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The 1927 Yankees won 110 games, lost 44, and bore the illustrious nickname "Murderers' Row." Filled with the likes of baseball greats Lou Gehrig, Babe Ruth, Earle Combs, and Bob Meusel, the team collectively batted .307, slugged .488, and boasted a league-leading 3.20 ERA. The team wasn't just amazing for its paper stats, but for its ability to consistently produce, as if systematically exploiting its opponents' weaknesses.
I'm not much of a sports fan. But I do love investing, and Foolish colleague Joe Magyer and I have tickets to the modern-day, value investing equivalent of a 1927 Yankees season: this year's Value Investing Congress, whose ranks include the likes of superinvestors Leon Cooperman, David Einhorn, Bill Ackman, Jim Chanos, Joel Greenblatt, and the Congress' founder, Whitney Tilson. Like the 1927 Yanks, these investors aren't spectacular just for their aptitude, but also for the consistency of their results, knowledge of craft, and efficacy in process. Suffice to say, we're pumped, and you should be, too.
We'll be writing articles, tweeting, and posting on the discussion boards at Special Ops and Inside Value, the Fool's value-grubber stock idea services. With the big show's beginning looming, I figured it only fair to inject a bit of sportsmanship -- because no sporting event is complete without a bit of prediction. Below, you'll find my take on four themes I expect to get a fair amount of air time at the VIC.
1. Gold: The new black?
I wouldn't be the least bit surprised to see the old gold saw trotted out.
As developed-world economies precariously teeter, there's the temptation to use cheap money to stimulate consumption, inflate our way out of debt, and encourage business investment. And admittedly, it's not the worst idea (though some might justifiably argue it's little more than a can kick) in widespread deleveraging cycles and the coincident economic softness.
Many investors have turned to gold as a salve against the risk of inflation, declining confidence in developed world economies, and justifiable skepticism that political wrangling will preclude a long-term fix. They aren't betting on gold for its absolute cheapness but as a systemic put. The rationale goes that gold provides a hedge, and some store of value, when monetary authorities are doing stupid things. Where monetary supply can be manipulated, gold isn't fungible.
Those arguments are well-taken, but my take is this: The systemic put argument isn't anything new, and gold is like any currency. There's no such thing as intrinsic value for gold, because like currencies, its value is only what the next person's willing to pay. So it pays to ask: Do gold prices already reflect the wide range of economic clouds? Maybe. But more importantly, we have no zero metrics for concretely assessing it.
2. Large and lagging
One might easily posit that despite recent volatility, the overall market isn't drooling cheap. I'd second that sentiment. Consider the prognosis: possible Eurozone fiscal crisis, still-rampant developed world unemployment, spiraling deficits, and a still-leveraged consumer.
But as value-grubbing sorts, a market that's not unequivocally cheap, dour prospects for the world economy, and cheap stocks are not mutual exclusivities. We relish the opportunity to pick up a defensively oriented, moaty business cheap. Blue-chippy large-caps fit the mold. By and large, many failed to participate in the market's torrid run-up, but participated on the downside.
In Aon, we see the potential to participate in the upside from hardening insurance markets, rising interest rates, prospect cost-savings from the Hewitt merger, and a very capable management team helmed by CEO Greg Case at 10 times our estimate of this year's free cash flow. Tied to a model that produces delightfully recurring cash flows, the upside comes free.
Meanwhile, Google has $33 billion in net cash right now, grew sales 32% last quarter, and sells for 18 times earnings. The search giant's near-infinite data stores afford an indefatigable and growing moat, which should bring the cash day in, day out. Sometimes, investing doesn't have to be rocket science. Color us unsurprised if they make it into the list of ideas, because they're really good ones.
3. Oh, financials
After the past few years' scourge, bank stocks are again in vogue for value types. And I wouldn't be the least bit surprised to hear the highest-quality institutions -- Goldman Sachs (NYSE: GS ) , Wells Fargo (NYSE: WFC ) , or JPMorgan (NYSE: JPM ) -- getting a little airtime.
These institutions are populated by savviest risk managers and brightest minds, and their hand was strengthened by an unintended (and unfortunate) consequence of the credit crisis: "Too big to fail" was reinforced. To boot, the "systemic cleansing" afforded by years of loan writedowns and seemingly dirt cheap valuations have improved the odds of bank investments turning out favorably.
That's all good and fair, but I'll hang two reservations out there. With the possibility of another credit crisis looming, are these financial institutions really safe? And more importantly, does anyone have the vaguest idea what's in those balance sheets or what they can earn on them? Cause that's kinda important to valuation.
4. Macro matters
A head-in-the-sand mentality to the economy's direction can come with painful consequence, as the credit crisis taught many company-focused value investors. So-called margins of safety can evaporate pretty quickly, and credit markets can close. In this sense, I'd expect ongoing and robust dialogue regarding the economy, valuations in context, and the importance of cash-rich balance sheets.
With the "Great Moderation" -- a period characterized by benign economic cycles, relatively low unemployment, and high GDP growth -- past us, understanding and applying some macro context to our investments is critical. Expect that to be top of mind.
Joe and I are eagerly looking forward to these and other skillfully presented arguments from some of the world's best investors at this year's Value Investing Congress. We encourage you to follow along with us, and if the spirit moves you, join us. A few seats remain, and you can get $500 off if you sign up today (Oct. 5). Just enter discount code: N11FOOL1.