Bonds & Interest Rates
Only about two dozen of these securities exist… but double-digit yields are common.
I first uncovered this asset class years ago, back when I started my High-Yield Investing advisory in 2004. In October of that year, I added one of these securities to my portfolio at $41.33. I sold it for $64.51 about two years later. Along with $9.93 in distributions, my total returns were just over 80%.
Another one of these rare investments has also done well for current High-Yield Investing subscribers. I added it to my portfolio in late October 2010. I’ve received $4.28 per unit in distributions and the price has soared. So far, total returns are more than 50% in just 16 months.
I like to return to investment ideas that have done well for me. So it comes as no surprise that I’m again looking into one of the highest-yielding, yet rarest, income investments on the market — royalty trusts.
These trusts are designed for one thing: to pay out royalties, or a share of production revenues, from a field of existing oil and natural gas wells.
The first trust debuted in 1979. Amazingly, even after more than 30 years there are still only about two dozen publicly traded oil and gas royalty trusts. And between 1999 and 2007, no new royalty trusts were created.
But in the past year, there has been a small renaissance in royalty trusts. I count four new trusts that have come to market in the last two years alone.
For income investors, the sudden surge of interest is good news. Routinely providing yields of about 10% or more, royalty trusts can seem too good to be true. Why, then, are oil and gas companies spinning off properties into publicly traded trusts?
Money.
Trusts allow the parent company to get full value for their reserves while also raising money, without diluting their common shares or going further into debt.
But there is one potential hang-up. By definition, these new trusts don’t have an established track record of generating cash flow from their reserves. Instead, you must rely on the company’s production projections and price assumptions, as stated in the prospectus.
That’s the downside. But it’s offset by at least two benefits.
First, recent trusts are being formed for a set life or “term” of 20 years. For example, SandRidge Permian Trust (NYSE: PER) was formed on May 12, 2011, and will dissolve by March 31, 2031. The parent company or sponsor endows the trust with proven reserves that have high-probability development opportunities to ensure the term is fulfilled.
In contrast, many older trusts formed in the early 1980s have consumed much of their original reserves. Although new production technologies have allowed them, in some cases, to draw more production from their reserves than originally anticipated, they still have a much shorter remaining reserve life. The average reserve life for older royalty trusts is about 8.3 years, versus 20 years for some of the newer trusts.
Once the reserves are used up, a trust expires and any remaining assets are distributed to unitholders. It can’t issue equity or debt to acquire new reserves.
A second benefit is some new trusts have created “subordinated units.” (Royalty trust shares are called units.) These units, which are held by the trust’s sponsor, support the distribution rate to common unitholders.
They work like this. When SandRidge Permian was created, sponsor SandRidge Energy (NYSE: SD) set aside 25% of the outstanding units for itself as subordinated units. These units are also entitled to receive distributions… with a catch.
The trust forecasts target distributions for several years in advance, based on projections of production volumes, commodity prices, the effect of hedges, expenses and taxes.
Then a subordination threshold is also established. For the SandRidge Permian Trust, the threshold is 20% below the target distribution. If the distribution ends up being less than the subordination threshold, the sponsor will make up the difference by reducing or foregoing the distribution on subordinated units. This way, there is some assurance that distributions will reach a pre-determined level should commodity prices fall.
In return, if the distribution is substantially higher than the target, the subordinated shares will receive an extra share of distributions.
These subordinated shares don’t last forever. The parent company retains these subordinated shares until new wells that the trust is also required to drill are completed. Then, a year later, the subordinated shares convert to common shares.
Now before you dive into any trust, there is plenty more to know. Taxes are a little trickier than with a common stock, and trusts will perform differently based on their hedging programs and their production mix of oil and natural gas (I detail all of this in my March issue of High-Yield Investing).
However, if you’re looking for a place to still capture high yields when interest rates are near zero, this sector may be small, but also holds plenty of promise.
[Note: If you’re interested in royalty trusts, be sure to learn more about StreetAuthority’s Top 5 Income Stocks for 2012 report. One stock we’ve selected is a royalty trust yielding double digits… another yields 8.8% and returned 13% during the bear market (when the S&P 500 fell -57%)… and a third holds stakes in dozens of infrastructure monopolies and has has paid more than 90 consecutive dividends. Visit this link to learn more.]
Good Investing!
Carla Pasternak’s Dividend Opportunities
Disclosure: Neither Carla Pasternak nor StreetAuthority own shares of the stocks mentioned above. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.
The idea of finding an undervalued stock is enticing, but how can investors distinguish between an international value tap and a bottomless money trap? Private investor and newsletter writer Chen Lin combs every continent to find junior exploration and production companies whose balance sheets outshine low stock valuations. In this exclusive interview with The Energy Report, Lin shares some lesser-known names that offer major profit potential.
COMPANIES MENTIONED: COASTAL ENERGY CO. – GROUNDSTAR RESOURCES LTD. – HARVEST NATURAL RESOURCES – IONA ENERGY INC. – ITHACA ENERGY INC. – MART RESOURCES INC. – NEW ZEALAND ENERGY CORP. – PAN ORIENT ENERGY CORP. – PETROBAKKEN ENERGY LTD. – PORTO ENERGY CORP. – PROPHECY COAL CORP. –PROPHECY PLATINUM CORP. – TRANSGLOBE ENERGY CORP.
The Energy Report: Chen, you follow world events very closely. Do events in Europe, especially Greece, have any effect on any of your decisions to buy or sell?
Chen Lin: Yes, but I look more at the fundamentals. Greece is on the edge of bankruptcy, but I think the market is well prepared for that. I’m looking more at whether there’s a major impact to the financial markets.
TER: How would it affect the way you trade?
CL: If we have another round of a huge deleveraging, I think I will be more conservative in general. I’ve become very aggressive in my investing since the beginning of the year because the European Central Bank (ECB) did another round of money printing and low-interest loaning to all the banks for three years. That dramatically expanded balance sheets, just like quantitative easing (QE) did in the U.S.
TER: You have had stellar returns in your portfolios. You grew $5,411 as of Dec. 31, 2002, to $1,383,041 by Dec. 31, 2011, but your portfolios were down 11% in 2011. What were the issues that resulted in that downturn?
CL: In 2008 I had a down year by a similar amount. I usually invest mostly long in the market, and I like to invest in undervalued stocks. Sometimes if they are extremely undervalued, I overweight them. So that tends to concentrate those stocks. When the market is down and investors don’t recognize the value, my stocks can be dragged down along with the overall market. Considering how tough the market was in 2011, I think I did relatively well in the period. I’m up quite significantly since the beginning of this year. People were seeking refuge in U.S. Treasury bonds, and now are suddenly starting to put money back to work. There has been a huge run-up of commodities and commodity-related stocks.
TER: At the end of 2011, you said that energy stocks were on a year-end clearance sale. After some price appreciation, are they still on clearance?
CL: A lot of the stocks I own have already appreciated dramatically since the beginning of the year, some even close to 100%. However, because they went down very hard last year and people panicked and sold everything they could to raise cash, I think there are still a lot of extremely undervalued energy stocks right now. Historically, if you compare the risk-reward, they’re still extremely undervalued. So I’m still overweighting energy versus precious metals.
TER: Are you currently trading out of equities that have greatly appreciated since the beginning of 2012?
CL: No, I am not. Well, some stocks I have, but mostly I’ve stayed with what I’m holding. I believe this rally still has legs. My largest position is Mart Resources Inc. (MMT:TSX.V), and my second largest is Pan Orient Energy Corp. (POE:TSX.V). Although I’ve been mentioning them in my newsletter for quite some time, I am still holding and riding those two stocks. I believe they are still very much undervalued.
TER: You’ve written that you’re expecting some big news from Mart pretty soon.
CL: I’m hoping the company can deliver a dividend. Its cash has been increasing dramatically in the past few months. It’s going after light sweet oil in Nigeria and selling it at a premium to Brent crude, so the company has a lot of free cash flow. The money is just piling up on its balance sheet, and I expect that to continue for the rest of the year. It’s pretty amazing that only two years ago the company was close to bankruptcy. Since then, it has just changed dramatically, and I don’t think it is appreciated by the market. I’m still very optimistic about the company and holding my position.
TER: Mart Resources has given back about 6% over the past month. Is this a buying opportunity?
CL: I think so. If you compare the valuation of Mart to other companies in the space, seldom do you see a company trading potentially at one or two times this year’s cash flow. Potentially, it could more than double its cash flow next year because it is finding more and more oil. Every well has been great in the past two years. That’s very unusual for a junior company. In addition, its wells have no decline. That’s something that amazes me because if you look at nearly all energy companies, you’re looking at very sharp declines in the first three to six months.
TER: Is there no sign at all of depletion? This huge oil field just continues to keep producing?
CL: That’s the thing. My guess is that it is sitting on a huge oil pool that’s interconnected and extends over a very big range. Once it pumps oil out, still more oil flows to the area, and so there’s no decline. This type of well is very hard to find on earth except in Saudi Arabia and a few other countries.
TER: So, Mart is producing oil that gives the company a marketing advantage because light-sweet refinement is low cost and therefore commands a premium price to Brent crude. Plus, depletion is not notable yet. What am I missing? I’m sure the picture can’t be this bright.
CL: Exactly. Well, the issue is Nigeria. It is a country where there are frequent protests and attacks on the pipelines. But those conflicts are mostly in the north, whereas Mart operates in the south, near the coast. So it’s pretty far away from the major violence. There is still tremendous opportunity and tremendous cash flow for this company. I think this will be the year when people see a dramatic rise in cash on its balance sheet and hopefully, with all that cash, it can pay dividends and bring in more rigs. It will build a pipeline and do everything organically without coming back to the market. That’s the beauty of this.
TER: A year ago you said you expected investors to begin accumulating shares in Pan Orient based on anticipated production from its big land position in Indonesia. You were correct. Shares are up more than 60% over the past three months. How much more growth can we expect?
CL: Pan Orient has a slightly different thesis than Mart Resources because there is some exploration/discovery risk. It is drilling wells, potentially very big wells, but I don’t know if the wells will be successful. With Mart, there is much more certainty. However, though there is risk for Pan Orient, it is a very experienced oil exploration company, and it’s been in Thailand for five years, drilling and fine tuning its technology.
I shared with my subscribers a report that estimates each of the three Pan Orient wells in Indonesia is worth about $3 of net asset value (NAV)/share if successful in the first half of 2012 and $2 for each of the other three wells in the second half of 2012. In addition, Pan Orient also has an oil sands property in Canada that it wants to sell. The company has $1/share cash on the balance sheet and cash flow over $1/share right now, and this is in addition to the oil sands property that it has for sale. Thailand is ramping up production and Indonesia has the big wildcat wells at work. So in terms of risk-reward, it’s an ideal situation. I wouldn’t be surprised to see the stock be a ten-bagger by the end of this year. The company could be a $1 billion (B) company. It was a $2 stock when I recommended it in my newsletter. Right now it’s $3 and change. With some success in drilling in Indonesia, I’m looking for a ten-bagger. Seldom do you have those in one year, so I have pretty high hopes on the stock.
TER: What other companies do you like?
CL: This year, I have put a new fracking company in my newsletter, New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX). It has done very well so far. The stock has really exploded, and some of this excitement is about the company getting ready to explore for shale oil in New Zealand. The company has a big land package, and I think Apache is going to start drilling in April not far from their huge land package, and so we may see some results in H212. In the mean time, the company has drilled a nice conventional well, which has 500 barrels per day on restricted flow. It is drilling the second well and planning the third. The success of the current drilling program can move the stock as well.
I still have Porto Energy Corp. (PEC:TSX.V) on my list. It was one of my biggest losers last year. You win some and lose some. The stock has been down to about $0.11 recently, but I’m seeing significant insider purchases. The company has about $10 million (M) in working capital, but it doesn’t intend to use all the money to drill the well on its own and then have to come back to the market to raise money at this depressed level. Instead, it is looking to do a joint venture (JV). So basically it would like its partner to pick up the costs and risk. I just spoke with the company, and management is still optimistic about getting a JV deal very soon. Porto is unique in that it has a huge land package in Portugal of over 1M acres on trend with the North Sea.
TER: You’ve said that the Portuguese government wanted to do anything it could to help Porto, and so it’s disappointing to see that the stock has been so weak. What is the government doing to help the company?
CL: I think the government is making it easier to get permits. Porto has drilled three dry holes. It hasn’t found any major oil yet, and that was its big downfall last year. I was told last year that if it found oil it would be easier to work with the government to bring the oil into production.
Portugal is trying to do everything it can to avoid the fate of Greece, and so an oil discovery would be very significant. Porto is being run by very experienced oil guys, and most of them came from Devon Energy Corp.’s (DVN:NYSE) international division. In fact, Joe Ash was running the International division, but he left a comfortable, high-paying job to run Porto because he believes in the potential. You can see from insider trading reports that he has recently purchased more shares with his own money. So that tells you the people still believe in the whole thesis of finding massive amounts of oil in Portugal.
TER: At this low $25M market cap, it seems like Ash with a few other people could easily buy this company and take it private.
CL: Yes. But when the stock went down, the company adopted a poison pill. I think it’s afraid of a hostile takeover. Taking it private is possible.
TER: You mentioned New Zealand Energy. Its shares, as you indicated, have gone to the races. The company is up well over 100% over the past three months. That’s a lot of conviction.
CL: I believe there is the potential of doing fracking on this Bakken-like land. There will be some development later this year, and that’s actually driving the stock price. This stock is still very undervalued.
TER: Are there other companies you like?
CL: There are quite a few still that I like. PetroBakken Energy Ltd. (PBN:TSX) has been a big winner for me. It was paying a 10% dividend when I picked it up, but it’s up almost 70% since then, and now it is paying a 6-7% dividend. The key is that if you compare the company with other North American-based fracking companies in Bakken plays, it’s still relatively cheap. I think it could potentially have more upside, but the easy money has been made with this stock.
I am also holding Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) and Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). Both stocks are rising this year. I like Prophecy Coal as it is getting close to a contract with Mongolia’s government. That will lead to financing and construction of the power plant. Prophecy Platinum should have its preliminary economic assessment very soon, so investors can get a peek of the project’s huge potential.
TER: Most of your stocks are microcap companies. I find it interesting that you own Petrobakken, which has such a large market cap at $2.8B.
CL: As far as market cap, it’s one of the largest I own now, but it had been hit very hard, and thankfully I was able to pick it up when it was quite depressed.
TER: What about another company that you like?
CL: Another company I like, which still hasn’t appreciated much, is Harvest Natural Resources (HNR:NYSE). This company has had bad luck like Porto. It drilled three dry holes in a row, and the stock is still very close to its 52-week low. The main attraction is that it has a big oil field in Venezuela. If you are looking at normal valuations, and if it’s not in Venezuela but rather a country friendlier to the U.S., then the company is probably worth at least $20/share. The stock is trading at $6–7. Venezuela is going to have an election this year in the fall, and Hugo Chavez will be seeking his third term. With all the things happening around the world, like the Arab Spring, I wouldn’t be surprised if Venezuela has some major changes this year. If that’s the case, this stock can have a huge upside.
TER: Harvest Natural just hit another dry hole, but clearly the dry holes don’t make you as nervous as the Venezuelan government, is that right?
CL: If it gets a hit in Indonesia that would be great. But this company already has a huge oil field in Venezuela that is self-funding. It doesn’t need to put money in. It was hoping to get money out as dividends for shareholders, but so far it has been having trouble getting any money out because of the government. But this could change overnight if the government has a change of regime.
TER: What other companies did you want to mention to us today?
CL: Another company is TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ), which I own. It is operating mostly in Egypt and Yemen. If you compare the company, cash-flow wise it is very, very cheap. Due to political problems, the company has mostly stopped production in Yemen. If it can start flowing again in the country, that would be another big catalyst. I like the stock, and I own the stock and options.
TER: What effect has the Arab Spring in Yemen had on TransGlobe’s business? Its shares have been above water for the last six months.
CL: The Arab Spring in Yemen actually depressed the stock. It used to produce from Yemen but because of violence, it stopped producing there. Any peaceful resolutions and new production would be a big plus.
TER: Any other positions you could talk about briefly?
CL: I also have two companies in the North Sea. Both did very well. One is Ithaca Energy Inc. (IAE:TSX). It just went up 40–50% because of a potential takeover. Another is a Iona Energy Inc. (INA:TSX.V), which was funded by the founder of Ithaca Energy. Both of these have done very well.
TER: Do you have any new positions?
CL: I recently purchased Coastal Energy Co. (CEN:TSX.V), operating in offshore Thailand. It has been growing its production quite dramatically in the past year, and it continues to grow.
TER: Coastal is another larger name with a $2B market cap. But just the opposite is Groundstar Resources Ltd. (GSA:TSX.V), which you owned last year.
CL: Yes. Groundstar was one of the worst stock picks I had last year. It drilled a well in Iraq and one in Egypt, and every well it drilled turned out to be a dry hole. So I had to cut my losses and get out of the stock when I saw it was raising money and diluting shareholders at a very low share price. The stock would have probably had a difficult time rebounding.
TER: It is so nice speaking with you again, Chen. Thank you for your time.
CL: I enjoyed it. Thank you.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Lin found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.
DISCLOSURE:
1) George S. Mack of The Energy Report conducted this interview. He, personally and/or his family, own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Resources Inc., New Zealand Energy Corp., Prophecy Coal Corp., Prophesy Platinum Corp., Iona Energy Inc. and TransGlobe Energy Corp. Streetwise Reports does not accept stock in exchange for services.
3) Chen Lin: I personally and/or my family own shares of the following companies mentioned in this interview: Mart Resources Inc., Pan Orient Energy Corp., New Zealand Energy Corp., Porto Energy Corp., Devon Energy Corp., Petrobakken Energy Ltd., Prophecy Coal, Prophecy Platinum, Harvest Natural Resources Inc., TransGlobe Energy Corp., Ithaca Energy Inc., Coastal Energy Co. and Groundstar Resources Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: In early 2010, when Porto Energy was a private company, Chen Lin received shares from the company to introduce it to hedge funds. I was not paid by Streetwise for this interview.
There are several forces lining up now to send stocks into a new bull market. Chief among them …
First, the sovereign-debt crisis. The money that’s going to come out of bonds has to go somewhere. It can’t all go into gold, silver and commodities.
So as money shifts out of sovereign-bond markets in Europe, and eventually the United States, there’s going to be a huge influx of capital into stocks — especially the cream-of-the-crop stocks, the blue chips and top S&P 500 names.
Second, precisely because of the European debt crisis, the U.S. looks like a heck of a lot better place to invest these days, especially for Europeans. That’s a corollary of the above point, but it’s already in force — European money is showing up on U.S. shores in droves, and most of it is going into U.S. stocks and bonds.
Third, as I’ve often said in the past, good quality stocks can often take on many of the attributes of commodities. In the sense that stocks can and often do inflate higher with money-printing and inflation, they can and do adjust upward as the underlying currency depreciates, or in anticipation of a currency devaluation.
This happened in the 1930s … and in just about every third-world and emerging-market country that experienced a depreciating currency. From Argentina to Brazil, from Indonesia to Malaysia, from Pakistan to Zimbabwe.
The only difference now and in the future is that the sovereign-debt crisis is not happening in emerging or third-world countries but instead is hitting the FIRST WORLD!
Money-Printing to the Rescue?
So, what could cause a new bull market in stocks when there are so many problems in the world?
The worldwide money-printing phenomenon will not be the cause of it. Even though money-printing is bullish for commodities and stocks, it’s not necessarily bullish all the time.
For instance, a lot of the recent money-printing has managed to help (at least temporarily) push back the European sovereign-debt crisis. So this can have the effect of temporarily taking some of the shine off of tangible assets. We’ve seen this happen in sugar, coffee, cotton and select other commodities that normally do well under a money-printing scenario, but are not doing so now.
And notably, right now the money-printing has largely gone to support banks in Europe. To help liquidity, to help the banks remain solvent, to help the credit markets, to bail out Greece again, and more.
But the money is not yet finding its way into the private sector, where loan demand and credit remains tight. So the fires of inflation are NOT being stoked by the current money-printing, and the inflation force behind a bull market in commodities or stocks is not yet here, either.
Simply put, money-printing is inflationary and bullish for asset prices under most scenarios, yes, but not always.
If it were, gold would already be at new record highs because there’s a heck of a lot more money-printing going on now than before.
We’re Not There Yet,
But When Is That Day Coming?
As strong as gold and silver appear … as strong as the Dow Industrials … the S&P 500 … and even oil look — they are not yet at the point where I can confidently say that new bull legs higher are starting.
Yes, I have been wrong in the short term. Very wrong. And I dislike that just as much as you do.
In fact, I personally am and have been short gold, silver, oil and the S&P 500 in the futures markets. So I fully understand how lousy it feels when you’re on the wrong side of the market.
But I will not succumb to emotions, guilt or popular sentiment just because I’ve been wrong in the short term. That would be the worst thing to do.
Instead, I have to go with hard, technical evidence gathered from my more than 30 years of experience, and from all my trading models and indicators, to draw my conclusions.
Here they are …
- Gold has taken out the December high, which is very positive for the longer term. It confirms that gold is still in a long-term bull market. But that’s all it says.
- To truly break out to the upside, we need to see gold take out the $1,808 and $1,835 levels — preferably on a weekly or monthly closing basis. Until then, gold remains in a very broad trading range that could easily see gold plunge back down.
- Silver, as noted previously, needs to take out the $35.85 level on a monthly closing basis. If silver cannot close above that level on Tuesday, February 28, then it is still at risk of a sharp decline.
- For the Dow Industrials, we need to see a close above the 12,850 level at month-end, before I can say for sure that the new bull market in the Dow that I’ve talked about many times is here. Short of that monthly breakout and buy signal, the Dow also remains at risk of a sharp decline.
- In oil, we need to see a close above the $111 level before I can confidently say that a renewed long-term bull market in energy is back.
This may occur this week, or next month. But no matter what, you can rest assured that, when these markets are fully flashing green, any money you missed out on making recently or any hits you may have taken following my short-term calls will be more than made up for. Many times over.
Best wishes,
Larry
P.S. Our natural-resources expert Sean Brodrick is finalizing an urgent series of recommendations on some new natural gas companies that he’s looking at … and his instructions went out at 1 PM Eastern Time Monday, February 27.
To get the full story on this incredible “New Fuel Revolution” straight from Sean … and to learn how to get the names of these stocks as soon as he reveals them, click here immediately!
About Larry Edelson
Larry has nearly 33 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Resource Windfall Trader (weekly) provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.
For more information on Real Wealth Report, click here.
For more information on Resource Windfall Trader, click here.
Warren Buffett has said that if you look around the poker table and you can’t spot the patsy, you’re it. In that spirit, another famed investor, Jeremy Grantham, is trying to deal investors a better hand.
Jeremy Grantham is a British investor and Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), a Boston-based asset management firm. GMO is one of the largest managers of such funds in the world, having more than US $107 billion in assets under management as of December 2010. Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.
Grantham doesn’t mince words. In Grantham’s view, outlined in a quarterly letter published late Friday, individuals launched into the market have embarked on “dangerous investment voyages” that threaten to separate them from their money. They hear the tempting call of countless stock-market sirens — self-interested cheerleaders and barkers who promise that it’s different this time, and that you must buy now or miss the boat.
Making the journey even more perilous is that stocks around the world are either fairly priced or nearly so, he says. Investors who buy now can expect meager returns over the next seven years.
….read Grantham’s detailed version of the 10 Investment Lessons: HERE – The Longest Quarterly Letter Ever.’
Here is a summarized version of the 10 Investment Lessons:
1. Believe in history
“All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.”
2. ‘Neither a lender nor a borrower be’
“Leverage reduces the investor’s critical asset: patience. It encourages financial aggressiveness, recklessness and greed.”
3. Don’t put all of your treasure in one boat
“The more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”
4. Be patient and focus on the long term
“Wait for the good cards this will be your margin of safety.”
5. Recognize your advantages over the professionals
“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing.”
6. Try to contain natural optimism
“Optimism is a lousy investment strategy”
7. On rare occasions, try hard to be brave
“If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.”
8. Resist the crowd; cherish numbers only
“Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant. Do your own simple measurements of value or find a reliable source.”
9. In the end it’s quite simple. really
Estimates and forecasts such as the ones GMO makes for the next seven years aren’t complicated, Grantham says – “[GMO] estimates are not about nuances or Ph.D.s. They are about ignoring the crowd, working out simple ratios and being patient.”
10. ‘This above all: To thine own self be true’
“It is utterly imperative that you know your limitations as well as your strengths and weaknesses. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.”
Jeremy Grantham is a British investor and Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), a Boston-based asset management firm. GMO is one of the largest managers of such funds in the world, having more than US $107 billion in assets under management as of December 2010. Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.
Estimates and forecasts such as the ones GMO makes for the next seven years aren’t complicated, Grantham says
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