Agora Financial’s Rude Awakening

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Dubai, UAE

• From the ashes come opportunity: A different view on today’s market chaos,
• Recalibrating your investment compass to point towards “sheer imbecility,”
• Get 6 months of Mayer’s Special Situations FREE and plenty more…   

Joel Bowman, reporting from Dubai in the Persian Gulf…

Lesson #1 for contrarian investors: Don’t be afraid to be called an idiot.

When Jim Rogers started his Rogers International Commodities Index back in 1998, people thought he was crazy. Gold, considered by most an ancient relic at best, was in a 20-year bear market. Industrial metals like copper and lead were also in the dumps and, after a few spikes in the early 80s and early 90s, crude oil was back down around $12 per barrel.

“Who on earth would want to buy commodities?” people said. “They’d have to be an idiot!”

At the time, equities were enjoying a long-term bull market. From 1970 through to 1998, the Dow Jones Industrial Average gained about 1,000%, from less than 900 points to over 9,000; depending on which month you measure from. People didn’t pay attention to things like the rising cost of living or stagnant real wages, much less the ever-increasing supply of freshly printed and minted money. All they saw was that stocks were on a tear and commodities were for fools.

Since Rogers created his index, it has returned well over 450% - even after last month’s panicked selloff. That ancient relic that nobody wanted soared over the $1,000 mark this year and oil, well, we all feel the surge in those prices every time we fill up the gas tank. Even after the world’s grease fell $30 from its July high of $147, it’s still up around tenfold since ‘98.

[Editor's note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.]

Meanwhile, the story back in the stock market has been abysmal.

“During the last eight and one half years…the S&P 500 has delivered a total return – including dividends – of minus 1%!” observed Eric earlier this week.

“That’s right; if you bought stocks eight and one half years ago, you’re nursing a loss. And if, heaven forbid, you spent euros to buy the S&P 500, you’re nursing a loss of 35%. These are disastrous investment results, no matter how you slice it.”

Still, those who shunned the dollar and stocks were out of step with the crowd. But that’s the way successful investors like it.

Take Doug Casey, for example. People laughed at Doug when he advised them to get out of the US dollar and to buy property in places like Nicaragua. (This was around the same time Rogers was banging on about commodities, drawing boos and hisses from the “in” crowd…who were busy piling into tech stocks). Unperturbed, Doug and his friends went about snapping up lots shortly after the Nicaraguan Civil War for around $17,500 each. Today they sell for about ten times that amount.

Again, what was considered idiotic to the mob proved profitable for the contrarian. And if the kind of success enjoyed by guys like Jim and Doug is considered idiotic, perhaps we should point our investment compass towards what the mob calls sheer imbecility.

The key to these success stories, and many, many others like them, is in knowing how to ignore the noise from the crowd and remain focused on the opportunities they have overlooked. In the column below, Chris Mayer takes a look at the rapidly changing landscape of our world and offers a different view on the opportunities it presents to us as investors. Please enjoy and send any comments to the address below…

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The Big Opportunity in Front of Us
By Chris Mayer

“What strikes me forcefully,” write James Grant, editor of Grant’s Interest Rate Observer, “is that Graham insists on opportunism, rather than prophecy or forecasting. What he leads us to do is consider the opportunity in front of us, and not to guess about the outcome of future events, which are unknowable.”

The Graham referred to is, of course, Benjamin Graham, the man who set down the old principles of intelligent investing. He was Warren Buffett’s mentor and helped scores of others find success in the markets. His ideas have become a touchstone for many investors of the old-school stripe, including your editor.

Graham’s wisdom is relevant today because the opportunity in front of us is immense, even though it might not feel like it, given the punishment the stock market has meted out this year.

It does not take any prophecy or forecasting to see the second Industrial Revolution unfolding at light speed in places such as China and India. Fareed Zakaria, a Newsweek editor, calls it “the rise of the rest.” He notes an extraordinary string of facts - some important, some silly, but all showing that America is no longer a lone heavyweight without challenges. Here are some of them:

The world’s tallest building is in Dubai 
India is building the world’s biggest refinery    
The largest passenger airplane is in Europe 
The largest investment fund on the planet is in Abu Dhabi 
The biggest movie industry is Bollywood, not Hollywood
The largest Ferris wheel is in Singapore, the biggest casino in Macao - which overtook Las Vegas in gambling revenues last year
The biggest mall in America, once the biggest in the world, no longer cracks the top 10
Only 2 out of top 10 richest people in the world are American.

“These factoids reflect a seismic shift in power and attitudes,” Zakaria writes. Not long ago, the U.S. held the top spot in most of these categories. It’s not prophecy: It’s happening now.

A recent study by Merrill Lynch and Capgemini adds to the growing pile of evidence of the great wealth creation happening overseas. Asia now churns out millionaires at a world-besting pace. Last year, the number of millionaires rose 22% in India and 20% in China. In terms of private wealth creation, Asia is home to five of the 10 fastest-growing markets.

Asia now has 2.8 million millionaires, third after North America, with 3.3 million millionaires, and Europe, with 3.1 million millionaires. In terms of the combined wealth of these millionaires, the study puts Asia third, at $9.5 trillion, behind North America and Europe again, at $11.7 trillion and 10.6 trillion, respectively. But Asia’s group is the fastest growing and is really not far behind.

Even more than just millionaires, purchasing power is growing rapidly in Asia. “The growth of their wealth is outpacing the growth of their population, and that’s a trend that’s going to continue in coming years,” said Ileana van der Linde, a principal with Capgemini.

This is not to diminish the wealth of the U.S. One out of every three millionaires still lives in the U.S., the highest of any country.

It’s not so much about a decline in America as it is about a surge of wealth in other parts of the world.

All that wealth doesn’t necessarily translate into stock market profits. These markets will go through gut-wrenching declines on their way to new highs. India and China have been the worst performing of the bigger markets this year. But the underlying growth there still has a long way to go. America, too, had lots of ups and downs over the 20th century, but investors who picked up shares during the downturns were amply rewarded for their patience.

And that’s your opportunity abroad. It doesn’t require any great prediction. Just look at what is happening in the world around you.

The U.S. economy will come back around at some point. Even now, there are pockets of opportunity in the U.S. There are mini-boomtowns growing up around hot energy drilling sites like the Marcellus and the Bakken. There is good money in building pipelines for water, oil and gas. America’s natural resources look cheap to the rest of the world. American timberlands are still prized investments.

But certainly, the overseas markets must occupy a sizable part of any long-term investor’s horizon. They certainly have been in mine for years.

The Most Important Investment Book Published in Years

In my home office, I have knickknacks I have collected from all over the world - a Buddha from India, a carved dragon from China, a mate gourd from Argentina, kente cloth from Ghana and much more. These are reminders of the big world out there. But the books are what really dominate the room. I don’t collect books, per se. I often purge my shelves to try and keep things manageable.

And here we come back to old Ben Graham again. There is, in fact, only one book that I have in more than one edition. That book is Benjamin Graham and David Dodd’s Security Analysis. I have the 1934, as well as the 1940 and 1951 editions. In September, McGraw-Hill will put out a sixth edition, based on the 1940 edition and with a star-studded cast writing introductions and providing revisions. Among those contributing are two of my favorites - Seth Klarman of Baupost and Bruce Berkowitz of Fairholme. James Grant contributes a chapter putting the book in its historical context.

I think this may be the most important book published on investing in a long time. You’ll want to secure a copy. The principles Graham and Dodd carved out are as important as ever. And the updating by today’s stars is something you won’t want to miss. I first read Graham’s book when I was a teenager, not understanding it fully. But it put me on a path I still travel today.

[Joel's Note: As you have probably come to gather by now, Chris Mayer is a favorite of your Rude editors and, by no small coincidence, a regular in these pages. His ongoing study of the great investors (think Graham, Greenblatt, Klarman, Templeton, Buffett and many more), coupled with his own experiences as a banker has armed him with a unique investing perspective.

That’s why I am so excited to announce that, for the next few days, we’re offering Chris’ elite research service, Mayer’s Special Situations, for HALF OFF. That’s right. You now have the opportunity to grab six (6) FREE months of Mayer’s Special Situations.

To further sweeten the deal, Chris has prepared a report for us on a new opportunity he calls the “Chaffee Royalty Program.” Basically, it’s a portfolio he’s amassed over the years, chock full of royalty investments ultra-profitable resource sector. Now that he’s done all the legwork, all you have to do is sit back and collect the checks. Not bad, eh?

To find out more about this limited-time offer, read on here.

P.S. This offer is available until next Wednesday, earlier if the 2,000 available positions are filled before then.

Oh, and just an inside tip here: Chris has the highest reader retention rate of all of Agora’s newsletters. Put simply, when people sign up with Chris, they stick with him. The waiting list to get in on this deal is sure to long and slow, so if you wish to avoid disappointment, act now.   

In other news, you’ll start trading today with the Dow up a smidge at 11,532.88 points. The S&P 500 and NASDAQ both finished yesterday down a fraction, declining 0.2% and 0.66% respectively. Meanwhile, oil trades this morning for around $109 per barrel and gold, making an early morning charge, is back up about eight bucks and changes hands for $816 an ounce.

We’ll be back tomorrow with more Rude news.

Until then…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com