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.
Hello DR,
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
Regards
Ian
Dear DR,
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.
Ken M.
Dear DR,
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.
Ray S.
Dan
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.
Cheers,
Luke
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.
Cheers Simon.
Dear DR,
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.
Regards,
Anthony.
More on what these stocks have in common tomorrow. Feel free to send us your suggestions at dr@dailyreckoning.com.au
Dan Denning
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 29 October 2008:
Here's a Crusoe story
" CASTLEMAINE Goldfields has reported high-grade gold from shallow depths at its Cappers project in Central Victoria – including an intersection grading 539.6 grams per tonne gold. source: miningnews.net "
The price has been murdered from about 17c to 5c as it falls whenever the market drops then fails to rebound during the rallies. Basically nobody is interested not withstanding the fact that Robinson and Man Friday could probably dig it out with a pick, a shovel, some timber (and a bit of time as they would need to go down 50m.) For me its a hold regardless of where the market goes. A strike will always be a strike!
Comment by Coffee Addict on 10 December 2008:
My other crazy Crusoe stock hold is Alkane Resources - a gold / rare earth prospective with a 15% share in BC Iron.
The key risk associated with this stock is water - which is in short supply around Dubbo, Parkes and Orange. Basically ALK will need to purchase the water rights then be very careful about how they use it. My gut feel is that the ALK's gold prospects are doable but water management issues will add to (otherwise low) costs and may reduce the feasible rate of extraction.
One reason you might buy this stock is that appears to be wedged between some of the big players - and at some stage (don't know when) Newmont will green light the McPhillamy’s gold project - giving ALK the usual 25% revenue share. Newmont could swallow ALK if it wanted to. otherwise, the McPhillamy’s revenue could be assigned to the development of ALKs other prospects as can the BCI revenues (when that eventuates). The other big end of town relationship through Ian Gandel. Alliance Resources which will generate significant revenue for Ian (who is the primary ALK shareholder) when the Four Mile Uranium prospects comes on line.
I don't know about the rare earth at the moment - but there is a 200 to 400 year supply of the stuff at Dubbo. The market assigns a zero value to this resource not withstanding a global shortage and difficulty getting it out of China. Surely it has some value.
For the immediate future it may be noted that this company has zero debt, about $7.5m cash in the bank and a market capitalisation of about $30m. It is selling at 12.5c down from a high of about 51c.
I would be interested to read about any other resource junior Crusoes out there, particulary if there is a Gold tangent. I'm looking for a discussion rather than advice (I tend to do my own research on the latter). Cheers.
Comment by Coffee Addict on 18 February 2009:
Hi Pete. Hope you are still holding on to my Crusoe gold tips!! The depth on one shows more buying interest than selling interest but its still a bit choppy of course.
I'm doing some more research on BDG but haven't bought yet. My wife spent most of the play money on a holiday instead.
My real and ongoing dread remains the passive (non) investment strategies of my super funds which are exempt from the superannuation choice legislation.
Comment by Pete on 18 February 2009:
Hi CA, I actually sold my ALK at 18c ... still a decent profit from 13c. I was getting a bit worried about ALK's exposure to non-gold resources and any drag they might have on the company (I am bearish on all minerals other than precious metals)
I do notice that CGT is doing well though. Great for everyone who bought in at the 3c distribution. I noticed that CGT looked promising afterwards as most trades were well above the distribution price.
In the short-term I am a bit bearish on everything at the moment. I may try get into some oil shares around June...but might wait until July 1 in the hopes of lower prices after a end-of-financial-year selloff. I could be very very wrong of course.
Congrats on two winners though, very good work
Comment by Coffee Addict on 20 February 2009:
Pete. Hope you are still holding CGT!
Maybe the bull run is nothing more than a simple rebound on a (previously) heavily oversold stock. Maybe the interest of any medium size buyer will always have this impact on an oversold microcap. Maybe there is information out there, I don't know about, that the company needs to clarify.
I understand that the company is likely to dig the pine plantation shallow bonanza grade area at Cappers using above ground techniques then extend a tunnel from there to the Chewton deposit and go down . They are punting that Chewton is a similar prospect to the old Wattle Valley mine.
Toll treatment of high grade Cappers ore will be an easy path to a quick profit. The low grade stuff from the tunnel, will I guess,need to be heaped until such time as on site processing becomes available. Processing facilities cost millions that the company currently does not have so any fast tracking would need a partner or finance or both. owever, I hope they don't think to big too quickly like BDG once did. If the Toll arrangement works fine for a small to medium operation perhaps they should stick with it. The risk that Gold prices can bubble then burst (just like anything else) can be managed by not over capitalising.
Although the Castlemaine deposits tend to have steeper declines than those at Bendigo they are similarly narrow. A BDG comparison is therefore relevant. Underground, BDG recently pulled a $2m cash surplus from $12m revenue earned in its mining trial so I will guess that CGT can do the same or better.
Not withstanding the fact that a company like CGT is takeover target in the current climate, my feeling is that shareholder interest may be best served if the Company completes its resource estimates before it goes looking. A fair price needs a valuation basis. CGT has enough resource to get their money back then some BUT the company's worth will grow by magnitudes IF and only IF further drilling demonstrates multiple Wattle Gully type reefs. For this we need patience.
Sorry for the prattle but thinking aloud is sometimes helpful.
Comment by Pete on 20 February 2009:
CA: Yep, still holding CGT. Pretty happy with the performance at the moment! You must be pretty happy too, posting some nifty double digit (approaching triple digit) gains already (on ALK too).
It was good prattle actually. You make some good points - basically try and achieve the highest valuation possible before making yourself a takeover target, to maximise gain.
Gold is a funny one. I sold out of ALK when I clearly shouldn't have, and I also sold my LGL and NCM shares a bit early too. I guess I am expecting a bit of a speculator blow-back before mid this year (but that is going purely by what I assume the market is doing psychologically). Also I am wary of the inflated share prices of companies that clearly will not be reflected in earnings per share. Extremely high P/E ratios are a symptom of the financial world we just left...I have no intention to revisit them unless I want take a gamble in surfing this bubble a bit.
That said, I am more than happy to speculate on the small-caps, as you are, because the gains can be amazing (i've personally done better out of small caps in my 18 months of investing that anywhere else).
Comment by Pete on 20 February 2009:
CA: Yep, still holding CGT. Pretty happy with the performance at the moment. You're doing well, posting some nifty double digit (approaching triple digit) gains on your two already.
It was good prattle actually. You make some good points - basically try and achieve the highest valuation possible before making yourself a takeover target, to maximise gain.
Excuse my cut-down reply, the last one got 'moderated'