You’re going to get a break from the drumbeat of gloom today, dear reader. True, Japan reached a 26-year share market low, the Aussie dollar is in free fall, and the Dow closed down over 200 points in the final half an hour of trading.
All that sets the stage for another nervous day of trading in Australia. Hong Kong fell 12%. The U.S. election is one week away. Mortgage funds are still freezing redemptions in Australia. And the U.S. is finally injecting money into banks and insurance companies.
But let’s put all that on hold, shall we? We have a loose end to tie up. A few weeks ago, you’ll recall that we told you we were reading Daniel Dafoe’s Robinson Crusoe. The question came up: if you were stranded on a desert island for ten years, what stock would you want to own for that ten years?
Crusoe, in point of fact (although the story is fiction) was stranded on his Island of Despair for twenty-eight years-which is plenty of time for the eighth wonder of the modern world (compound interest) to work on your behalf. For example, a lump sum of $10,000 invested for 28-years, compounding annually at 8%, would become $86,271.
Granted, Crusoe needed to find an investment that compounds at 8% annually, no small feat. It’s a little easier if you have more time, where you can survive the cycles that take markets up and down. But assuming he could do so, let’s also say he set up a trust before being cast away. That trust, on top of the original $10,000, invested another $1,000 each year for his twenty eight years of captivity. How does he fare then?
Remember, time is the great friend of the power of compounding. The more time you have, the more magic even a modest rate of compounding works. If Crusoe starts with $10,000 and puts in an additional $1,000 each year for the rest of his twenty eight years, he leaves the Island of Despair with his man Friday to a Kingly sum of $189,237-an increase of 1,792% from his original nest egg.
Now, you might say a man would be hard pressed to live off the income from $189,237 for the rest of his life. And you’d be right. He would need to start with a bigger principal or get a higher rate of compounding (which would involve more risk).
But if he were counting on turning that $10,000 into his old-age pension, that man would probably have to draw down his principal too to survive, eroding his annual income. He’d be in a strange kind of race to make sure he didn’t outlive his savings, but also that his savings didn’t outlive him.
Back in the real and modern world, the key is not just making money on your money via compound interest over time. They key is investing in assets that compound your return at an even higher rate without exposing you to inordinate risk. How did Crusoe manage that?
He owned farmland in Brasil. Prior to his disastrous voyage (he was sailing to Africa to buy slaves, so in a metaphysical sense he got what he had coming), Crusoe set himself up in business growing sugar, tobacco, and molasses. When his business partners showed him his accounts after twenty eight years, his farmland had dramatically increased in value. But how?
First, it steadily increased annual production with small improvements in technology. Second, his farm produce increased in value as well. Timber, sugar, molasses, and tobacco-all these went up in price as the New World became more populated and commercialised. People like drinking, smoking, baking, and sweets.
If you think about it, Crusoe’s accidental investment strategy had at least one thing in common with Warren Buffett’s deliberate strategy: he invested in assets that generated lots of cash flow, but did not require huge capital investment. These were also assets that were capable of big annual increases in earnings without access to capital-pretty handy these days, wouldn’t you say?
The ability to generate new earnings off net tangible assets is what you’re after in this market. Alcohol, tobacco, farmland, food…all these are good, recession-insulated businesses for the future. But more importantly, run properly, the capital structure of these businesses means you’ll get increased earnings despite tighter access to credit in the global economy.
We’re working on a fuller list of these companies for our new product on Superannuation, Income, and Safety. We’ll keep you posted on the results. In the meantime, you’ll find what some of your fellow DR readers think are great Crusoe stocks.
A word to the wise, we aren’t vouching for any of these tips, and can’t verify all the claims made here are factual. Make sure you do your own homework (as always.). Also, you can expect that some of the readers own the shares they’re writing about, which is just fine, as long as you know that up-front. Everyone talks his own book.
But please don’t take this as a recommendation to buy these tips. We haven’t done any research on them ourselves. The DR is such a diverse and talented group, however, we thought you’d want to see some of the ideas your colleagues are pursuing.
My best suggestion for a Crusoe stock is Newcrest Mining (ASX:NCM).
- Very little debt (geared at only 8%)
- Lots of gold in relatively safe geopolitical areas
- Surge in production scheduled from mid 2009
- No goldmines on volcanic islands (like Lihir)
- No goldmines in China that could be nationalised (like Sino gold)
- Not viewed as a base metals play (like OzMetals)
- Sells gold in $US, but most costs are in $A
- Market hasn’t recognised peak $A gold price
- Large cap, safe for institutional investors
- Endorsed by Doug Casey
- Current entry price very low
- Set to benefit from pending US monetary inflation (more GUDD days)
- Gold is the next and ultimate safe haven, once $US rally ends
- Leverage to increase in gold price
- Low hedging
- Seems to be the obvious DRcompatible investment
If I were to hold just one ‘Crusoe’ stock it would be Global Mining Investments. Operated by the famed Evy Hambro out of BlackRock, London and listed on the ASX (GMI), in one single investment it covers approximately 65 of the best resource stocks in the world, about 30% of which are listed in Australia including of course BHP and Rio etc., as well as up-and-coming resource companies.
It pays a handsome dividend maximising imputation credits for Aussie dwellers, and most importantly for the times ahead, GMI has excelled at picking stocks that are taken over by the bigger fish to provide a cascading waterfall of capital gains. Which is what every self-respecting Crusoe investor needs.
Pike River Coal. 17 million tons of coking coal. West Coast of New Zealand, South Island. Hit coal today. Must go up, only NZ$1.50 or so at present, issue price, 18 months ago, $1.00.
Maybe Caltex(CTX), but don’t go telling too many people!
Lots of cash, low debt, lots of cash flow, 8% dividend approx, Woolworth’s alliance. Is slowly increasing retail sales at service stations. With the fall in the oil price, it should help margins. It has also weathered the crash fairly well, it has come off its high about 50% but that was at least a year ago, before the crash and since then has pretty much kept in the range of $10 to $13. It’s at the lower end of that now.
A boring stock that doesn’t make many headlines or exciting developments and has little competition in the refining area. I also think it may get a nice little kick out of petrol prices that haven’t really come far off their highs, even though there has been a 50% drop in oil prices, again that’s gotta help margins.
Risks – retail sales crash, and a heavy recession reduces need for fuel – but then again, petrol, like cigs and booze is probably one of the last things to go off the shopping list. You might also be regarded as a “greedy” petrol company shareholder, but I think I can live with that.
My long term stock is Carnegie Corp (ASX:CNM). I know it’s a penny dreadful now but I see it as a stock with a lot of growth potential.
Macarthur Coal (ASX:MCC) at $6 or less the best investment I have ever seen. Market cap about 1bill, almost no debt, just upgraded half year profit to 150mil., 50 percent owned by China, India and Korean companies who just recently paid $20/share. So even if coal prices go way down they will buy from Macarthur. The more the AUD goes down the more they will make.
More on what these stocks have in common tomorrow. Feel free to send us your suggestions at email@example.com
for The Daily Reckoning Australia