Simon Black: Notes From The Field
August 21, 2015 Rome, Italy
I grew up in Texas in a middle class household to two very hard-working parents.
And to say we were middle class may even be a stretch. We were definitely clinging to the bottom rung of middle class.
Money was always a problem. And my parents each held multiple jobs in addition to making a go of their own business in order to make ends meet.
I never missed a meal. But the constant stress and worry about how we were going to pay the bills that month was palpable.
We didn’t have medical insurance or any savings, meaning we were just one illness or urgency away from being wiped out.
There always seemed to be too much month at the end of the money. So every penny mattered.
We didn’t buy anything unless it was (a) necessary, and (b) a major bargain.
Things eventually got better, as they tend to do. My parents found their financial footing and became more successful. And I’ve done well in life.
But I’ve taken those middle class values with me into the world, and they’ve deeply impacted my own investment ethos.
Just like what was drilled into me when I was a kid, I can’t stomach overpaying for anything. Even when investing, I’m only interested in a major bargain.
This happens occasionally in investment markets, though it’s extremely rare today.
There are plenty of profitable, well-managed companies out there. But they’re incredibly expensive. Twitter, for example, has a valuation of $17 billion. Yet it lost nearly $600 million last year.
Netflix manages to grind out a profit; but the company is valued at more than 200 times its earnings.
AirBnB is a private company. Yet its value is at least $25 billion even though it doesn’t own a scrap of real estate or turn a profit.
These all strike me as extremely expensive. And ludicrous.
But it’s unfortunately the norm these days.
Most financial assets are in major bubbles, whether it’s real estate (yes US housing is at that point again), stocks, bonds, private equity, etc.
So it’s very difficult for anyone with middle class values to invest... unless you expand your thinking to the whole world.
There are pockets of value out there if you look hard enough-- like mining companies and developing markets.
Let me give you an example of something that I bought recently, and talk you through my thought process. As a caveat, I should tell you that I generally dislike stocks.
Stock markets are a rigged game designed to extract wealth from the little guy and put it in the pockets of investment banks and high frequency traders.
So for me to be interested, there better be some serious value on the table.
Royal Dutch Shell, one of the world’s largest oil and gas companies, is a good example.
Thanks to the slide in oil prices down to $40 (and perhaps lower), Shell’s stock price has been hammered.
So the company is trading right now at the value of its net tangible assets.
In other words, by buying Shell stock, I’m purchasing every asset the company owns at COST.
Yet on top of that, they pay a 7% dividend yield.
In real estate, it’s like being able to purchase a beautiful house in the best part of town at a price that barely meets the cost of construction.
And on top of that, there’s built-in rental income that starts putting money in your pocket right away.
This is a solid deal in my mind, especially for a company that has a long-term history of consistently growing its dividend yield.
(By the way, I can reinvest the dividends that they pay me into more shares, so I’ll be continually adding to my position over time.)
The added benefit is that Shell is not a US company.
I bought the stock overseas (I’ll explain why next week) and paid in British pounds.
So I could make money off the dividend. Or if the stock price goes up. Or if oil prices go up. Or if the pound appreciates against the dollar.
That’s one of the primary benefits of investing internationally: there are a LOT of different ways to make money.
And it makes a ton of sense to do this now that the dollar is at a 10+ year high against nearly every major currency out there.
(Again, developing markets are looking especially cheap, and I also bought into some of them as well, including Russian and Colombia.)
To be clear, I’m not recommending that you follow me into this.
It’s entirely possible that Shell’s stock gets cheaper. In fact, I’m expecting it. I also expect it will stay cheap for a very long time.
I just have the willingness to wait, because I know that it’s hard to lose when you buy profitable assets so cheap. Plus, Shell has seen worse in its history.
During World War I, for example, German forces wiped out over 20% of Shell’s production capacity.
So I’m confident they’ll be able to weather $40 oil without collapsing.
Have a good weekend, Simon Black Founder, SovereignMan.com