The Man I'm Betting $5 Million On... - Vivek Kaul's Diary
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The Man I'm Betting $5 Million On...

Apr 19, 2016

27

GUALFIN, Argentina - Our recently retired ranch manager, Jorge, came up on Saturday. So, we organised a party for him.

More about that tomorrow...

Today, we turn our attention back to the shabby world of money...and to a big decision we've made about our own finances.

A Remarkable Performance

As you may know, we just made a deal with longtime friend and star analyst Chris Mayer.

I say 'star' because over the past 10 years, Chris's recommended portfolio has outperformed the best billionaire money managers.

We had an independent CPA examine the track record of Chris's Capital & Crisis newsletter (which he no longer edits).

Turns out, if you invested $100,000 in Chris's advice in 2004, you would have been sitting on over $480,000 a decade later.

As you can see below, against even the best investors in the world - guys like Warren Buffett, Carl Icahn, and David Einhorn - that performance is remarkable.


Our deal with Chris works as follows...

Chris will pick stocks using his own methods. We will follow.

Later this month, we'll start investing $5 million of our family money in Chris's recommendations.

Always in Doubt

We had mixed feelings about it...

We have great faith in Chris. But we don't like investing in stocks.

When you 'invest' in a ranch in Argentina, you make no money...but at least you enjoy yourself.

You meet new and interesting people. You confront new challenges. You learn things you didn't know.

Stocks give us no such pleasure. Never once has a stock said so much as 'hello', no matter how much money we put into it.

Also, we believe this is the worst time to invest in the stock market in the last eight years - for the many reasons we've discussed in the Diary.

For the record, we still expect US stocks to perform badly in 2016...and beyond.

But the guiding principle of the Diary is doubt...

We doubt that this is a good time to buy stocks. We doubt that the feds' managed currency system will survive. We doubt that our 'Deep State' government serves us well. But we also doubt that God tells us His plan for the stock market.

Chris has made a lot of money for his readers over the last decade - through good times and bad. Our investments - heavy with gold, cash and real estate - did less well.

The next decade could go either way.

We'll stick with our big positions in gold, cash, and real estate. But...bowing to doubt...we'll hedge our bets, too, with stocks.

A 'Good' Business?

Some things you do for profit. Some you do for fun. Some things you do because you don't know any better.

And some you do just for the hell of it...

We're not sure which category to put this in. If Chris does anywhere near as well as he has for the last ten years, we will say we did it for the money. If we lose money, we'll say we were right about stocks all along.

Like everyone else, we've read many books on investing. We've followed the debates between proponents of the Efficient Market Hypothesis (who claim you can't make outsised returns as an investor without taking outsised risks) and their critics.

We've studied the evidence and looked at the results. But all of this 'book learning' has been overshadowed by what we have learned from running our own business.

In the stock market, you make money by finding good businesses...and sticking with them.

The problem is it's hard to know what a good business is.

Coca-Cola is a good business. It has a product that costs little to make. And people like it. Many are almost addicted to it.

But there are plenty of carbonated drinks around; new ones come along every day. So it is not obvious why Coke should be a winner.

That's why people usually can't tell how good a business is, even when they are right in the middle of it.

In 1888, for example, Asa Candler bought the formula for Coca-Cola from its inventor, John Pemberton, and other shareholders for just $550.

And in 1961, the McDonald brothers - Richard and Maurice - sold their fast-food sandwich shops to Ray Kroc for $2.7 million.

And in 1976, the third founding partner of Apple, Ronald Wayne, sold his 10% stake in the company (today worth over $62 billion) for just $800.

If founders and owners don't know what their businesses are worth, how can outside investors?


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Buffett's Big Bet

Most of the time, the answer is: They can't.

Eight years ago, Warren Buffett bet $1 million that a group of hedge funds chosen by New York City-based money management firm Protege Partners would underperform the S&P 500 over the following ten years.

This bet still has two years to run. But so far, Buffett is winning by a large margin. The S&P 500 is up by about 65%...versus the roughly 22% average gain for the five hedge funds Protege Partners selected.

If the hot shots running hedge funds can't beat the indexes, who can?

All we know for sure is that Chris Mayer has. He's beaten the big money managers, and the S&P 500, over the last 10 years - by a wide margin.

Will he do so over the next ten years?

As the SEC reminds us, past performance is no guarantee of future performance. Still, it's all we have to go on.

Tilting the Odds

One of the things Chris does to shift the odds in his favour: He pays attention to the people running the business.

Again, from our own experience, there are a lot of people running businesses who are more interested in their careers and their compensation than the health of the business itself.

Especially, now...and thanks largely to the corruption of the entire system wrought by today's credit-based money...managers and investors tend to be very short-term oriented.

But real growth and real profits are rarely produced quickly.

Businesses are best understood as learning, not money-making, machines. The ones that succeed are the ones that learn more quickly - at low cost...by trial and error...over a long time.

Try to goose up profits in the short run and, most often, you cut off long-term learning.

That's why companies bought and sold by professional investors, funds, or private equity firms are almost always a disaster. These predators strip out real assets, load up the company with debt, and then try to sell the husk of the company to unsuspecting investors.

That's why Chris favors businesses where the operator has his heart in it. He will do what he has to do to help his business succeed.

Again, it's no guarantee. But it's a small edge.

Chris (who started his career as a loan officer in a bank) also spends a long time studying company reports and adding up the numbers.

Often, he finds they don't add up at all. This doesn't necessarily put him onto winners...but it helps him eliminate the losers.

We've known Chris for years. We trust him to pick stocks as much as I trust anyone.

Does this mean we will make money following his advice?

We don't know. But we're going to find out. And you are, too...

We're making our own bet - five times as big as Warren's.

We're betting that Chris can not only beat the S&P 500...but also that he can keep us from losing a lot of money, even if the market turns down.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "The Man I'm Betting $5 Million On..."

karthik

Apr 26, 2016

Dear BB,

You have been consistently preaching pessimism on stock market for the past 2 years at the least. You have raised a red flag on stock market for more than a year ago. You have been insisting your reader to stock the real money, which is gold.

Now you are saying that you are going to invest $5 million in stock market, which is against and totally opposite to your preaching for so many years.

It might make an opinion in the minds of readers that there is no coherence between what you do and what you say and all your writings should be taken with a pinch of salt.

Please clarify one thing. Do you sincerely belief that the stock market is going to be in uptrend on a longer term, though there can be short term hiccups? If so, do you really need to be so pessimistic about each and everything around you now? Which stand of BB is correct?

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Prakash Basrur

Apr 20, 2016

Indeed ! South-west tropical monsoon winds breezing across the Arabian sea coastline of India decide the yearly fate of our economy and nothing else ! Perhaps we were busy concentrating on other aspects of improving our economy in last 70 years ? Now , at least , it is high time that we take very seriously the work of diverting the waters of our perennially flowing east coast rivers to the west coast ! Our pessimism about undertaking such a gigantic civil engineering project should give way to an optimistic approach of undertaking this life saving work soonest possible without wasting precious time in politicking by our opposition parties ! Bipartisan ( or shall I call it a multi-partisan ? ) attitude to plan & implement the project is the need of the hour ! Earlier NDA government of Atalji had taken up the work seriously and appointed Mr.Prabhu to plan for it. I guess the Prabhu-plan is ready on paper and this NDA Sarkar under the able leadership of Modiji could ( and should ) resurrect that Prabhu-plan from the dust gathering shelves and reappoint Mr.Prabhu exclusively for the execution of that most urgent National Project. Perhaps the the administrative capability of Mr.Nitin Gadkari too could be brought into the execution of the project !

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AB Pereira

Apr 19, 2016

Does this mean Bill Bonner has finally relented and going the stocks route after waiting in the wings (with cash, gold, RE) for so many years? Will this be the sign for the stock markets to go down?! Just sounding a bit contrarian to BB, just like how stocks and gold behaved over the last 6 years since 2010.

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