Published: December 2 2008 03:06 | Last updated: December 2 2008 03:06
I am so stupid it’s hard to describe. But I’ll try. About 20 years ago I walked into a 7-Eleven store at about two in the morning with some friends, and as a joke yelled: “Everyone down. This is a robbery.”
Please, if you ever take my advice about anything I write in this column –do not do that. It’s not funny. I can say this from experience because nobody laughed. In fact, nobody in the store made any sound after I said that. In comedian terminology, I “died”. It wasn’t funny. It was just crazy.
To make the obvious segue, this market is not very funny either, even though there are a lot of things that are crazy. Let’s brainstorm and try to make a list.
● Credit default swaps on Berkshire Hathaway are trading at double the price of credit default swaps of Boeing or JPMorgan. In other words, people are betting that the safest company on the planet, run by Warren Buffett, the best investor ever, is twice as likely to go bankrupt as the company that supplies aircraft to the bankrupt airline industry. There have been
plenty of articles on why this is crazy and yet it still happens.
● Many companies that are profitable or breaking even are starting to trade for less than their cash in the bank. Imagine if you could buy a company that has $160m in the bank for just $80m. You would buy it, liquidate the company, and put the remaining $80m in your pocket. Right? And yet, because everyone is in knee-jerk, hide-under-the-covers mode, this bizarre position is exactly what is happening.
Here is a specific example: Trident Microsystems is a mediocre player in a mediocre business. It sells chips for high-definition televisions and has $200m in revenues, although that figure is falling. It had $8m in positive earnings before interest, tax, depreciation and amortisation over the past 12 months, but that’s falling. The company can be bought on the stock
market for $89m. I know you don’t have that in your pocket, but here’s the kicker: it has $230m cash in the bank and no debt.
I’m not the only one who thinks this company is a bargain. Its largest shareholder is Renaissance Technologies, the successful hedge fund (it is up 50 per cent-plus in a year like this).
● Along similar lines, traditionally safe, closed-end mutual funds are starting to trade at enormous discounts to their net-asset value. Closed-end funds, unlike open-ended mutual funds, are those that trade on a stock exchange, so they can end up trading for less than the value of all of their assets if they were liquidated.
An age-old hedge fund strategy is for activist funds to buy the shares of a closed-end fund trading at, say, a 15 per cent discount to its net-asset value, and then force it to liquidate. The problem is that several of the funds that normally do this strategy are going out of business, hence the stocks they own are tumbling as they liquidate.
I like TS&W/Claymore Tax-Advantaged Balanced Fund. It owns mostly municipal bonds in
Everyone is scared right now. The value of their portfolios has fallen 40-80 per cent. It’s not good enough to hear from pundits on television who are saying: “Well, I’m all in cash now and I called this from the beginning.” No you didn’t. Stop lying. We can all see right through you and it’s a bit embarrassing, if you ask me.
Right now the rules are changing and we don’t really know how the game is going to be played going forward. But if you can buy $1 for 50 cents, that strategy will always work over time. It’s the strategy Buffett specialised in when he began his career 50 years ago. But it takes time to play out and you must be patient.
While you are waiting, please try this one exercise to keep your mind occupied and off the market: use the camera in your cell phone and take a picture of the most beautiful thing you see each day. At least that trick works for me.
