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Jay's Portfolio As of June 30, 2010 |
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As explained in last month’s update, I needed to raise cash because I was disbursing it for reasons unrelated to investing. A quick comparison with last month’s portfolio allocation reveals that most of my increase in cash came from sale of a portion of my mining shares. Cash increased from 25.9% to 30.4%, and the mining shares fell from 17.4% to 12.4% in the month of June (Note: In addition to the sales proceeds taken out of the mining shares which were sold, the change in market values of my mining shares still held also influences these numbers. See the important discussion on the mining shares below). A Look Back I begin this month’s comments with a simple look back to the late 1990s. All during 1998 and 1999, Jim Rogers was telling us that the great secular bull market in stocks, which began in 1982, was ending, and a new secular bull market in commodities was beginning. (See Jay's Working Hypothesis for more details). Rogers’ thesis was corroborated by several other experts I follow. I made the decision late in 1999 to begin building my portfolio on this assumption. I began reducing my stocks and buying gold and silver as they were the safest commodities and the easiest to buy and hold in ones possession. They also reduce or eliminate counterparty risk and systemic risk. On January 1, 2000 I started keeping records tracking my portfolio as well as gold, silver, and the Dow Jones Industrial Average. That’s what you see in the chart above, a complete performance record on these assets from 1-1-2000 through 6-30-2010, a 126-month period of time. Now think a moment about this one simple fact. Over the 126-month period, gold has increased from $282 to $1,242, an increase of 330.4%. This is a compound annual rate of growth of 14.9%. During this exact same time period, the Dow index has fallen from 11,650 to 9,774, a decline of 16.1%. That means that denominated in terms of gold, stocks (as represented by the Dow) have lost 80.9% of their value over this period! Here’s an easier way to understand that in my opinion. On January 1, 2000 it took 41.3 ounces of gold to buy the Dow index. As of June 30, 2010, it took only 7.9 ounces of gold to buy the Dow index. Stocks have relentlessly lost value against gold over this 126-month period. This simple thesis is all one needed to know in 1999 to get a safe annual return of about 15% per year. Two Key Questions First, am I implying that gold has always gained against stocks as it has these last 10+ years? By no means! The current secular bear market in stocks was immediately preceded by a secular bull market in stocks which ran from 1980 to 2000. This was the golden age for the stock market, during which stocks gained about 10% per year in dollars, but actually gained about 20% per year against gold. See My Working Hypothesis, especially Charts 1 and 2, for an explanation of the causes of these long secular bull and bear cycles. That brings us to the really key second question. Where are we in the current secular bear stock – secular bull commodity cycle? The answer according to the consensus of my experts: probably about half way. In 1999, Rogers predicted about a 20 year period during which commodities would go up several hundred percent while stocks would be flat to down over the same period. So far he’s perfectly on target. Of course, the actual length of this cycle is unpredictable. His original forecast of an end in the cycle between 2017 and 2020 still looks as good as any to me. But that’s not the really important aspect of the question. The big question is, if you have not participated in the cycle up to this point, have you missed the major portion of the opportunity? And here the good news is that the answer is no! There is a very simple reason. These long cycles tend to evolve into a “bubble” phase near the end, during which the public recognizes the asset of choice and begins to pile in wholesale. The price begins to increase exponentially and finally ends in a blow off bringing the cycle to an end. This has been common to all the major bubbles in history, the Japanese stock market in 1989, the US stock market in 1999, the gold market in 1980, the tulip mania in Holland in the 1600s, etc. It’s not unusual for 75% or more of the entire move in price to occur in the last 10% of the time period, or even less. During the 10 year gold bull market of the 70s, the full move was from $35 to $850, a move of 24.2 times over the ten years. But only about 12% of the full move occurred in the first 7 years. The other 88% occurred in the last 3 years, and most of that during the last three months of 1979 and the month of January, 1980. My conclusions:
The Gulf Oil Spill You might wonder why I bring this up at this point in my comments. My expertise on this subject is essential nil, and my opinion essentially worthless. Yet, I believe I have a valid reason for bringing it up, if for no other reason than as a lead in to my next comment on the mining shares. If you’ve been following the news, as well as many analyses on the internet by experts on the off shore oil drilling business, you know there is a huge range of possible scenarios which could play out for this disaster. They range from stopping the leak in a reasonable time, cleaning up as well as possible, then relying on the ocean to do most of the cleaning up as it has for past spills, all the way to an explosion of a big bubble of methane gas below the ocean floor which would create a huge tsunami which would flood the gulf coast from Texas to Florida. I have no idea what will actually happen. But there is one man who is an expert on the oil drilling business in whom I have confidence. His name is Matt Simmons. He is Chairman and Chief Executive Officer of Simmons and Company, a Houston based investment bank that specializes in the energy industry. I have read his book, Twilight in the Desert, the coming Saudi oil shock and the world economy. Mr. Simmons is highly respected for his expertise on oil drilling. A few days ago the Washington Post quoted Mr. Simmons as saying, “We’re going to have to evacuate coastal areas of the gulf states.” I don’t know exactly what Mr. Simmons meant by these words, but assuming the quote is accurate, I would take it very seriously. I would not want to risk what might happen if he is correct. Another event with possible negative financial consequences would be a war in Iran. My reason for mentioning these here is to challenge all of us to try to factor events like these into the financial crisis our nation has gotten into over the past 2 or 3 years, and then ask ourselves what effect it might have on the stock market if the nation has to face one more major crisis. That brings me to my comments on the stock market in general and my mining stock portfolio in particular. The Gold and Silver Mining Stocks Here are the headlines to Chris Weber’s July 1 issue of Global Opportunities Report: CONTINUE TO MAKE GOLD AND CASH THE CENTERPIECE OF YOUR HOLDINGS DEFLATION REMAINS THE IMMEDIATE DANGER YOU SHOULD BE OUT OF THE STOCK MARKET; Chris Weber has a stellar long term track record. I take him very seriously, and I agree with his current position. For the record, he also holds silver, but his silver position has a lower market value than his gold. What then should my posture be relative to the mining shares? I have kept my mining share position a small enough part of my portfolio that I would be willing to stay with it through thick and thin until the bubble phase of the secular gold bull arrives. That has been my position since the beginning of the gold bull market. WARNING TO MYSELF: Unless I am willing to risk loss of most or all of my present 12.4% position in the mining shares over the next year or so, and hold it until the bubble phase of the gold bull market arrives, I should reduce or eliminate it. (NOTE: I would make exactly the same statement about any other common stocks, if I had any, which I don’t). In the last few days my thinking has begun to change. I think the next leg down in the stock bear could be a disaster. And since the mining shares are acting more like stocks than like gold (i.e. they haven’t yet decoupled from the stock market as they have in the past during the bubble stage of a gold bull), why risk that capital, especially since my experts all believe we are not near the bubble stage? Therefore, I may reduce my mining shares at any time. I’ll let everyone know immediately if I do. By reducing my mining shares, might I be missing part or most of a big move up? Certainly! But one of the lessons I have learned over the years, the hard way, is that one should never equate lost opportunity with lost capital. They are very different! If my experts help me identify the bubble phase, I will likely want to hold some mining shares…well and good. If not, I will remain content without them. Wisdom to Ponder He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty. (Proverbs 28:19, NIV) Dishonest money dwindles away, but he who gathers money little by little makes it grow. (Proverbs 13:11, NIV) Be patient then, brothers, until the Lord’s coming. See how the farmer waits for the land to yield its valuable crop and how patient he is for the fall and spring rains. (James 5:7, NIV) |
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| This web page was last updated on 06 July 2010 . |