These of course are the times that separate the men from the boys, the girls from the women and the successful investors from the poor.
Making money is easy when the markets simply rise and rise and rise. The ones who accumulate and keep wealth however are the ones who have a plan when markets fall.
To begin our lesson today let’s remember the lesson we learned last year from the November 2005 to November 2006 performance of the Emerging Asia Portfolio we tracked. That portfolio rose 114% over the year. That’s really great stuff!
Yet this rise was not in a straight line.
The rise began in November 2005 and the portfolio rose +75.19% in 20 weeks to March 5, 2006, when the second worst emerging market plunge in a decade too place.
From March through July the Emerging Asian Portfolio dropped to 30.28%. Then it rose 83.88% from 30.28% to 114% July through October 2006.
That portfolio which started with $100,000 gained $251,640, a 151.64% profit in 3 months.
Investors who invested $100,000, borrowed $200,000 and held on through thick and thin, made 114.16%
They earned $114,160 in one year.
Investors who were caught up in the early market rise and jumped in around March lost their entire $100,000 by July. They could have lost even $34,710 in just five months. In other words they were down $134,710!
Investors who entered at the bottom of the correction in July 2006 earned $151,640 (on $100,000 invested) by November, in just three months.
This experience led us to formulate three important ideas.
#1: Belief in a personal investing idea is vital.
#2: There are always things you cannot see. Always be open to changing this personal investing idea.
#3: Do not invest more than you can afford to lose! If your personal investing idea is wrong and you lose everything, then you have nothing left to let your idea evolve.
The way we develop our investing idea or belief is to continually look for and spot distortions and trends in times of crisis.
My “investing idea” is to add to my portfolio during these down turns. This is because I see a bullish trend for the next 20 or so years.
Before I explain why, let me remind you that the main stream media love trouble, fear and crisis. Nothing attracts a crowd like trouble. Chicken Little learned this early on and the sky has been falling in one scenario or another since.
You will be reading about crisis, collapses, freezes, turmoil and such. Sudden drops as we see above will be scary.
Yet the ultimate real fundamental remains constant. That fact is more people, doing more, in better ways. In other words more supply and more demand!
We have read a lot recently about the energy crisis. There is only one energy crisis that should be of concern and that would be the energy of farmers as humanity’s economic fuel.
The history of the Industrial Revolution is fueled by farmers moving from a rural to urban environment and
gaining improved productivity through new technology so these poor unproductive farmers who consumed little can produce more so they have more wealth to increase their consumption. These farmers create the working backbone that allows the generation before to step up and offer something value added.
We have enough farmers to continue the industrial revolution, perhaps a billion still in India and China, then there are those waiting in even poorer places like Vietnam and the former Burma, etc.
There have been plenty hiccups in the process over the past hundred years. No doubt there will be more. Each generation has to adjust. New tensions close old systems of order as technological advances create new ways for mankind to serve one another.
This ever evolving human economic expansion is like a ticking grandfather clock. The pendulum swings left, then right and back again. This is comforting to know when you can see that the clock has not stopped. In fact this is lucrative to know. When the clock is left, you can invest right and vice versa.
Over the past 100 years this process (reflected in the rise of the US stock market) has been very dependable as the charts below show. Tick tock, up and down, but in the long run always up and up.
100 year history is great, but what about right now? Where will markets go?
The Dow has moved in approximate 15 year up and down cycles. The market even rises in the down cycle but not so much…plus there is a lot of sideways motion that can chop the non thinking investor to pieces.
We are in a 15 year down cycle which began 9.5 years ago in early 1998.
The previous 15 year down cycle was from Feb. 1966 to August 1982. Compare what has happened in the first 10 years of 1966 to 1976 downwards cycle ot the first 9.5 years of this cycle.
D represents a downward cycle within the longer 15 year trend. U shows an upwards sub cycle in the downwards trend.
Start of both 15 year downwards cycles. The first began in 1966. The second began in 1998. The first downward sub cycle was sharp and short.
D Years % + – Months
1966-1966 -22 8
1998-1998 -17 9
Then both cycles saw a recovery to pull the remaining suckers in.
U Years % + – Months
1966-1968 +48% 26
1998-2000 +60% 18
A longer slide began in the second sub cycle down.
D Years % + – Months
1968-1970 -36% 18
2000-2003 -25% 36
Finally the correction takes hold, good values and lower interest rates attract investors for a nice rise.
U Years % + – Months
1970-1973 +74 32
2003-2004 +30 12
Yet this is a bear cycle and the gains are lost soon in the third sub cycle down.
D Years % + – Months
1973-1974 -48 21
2004-2005 -10 12
Again we see a nice rise before one final plunge.
U Years % + – Months
1974-1976 +73 24
2005-2007 +45 32
This comparison brings us to the present time. A comparison of the entire trend shows a very similar result!
U Years % + – Months
1966-1976 +94 129
1998-2007 +83 119
If this comparison has any validity, then we should expect a bit more rise over the next ten months. This would suggest that this is one more short term cycle possibly the result of seasonality (more on this in a moment) coupled with the junk bond market.
Looking back at the past we can also argue support for two more downwards sub cycles and one more up. Here is what the Dow did for the remainder of its last 15 year bear.
Such historical measures are so inexact that we cannot predict just from them what will happen in the short term. The numbers are close enough that we could be entering the fourth sub cycle down (similar to 1976 to 1978). If so expect a sustained drop in markets for two to three years as you can see below.
Years % + – Months
1976-1978 -19 18
1978-1980 +62 32
1980-1982 – 27 27
Again if history repeats, we’ll then see one more strong surge in the 1998 to 2013 bear before some great new innovation ignites the next 15 year bull. This will be very good news for retiring boomers who manage not to be wiped out from the next half decade of sideways motion.
There are other reasons for a bullish market sentiment. Note in the graphs above that not only has the overall trend been up, but the upwardness has grown.
Bull markets have been stronger and longer in each wave. This is supported by the nature of mankind, all biological things and even the expanding nature of the universe…not to mention the willingness of governments everywhere to now flood markets with liquidity every time markets suffer a drawback.
This means that markets are less likely to crash and are more likely to rise. Yet the profits these rising markets bring are less likely to buy less!
This is why we need to continually look for and spot new distortions and trends so our investing ideas can evolve and keep the spending power of our wealth intact.
During the 39 years I have been investing abroad I have enjoyed seven golden trends.
#1: 1970s Gold & Silver.
#2: Japan , Germany , Switzerland , England , Australia and Hong Kong .
#3: 1980s. The Tigers, Taiwan , Singapore Malaysia and South Korea , & Turkey .
#4: 1990s. South America (which led me to Ecuador ).
#5: 2000s. China , India and Eastern Europe .
#6: Invest in Real Estate Throughout.
#7: Bet Against the US Dollar Throughout
Now an eighth trend, perhaps the most powerful of them all, Green has begun.
Betting against the US dollar as the chart below suggests still makes sense.
The supply and demand fundamentals of real estate have always made sense (more people – no more land). Just remember location, location, location. This is why I am buying more real estate in England and Ecuador .
Which markets might be best?
Good value is always the best indicator of where to invest. For this I use Michael Keppler’s best value analysis. I’ll be sending his most recent updates in a week or so to all my readers, but here are his latest evaluations.
Good Value Major Market Evaluations
BUY CANDIDATES: Belgium , France , Germany , Italy , the Netherlands , Spain , United Kingdom
NEUTRALLY RATED MARKETS: Australia , Hong Kong , Norway , Sweden
SELL CANDIDATES: (Low Value) Austria , Canada , Denmark , Japan , Singapore , Switzerland , U.S.A.
Good Value Emerging Market Evaluations
BUY CANDIDATES: Brazil , Korea , Malaysia , Poland , Taiwan , Thailand , Turkey
NEUTRALLY RATED MARKETS: Chile , China , Colombia , Czech Republic , Hungary , Israel , Jordan Philippines , Russia , Sri Lanka , Venezuela
SELL CANDIDATES: (Low Value) Argentina , Egypt , India , Indonesia , Mexico , Morocco , Pakistan , Peru , South Africa
Emerging markets for the sixth year running appear to still be the best sector. From January through July 2007
The major market MSCI World TR Index has advanced 6.7 % in US dollars and 2.8 % in euros.
During the same period the broad emerging market MSCI Emerging Markets Index is up 23.8% in dollars and 19.2% in euros.
The MSCI EM Asia Index up 23.8% in dollars and 19.2% in euros.
The MSCI EM Europe, Middle East , Africa Index is up 12.2% in dollars and 8.1% in euros
The MSCI EM Latin America Index is up 28.8% in US$ and 24.1% euros.
Here are some other thoughts to consider now.
First, those who are or feel threatened by this downturn could reduce leverage. As of last week all these multicurrency portfolios were remarkable even without leverage. Look at their non leveraged performance!
Green Portfolio $100,000 Up to $137,105
Emerging Port $100,000 Up to $135,976
Swiss Samba $100,000 Up to $119,293
Dollar Short $100,000 Up to $113.474
Lions who have money in reserve may want to take a chance and increase if their personal investing idea is one based on upcoming recovery and growth. Here is a comparison of how portfolios with less and more leverage would have fared versus our existing leveraged positions (as of last week).
2007 Portfolios No Leverage Our Portfolios More Leverage
Swiss Samba +19% (1.5 times leverage) 38% (3 times) 57%
Emerging Market +35% (1 times leverage) 61% (2 times) 87%
$ Short +13% (2 times leverage) 29% (3 times) 42%
Green +37% (2 times leverage) 189% (3 times) 248%
Our mission at borrowlowdeposithigh.com is to help you be a good manager of your financial manager. You need to develop your personal investment idea with your financial planner. Otherwise, at times like this, you may feel adrift and alone. We hope that these thoughts help you have a better grasp of the big picture so you can strengthen your investment ideas now.
P.S. Thomas Fischer from Jyske Bank will join us at our next International Business & Investing Made EZ in North Carolina, September 14-15-16, 2007. We hope to see you there. Details are at
Or join us and Jyske Bank at our hotel El Meson de las Flores for
International Business & Investing Made EZ in Ecuador , November 9-10 and 11.
Also please let me repeat some great news. Since Jyske Bank has increased their minimum account for US investors to $100,000, I have been researching for ways to help readers who have less than $100,000.
One solution may come from New Zealand . A long time friend and reader, Charles Drace, has sent me this note.
“Hi Gary ,
“Good news on the prospect of publishing your MultiCurrency Sandwich programme with a large publisher. I’m sure this will work out well as it’s such a good programme.
“Having heard that, I thought it a good time to draw your attention to the fact that our 21st Century Renaissance Performance Unit Trust has 50% of it’s portfolio in a Jyske Bank Invest Loan programme, and that has
in fact been the best performing part of all our unit trusts. I think you were already aware that my own 6 year Jyske Bank trial programme grossed over 30% per year.
“It had always been my intention to ask you to bring this to the attention of your readers as I thought it might appeal to those who didn’t want to run the programme by themselves.
“However, I have desisted so far because our portfolios are managed from a New Zealand dollar perspective and with the NZ dollar being vastly overvalued at the moment, I thought it fairer to potential investors to wait until the dollar had dropped so they would have the future opportunity of currency appreciation rather than the current outlook of
“Having read your latest news, though, it occurred to me that maybe you might want to mention the opportunity for readers of your book/report to use us if they didn’t want to open/manage an account on their own.
“We are a fund management company, with all the regulatory and legal work in place, including investor’s funds held by NZ’s leading [government owned] Trustee Company and auditing by PriceWaterhouseCoopers. We have all the administration systems in place with the top NZ unit trust administration company providing our backroom, not to mention a good working relationship with Jyske Bank. Kind regards, Charles”
I have not taken any further due diligence steps so anyone who wishes to use this facility should double check credentials and facilities to their own satisfaction. Personally my relationship with Charles has been delightful and my opinion based on seeing him in action for more than a decade is that he is a person of the highest integrity.
His contact details are below.
Socrates Fund Management Ltd., manager of…
21st Century Renaissance Gold & Metals Unit Trust 21st Century
Renaissance Performance Unit Trust 21st Century Renaissance Income Unit
Trust PO Box. 3833, Christchurch , New Zealand 8140 Tel [+643] 364-9140
Fax [+643] 364-9132