In last Friday's letter, I said that I had not bought any single stocks in the last decade, preferring funds and managers, and in general I still do. However, I am now going to start buying a specific asset class this month and currently plan to add to those holdings at least every quarter for several years. This is the high risk portion of my portfolio, so it will not be all that large a percentage. (Do not write and ask me what the right percentage is. It will be different for everybody. For some of you the answer will be none, as you need to be taking very little risk. Consult your investment professionals.).
Let me state emphatically that I am not going to become a stock picker. My regular letter will remain focused on the macro economic environment and investments in general. This is not my recommended advice to you but what I am doing as an individual investor. I simply know that many readers are interested in what I am doing personally and in my investment ideas. If this doesn't make sense to you, then by all means hit the delete button later. With that thought, let's dive right in.
In the 70s, we had a bubble in gold and commodity stocks. Some stocks had huge run-ups because of major gold finds coupled with the price of gold going up over 20 times over the period. A gold mine became a hole in the ground with four promoters standing around it telling you a story about why there was gold in the hole. Sometimes there was, but often the "gold" was the stock the promoters sold. I was too young and poor for that bubble, although I did get into a few (sadly too few) later winners.
Then we had the tech bubble. And the internet craze. Obviously, some of those stocks are still around and have been longer term winners, but the number of stocks that went public with crazy offerings, no revenues and valuations from left field eclipsed anything I have ever witnessed. I missed that bubble as well, as I was bearish about the markets in general and tech in particular, as I wrote in my first book (1998).
I think there is a potential for another bubble over the next decade. There will probably be several, but there is one I am particularly interested in and that is biotech, with an emphasis on stem cell and gene therapy and their allied kin. For reasons outlined by my friend Patrick Cox, writer of the newsletter Breakthrough Technology Alert, in today's Outside the Box, I think we are on the cusp of a decade of remarkable breakthroughs which will change the way we do medicine.
While some of these breakthroughs will come via large firms, others will be in smaller companies. Imagine cures for certain types of cancer. Rejuvenation of failing hearts? Livers? Genetic therapies for all types of diseases? The list of potential blockbuster therapies from current research is enormous and growing.
There are going to be some companies which will simply see their stocks explode. Of course, for everyone that has a large run, there will be failures which will go to zero. Or companies that seemingly have "the cure" only to have another company come along with something faster and cheaper, wrecking their share values. (Think of the dawn of the computer age and how many once high flying stocks went to zero. Biotech stocks are not bonds.)
But I think (personal belief here) that what will capture the imagination will be the large winners. Everyone will want to be in at the beginning of a new home run. As the decade goes along, we will see companies go public before they are really ready, just because they have a great story and people will want to fund that story.
It has the classic potential to become a bubble, because there is a deep reality - some substance to the stories of the winners - that will make people look for the next big winner. So far, we as humans have not proven ourselves able to resist bubbles. Maybe this will be the time we all become adults and there will be no bubble. Maybe. But my thought is that it will not be.
And as I have been ending my speeches recently, I have lived through a number of bubbles. I have never gotten to invest in one. This time, dear God, just once please let me be at the beginning of a bubble.
Now, I have no particular expertise in biotech stocks. I go to conferences, read articles and hear amazing stories. They all sound good to me. But for about a year I have been reading Patrick's newsletter, and have spent a lot of time talking with him (and others in the biotech industry). He does have expertise in looking at all types of breakthrough technologies (and not just biotech). He is one of my main sources for ideas in this space, and if you are interested in the tech and biotech world, you might consider subscribing to his letter (I will provide a link later). As an aside, he will be writing the chapter on biotech in my next book.
Starting this month, I will begin to buy some of the stocks in his suggested portfolio. I will start with four stocks and add to those positions and other stocks over the coming years. I think this is a long term play. My best guess is that the coming recession I predicted last Friday may hurt the value of these stocks, but I simply don't know. This is not a trade, nor will I be hedging (at least not for some time). I expect to be adding small positions for years.
Do not write and ask me which stocks I will buy. For lots of reasons, I won't do that, not least of which it is not fair to Patrick for me to use his intellectual work. I am building a portfolio, and I can almost guarantee you that some of those stocks will end up being dogs. Second, Patrick is not going to mention any specific stocks in this week's letter. It would not be fair to his smaller subscriber base to mention a stock to 1 million readers. Third, if you do subscribe and after some time reading and researching on your own, decide to buy a stock or two, do not chase the price. And I would suggest you do not buy all you intend to buy all at once. Space it out over time. These stocks can be very volatile and it is probably better to average in over time.
There are some other letters and analysts that I am going to introduce you to over time. There is no need to rush. Also, if you know of another writer I should be aware of, feel free to drop me a note with their name. Now, if after you read this week's Outside the Box you are interested in subscribing to Patrick's letter, you can do so here. The writing on the web site is fairly typical in it's over the top promotional style, but see through that to his actual work. And they are knocking off $300 off the regular price of $895 for my readers. I am a big fan of Patrick, and admire his thoroughness and work. If you want to invest in this sector, starting off with Patrick is a good way to go. Take your time, read, learn and then invest. Again, no hurry here. But do get started researching.
A couple of caveats. I may be completely wrong about there being a potential bubble in biotechs. Just because there may be similarities to previous bubbles does not mean there will be another. Past performance is not indicative of future results, as I say time and time again. Second, stocks you buy in the near future may really get hit in the next recession. You might consider waiting if that will make a big difference to you. Like I said, there is no rush. Consult with your investment professionals about this, and do not take large positions relative to your total portfolio. A stock that I could be convinced about today can be made obsolete by newer technology. Cautious optimism is always proper, with the emphasis on caution.
Finally, and as a reminder, this is a market and sector call by me. I have no idea on who the real winners will be in ten years, although I hope I get lucky and find a few. And for those of you who don't have enough money (yet) to buy into this concept but still like the idea, consider a small cap biotech mutual fund as a way to start. There are several.
Now, let's see what Patrick has to say about the coming new world of biotech.
This week I offer something unusual for outside the Box, in that I agree on almost all points with my friend David Rosenberg, except he tells it so much better than your humble analyst. David was the former Chief Economist at the former Merrill Lynch (ah, Mother Merrill, we barely knew ye.) and is now Chief Economist at Gluskin Sheff + Associates Inc., which is one of Canada's pre-eminent wealth management firms. Founded in 1984, they manage $4.4 billion. (For those who wonder, David left NYS to return home to Toronto. Much shorter commute time.) David looks at the recent stock market run-up, why he likes corporate bonds better than stocks, what is lagging with the consumer and a lot more. It is a very pithy read.
Have a good week, I am off to a beach in a few days, but there will be an e-letter this Friday. You are in good hands.
Your looking forward to reading with drinks with little umbrellas analyst,
What is fair value for stocks? Are they now cheap? You can certainly make that argument by comparing valuations based on past performance. But repeat after me, "Past performance is not indicative of future returns." The investment climate of today is almost certainly going to be quite different than that of the 80's and 90's. Thus, to expect stocks to repeat the performance of the last bull market in a climate of government intervention, deleveraging and increased regulations may not be realistic?
This week Bill Gross, the Managing Director of PIMCO (and one of my favorite analysts) moves away from his familiar neighborhood of bonds and offers a few thoughts on stock market valuations. This is not a lengthy read, but it is one you might want to read twice, as the concepts are important. And not just for stocks but for investments of all types. I trust you will enjoy this week's Outside the Box.
This week we visit some very thoughtful analysis by an old friend of Outside the Box, Dr. John Hussman of the Hussman Funds (http://www.hussmanfunds.com/index.html). Is it 1932? Are we in a Depression? Where is the bottom? John gives us a very balanced view and actually offers some positive insight on the markets. There may be light ahead.
(Note: there is a chart from Ned Davis Research that is, as John notes, not to be distributed further. I did call Ned Davis Research and they graciously gave me permission to use it as well.) Have a great week, and enjoy some positive thoughts below.
Is the market over-valued? In this week's Outside the Box, one of my favorite global equity analyst's (and no stranger to regular readers), James Montier of Societe Generale does some very interesting analysis on the European and US markets and finds the number of stocks which make his list as possible for being a "short" is at very high levels. This is a remarkable read and re-enforces my view that we are in a "sell in May and go away" summer. This is really a great Outside the Box. Enjoy.
I get more questions about gold than other single topic. The fascination for the "barbarous relic" among my readers is clear. This week in Outside the Box we take a look at the gold stocks and the potential future investment opportunity. David Galland of Casey Research provides an intriguing analysis of the gold market today. In particular, why have gold stocks lagged the rise in gold? This is the opposite of what orthodox gold investing strategy says should happen. And I happen to agree with David's rationale for the paradox and his contention that gold stocks are poised (finally!) for the same rise that their base metal brethren have seen.
I have known Doug Casey and David Galland a very long time. Doug got me into my first natural resource stock almost 25 years ago (which ran up 8 times before we sold). They take their research on gold stocks very seriously, and have been quite successful over the past years. While they are more bearish on the economy than I am, their analysis of the natural resource markets and gold stocks in particular has been spot on. In the mid-80's I wrote my first newsletter which focused on gold stocks. I sold it after about a few years as I became bearish on gold, but kept up the interest in the stocks.
But one thing I learned. If you are not on the ground talking to the men who are doing the work, getting into the behind the scenes facts, you are going to have a hard time making money even in a gold bull market. Doug is one of the few guys that truly know what is going on in the market. He knows the difference between those who are serious about mining and those who are simply promoters.
If you are interested in specific gold stocks and gold stock investing, I strongly suggest you subscribe to Doug Casey's letter The International Speculator. Going it on your own or taking tips off a few web sites is dangerous to your portfolio. If you subscribe, they will send you their recent update which covers in-depth all the stocks he likes and a few he says to avoid. I got them to give my readers a risk free trial for three months. For more information on how to subscribe, please click below:
My good friends and London associates, Absolute Return Partners, have recently released their monthly letter. The letter consists of two essays with the first by ARP President Niels Jensen and the second by partner Jan Vilhelmsen. Given that the equity sell-off around the world has been far more dramatic than in the US, I thought it might be useful to get a view from "over the pond."
Niels comments on the correlation between commodities and stocks and takes a look at what history can teach us from years past. In light of all of the talk, this is a contrarian's view opposed to the "it's different this time" camp (like we haven't heard that one before). On the other hand, Jan explores a sector of hedge funds that, by definition, do not live up to their name. He concisely summarizes this discovery by stating, "If you pay the high fees that hedge fund managers demand, you would at least expect to get something that you cannot easily create yourself."
With most observers ranting and raving about the "new economy," I trust that you will enjoy this article that bets against the consensus by siding with history and the data. Enjoy the read and continue to think "Outside the Box."