wisdom believes that the current sovereign debt crisis is the result of governments having been too profligate. But it is not that governments have been spending ‘too much’ that is the problem; it is that corporates have been spending ‘too little’. Moreover, because this corporate saving is the main counterpart to the government’s borrowing, until companies start to spend again, the burden of fiscal adjustment will have to fall on cutbacks in public services and higher personal taxation. It is time to shift the debate away from talking about the fiscal position, and focus instead on whether it is a shift in corporate behaviour that is responsible for the fiscal mess in the developed world. It is very unusual for the corporate sectors to run sustained financial surpluses. Look back at the UK and the US for more than half a century and the corporate sector has tended to be a net borrower, not a net saver. What has prompted the recent move into financial surplus has been the decision by companies to step away from investment. Investment- to-gross domestic product ratios in the developed world are now close to the lowest levels seen in 60 years. Corporates appear to have decided to run themselves for cash, and not for growth. It is this profound shift in corporate behaviour that policymakers and politicians have been slow to spot. Until this behaviour changes — or is changed — it will be very hard to improve the fiscal arithmetic. In the Reagan-Thatcher era, politicians cut taxes so that companies would come to their country, invest, create jobs...so that those politicians could, in turn, be re-elected. It does not work like that anymore; globalisation has seen to that. The reality is that public services used by the ‘99 per cent’ are taking the strain, while attractive corporate tax regimes are protected. Just as the trade-union barons of the ’70s failed to see the writing on the wall, so the global captains of industry may suffer a similar fate unless they put their cash to work in the countries in which they are domiciled. The Argentines are the pacesetters for all modern governments. And The Financial Times is their newspaper of reference. It’s what the policy makers read. And the bankers. Here, The Financial Times makes it clear what the policy makers should think: that corporations are to blame for current financial problems. They haven’t invested their money the way they should. If they’d invested more, instead of paying dividends and bonuses to rich people, we’d have more jobs...more spending and more growth. Surely the feds can help them find ways to “invest” their money... And more thoughts... “I love the US...but it does seem to be going in a bad direction,” said a friend in Miami. “You look around here and everything looks good. The grass and trees are all manicured. People are prosperous. But you go inland and it’s a different story. A lot of people in Florida don’t have two dimes. That’s why you see so many old people working. They’re taking tickets at the amusement parks. They’re working the cruise ships. They’re parking cars. They don’t have any money. They have to work to make ends meet. “And the real estate market here is a disaster. People tell you it’s bottoming out. I don’t see it. What I see are few transactions...the market is very soft. People keep thinking they’re going to buy at the bottom. They buy...and then the bottom sinks some more. “This is a consumer society down here. People live in suburbs...almost the whole state is suburb. They go to work. They come home. They go out to eat. They go out to shop. “At any hour of the day, you’ll see work vans in about half the driveways. Someone’s cutting a lawn or fixing a cable TV. Nobody does these things for himself. That’s the way people live down here. They call someone. It’s money in and money out...all the time. Nobody’s got any savings...or any time. It’s go...go...go...You go to work. Then you go shopping. “And it can’t stop. If it just slows down a little, the state goes into a slump. Everybody is checking his cellphone or iPhone or email all the time. He can’t stop either. It’s go, go, go.... “Nobody can take the time to think or even to wonder. That’s why a real depression now would be much worse than the Great Depression of the ’30s. Nobody can sit still. They can’t wait for it to pass. They can’t stop to breathe...or think...or wait for all the problems to clear up. They can’t relax and wait for an uneconomic upturn. They have to work. “They’ve got to have money coming in...and money going out. “You know, I’ve been reading your Daily Reckoning for years. And the one lesson I take from it is that you have to have some savings...so you’re not forced to run on the treadmill all the time. You need some money and some time. Otherwise, you’re never going to figure out what is going on. And you’re not going to have a clue of how to make any money. You just go from day to day...from job to job...from one shop to the next mall...from bill to bill... “Scientists have done some studies on how the brain works. They found that most of what we do is reactive... Like someone throws a ball at you...you reach out and catch it. Quick response. “But there are some things where the brain needs time. Some kinds of deep thought require, well, reflection. And nobody has time for reflection when they are on the computer or the iPhone...or rushing to get something done... “And nobody can stop to think when they are having trouble paying their bills. That’s why you need savings. That’s why you need to have a garden, too. Nobody’s got a garden down here in South Florida. We have to go to the supermarket to buy our food. “Of course, that’s part of the problem. If you have to work to prepare your food, you get better food...and you don’t get fat. But now you have to work to not get fat. Otherwise, food is just another distraction...like the iPhone or the Internet. You eat because it’s easier than thinking. It saves you from having to figure things out. “You work. You drive. You shop. You check email. You call people. You eat. Money in. Money out. There’s no stopping it. No hesitating. No time to think. No time just to let things be.” Regards, Bill Bonner for The Daily Reckoning