How To Profit From What Is Right In Front Of Your Nose!
Friday, June 20, 2008 | Ethan Roberts
Have you ever seen the movie, "The Treasure Of Sierra Madre"? There is a classic scene from that film in which three gold prospectors, Humphrey Bogart, Tim Holt, and Walter Huston, finally reach a clearing in the mountains. Both Bogart and Holt fall to the ground, exhausted and dehydrated. Huston, on the other hand, though much older than the others, looks fresh as a daisy, and is busy inspecting the Earth. Bogart begins to talk about giving up and going back to civilization. Suddenly, Huston begins to dance a jig, laughing at them and scolding them with:
"Let me tell you something, my two fine bedfellows. You're so dumb there's nothing to compare you with. You're dumber than the dumbest jackass...You're so dumb, you don't even see the riches you're treading on with your own feet!"
Bogart and Holt get a lesson from Huston
The old man knew just how close they were to finding the gold. But Bogart and Holt were so famished and self absorbed, they couldn't even see it. Eventually they all find the gold together. However, when Bogart is later killed by Mexican bandits, they steal his cheap boots and dump out his saddlebags, which contain all of the gold laden dust the prospectors found. The bandits thought it was just worthless sand.
I think life is like this each and every day for most people. The mundane demands of life take up so much of our time and attention. Yet each and every day the gold is right under our noses, and too often we don't see it at all, or we mistake it for ordinary sand. Today I want to talk with you about how you can learn to see the gold, and then to prosper from it.
Consider these three recent events in my life (yes, I know, I need to get a real life):
1) This past weekend the wife and I were participating in our neighborhood Garage Sale. Among the many shoppers, two different people within a ten minute span asked me, "Do you have any old coins or stamps?" Another fellow was looking for broken jewelry, watches, and anything with gold or silver.
2) The other night I went to the mall, but there were hardly any shoppers there. I mean it was so empty you could hear the proverbial pin drop. So I'm talking to the woman at the empty Japanese food stand in the dining court, and I ask her, "Where are all the people tonight?" And she replies, "Oh, it's been like this since January."
3) Last Friday I'm reading an AP article about how Americans are trying to cut back on buying expensive supermarket food and have reduced how often they eat in restaurants. The article mentions how Spam is increasingly back on the menu at many American homes. Spam?! Now there's a gruesome thought. Then suddenly I remember that Spam is made by Hormel.
Spam! When recessions curb your appetite for fine dining...
Ok, so how can we make money off these random events?
First, to have several people asking about old coins, stamps, gold, and silver at a garage sale, suggests to me that collectibles are coming back into vogue, and that the demand for precious metals is still strong. It reinforces in my mind that the precious metal ETFs should be bought on all dips.
Second, my subjective experience tells me that the retailers are once again struggling. There was a market rally this past week, related to some strength in the May retail reports. It seems that people did NOT pay down their debt and save their tax stimulus checks, like they said they would in the polls. Instead, they spent it in the retail outlets. But folks, those checks are now gone, and the retailers are once more taking it on the chin. Everywhere you go it's 40% off, 50% off, buy one, get one free, and on and on.
So what do you think will happen when the retailing numbers come out for the second quarter?
Even if the revenues are there, with all of the discounting, the margins are going to stink. My experience in the mall warns me to continue to avoid retail stocks, and even possibly to research the weaker stores as possible shorts. Just because JC Penney (JCP) has fallen from $75 to $40 doesn't mean it can't go to $30 or $25. You may think that Sears (SHLD), down from $160 last year, looks attractive at $83, but there's nothing attractive about their empty stores and salespeople standing around, forlorn and looking for something to do.
But one company's doom and gloom is another company's ticket to success. Hormel Foods Corp. (HRL), maker of the aforementioned Spam, rose from $32 to $42 between August, 2007, and April, 2008. It has recently pulled back to $36.50. But if a tough economic environment is causing Spam to regain its popularity, then Hormel could very well be a stock to own. In fact, Hormel recently announced that strong sales of its pork-in-a-can helped to lift its second quarter profits by 14 percent. They were even able to raise their prices in recent months without it hurting sales.
Do you see how this works?
Peter Lynch once bought a company, Hanes, for his Fidelity Magellan Mutual Fund, because his wife mentioned to him how much she liked their L'eggs pantyhose product. Of course he did the necessary investment research as well, but discovered that the stock was a very good value. Hanes soon became Magellan's largest investment, and ultimately was a big winner for the fund. Lynch wrote in his books that he would also watch his teenage daughters' shopping habits to discover new investment ideas.
Lynch told investors they could make terrific returns on their money, not by going for complex, hard to understand businesses, but just by investing in what they already know. He said (and I absolutely love this line):
"Go for a business that any idiot can run, because sooner or later any idiot probably is going to run it!"
Ain't that the truth!
When you go to the mall, don't just focus on your shopping needs. Make it an investment search as well. You do this by taking the time to glance into each store as you walk along. See who is busy and which stores are empty. Jot down notes on a small pad to help you remember later on. Did you know, Abercrombie & Fitch (ANF) was just a $20 stock in 2002? Today it trades near $70.
A 250% gain in six years, just by watching where your teenager likes to shop!
When you go to the supermarket, take notice of which companies have new products that are selling well, or seem to be a clever new idea. Do you know how many billions of dollars Proctor & Gamble (PG) has made in recent years from those Swiffer electrostatic wipes? When you go to the movies, take note of which companies are prospering from a mega hit. When the new cars come out, take notice of whose cars you see everywhere on the road.
Look how happy Swiffer has made her!
It's just about opening our eyes and ears to the world around us. Each and every day there are news stories that contain nuggets of gold about new products, new trends, and new features that can make us money. You don't even have to read the stodgy old Wall Street newspapers to learn about them. The ideas are there every day on the MSN, AOL, and Yahoo headlines. Read and grow rich. When you hear about a story, dig a little deeper. Do some research to figure out who stands to gain or lose from this news event.
We just had a health scare over tainted tomatoes. Who do you think might lose business from that? Gasoline is now well over four dollars a gallon. Who stands to prosper because of that? Which fuel-dependent stocks will continue to decline? Listen to your wives, your kids, your co-workers, and your friends when they tell you what they are buying. New video game? New tech gadget? Who is making money off the Hannah Montana craze? When you go to your local Home Depot or Walgreens, ask the cashier or the salespeople, "How is business in the store lately?" Believe me, they will tell you. Employees love to talk, especially when business is bad.
That's one way you can legally trade on inside information!
Unless your rich uncle Mortimer is about to expire and you are Numero Uno in his will, building wealth is not something that happens to us by being passive. We must seek it out by always being attentive to where the opportunities lie. Average Joe, our favorite poor soul, will sigh and complain about the high gas prices, but he does nothing about it. You, on the other hand, want your wealth to grow. So you do the research and discover that you can buy shares of an exchange traded fund called UGA, to serve as a hedge against higher prices.
With summer here, if you have never read Peter Lynch's classic book, "One Up On Wall Street," now would be a good time to check it out for that relaxing day on the beach or your backyard deck. Train yourself to be like the Walter Huston character in "Sierra Madre," and soon you will be the one dancing the jig and clapping your hands with delight!
As for me, I'm enjoying summer time, firing up the old grill for a delicious Spam barbecue, but after this hearty meal, it's back to work for me. I now see that my lap top computer appears to be a bit dusty. I may just run a couple of Swiffer's over it to keep it nice and clean. Oops, wait a minute, I better not, it might just turn out to be some of that Sierra Madre gold dust!!!
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Ethan Roberts
Chief Investment Officer
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