Pity the Poor Pig Farmer: A Search for “Deep Value”

LONDON ENGLAND 1 December 2006 - We are resolutely ignorant of the future. So we keep our eyes wide open.

It is easy to stand taller today, all you need is to step onto one of the world's prestigious hedge funds - say Medallion or Lone Pine. Your neighbors will look up to you. Even your wife might think better of you; you are not only rich, but also smart and well connected.

Pity the man, on the other hand, who has to tell his family and friends that he is invested in a pig farm, a cotton plantation, or a down-market retailer; he almost shrinks. "He must not have very much money," say his friends. "He must not have very good friends," says his money.

But what you gain in stature today may be lost in both inches and dollars tomorrow, for there is likely to come a time when you will have to do some explaining.

When the grandchildren ask, "What happened to the family fortune, grand-dad," you will want do have a ready answer.

"It disappeared in the great crash of '07," you might be able to say - as if referring to some obscure form of magic.

"A hedge fund manager leveraged it... and put it into leveraged derivatives," perhaps you could say, dazzling the little suckers, while putting the blame squarely onto someone else.

"When the housing market collapsed, we lost everything," might be a good way of describing it; your cute tykes couldn't expect you to beat that one.

We claim no ability to look into the future. Still, the future is very much in our thoughts, and with a little luck, we will one day live in it, whether we like it or not. And we want to be ready.

So we ask ourselves, "Which investments are most likely to hold up in an uncertain future?"

"Deep value."

When we hear our friend Rick Rule say these words, we think of gold buried under a mile of hard rock somewhere in South Africa. Rick is a geologist. He probably thinks of layers of rock by their proper names and calculates the cost of digging through them.

But when Rick spoke of 'deep value' in New Orleans recently, he was referring to something else - businesses that you can buy for half what they're really worth. The depth of value he described was the measure by which an investor could protect himself today from having to answer awkward questions tomorrow.

Rick described the type of businesses he looks for:

"Typically, these are businesses owned by families - not public stock holders. And they are beset by boredom. They rarely give interviews. They don't hold press conferences to release their quarterly numbers. You're lucky if they will return your phone call."

One example: Boswell.

Boswell is a large, boring company owned primarily by the Boswell family, with a few shares available to the public. It is primarily in the business of cotton farming, from which it grosses about $700 million and earns about $70 million.

This alone would make Boswell a value stock, says Rick; it is in a solid business, with $120 million in cash, and the shares trade hands (however rarely) at only about 8 times earnings. But the real story of Boswell is deep in the ground, not in the news. It happens to own some of the biggest tracks of the most valuable open land in Southern California. Thousands of acres are carried on the firm's books at the price of acquisition - which took place decades ago. And underneath all this land is the biggest, most rapidly replenishing aquifer in Southern California. The value of the water alone is worth about $4 billion at today's prices.

"So what is a company with thousands of acres of prime land in Southern California...with plenty of water underneath it...going to do," Rick asked his audience. "That's right, Boswell is going into the real estate development business."

How much Boswell will eventually be worth, we don't know. Eventually is far in the future... far ahead of our nose. But we have a feeling Rick is right; compared to the many fortunes that will be lost in hedge funds and derivatives, there will be very few lost in deep value stocks such as Boswell.

Tomorrow... another deep value idea: pig farming.

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