The Market Knows Best
Don’t Worry, Be Happy
An Undervalued Food Stock
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I hope you enjoyed a wonderful Independence Day holiday. The highlight for me was having all three of my kids back home and feeding 32 family and friends in my back yard, featuring lobsters caught by my brother-in-law! But today it’s back to work, and I begin this issue with some concerns expressed by readers in recent weeks.
“I am increasingly concerned about the impact of inflation on the value of my portfolio.”
“Over 2/3 of all births in Los Angeles County are to illegal alien Mexicans on Medi-Cal, whose births were paid for by taxpayers. 95% of warrants for murder in Los Angeles are for illegal aliens. How can I invest when the immigration statistics are so troubling?”
“Unless we get the world’s population down below 5 billion, we’re doomed.”
“My partner Scott is addicted to Kudlow. He’s got to watch him at 7 every night. But he’s too scared to invest!”
“I’m afraid that the U.S. political class is so addicted to lobbyist money that they’ll never make the hard choices that can get this country back on track. Our days are numbered. China will be the next global leader.”
And finally, addressing perhaps what is the greatest shared worry of Americans today, “I’m worried that the BP oil spill will end up hurting us more and costing us more than Katrina.”
In short, there’s plenty of worry out there.
But allowing worries about fundamental problems like these to influence your investing decisions is a mistake, and the reason is this.
Everyone else who’s investing in the market has ALREADY worried about these things, and they’ve adjusted their investments accordingly. In professional jargon, the market has already “discounted” these concerns. Furthermore, the market as a whole is much smarter than any one investor; the market is always right. So instead of worrying about the future, and attempting to calculate how these fundamental problems will affect particular stocks or the whole market, you should simply watch those stocks and watch the market!
If this is confusing, please read it again, because you must understand this if you’re going to be a successful investor.
(In one classic investment book, “How I Made $2,000,000 in the Stock Market,” by Nicolas Darvas, first published in 1960, the author writes, “To guard myself against any possible interference, I put up my barrier. … I buy a copy of an afternoon paper that gives Wall Street closing prices. … I tear out the pages giving the day’s quotations and throw the rest of the financial section away. I do not wish to read any financial stories of commentaries, however well-informed. They might lead me astray.”)
In sum, when it comes to investing, you should do what Darvas did. Ignore the news and ignore the commentary. Simply let the action of the market be your guide.
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Getting back to worries (but away from investing), it’s equally important that you don’t let today’s worries influence your thinking about what will happen to the U.S. and the world in the long run.
The main problem with focusing on today’s headlines is that they foster a short-term mentality, and thus crowd out attempts to balance the immediate with a longer-term view. And longer-term thinking is difficult enough without the distractions of the breathless commentators who repeat who-said –what-today-on-what-topic ad infinitum.
So let me address the concerns above one at a time.
On the topic of inflation, many people are concerned that as the economy recovers, today’s super-low interest rates will encourage buying and in the process fuel inflation. After all, that’s what’s happened in previous decades. But a longer-term perspective tells me that demographic forces--above all Baby-Boomers shifting from spending to savings mode--will dampen any inflationary tendencies.
On the topic of immigration, I have three thoughts. One, the history of civilization tells us walls don’t work. Two, the strength of the U.S. has always come from immigrants striving to build better lives for themselves, and I believe that tradition can be continued, particularly if our Federal government works to attract and keep educated people, and rewards productive behavior more than it rewards unproductive behavior. Three, looking longer-term, demographic forces again tell us that in a few decades we will face a serious labor shortage, and that we may be competing with other western countries to attract workers.
On the topic of the global population, I strongly believe that the earth can support billions more people, but that to do it healthily we must transition beyond our fossil fuel economy so that air and water pollution diminish and so that the effects of global warming, like rising sea levels, do not become too great to fix and/or adapt to. We must recognize that the main cause of poverty/malnutrition on earth is not due to a deficiency of assets, but due to the misallocation of resources, and the main reason for that is misguided government policies. Finally, we must elect leaders who see the main benefit of growth--that every human born can be not only a productive worker but also a person capable of generating the ideas that help make the world a better place.
On the topic of watching Kudlow or any commentator every night, I say, if it bothers you so much that you’re fearful to invest, turn it off! Get some perspective. Remember that the best investments are those that are not obvious; they’re undiscovered small stocks like Isilon Systems (ISLN) or stocks in out-of-favor industries like Alaska Airlines (ALK). While mass-market commentators like Kudlow might provide entertainment, they’re unlikely to be a source of great investment ideas. And if you’re still scared to invest, remember that the long-term trend of the market is up, and that the very best time to buy is at the deepest trough of pessimism.
On the topic of politics and lobbyist money, it looks like the next election will bring a few fresh faces to the halls of power, and if we elect carefully, these fresh faces will be somewhat less beholden to the lobbyists. Overcoming the power of that money won’t be easy, but I don’t favor trying to do it with the force of law. I favor the forces of knowledge (transparency) and education.
On the topic of China, I’m very happy to see China growing, not only because it’s a chief reason that Cabot China & Emerging Markets Report has been the top-performing investment advisory over the past five years but because raising the standard of living of people everywhere is good for us. But I’m not worried about China taking the lead. Its economy is still just one-third the size of ours, and I know that its economic growth will slow as it grows larger and more complex.
Finally, turning to the topic of the BP oil leak, I see a parallel with the case of the Cambridge, Massachusetts cop who was accused of racism last July when he responded to a 911 call and ended up handcuffing Harvard professor Henry Louis Gates, who was trying to get into his own house. A $100,000 independent commission announced last week that both the policeman and the professor were at fault (something most of us figured out much more quickly and cheaply). In the Gulf, I blame BP for incaution caused by greed and I blame the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), also known as the Bureau of Ocean Energy, and formerly known as the Minerals Management Service--whose head has already resigned--for lax oversight.
I think BP was foolish to give away $20 billion to the U.S. government without getting something tangible in return.
I think the lawsuits will drag on for years and make numerous law firms rich.
I think the ocean will clean itself in time, but it will be a long time.
Finally, I think President Obama should use the leak as a springboard to a new energy policy that discourages petroleum use with a simple gas tax--just as they do in Europe--and encourages the use and development of sustainable energy sources. Furthermore, as the gas tax is phased in, CAFE (Corporate Average Fuel Economy) requirements should be phased out; as their main value has been in encouraging automakers to find ways to get around the rules (like classifying baby-toting SUVs as trucks), and true market forces should be allowed to determine what we drive.
In sum, there’s always plenty to worry about, but putting these worries in perspective can help you see the bigger picture, which can bring psychic comfort … which can make you a better investor.
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Moving on to the market, we got a nice rally today, but one swallow does not make a summer (Aristotle) and one up day doesn’t make a bull market. But the rotten sentiment levels--which may have reached a nadir last week--mean there are plenty of stocks trading at bargain prices out there.
One worth investing in is Sysco (SYY) the leading distributor of food and related stuff to restaurants, hospitals, hotels and schools.
It’s a favorite of Roy Ward, editor of Cabot Benjamin Graham Value Letter, who recently added it to his Wise Owl Portfolio and wrote this:
“SYY shares sell at only 15.0 times forward EPS with a dividend yield of 3.2%. Sysco is a top-notch company in an industry with excellent growth prospects. We expect SYY shares to advance to our Minimum Sell Price of 39.97 within one to two years.
Sysco has 186 distribution facilities in the U.S., Canada and Ireland. The company focuses on prompt and accurate deliveries and on additional services such as inventory control assistance and menu-planning advice. The company stays ahead of the competition by offering a wide array of fresh, frozen and canned food products. The company also offers a broad range of culinary equipment and supplies.
Sysco is building regional distribution super-centers to buy in larger quantities to achieve lower prices and better serve its customers. Sysco reported sales and earnings increases of 2% and 10% for the quarter ended 3/31/10. Sales to restaurants picked up for the first time since the third quarter of 2008. We expect the increase to accelerate during the next several quarters. We anticipate sales will increase 5% and earnings will rise 10% during the next 12-month period.”
Roy’s Maximum buy price is 31.02, and the stock is now trading under 29, meaning it’s a great buy for the investor who can buy and hold for a year or so as it climbs to Roy’s Minimum Sell Price of 39.97.
For more details, click below.
http://www.cabot.net/info/bgv/bgvkr02.aspx?source=wc01
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
