from the Great Depression
February 17, 2009
Applying Odlum’s lessons today
“Odlumites … are looking under every available rock for opportunity,” Grant said. Like Odlum, he’s seeking opportunity with a margin of safety at a good price. That translates into buying “low-priced options on … certain events of unlikely timing.” Low prices limit investors’ downside risk.
One certainty is inflation — Grant doesn’t have much faith in central bankers. “We expect that neither the Fed nor the Reserve Bank of Zimbabwe nor the Swiss National Bank will shut down the printing presses in a timely fashion to skirt major new inflation,” he said.
Grant sees opportunities in several places, including gold, fixed income, and stocks. “Gold isn’t merely a refuge against inflation. It’s principally a refuge against monetary disorder,” Grant said.
About 18% of his business balance sheet is in gold, he said. He believes there will be a flight from paper money because it will be debased by central bankers increasing the money supply. “I feel sure the dollar will go through the wringer,” he said.
Fixed income is currently priced for bad events that aren’t likely to happen, Grant said. Grant likes value-priced residential mortgage-backed securities (RMBS), convertible bonds, and leveraged loans. For example, three years ago RMBS were priced as if no homeowner would ever default, Grant said. Now they’ve gone to the opposite extreme, with some tranches priced to break even if losses rise to the 60% range.
Yields are attractive, Grant said, because “through brute regulatory force and the power of the printing press, we expect credit will skirt the abyss.” He believes in the traders’ axiom that “there are no bad bonds, only bad prices.” In other words, just about any bond is attractive at the right price.
Grant likes the underpriced common stock of companies that will eventually benefit from developments under way. For example, energy prices will rise again due to inflation, he said, and raw materials producers are curtailing their investments. Grant said Natco Group (NTG), a producer of oil wellhead process equipment and related services, is a potential beneficiary. In his Jan. 23 newsletter he quotes Grant’s analyst Dan Gertner saying, “In 2007, Natco was priced for a never-ending bull market in crude oil; today, it is priced for a large portion of society living in peat-heated caves.”
“There are increasingly compelling bargains in securities markets,” Grant said. But there are also some overpriced investments. He expressed concern that investors are pursuing the wrong opportunities. “The Wall Street Journal can’t stop talking about toxic mortgages and super-safe Treasuries,” he said, “but could it be the reverse?”
Grant is puzzled by human nature. “We humans seek … bargains at the mall, but shun them on Wall Street.” It’s too bad more investors won’t learn the lesson taught by Floyd Odlum.
Susan Weiner, CFA, is a writer specializing in investment and wealth management. Contact her through http://InvestmentWriting.com.
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