海角大神

The New Year invites guesses about the year ahead. I thought I wouldn鈥檛 bother this year, but then I found myself scribbling out some investment resolutions and predictions on a napkin over breakfast. Here are some of them:

1. Ignore the 鈥済old is in a bubble crowd.鈥� The mainstream press doesn鈥檛 understand gold. They look at the price and think it鈥檚 expensive. Instead, they should turn it around and question the value of the dollar. Gold is best thought of as a play on the creditworthiness of paper money. When people worry about the printing presses, gold does well. As most governments have huge deficits to finance, gold shouldn鈥檛 collapse.

Besides, on an inflation-adjusted basis, gold is still below its all-time high in 1980. It would have to trade north of $2,000 an ounce to break it.

Gold stocks are the best way to play gold because they are going to put up a stellar year of earnings in 2011. Many will mint money at $1,400 an ounce. Stay long gold stocks.

2. Stick with the fundamentals. People come up with all kinds of crazy indicators to try to predict what the market is going to do. The year 2010 had a couple of really silly ones that got a lot of press. Anyone remember the 鈥�Hindenburg Omen?鈥� That people gave any credence to this idea at all makes me wonder about the survivability of our species.

But it wasn鈥檛 the only one. I clipped out and saved a column from 叠补谤谤辞苍鈥檚 dated July 5, 2010, giving serious ink to the idea of the 鈥�Death Cross鈥� 鈥� another indicator that cropped up in 2010 and predicted the market would crash. Of course, the market is 25% higher since.

Ignore these contrivances. The future is unpredictable. You鈥檙e better off studying businesses and trying to buy only cheap stocks. Move to cash when you can鈥檛 find anything to buy and wait. It鈥檚 worked for me anyway.

3. Question the 鈥�US blue chips are cheap鈥� argument. This one is controversial because you couldn鈥檛 find a money manager today who doesn鈥檛 think US blue chips 鈥� Microsoft, Johnson & Johnson, Kraft and the like 鈥� are cheap. Nearly everyone does. That鈥檚 the problem. Something is wrong here.

Microsoft trades at only 12 times earnings, but perhaps deserves that multiple. Yes, it generates a lot of cash, but it has done little with it for shareholders鈥� benefit. The problem is that a lot of these big firms hoard cash, earning nothing, or spend it on value-destroying acquisitions. All that great cash flow these firms generate never gets into shareholders鈥� pockets.

Microsoft, Hewlett-Packard, Cisco and Intel are examples of companies that throw off lots of cash and carry excess cash鈥�yet pay hardly anything to shareholders.

As Bill Miller, manager of the Legg Mason Value Trust, points out:

鈥淸These companies] all could EASILY pay out 70% of their free cash flows as dividends and still build cash on the balance sheet. If they did so, it is hard (nay, impossible) to believe their stocks would not move dramatically higher. My guess is that at worst they would trade at between a 4% and a 5% dividend yield, about where much-slower-growing utilities trade, providing an immediate gain of over 30% to their owners.鈥�

I agree. If big blue chips were smart allocators, they鈥檇 be great investments. Look at what McDonald鈥檚 has done. Or even IBM, which trades at a higher price-to-earnings ratio than Microsoft, a notoriously poor allocator of capital.

Until these big blue chips start thinking about shareholders, I don鈥檛 think they are especially cheap. They probably trade where they should trade.

Meanwhile, I still find better bargains among smaller-cap stocks, in which the people running the show have skin in the game. I鈥檇 rather invest in these names than some giant corporation that hands its executives lush option packages. Over the long haul, I prefer 鈥渙wners鈥� versus 鈥渞enters.鈥�

4. Stay with commodities where supply is tight and there is no immediate cure. I think 2011 will be more difficult for commodity investors. Mining companies are pouring record amounts of cash toward new projects. That鈥檚 like turning on the shot clock in basketball. There is a window to score here, but it is closing. Some commodities, though, ought to do better than others.

There is an old market saying that says, 鈥淕ood things happen to cheap stocks.鈥� Even though we can鈥檛 predict when things will happen, a cheap stock usually doesn鈥檛 need much help to produce a sizeable gain. In the commodity world, a similar saying might be 鈥淕ood things happen to commodities where supply is tight and finding more is not easy.鈥�

Coking coal is a good example. Quality deposits are hard to find. Steelmakers are looking all over the world for new sources of supply. But then, in recent days, the sky opened up in Australia. The rain was so torrential, it鈥檚 halted exports of about 40% of the world鈥檚 coking coal. A whole bunch of companies declared force majeure, saying they would not be able to meet supply contracts.

No one could鈥檝e predicted that, but good things tend to happen to such commodities. Coking coal prices will surely spike upward in the second quarter. Already, coking coal contracts for January-March are $225 a tonne, the second highest on record.

For 2011, I鈥檇 say uranium has the most upside potential, outside of the precious metals. Even though prices rose in 2010, they still don鈥檛 compensate miners for the risk of building new mines. It鈥檚 also a very concentrated industry, like coking coal. More than 60% of all uranium comes from just 10 mines. Stay long those uranium stocks.

What about the biggest potential correction on the downside? I鈥檇 say agricultural commodities. We鈥檙e going to see record planting all over the world. My guess is that these plantings will be enough to dent to the run of commodities such as wheat and corn. Good for stocks such as Pilgrim鈥檚 Pride (NYSE:), though, which should enjoy a fall in feed costs.

5. Keep traveling. I always learn something new when I travel and often uncover new investment ideas as well. All of which is to say it鈥檚 a good thing to leave your desk and step out into the world. This year, I have a number of places and people I鈥檇 like see and meet. For instance, in March, I plan to check out Colombia. And in May, I hope to visit South Africa.

6. Keep a sense of humility. The most important resolution is one I make to myself every year: It is to keep a sense of humility about the markets. Unpredictable things happen all the time. There is some element of luck involved, for good or ill. And everyone 鈥� no exceptions 鈥� gets his head handed to him at some point or other in his investing life. If you play long enough, you will have your share of losses and disappointments. As Roy Neuberger wrote in his memoir, So Far, So Good: The First 94 Years: 鈥淎lways-right investors don鈥檛 exist, except among liars.鈥�

So there is no room for overconfidence, stubbornness or arrogance. Take your gains and losses with cheerfulness and a light touch. Don鈥檛 be afraid to say, 鈥淚 don鈥檛 know.鈥� Keep an open mind. Keep learning. And enjoy the ride.

Here鈥檚 to 2011!

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