Mid-Course Correction

The month of August was not kind to my portfolio. It fell 7.11% in August, leaving me up 8.07% for the year to date. As I have mentioned before, had it not been for the continued increase in the value of my oil and gas production properties, I would probably be somewhere near even for the year to date. I am completely satisfied and thankful for these results, and not the least discouraged about the prospects for the portfolio. Reasons will be explained below.

First, let me share with you the little bit of activity in the portfolio during August. I added a little to my insurance puts and calls position. In total they amount to only 2.2% of the portfolio. Their duration is about 18 months. Like my fire insurance premium on my house, if during the term covered by the premium (1 year) I don’t have a fire, the premium will become a loss. So far, the puts and calls are valued at just about what I paid for them, so their insurance value (or lack of it) is yet to be determined.

The only other transaction I did in August was to add to my silver by purchasing the Silver ETF (symbol SLV). From silver’s high near 21, SLV had fallen to 16.25. I felt this was a good value, so I bought some at that price, only to see it almost immediately fall all the way down below 13, ending the month at 13.37. This is one of the best values I have seen in a long time. Even though I have a full allocation to silver, I may add some more soon because it is such a compelling value. Details for the whole portfolio are shown on the Jay's Portfolio Market Values and Jay's Portfolio Performance pages which have been updated to August 31, 2008.

Nearly all my investments dropped in value during August. Am I discouraged? Not in the least. We have been due a major correction in the secular commodity bull market, and now we are in it. How long it will last, and how far down it will go is unknowable, but I am prepared to stay the course, remain patient, holding my major allocations at about the same levels they were a month ago. This is what my top experts (especially Maybury and Rogers) are doing with theirs. It is their opinion that we are probably no more than half way through the commodity bull market, and that there are plenty of opportunities for significant gains ahead.

The correction could already be over, or it could drag out for months. A great illustration is the gold and silver bull market of 1970-1980. I just finished studying a chart of that market. Gold rose from $38 to $200 during the period from January 1, 1971 to December 31, 1974. It then fell 50% to $100 by the late summer of 1976, then rose to a new high above $200 in the spring of 1978. From that point it rose four times to $850 by January of 1980.

In addition to the 50% correction, which required more than 3 years to make a new high, there was a 35% correction, and at least two other 20% corrections during the ten year bull market. This is the way bull markets behave. I remind you of Richard Russell’s description of a bull market as an actual bull which bucks most if its riders off, carrying only a few all the way to the top.

The great investors have learned to use this information to their advantage. They have learned to operate almost completely independently of their emotions. More importantly, they do not need the market…any market. Please burn that statement into your memory and never forget it…THEY DO NOT NEED THE MARKET. So, they wait with almost inexhaustible patience for these major sell-offs, have plenty of cash reserves, then buy when everyone else is selling (as Rogers puts it, “I buy hated assets”), and, of course, they must be assets which they believe have intrinsic value, such as commodities at the start of the commodity bull market in 1998. Once the secular bull is well under way, they do not sell until they believe the bull is over. When a correction starts, you never know how far down it will go, or how long it will last. Sometimes they will add following a major correction down, but rarely sell until they believe the bull market is over (Rogers current estimate is that this current commodity bull will end sometime between 2017 and 2020).

Current conclusions
In light of the above, I would not sell any of my physical gold and silver, nor my mining or energy related stocks. They are becoming a better buy every day. If you are under-allocated in this area, this is a good time to add a little. I would maintain my current major allocations (see portfolio pages). If my stocks exceeded 20%, I would consider reducing them, holding only mining and energy stocks (and my small airline package) at this time. And I would want at least 30% cash. In view of the strong recent rally in the US$, I believe it is a great time to diversify some US$ cash into the other currency investments which I hold. All of them are suitable for purchase now.

Permanent Portfolio Fund (PRPFX)
For those of you invested mostly, or totally, in the Permanent Portfolio Fund, this is an excellent time to add to it if you have money to invest. It is selling near its bottom trend channel line. Over the past 6 years, any time you're invested near this line, it produced double digit annual returns from that point to the present time. Take a look at the chart and you will see what I mean. Those of you who are not invested in PRPFX, but want to reduce the risk in your portfolio, might consider investing a portion in it at this time.

Something to meditate on
Here’s a quote from a Bible study book written by one of my mentors. It came to my mind as I was writing this letter.

As I read this, I thought of what Jesus asked us to do in Matt 6:19-20, “Do not store up for yourselves treasures on earth…but store up for yourselves treasures in heaven…” For those who would like to study these verses, see Chapter 15 of the book, Biblical Economics, on this site.

Jay