One of the best parts of writing here on Real Money is all the people I have met as a result. I have gotten emails from and developed friendships with some pretty interesting people. I have met fellow value investors as well as newer investors looking for guidance, experienced fund managers and even a few traders and growth types and enjoy regular correspondence with them. I Iove talking all things markets, books and baseball with readers and look forward to hearing form more of you in the future.
One of the more interesting and informative people I have met is a fund manager from California by the name of Pope Brar. I talked with him earlier this year and he was kind enough to share his investment checklists with us. We caught up again yesterday for a conversation about investing and markets.
We talked about the markets emphasis on, and overpricing of, certainty. There has been a lot of talk in recent months about low volatility strategies and how they beat the market by relying on predictable results from the top blue chip companies. I am not sure that low volatility is so much a strategy as it is a condition, and the performance of this approach will change dramatically when we see the markets endure an extended period of high volatility. That has not happened in some time, and people have become very complacent about risk in recent years.
Pope looks at things in exactly the opposite manner. He looks for what he calls low-risk, high-uncertainty situations in which to invest. He told me during our call: "we believe the investment business is set up in the wrong way. It is commonly believed that one must assume high risk to achieve greater returns. Successful investors do everything to avoid risk. A majority of their success is built on making a few low-risk bets with high-return possibilities. To minimize risk, we look for investments with a large margin of safety, but ones that may be undergoing short-term uncertainty. The market vehemently dislikes uncertainty and at times provides glaring bargains, despite a favorable long term outlook. We look forward to discussing how investors can take advantage of this opportunity."
I thought about that for a while and he is exactly right. Although I came to the sector through valuation alone, my recent forays into the silver mining markets is a perfect example of a high-uncertainty, low-risk situation. The stocks we bought, like Pan American Silver (PAAS) and Coeur Mines (CDE) were trading at a fraction of book value with low debt to equity ratios and high current ratios. There simply is not a lot of balance sheet risk.
In the near term, I have no idea what the metal markets will do. I do have a very high degree of certainty that at some point in the next few years we are likely to see a strong rally that lifts the metals and the stock of companies that mine them a lot higher. I have no clue if the rally will be caused by inflation, geopolitical unrest or just improving economicconditions that will lift the prices higher. I am just pretty sure it will happen. And when it does, I will be able to sell mining shares for several times what I paid for them.
We can apply the same logic to some other sectors as well. I have no idea when our domestic energy policy will turn towards natural gas and lift the demand for this clean, abundant fuel source. I am pretty certain that we will, sometime in the next decade. I am pretty sure we will relax export restrictions as well. When that happens, some of the safe and oil and gas stocks I own like Hercules Offshore (HERO) and Swift Energy (SFY) should appreciate substantially.
Mr. Brar also said something that is similar to what I have been preaching for years. He told me: "one of the intelligent ways to generate returns is to be a practitioner of patience who goes about leisurely tasks, but when the world becomes severely uncertain, pulls out the tools and goes to work."
That sounds a lot like my old friend Mr. Womack the pig farmer or John Templeton and his suggestion to buy at the point of maximum pessimism. You can earn much higher returns looking for safe and cheap stocks in depressed markets and sectors than you can trying to trade the short- term movements or buying high-priced stocks after an extended rally.