The Rude Awakening
Gaithersburg, Maryland
Wednesday, June 20, 2007 ------------------------- - Jumping on India and the boom in water ETFs,
- The real "Rags to Riches" story,
- Enjoying the leader's privilege and plenty more…
------------------------- Chris Mayer, reporting from Maryland… A filly won the Belmont Stakes this year. Her name was "Rags to Riches," and she was the first filly in 102 years to win the final leg of the Triple Crown. On the surface, the filly's feat would appear to be one of those remarkable, against-all-the-odds sorts of achievements. But when you dig a little bit deeper, you find out some things that place the filly's victory in a somewhat surprising context. Things are not what they seem. Investing is no different. Those investors who look no deeper than surface-level observations often fail to recognize the make-or-break context of their investments. Indian stocks and water-related ETFs are two current examples of situations where investors are overlooking some very important contextual facts. But let's stick with thoroughbreds for a minute. Only 11 other fillies since 1900 have even made the attempt to win at Belmont. This may seem odd given that the difference in speed between male and female horses is slight. The record at Belmont, held by Secretariat, is 1:45 2/5. The filly record is 1:145 4/5 held by Go for Wand. So why do so few fillies make the attempt? Money. Simple economics dictates that male horses would race more often than female horses. If a male horse wins at Belmont and he gets sent to stud. Smarty Jones, who won two-thirds of the Triple Crown in 2004, commands a stud fee of $100,000. He can breed with up to 110 mares a year. That's a lot of bread -- about $11 million in earnings. By contrast, a female horse can produce only one foal per year. Hence, the 102-year old record -- widely reported by the press -- doesn't really tell much of the story. All that background about the number of attempts and the economics of it explains a lot. So it is with markets, as I explain below… --- Mayer's Special Situations Alert --- Holding Home Depot (NYSE:HD), you could have made a 303% return over the last decade. On Wal-Mart (NYSE:WMT), 351%. And on American Express (NYSE:AXP), about 370%. And plenty of investors did just that. But you could have made twice that - 818%, in fact - owning shares in another kind of investment that most investors… and most brokers… missed completely. The Next Round Of Profiteering Is About To Start. Secure Your Position Here With Mayer's Special Situations ------------------------------------------ "Rags to Riches"
By Chris Mayer If you looked at the Indian stock market on the surface, you would worry. You would say, "It looks expensive." In June 2005, India's Sensex Index - think of it as the Indian Dow Jones Industrial Average - crossed 7,000 for the first time. By December 2006, it had crossed 14,000. However, when you dig a little bit deeper, you find some things that put those numbers in better context. First, in the last year, about half of those returns resulted from currency gains. The dollar weakened significantly and the Indian rupee rose. Second, most of the gains over the past 12 months came from about five stocks. As Marc Faber points out in his latest letter, the median return of Indian stocks over the last 12 months was minus 17%. So most stocks - about two-thirds - are down.
Paints a different picture, doesn't it? In every market, there are pockets of opportunity worth playing, even if the overall market looks scary. I like to dig below those surface appearances. Diving into Water ETFs There is also a boom in water exchange-traded funds, or ETFs (which are like mutual funds that you can buy and sell just like stocks). A Barron's piece over the weekend reported on the growing list of water-themed ETFs. But before buying water ETFs, investors should know a little about how they work. The newest one is PowerShares Global Water Portfolio (AMEX: PIO). It's portfolio contains 41 stocks of companies in the business of doing something with water - providing it, treating it, etc. Before that, we had the Claymore S&P Global Fund (CGW), which hit the market in May. It has a 50-stock list. First Trust ISE Water Index Fund (FIW) also went public in May. The granddaddy of these water ETFs is the PowerShares Water Resources Portfolio (PHO), which came out in late 2005. I've never been a big fan of ETFs, because I prefer to pick stocks individually. I also don't like the rebalancing aspect of ETFs. They tend to sell their winners each quarter, or each year, so no one stock dominates the index. Yet in my own investing experience, I find that it is precisely those big winners that really make the difference between doing OK and doing great in the stock market.
Even so, if you can't buy a portfolio of specific water stocks, these ETFs could provide broad exposure to the global water sector. Regardless of whether or not I invest in them, it can be useful to pay attention to the ETFs, because as their assets grow, they become steady buyers of the stocks in their portfolios. Some of the water companies have relatively small market caps. And some of these ETFS are getting large. The PHO has nearly $2 billion in assets. One of its top holding is Layne Christensen (NASD: LAYN), which has a market cap of only $700 million and change. The end result of a booming water ETF sector could be relatively high multiples on a number of water stocks. It will be interesting to follow these developments. But again, a little digging here gives us a couple of useful insights. The first is that ETFs exhibit bad investing habits (selling off those winners). And the second is that the most important impact of ETFs may be the effect their increasing popularity has on the stock prices of the stocks they must buy. Joel's Note: By the time the water story started making mainstream headlines early last year, Chris Mayer had already bolted from the gate. While other investors continue to jostle for position back in the pack, Chris has enjoyed the "leader's privilege" and continues to refine his water plays ahead of the curve. If you wish to play this exciting and escalating investment scenario, you might as well bet with the leader of the pack. I've included a link to Chris' water report below for all the information you need to get started: Investing in Water - Chris Mayer's Blue Gold Report --- Flash Investment Alert --- The 10 Most Boring Stocks That Could Ever Triple Your Money …or MORE Spank the S&P by up to 2,800% with CAVEAT Investing: the key to finding mega-profitable market "sleepers" that can help YOU build a fortune…in months, instead of decades! Click Here To Get Started Today: Capital & Crisis ------------------------------- Rude Endnote: Finding yourself ahead of the curve with your own investment insight? Wish to opine on something Rude to your editors? Drop us an email at aussiejoel@the-rude-awakening.com and let us hear it. A selection of reader mail appears in the Monday Mailbag. Now it's over to your editors of the 5. It'll be arriving shortly, direct from H.Q. in Baltimore. Cheers, Joel Bowman
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