John Templeton’s Lost Memo

Sir John Templeton, founder of Templeton funds is widely acknowledged as one of the greatest investing minds ever. He died in 2008 at the age of 95. His son recently released a memo found among his belongings that was written in 2005.

Apparently, Templeton predicted the coming economic challenges and it seems Greenspan was wrong – it isn’t impossible to predict financial bubbles!

John M. Templeton
Lyford Cay, Nassau, Bahamas

June 15, 2005


Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.

Increasingly often, people ask my opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my lifetime. Quite likely, in the early months of 2005, the peak of prosperity is behind us.

In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great that most currencies and bonds are likely to continue losing their purchasing power.

Mortgages and other forms of debts are over tenfold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.

Surplus capacity, which leads to intense competition, has already shown devastating effects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages almost to zero when adjusted for higher cost of living. Clearly, major corrections are likely in the next few years.

Most of the methods of universities and other schools which require residence have become hopelessly obsolete. Probably over half of the universities in the world will disappear quickly over the next thirty years.

Obsolescence is likely to have a devastating effect in a wide variety of human activities, especially in those where advancement is hindered by labor unions or other bureaucracies or by government regulations.

Increasing freedom of competition is likely to cause most established institutions to disappear with the next fifty years, especially in nations where there are limits on free competition.

Accelerating competition is likely to cause profit margins to continue to decrease and even become negative in various industries. Over tenfold more persons hopelessly indebted leads to multiplying bankruptcies not only for them but for many businesses that extend credit without collateral. Voters are likely to enact rescue subsidies, which transfer the debts to governments, such as Fannie May and Freddie Mac.

Research and discoveries and efficiency are likely to continue to accelerate. Probably, as quickly as fifty years, as much as ninety percent of education will be done by electronics.

Now, with almost one hundred independent nations on earth and rapid advancements in communication, the top one percent of people are likely to progress more rapidly than the others. Such top one percent may consist of those who are multi-millionaires and also, those who are innovators and also, those with top intellectual abilities. Comparisons show that prosperity flows toward those nations having most freedom of competition.

Especially, electronic computers are likely to become helpful in all human activities including even persons who have not yet learned to read.

Hopefully, many of you can help us to find published journals and websites and electronic search engines to help us benefit from accelerating research and discoveries.

Not yet have I found any better method to prosper during the future financial chaos, which is likely to last many years, than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.

Best Trade of 2009

Almost exactly a year ago, I mentioned a paired-trade investment between the long-term Bond ETF (TLT) and short-term corporate/sovereign bond ETF (AWF).  I went long AWF and shorted an equal dollar amount of TLT. Last week, I closed the position after holding it for just over a year.

When I entered the trade, AWF was trading for $8.29 and had a yield of 13.4%, while my short position in TLT was trading at $112.10 and had a yield of 3.5%.  When I close out my position a year later, AWF had a price of $13.10 and a yield of 8.6%, while TLT was going for $91.65 and yielding 3.9%.

I made about 63% on the long AWF position and 18% on the short TLT position. Coupled with the 9.9% net dividend yield, that trade made me ~91%. Not a bad return for a year and 4 days.  Bond yields don’t usually move 500 basis points in a year. No point being greedy. Time to bank some profit!


A drop in the stock market will cause the price of bonds to move up, since they typically are inversely correlated. Similarly a sharp rise in in yields would cause bonds price to drop. I expect a move in TLT to about roughly $96 at which point I might renter the position depending on the larger macro-economic picture.

Interview With Jim Rogers

The Financial Times published an interview with Jim Rogers, who’s one of my favorite investors. He’s written incredibly interesting books on macroeconomic adventures, but more importantly managed to retire 30 years at the age of 37 after making a fortune with George Soros for his Quantum Fund:

What is your basic investment strategy?

Buy low and sell high. I try to find something that is very cheap, where a positive change is taking place. Then I do enough homework to make sure I am right. It has got to be cheap so that, if I am wrong, I don’t lose much money. Every time I make a mistake, it is usually because I did not do enough homework.

Do not underestimate the value of due diligence. In the 1960s, General Motors was the world’s most successful company. One day, a GM analyst went to the board of directors with the message: “The Japanese are coming.” They ignored him. Investors who did their homework sold their GM stock – and bought Toyota instead.

I’m not buying any stocks at the moment. If anything is undervalued now it is commodities and some currencies.

Where should people put their money in the recession?

Invest only in things you know something about. The mistake most people make is that they listen to hot tips, or act on something they read in magazines.

Most people know a lot about something, so they should just stick to what they know and buy an investment in that area. That is how you get rich.

You don’t get rich investing in things you know nothing about.

You can read the full interview here.

Investing For Sustainable Dividend Yield

The following is a guest post by Saj Karsan. Saj regularly writes for Barel Karsan, a site dedicated to finding and discussing current value investments.

Stocks with higher dividend yields do outperform the market. Having said that, however, it’s important to be able to determine if a company’s dividend yield is sustainable.

Consider World Wrestling Entertainment (NYSE: WWE). CEO Vince McMahon’s antics are well known, both in the boardroom and as an entertainer himself! For those unfamiliar with his antics (or those who enjoy re-living WWE moments), a video example of McMahon in action is portrayed below:

WWE pays a dividend yield above 10%. However, the following chart demonstrates why you can’t choose a stock on dividend yield alone:


Clearly, WWE has been paying out more than it has been earning! Over the last four fiscal years (“2006 T” representing an 8-month transition year to a new fiscal year-end), WWE has paid out $1.06 more per share than it has earned!

How does it do it? Balance Sheet strength! The company has virtually no debt, and more than $2.80 of cash (including short-term investments) per share. That means it could continue to pay out cash over and above its net income by 25 cents per share for the next 10 years!

Does that make it a buy? Not quite. At a share price of $14, even if management immediately paid out that entire $2.80 to shareholders, one would still be paying $11.20 for a company that earned 62 cents / share last year, representing a P/E of 18.

When a dividend yield looks appealing, make sure it’s not too good to be true!

Disclosures: None

If you enjoyed this article, consider subscribing to Barel Karsan.

Investing In Tax Liens

What Every Investor Needs To Know About Tax Liens!

Today’s guest post comes via Blunt Money, an Arizona-based wife and mother, who’s had experience with being divorced, unemployment, under-employed, employed and self-employed!

What are Tax Liens?

Tax liens are liens placed against real estate to secure the debt from unpaid taxes. They are first liens, which means that they (in theory) must be repaid before any other debts that the property might be collateral for. Like everything else regarding tax liens and investments, there are a few exceptions to this — nothing is guaranteed.

The process of investing in tax liens and the amount of interest you can earn from them varies from county to county, so it’s best to get specifics on the exact requirements from the particular county you’re interested in.

My experience is with buying them in Maricopa County, Arizona. Here, the auction is held online once a year in February. The highest you are allowed to bid is 16% interest, and the lowest is 0% interest. If you win the bid and the tax lien is repaid, you earn the amount of interest you bid that was charged during the time you held the lien. If the tax lien is not repaid within 3 years, you have the right to start foreclosure proceedings.

This means that there are two basic ways to think about tax liens: either you hope to end up with the property itself eventually, or you hope to receive interest when the liens are redeemed. I try to split the difference — I look for good properties that I believe would be worth owning if I ended up with them, and I also try to earn a better interest rate on them than I could receive elsewhere. I’ve had several liens o ver the years, all in the 5-7% range. One set of liens got close to being eligible for foreclosure, but was paid off a few months before that date. The rest have all been repaid fairly quickly, usually in under a year or two, which is more typical.

Do Your Research Before You Buy

If you want to increase the probability of you owning the property if the lien is not repaid (and if you want to increase the chances of actually being repaid) you also need to pay the subtaxes on the property for subsequent years. This is handled by calling up the county and arranging to make payment for them once they have become delinquent.

Investing in tax liens requires a commitment because you could end up owning 3 liens at a time on a single property, and you need to watch to see if the current year’s taxes become delinquent. The liens that I’ve purchased have ranged from about $400 to $1500 each, but they go for a very wide range of amounts.

The most important thing when investing in tax liens is to do your due diligence before bidding on a property’s lien. This is a time consuming part of the process, but it’s critical. Be certain of exactly WHAT You are bidding on. Dangers include ending up the owner of a property that requires you to pay for toxic cleanup, or (not quite as bad) ending up the owner of a worthless piece of property that you can’t sell. There’s also the ever-present investment danger of losing your entire investment.

As far as due diligence goes, the satellite view in Google maps is a good starting point. For properties that look interesting beyond that point, I then check the county assessor’s site to find out the property owner’s name. I also generally take a look at the county recorder’s site to see what other properties they may own, and to get an idea of the owner’s general financial shape. I try to judge the odds; and bid lower on liens I feel I’m more likely to end up with the properties on, and higher on liens that look likely to be repaid. Anything that looks bad, has problems, or that I just have a bad feeling about gets eliminated at this point. The next step is to drive out to the remaining properties. I do basic things like make sure that they’re still standing, look decent and are in a decent neighborhood, etc. (Talking to the owners is a no-no.) The last step I take before bidding is to check PACER to make sure that the owners have not started bankruptcy proceedings, as not getting repaid in that situation is also a danger.

From that point out, it’s just a matter of following the bidding proceedings and being certain that I don’t go over budget if I should win all of my bids.

See this page to buy tax liens or learn more about investing in tax lien certificates.

[AffomaticEbay]Tax Lien[/AffomaticEbay]

How To Invest Like China

In the last post we saw that China was slowly diversifying away from it’s usual investments in US Treasury Bonds and investing in hard assets, natural resources and maybe other currencies.

There probably a very good reason why the world’s second largest holder of US Dollars is weaning itself away from bonds issued by the world’s largest debtor nation.  If you believe the Chinese know what they are doing, it might make sense to imitate their investment strategy.

While you don’t need to buy $80 Billion worth of gold, you might do well buying gold equal to at least 5% of your net worth. Gold is not an investment in itself but a historic store of value. Regardless what anyone tells you, the US Dollar is not a store of value. During times when governments print money hand-over-fist, gold typically does well. In fact, over the past 10 years, gold has appreciated against every single currency.

You can either buy the physical gold, gold ETF(GLD) & gold mining stock ETF (GDX), gold certificates or a custodial account. You can also buy silver and silver ETFs in a similar fashion. There was a recent Chinese news report recommending Chinese investors buy silver since its a better value than gold!

You can also exchange your US dollars directly for foreign currencies. Everbank currently has a Marketsafe BRIC CD, which invests in a basket of Brazilian Real, Russian Ruble, Indian Rupee and Chinese Remnimbi.  This CD doesn’t pay any interest but the principle is protected against loss! But if you’d rather take a risk and earn some interest, Everbank has a slew of CD products in several European and Asian currencies.

Another option are the CurrencyShare ETFs for Australian Dollars(FXA), British Pounds(FXB), Swiss Francs(FXF), Japanese Yen(FXY) and Euros(FXE).  Another ETF worth considering is UDN, an inverse US Dollar ETF, which is a basket of the above mentioned currencies. (However, inverse ETFs may not accurately follow the downward movement so you’re cautioned to do some research).

I do not recommend forex-trading as a means of hedging yourself against Dollar devaluation. Forex trading is a highly leveraged, zero-sum speculation. In a zero-sum game, a participant can only win at the expense of another participant. In fact, it may be considerably less than zero-sum becauase your brokerage can run your stops (which it can see) and effectively trade against you.

If you are thinking of investing in currencies, definitely check out Everbank’s free newsletter, the Daily Pfenning. It provides a very informative (and entertaining) look at global economics and investing. Actually, you should subscribe if you do any sort of investing! Everbank also has a low-cost custodial account for gold and from time to time (whenever the price of gold drops dramatically) they offer a MarketSafe (which means principle-protected) Gold CD. Sign up for the newsletter and they’ll inform you whenver they come out with new products.

If you have a penchant for natural resources, you should look into Master Limited Partnerships (MLPs) like Tortoise Energy (TYY) or Kinder Morgan (KMP). Both pay a juicy dividend that is considered a return of principle and thus non-taxable (although it does alter cost-basis). However both have appreciated significantly this year. Canadian Royalty Trusts like Enerplus Resources (ERF)  are also an option.

You can also buy natural resource stocks like Rio Tinto (RTP) or BHP Biliton(BHP). China has been trying to buy multi-billion dollar stakes in companies like these and is currently unsuccesful. If you think that a day may come where Chinalco will be successful, you might want to get in before that happens.

IRSA International (IRS) is an Argentinian company that trades on the ADRs.  It owns farm land, resorts, hotels and shopping malls in prime locations.  After decades of “quantitative easing” (another word for printing money) wreaked havoc on their economy and standard of living, Argentinians don’t trust banks or central bankers. They trust gold and farmland. The way the US economy is going, we too may come to that same conclusion. Just to be safe, I bought some of the stock. On the other hand, you might be better off buying farmland or a ranch for hunting. I’m pretty sure, buying farmland is next on China’s list!

Disclosure: I own ERF, TYY,FXA, IRS, Everbank MarketSafe Japanese REIT CD, GDX and physical gold/silver.

Mobs, Messiahs & Markets: Book Review

The publishers of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, were kind enough to send me a free copy to review.

I’m glad they did. It was an excellent read, similar in some respects to one of my all-time favorite investment books: Extraordinary Popular Delusions and the Madness of Crowds delves into human psychology and crowd behavior. Mobs, Messiahs & Markets is like a modern-day version with emphasis on investing and explores popular delusions like “real estate never goes down”, “stocks always go up”, “deficits don’t matter”, “you are either with us or against us”. When rational, intelligent human beings become part of a group, they are fine. However, as soon as they become part of a crowd, they lose all rationality and turn into blockheads! I found the book quite entertaining, with great wit and sarcasm to keep me amused.

The book talks about people who were determined to make the world a better place by making it conform to their delusions. People like Hitler for example! The authors also talk about how crowd think leads to wars and how wars are futile and never worth the cost. There’s also a complete chapter making fun of Thomas Freedman and his banal book “The World is Flat”. I never liked that book and apparently neither did the authors. There’s also a full chapter devoted to Alan Greenspan which was particularly eye-opening. It describes how his cowardice was responsible for the mess we’re in today. He exchanged his ideals when he went to Washington for fame and fortune. In his younger years, Greenspan apparently once said “In absence of the gold standard, there is no way to protect savings from the confiscation of inflation…The financial policy of the welfare state requires that there be no way for owners of wealth to protect themselves“. But once in Washington, he turned on the credit spigot and inflated the money supply 10-fold!

The end of the book explains how you should ignore the popular beliefs and learn to think for yourselves if you want to invest profitably. They also caution against buy and hold investing. There is no such thing as buy-and-hold, you are either long or short an investment. If you are in cash, then you are long currency and short stocks and vice-versa. In the current economic climate they encourage going long Gold and short the US Dollar, which they think will fail like all fiat currencies before it (there’s actually a pretty extensive list of defunct currencies on page 256). As they say, gold isn’t a typical investment but its more of a store of value. Since the value of the dollar is about to be destroyed, it makes sense to load up on gold.

Overall, it was a very interesting read. The first half was a little excessive in its mockery of public figures and events. But the later half more than made up for this by explaining how the government and various financial institutions swindle the common public. I plan on re-reading it for the sheer entertainment value alone!

Super-Hero Investments

Just thought I’d share an interesting email:

Jim Grant noted in his recent Interest Rate Observer that eight blue-chip companies now meet or exceed Ben Graham’s strictest criteria for defensive investors: Pfizer, Nucor, Cooper Industries, Cintas, Tiffany, Archer Daniels Midland, Molex, and RadioShack.

These are like superhero investments. Each has

  • 10 consecutive years of net profits
  • 20 consecutive years of uninterrupted dividend payments
  • earnings growth in the past decade of at least 33%
  • price-to-earnings and price-to-book multiples of less than 15

For perspective, Grant notes that at the bottom of the Nasdaq bust in 2003, only two stocks met all those criteria. At the bottom of the market in 1991, only six qualified. (Since 1991, those six produced average annual returns of almost 19%.) If you bought just these eight stocks and forgot about them for a decade, chances are better than 90% you’ll make a substantial return and beat the market. Usually, that’s a lot harder to do.

Note: These, are not my personal recommendations to buy. Do your own Due Diligence.

Is It Safe To Buy California Munis?

In my last post, I mentioned that about California was running out of cash.  Because of these concerns, yields on California Municipal Bonds are pretty high right now. But is it safe to buy them?

According to the Wall Street Journal, it would appear that it is. They asked the California state treasurer Bill Lockyer whether  the California public debt was completely safe. “Absolutely, the only way we’re going to default is if there’s a thermonuclear war.”

David Blair, the head of municipal credit research at bond giant Pimco, agrees. “They clearly have the ability to pay,” he said. But he added that the main risk is headline risk, where bad news smacks prices.

The ten-year Treasurys currently yield about 2.5%. California’s bonds yield about 4.2%. And that’s also exempt from federal income tax.

According to Vanguard’s Mr. Smith, the gap between the two has never been so high. The picture is similar for municipals across the country. Panicked investors have dumped everything – and blindly jumped into Treasurys, driving yields down to incredibly low levels. Meanwhile munis are also under pressure because so many states and cities will have to borrow more.

So there’s no doubt that California will pay back the debt. In the worst case, the Federal Reserve would just bail the state out. If they’re willing to bail out car companies, I’m sure they’ll step in for California.

But if there’s more bad news, the yields could go higher still, and the prices of the bonds could fall in value.

Will 2009 Be A Good Year For Stocks?

Prof. Jeremy Siegel, author of the excellent book The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, seems to think 2009 will be a good year for the stock market:

All of this means that, although the first quarter of 2009 will see negative growth, GDP should stabilize in the second quarter, earlier than most economists now anticipate. In real terms, housing prices have already retraced most of their gains from 2000, and by midyear prices should stabilize in this low-interest-rate environment. Year-over-year inflation should sink to zero, especially in the first half of 2009.

This year, as the economic slide abates and investors realize a catastrophe has been avoided, stock prices should enjoy a 20 percent or higher return. All equity sectors should recover.

The financial stocks will still be burdened by bad loans and government obligations. Nevertheless, new lending will prove extremely profitable to the banks whose cost of funds is now essentially zero. The Fed might find that it will be forced to raise rates during the summer, earlier than planned. And I believe long-term Treasuries are in a giant bubble and their prices will fall to earth once the economy improves.

All of this doesn’t mean there are no risks to stocks. The Fed must do more to encourage banks to lend to credit-worthy, non-delinquent customers. And the Obama administration must carefully structure its recovery plan so as not to bail out those that have been profligate and penalize those who have been thrifty.

Still, just as 2008 disappointed us on the downside, 2009 might surprise with better numbers than most are expecting.

Of course, just like everyone else, he didn’t exactly predict the worst bear market since the Great Depression! In fact, he thought the market would be led higher by financial stocks.

One of the few people who got it write was Nassim Nicholas Taleb or NNT for short. NNT was an options trader who achieved public fame after his awesome 2001 book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets became a best-seller. His hedge fund actually did very well last year returning in excess of 50%.  Check out his video:

Also check out this great NYT article on how misunderstanding of risk management tools caused the financial mess.