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What does my 2031 crystal ball predict?

Companies, Insightful Insights, Investing Education | Comments (202)

What does my 2031 crystal ball predict?

I’m going to kick off 2011 with two things that I will unlikely repeat. Rather than look at individual companies today – something I am hitherto always focused on (and always will be) – I would like to share my insights, ever so briefly, into what I think are the major and possibly predictable themes for the next twenty years. The second? A 1781 word blog post.

A word of warning… my track record at correctly predicting market direction is lousy. Thankfully this inability hasn’t hindered my returns thus far and probably won’t in the future.

Having provided that requisite warning, I invite you to consider the following thematic predictions (and yes, they are predictions).

1. Higher Oil Prices

The International Energy Agency (IEA), Energy Information Administration (EIA) and Platts Oilgram News have ‘confirmed’ that peak oil (maximum daily global oil production) was reached in 2005/06. With this backdrop, any hint of Chinese demand increasing and drawing down on spare capacity can cause significant price surges. It is interesting that prior to the last oil price spike, and when oil traded at $90/barrel, US unemployment was about 4%. If someone back then had asked you what the oil price should be in 2011 if US unemployment was more than double – you would not guess ‘still $90’.

It strikes me that there is a lot of demand for oil supporting the price that is not contingent on a strong US economy. China is the first that comes to mind. Other analysis reveals the Middle East, driven by the desire to be a global leader in the manufacture of plastic, is using much more oil than in the past.

And as Jim Rogers has regularly noted; if the US and global economies strengthen, demand for oil will increase. What if they don’t? Rogers anticipates the US Federal Reserve will print more money and the price of commodities will go up.

2. Higher Coal and Uranium Prices

Of the 6.8 billion people on Earth, over 3.5 billion have little or no access to electricity. Irrespective of greenhouse gas concerns, rising demand for energy will see coal’s current share increase. China and India will lead the demand. China’s demand shifted the country to net importer status in 2009 and by 2015 will more than triple consumption from 1990 levels. According to some reports, China is commissioning a coal-fired power plant every week.

In India coal generates three quarters of the country’s electricity, yet over 400 million people have no access to electricity. Demand for coal has risen every year for the past ten years. Some expect India will triple its coal imports in the next… wait for it… two or three years. Democracy hinders the ability of the government to install decent transport infrastructure (it can take six or seven hours to travel just 250 kilometers) and one would expect the same issues will prevent any substantial increase in the domestic mining of coal.

Don’t be surprised if there are more takeovers of Aussie coal companies.

Uranium has recently bounced 50 percent from the lows, but remains half the level of 2007 highs.

If the price of coal and oil rises, then the political opposition to uranium that has resulted in underutilisation of this resource (and of course constrained supply) will cause the price to rise materially.

According to the World Nuclear Association (WNA), global demand for uranium is about 68.5 thousand metric tons. Supply from mines is 51 thousand. The Russian and US megatons-to-megawatts program fills the shortfall, but clearly that provides only a short-term band-aid. So there is already a shortfall; currently, nearly 60 reactors globally are under construction and nearly another 150 are on order.

Late last year China increased its nuclear power target for the end of the new decade by 11 times its current capacity. And China plans to build more plants in the next ten years than the US has, ever.

On the supply side, new mines can take more than a decade to go from permit to production and while Australia has the largest reserve in the world, government debate has barely begun.

3. Higher Rubber Prices

Less than 50 people per 1000 own a car in China, and the country already consumes a third of the world’s rubber! The numbers elsewhere are three times that per thousand. It doesn’t matter whether those cars are electric, hybrid, diesel or petrol – the Chinese will need rubber for their car tyres.

On the supply side, rubber comes from trees predominantly grown in Asia.  They take many years to mature and recent catastrophic weather has dented supply.

4. Weather, Weather everywhere

Many years ago my wife gave me a copy of The Weather Makers. In it Tim Flannery predicted the south-east corner of Australia would dry up and the northern states would experience increased rainfall. Whilst it seemed farfetched at the time, it was sufficiently concerning for me to put the purchase of a rural property in the North East of Victoria on hold. The 2009 Black Saturday bushfires and now, the devastating floods being experienced by 75 per cent of Queensland, are enough to convince me that Flannery’s predictions were prescient. The rest of the world has not been spared – the closure of Heathrow and JFK airports are testament to the fact that, irrespective of whether humans are responsible, the climate is changing.

Expect the price of agricultural products and foods to strengthen. This never occurs in a straight line so there will be bumps along the way, but food prices are going to rise and 140 year highs in cotton, for example, may be just the beginning.

Jim Rogers reckons you will be rich if you buy rice, and I would have to agree. Global increases in demand, supply shortfalls and then disruptions due to more violent weather patterns (La Niña notwithstanding) should be expected to dramatically increases prices.

Floods in Thailand (the world’s rice bowl) will cut production, insufficient monsoonal floods will cut production in Vietnam (the world’s second most important rice bowl) and freak weather elsewhere has meant other producing countries now rely more on imports. Rice is the staple for half the world’s population. Riots in 2007, when the price of rice hit a long-term high, offers an insight into how important this food is.

And as Jeremy Grantham said on CNBC: “We’re running out of everything”.

5. Inflation and Interest Rates

With wheat, cotton, pork and oats rising more than 50% last year and copper, sugar, canola and coffee up more than 30%, the inflation train has left the station, so to speak. Then there is the US Federal Reserve’s perpetual printing press – driving yields down and causing a currency tidal wave to flow to emerging countries, like China. Once the funds get there, they seek assets to buy, pushing their prices higher and thus exporting inflation elsewhere.

Despite this, in the US at least, the trend has been to invest in bonds. After being beaten to within an inch of their lives in stocks and real estate, there has been a love affair with bonds. The ridiculously low yields in bonds and treasury notes does not reflect the US’ credit worthiness and has caused some observers -including US Congressman Ron Paul (overseer of the US Fed) in Fortune magazine – to describe US Bonds as being in a “bubble”.

The Fed’s policies are geared towards low interest rates. But artificially-set low rates don’t reflect genuine supply and demand of money – they perpetuate a recession or at best merely defer it. The low rates trigger long-term investment by businesses even though those low rates are not the result of an increase in the supply of savings. If savings are non-existent, then the long-term investment by businesses will produce low returns because customers don’t have the savings to purchase the products the businesses produce. But that is a side issue.

The US, for want of a better description, appears to be bankrupt. A country with the poorest of credit ratings and living off past victories will not forever be offered the ability to charge the lowest interest rates.  And China won’t continue to allow itself to be the sponge that absorbs US dollars either. Indeed at the start of this year, China allowed its exporters – for the first time – to invest their foreign currency directly in the countries they were earned.  No longer do they have to repatriate foreign funds and hand them to the Peoples Bank of China in return for Yuan. This is a solution that Nouriel Roubini didn’t consider in his article – how China may respond to inflows that inevitably drive up its exchange rate, published in the Financial Review late last year.

5a. Expect US interest rates to rise

Inflation in the US has been held down in the first instance, arguably, by some questionable number crunching, but also by the export of deflation by China to the US. Now the inflation train has left the station (coal, uranium, food, agriculture, rubber et. al., Chinese input costs will go up – because its currency hasn’t (to help its exporters remain competitive)) – and the ability of the US to continue to report benign inflation numbers becomes problematic.

If inflationary expectations rise, so will interest rates. Declining bond prices will again dent the investment performance of pension funds that have been pouring into treasury and municipal bonds (they’re another fascinating story – Subprime Mk II). In turn, the ageing US consumer will feel the double impact of poor present economic conditions and poor retirement prospects.

Over in China, even if the government tries and mitigate inflation by simply capping prices, suppliers won’t invest in additional capacity and the resultant restriction in supply will simply defer, but not prevent, even higher prices.

Tying it all together

It’s far easier to invest when the tide is rising and it is also easier to make profits in businesses when your pool of customers is expanding and becoming wealthier. Value.able investment opportunities (extraordinary businesses at big discounts to intrinsic value) will be found in companies that sell products and services to Asia and India (from financial to construction), as well as those that stand to benefit from the ongoing impact of rising demand for, and [climate] effects on, food and energy etc. These opportunities will dominate my thoughts this year and this decade and I believe they should guide yours too.

So now I ask you – the Value.able Graduate Class of 2010 and Undergraduate class of 2011. What are your views, predictions and suggestions? Which companies do you expect to benefit the most? Be sure to include your reasonings.

I will publish my Montgomery Quality Rating (MQRs) and Montgomery Value Estimate (MVE) for each business you nominate in my next post, later this month.

Posted by Roger Montgomery, 13 January 2011.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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202 Comments

  1. Stephen
    :

    Thank you for all your help.Can I ask how to invest in oil &rubber
    &when..Prices are high at present! Anybody have a IV fora stock called KAM?
    Stephen

  2. David
    :

    As this post includes some fairly wide ranging views on the future I wanted to put this out there to see what Roger and others thought. If the long-term average for the AUD against the greenback is around 70-75 cents, then as long as we are at parity doesn’t this represent a great opportunity to buy US stocks at big discounts (30-40%) to their IVs? If the stocks do nothing at all then there will still be big upside when the AUD eventually weakens against the USD. Maybe that’s overly simplistic and it’s more a currency play but I’m buying US blue chips and waiting for the inevitable US recovery.

  3. dc
    :

    Hi Roger

    Any suggestions about how one might invest directly in commodities?

    No advice but where to look if one was interested in investigating the options.

    Thanks

    DC

    • Roger Montgomery
      :

      Have a chat to Matt Andronicus from the futures division of at Macquarie Bank or the guys at Man Financial for CFD’s and Futures. These are highly leveraged products and in summary, very high risk.

  4. Roger Gibson
    :

    Roger

    Your post has made for good reading with some great insights from contributors. Being a more simple soul then I’ll accept that the future points to continuing strong demand for our resources but stick to the question of which of our companies will benefit from it. It might seem unimaginative but of course the answer is BHP and RIO.

    Companies in a monopoly position of owing the rights to resources in demand have a uniquely competitive advantage. That’s not to say that Rio or BHP are in a true monopoly supply position with respect to anything but if they control a sufficient proportion of world supplies in a mineral then the effect is the same. This must surely be the case with respect to iron ore, also with very strong positions in other minerals.

    I remember from reading Benjamin Grahams book years ago coming to the view to avoid the miners – finite resources, difficult to value etc., but Ben Graham was a strict buy and hold investor whereas, and correct me if I am wrong, I see Value-able as a trading strategy. And that makes all the difference.

    You have considered a twenty year period and the long term perspective forms a great background on where to focus investment attention, but as far as individual companies are concerned then doesn’t the focus have to be the Value-able cycle? You don’t specifically define a Value-able cycle in the book though it is probably the most important thing I brought away from my reading to form the basis of what and when to buy, and when to sell. It is not a time cycle; it is a buy/sell cycle in terms of the price – intrinsic value relationship. I suppose a reasonable strategy might be to buy exceptional companies that have a competitive advantage at a maximum price of 85% of their IV and sell them if they reach 115% of next years predicted IV. While ever ROE is maintained and predicted IV keeps increasing the cycle goes on forever. If the price doubles overnight but earnings predictions have remained the same then you may only hold the share for a day. (unlikely)

    With the latest results from Rio I have them trading at well below IV and expect the upcoming BHP announcement to put them in the same boat. They both have competitive advantage due to their dominant position within the market they supply, positive cash flow, long term demand for their minerals, and are fairly cheap. It’s not necessary to say what will happen to them in twenty years. Only will they out perform over a Value-able cycle within a reasonable time frame?

  5. Elise
    :

    Roger,

    Just a small comment, in case noone else has pointed it out, regarding: “the Chinese will need rubber for their car tyres. On the supply side, rubber comes from trees predominantly grown in Asia.”

    My understanding is that most of the rubber for car tyres is actually synthetic (SBR styrene butadiene rubber, if memory serves correctly), made from a couple of products from petrochemical plants.

    WW2 put paid to making tyres from natural rubber. The British boycott of Malaysian rubber forced the Germans to develop synthetic rubber tyres, and the world has never looked back…

  6. Johm
    :

    Hi Roger,

    Best you stick to the micro analysis.

    I think people in Victoria would agree its pretty wet there at the moment – not really drying up.

    • Roger Montgomery
      :

      Thanks for the tip! I hope its stays wet too, the last few days in Sydney have taught me that the weather can go from wet to agapanthus-killing-heat in just a few days.

  7. Mark
    :

    Steven,Kev and Roger

    Fund Managers make money from ICR’s Indirect Cost Ratio Fees which are including in the unit price of the fund therefore their profits are not influenced by the performance of the market. The competive advantages would be that simply people cannot withdrawal funds from superannuation account and as superannuation (SGC) contributions are expected to increase to 13% this will see more money invested in managed funds which would see sustained profits for KAM. also they do their own adminstration this allows for fees like the Admin fee, Member Fee, Withdrawal Fee, Expense Recoveries and all other hidden fees to be charged to the account. it gets better the fund also offers financial advice which allows for fees such as the adviser review fee and service fee to be charged on the account the fund also makes money from the cash portion of the fund by taking a portion of the interest obtained from the bank e.g the interest rate being 4% and the member’s account being crediting 3.8% to the member account just as an example, as you can see superannuation’s companys have alot of benefits i like to compare them with banks simply becuase member’s can only take funds out at retirement with superannuation but with banks any time. I would by happy to pay up to $1.50 for KAM and believe it is a potentional Wealth Winner.

    Thanks Mark

  8. Lloyd
    :

    Struggling for a sense of historical precedent to what the US Fed under bernanke is orchestrating I came across Keynes “The Economic Consequences of Peace” published in 1919. In it he says:

    “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    Is it just me, or do other people see the parallels of this assessment with and consequences that must come from Quantitative Easing?

    So is the US Federal Reserve under Bernanke Lenin’s best friend? And what does this mean for investors over the next decade or so?

    Regards
    Lloyd

    • Steve I
      :

      The US Federal Reserve has been debauching the currency since it’s very existince in 1913 and has already lost 95% of it’s purchasing power. I don’t think Bernanke and QE are the cause – he is just running the final legs of the US Dollar.

      • Lloyd
        :

        Steve I,

        And yes the problem is not Bernanke (which I did not assert was the case) but rather the whole US Government and Fed approach.

        The good old Bernank, is just the most recent of a series of brain dead, puppet leaders of the Fed, continuing on the same merry path, rather than the cause of the problem. The only exception to this generalization is former US Fed chief Paul Volcker, who for a period reversed the currency debasement and killed inflation. His good work was rapidly undone.

        Also are you aware that 50% of the 95% loss in purchasing power of the the US dollar since 1913 has occurred in the last fifteen years under two Fed leaders, Greenspan (of the famed Greenspan put so beloved by Wall Street) and the Bernank (otherwise known as Bail Out Bernanke now equally loved by Wall Street)?

        The problem has been evident for a long time but the debasement process is now on an exponential acceleration path. It will end in misery and tears for careless investors, without doubt.

        Regards
        Lloyd

  9. Lloyd
    :

    As a fitting end to this thread about the prognostication of future trends over the next twenty years I suggest we consider the words of Keynes:

    “The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    Yogi Berra put it a little more succinctly, if less academically. “Its tough to make predictions, especially about the future.”

    With this wisdom in mind I suggest we should invest in sound business run by ethical managers, with great integrity, purchased at a price well below intrinsic value.

    Regards
    Lloyd

  10. Rob M
    :

    Hi Roger and Value-able musketeers,
    I enjoyed Rob S’s comments above.
    I believe Quantitative Easing doesnt lead inexorably to inflation or higher bond yields in the present context of high US & developed world sovereign and private debt levels. This is because all those bank reserves created by QE are not lent out by banks given there are so few good borrowers around anymore. Individuals have too much debt and GDP growth is slow. Governments in Europe and soon the US are cutting spending. There is excess global manufacturing capacity. Excess supply and impaired demand is not the recipe for inflation. Anyway, I strongly recommend you read Gary Shilling’s latest book ‘The Age of Deleveraging’ which also has his investment recommendations.
    Also, we are at a worldwide peak in demographics in the developed world now. The inverse dependency ratio is the ratio of workers to dependants (of the sum of people aged 15 to 64/((0 to 15)+(65 to 100+)) has recently or is peaking in Europe and US and Australia and is closely correlated with house price peaks (and onset of recessions). See link below. Harry Dent’s Peak Spenders are the 46-50yrs population cohort and they have the biggest spending power by far & they are peaking similarly. This cohort population size graphed over time correlates to stock market indices!
    So we live in a time where we have historic high debt levels together with a historic peak in economically key demographic indicators. Anyone else see a long period ahead of both slow growth and price deflation?
    China is being inordinately boosted by a massive capital investment program (that will not provide adequate return on capital in a world of excess capacity and indebted consumers) and a real estate bubble. Its exports are down along with the decline in US and European consumer spending. The Shanghai index is perhaps speaking to these truths. They have done the reverse of what was needed structurally in their economy. Doubled down on creating manufacturing capacity after a historic blow out peak in US consumption instead of creating their own consumer driven economy. Of course I follow Hugh Hendry and Jim Chanos et al here. Jim Chanos particularly is the most famous short seller on Wall street and his words are very enlightening.
    I add that the dangers of deflation (not inflation) & slow growth were recognized by Bernanke last November also, hence QE2.
    Further reading: David Rosenberg (daily) and John Mauldin (weekly) and the Hoisington management quarterly newsletter. All free. Most important: Shillings book and chase up all demographic info you can – Dents latest book is a very good start. Check this great paper on the Bank for International Settlements site: http://www.bis.org/review/r110112a.pdf

    • Roger Montgomery
      :

      Hi Rob,

      Deflation versus inflation is indeed the debate of the beginning of this decade. The winner of the debate will be known at the decade’s end. I note your interest in Rosenberg and Dent – two perennial bears; something to be careful of.

  11. Pat Fitzgerald
    :

    Hi Roger

    Mastercard [MA]:

    From website: MasterCard Worldwide is a driving force at the heart of commerce, enabling global transactions and bringing insight into the payments process to make commerce faster, more secure, and more valuable to everyone involved. As a critical link among financial institutions and millions of businesses, cardholders and merchants worldwide, MasterCard provides services in more than 210 countries and territories. MasterCard advances commerce worldwide by developing more secure, convenient and rewarding payment solutions, processing billions of payments seamlessly across the globe, and building economic connections that accelerate business.

    At the core of the company’s business strategy is a unique and laser-sharp focus on its customers. The company’s customer teams provide a single point of contact for activities across the globe and a truly unified partnership for mutual success that sets MasterCard apart from the competition. MasterCard is an advocate for its customers’ businesses, committed to driving value for their enterprises.

    As it looks to the future, MasterCard is committed not only to continuing to deliver value to its customers and other stakeholders, but also to promoting the advantages of electronic payments, accelerating the displacement of cash and checks, and advancing commerce across the globe.

    Powered by the MasterCard Worldwide Network – the fastest payment processing network in the world – MasterCard processes over 22 billion transactions each year, has the capacity to handle 140 million transactions per hour, with an average network response time of 140 milliseconds and with 99.99% reliability.

    Other comments:

    Second largest electronic-payments network in the world behind Visa.

    One of the most recognised brands in the world.

    Visa and MasterCard, unlike lenders such as American Express, are insulated from rising charge-offs for uncollectible credit-card debt because they process transactions while avoiding the risk associated with making loans.

    Major competitors: Visa, American Express, Discover, PayPal.

    Future: electronic transactions are growing at a fast rate and are becoming a greater percentage of total transactions by replacing cash and cheques. New opportunities in electronic payments via mobile phones. Also possibly new competition from electronic payments via mobile phones (eg Apple may be adding near field communication (NFC) to the iPhone).

    Regulatory risk: merchants are putting pressure on politicians to reduce fees and charges on card transactions.

  12. Steve
    :

    Just looking into K2 a bit further and it looks as if they received a significant one-off tax benefit for the year which may have made their NPAT higher than normal. Also, I didn’t think the company had paid any dividends for the year (couldn’t see anything listed in the usual spots in the annual report) but upon further investigation (it’s tough to find this info sometimes!) it appears they did pay a dividend. Both of these facts might change my valuation. I also don’t know how comfortable I would be investing in a fund manager – it seems like you are at the mercy of the stock market even more than usual

  13. Steve
    :

    I get a valuation for K2 Asset Management significantly above the current price. However, I’m not sure if it’s correct as the business is the holding company for a super fund and I don’t know if this means we should be using a different valuation model? I’m also not sure how to look for competitive advantages for a company like this. Does anyone else have any more thoughts on the company? I do know that Roger listed it as an A1 stock in his post on 7th September

  14. Scott
    :

    My prediction for what its worth, and this is not advice, is that 2011 and 2012 will be good for global stock/markets with decent rises

    The crystal ball has spoken!

  15. Steve K
    :

    Roger,
    Thanks for the interesting post. Most certainly energy prices are on the rise, companies will look to reduce their exposure in this area and with a tax on carbon forthcoming you would have to think that “green” energy companies would prosper.

    One such company is Solco (SOO). There financial performance looks impressive since a company restructure some years back.
    As demand increases, the cost of the PV systems will decline making the investment in these systems more attractive. Yes it is a maturing market and competition will be fierce. Competitive advantage will be reputation, demonstrated performance, key supplier relationships and supply chain excellence. It is certainly an industry to watch.

  16. Kevin
    :

    Hello Roger,

    just wanting to know your view on k2 Asset Management (kam) its a superannuation and investment company with a ROE of about 102% little or no Debt and what i believe to be a comparative advantage over the banks as they charge ridiculas fees and people simple cant withdraw from super only rollover and SGC Govt Contributions are only going to be increased so its looks like a great business i have an IV of well over $1.00 and at around $.85 defiantly appears to me like its a good buy.

    CHeers Kev

  17. George Economou
    :

    Hello Roger and fellow contributors,

    The only thing I know for certain about tomorrow is that Internet use will continue to increase. Therefore I would be interested to hear your thoughts about a company called Vocus Communications (VOC). They are a wholesaler of network access which they then sell to retail internet service providers. By my reckoning they satisfy all of Roger’s criteria for an ‘A’ class business. Although they’ve only been around for a couple of years their last annual report and latest updates indicate solidly increasing revenues and increasing ROE (38% in FY 2010). The management and directors are competent and seem ethical. I’ve calculated an IV of about $2 (10% RoR) based on FY 2010 results (which they will easily surpass this year); they’re currently trading at about $1.45.
    I hope everyone had a good holiday and I’ve benefited immensely from all your thoughts and wisdom of which I am very greatful. Most of all, Roger I cannot thank you enough for the systematic framework that you have provided for investing. Thank you for not ‘hiding your light under a bushel’.

    George

  18. Matty
    :

    What an interesting way to start the year, when everything around us seems so uncertain: debt and currency wars, BRIC booms continuing for how long? Ageing Western democracies and straining natural ecosystems; it is almost like the year 2031 will at least have more certainties than 2011/12. (A thematic used in Asimov’s foundation series, but I digress).

    Someone has already mentioned BHP and CSL which I see as successful aussies on the global stage and bound to be playing a role in the big themes in the years to come. One other company I saw mentioned by another blogger is IPL. I know this is not highly rated as a value play and would also not be highly rated on the MQR, but it is at least a stock that has some exposure to soft commodities, which I would feel uncomfortable and incapable of doing as a pure single commodity trade. I don’t know if investing in a commodity index is a good idea? When the easy mineable fertilisers are depleted, the price of ammonium fertilisers will be directly driven by the price of energy as they are derived from gas. Potential: I see this as a play on developing nations increasing hunger for more protein and also energy prices in general (as well as the hard commodity mining volumes via explosives production). Threats: Lots of intangibles and debt on the balance sheet from Dynobel acquisition and at the mercy of commodity markets.

    In the spirit of squeezing out more Roger guru knowledge and giving him more work to do, I would like to nominate one more listed Australian company, ISS. If you want to target clients that are getting richer, then why not target commodity producers, so value.able disciples should seek out commodity servicing companies. ISS helps develop software that helps monitor and run industrial plants more efficiently. Potential: If energy is going to be more expensive and commodities dearer, then squeezing out an extra 1000 barrels from a well, saving 1% energy input on your LNG train or reducing plant downtime by 1% will equate to big $$$ gains. Another company in a similar space is Hansen Technologies which is closer to the utility side of things, with billing systems and helping adapt to changes in distributed energy production with smart metering. Threats: Lots of competition in this space (including big international players and the commodity producer engineering departments themselves) and the technology platforms are a rapidly moving one. Again vulnerable to commodities but what isn’t in this market? I would venture to say that even Aussie housing market is to some extent dependent on a commodity boom.

    On the international stage I see opportunities for companies like ABB who will help transform the way energy is delivered in the future. In particular I see a big future for solar energy (solar PV will not be the only winner), especially as conventional energy prices increase and the solar cell manufacturing plants get bigger, driving down PV costs, solar becomes more of an option. (I read an article recently that showed evidence of small solar systems being competitive with nuclear power in sunny regions of the world). With this in mind I like the look of SMA Solar Technology. Potential: Every solar installation needs inverters and SMA have the highest efficiency on the market and exposure to every class of inverter in the market, flexible production and support in Germany, USA and soon Canada and India. Threats: Reduction in government subsidies, margin squeeze from cheaper, larger competitors, only 25% float so at mercy of managing board, but they don’t seem to be the value destroying types. Exciting times ahead and to finish off with a legendary Ray Charles potential quote “2031, I’d like to see that!”

  19. Steve K
    :

    Roger,
    Thanks for the interesting post. Most certainly energy prices are on the rise, companies will look to reduce their exposure in this area and with a tax on carbon forthcoming you would have to think that “green” energy companies would prosper.
    One such company is Solco (SOO). There financial performance looks impressive since a company restructure some years back.
    As demand increases, the cost of the PV systems will decline making the investment in these systems more attractive. Yes it is a maturing market and competition will be fierce. Competitive advantage will be reputation, demonstrated performance, key supplier relationships and supply chain excellence. It is certainly an industry to watch.
    Steve

  20. John B
    :

    My suggestion of a stock worth keeping an eye on is Hansen Technologies (HSN) which is in billing software for telecommunications/utilities among other things. It has a respectable ROE of 23% and in my calculation an IV of somewhere between 77 and 83c. This is only a small premium on the current price of 73c but would be worth considering on any dip. No debt, equity has been fairly stable over 5 years and there is a depth of IT experience in management.

  21. Andrew
    :

    I am writing this here more for my benefit so I don’t forget it as I am currently in a shopping centre getting a hair cut but if anyone else finds this helpful than all the better. Just had a great example of something I am trying to incorporate into my investment strategy and criteria.

    I am in the process of using the lessons I have learnt in rogers and other books about business and investing to innovate and create a strategy around my beliefs and come up with what I think the best strategy for me. As mentioned here I skew my analysis to more so the competitive advantages of a company rather than simply the financials.

    In my opinion not all competitive advantages are not created equal and I want to invest in companies which I believe have the strongest and most sustainable competitive advantages.

    I will share my thoughts after a few replies. I don’t think simply able to raise prices and sustain profits without losing customers is enough but I am interested in what others think so I leave the below question to my fellow graduates.

    What does everyone think the best competitive advantage is for a business to have?

    • Andrew
      :

      As for a hint to my thoughts as well as the example I mentioned, please read below.

      In big w a child was looking to buy another copy of toy story 3 as the dvd they had was broken or worn out after the child watching it so much.

      Another example, a child stiting in the disney section in dymocks on george street sydney, sat on the floor and was completley focused on watching the cartoons running on the screen. These were not the newly created computer designed cartoons but the movies that were hand drawn back in the 1950’s and 60’s.

      And finally to put it all together, in disneyland both parents and children come together and both have a great time based on their mutual appreciation of disney. The parents were introduced to disney movies and then when they had kids shown them disney movies. What caused all the above? It is the single greatest sustainable competitive advantage to have.

    • Ashley Little
      :

      Hi Andrew,

      Competitive advantage comes in many form…….It is important that this is sustainable.

      If you can if you can sustainably rise prices and keep profits and customers you have a sustainable competitve advantage. Think sees candy and coke.

      If you are the lowest cost provider you have a sustainable competitive advantage. Think Walmart.

      If you live on an island and it is too far to swim to another bank then the 4 banks on that island have a competitive advantage. Think Australian banks.

      If your product is imbedded in the market proceess then you have a competitive advantage.Think IRE.

      Lots of competitive advantages around…….Roger wrote an entire chapter on it from memory (I still have’nt got my copy back) Competive advantages are not just limited to the sees candiy’s of the world.

      • Julian Hunter
        :

        The best competitive advantage is the ability for a comapny to reinvest incrimental capital at high rates of return. That’s hard to find by itself but the sustainability of the competitive advantage is what is even more difficult to find and correctly predict.

        The Buffett litmus test for a competitive advantage is “if you give me X amount of dollars, could I muscle in on this company?”. I think he once mentioned this using Coke as an example and said “If you gave me $100 billion dollars and told me to dethrone Coke and become the number one soft drink maker in the world I’d give you back the money and tell you it cant be done”.

        It is interesting to note that when Warren was asked what he would be doing if he was 20 something years old with less than 10 million dollars to invest he responded that he would be doing almost exactly the opposite of what he is doing now. Eg – he wouldn’t be investing in Coca Cola, Wal-Mart, Wells Fargo etc – he’d look for smaller opportunities. Coca Cola is a great company with probably the best competitive advantage on the planet but it might not be the best investment for a small investor.I believe Charlie Mungers’ quote on the subject was: “I think I’d be looking in the small-cap world…I wouldn’t try to figure out whether the drug pipeline at Merck was better or worse than the drug pipeline at Pfizer…I’d go where there were market inefficiencies”

      • Andrew
        :

        I know Ashley, i even have the book on competitive advantages written by Micheal Porter. I will leave up to Roger but i think a post solely about compeittive advantages would be a great discussion as sometimes i think people go searching for something that could be seen as a competitive advantage in order to justify buying a company that has a high ROE but might not be there.

        Sustainable Competitive Advantage is probably the biggest area which i base my investing choices on. If it ticks the other boxes but not the competitive advantage one i don’t want it.

        I said in my original one that “I don’t think simply able to raise prices and sustain profits without losing customers is enough”. I believe this as that in itself is not a competitive advantage in my opinion. The sustainable competitive advantage is the reason why you are able to raise prices and not lose customers or levels of profitability.

        This leads me to my next point which i hinted at in a post which didn’t make it on here.

        My opinion which i have formed after just observing things and people and something that is hard to measure and not really covered in many books although roger hinted at it with the Pandora example, it is also probably the hardest one to get and the easiet one to break, the single biggest sustainable competitive advantage is “a continuous emotional attachment to the brand/product or service”.

        We, as humans, are an emotional species and that emotion governs what we like, don’t like. Some people don’t even relise this. However, we like to keep pictures as reminders of happier times, prefer certain songs as they ellicit some type of response in us whether it is jumping up and down having a good time or cry as you remember a time since past. These are just a coupleof examples. The same thing can happen with products that we use or consume every day.

        Why is Snow White and the Seven Dwarfs movie which was originally released around 1937 still a classic and staple of childrens entertainment today. I think if you really dug deep is to find that the parents who bought the movie for their child were given that movie when they were a kid by their parents and it touched them when they watched it and probably seeing how it is so old this process goes back a few times.

        This is a reason that i have really become interested in the Disney business (not its stock but its actual business, their processes and how they do things).

        Disney will always have a fan base as they create emotional attachments and have been making emotional attachments for over 50 years now with its consumers. They even have customer service processes in its parks which are to help “guests” have this attachment and is something i think all service based companies should read about. These are called “Take 5’s and Magic moments”.

        Coke is another example of this, only need to ask an avid coke drinker if he would like a Pepsi.

        it’s also what makes sport such a well supported industry and something which Football Federation Australia is struggling to grasp and why the crowds have fluctuated so much and having a downward trend.

        If i can find a business that has good economics to it but can also create a long lasting emotional attachment to its brand by the customers than i will gladly buy a whole lot of that when the price is right.

        However these companies still need to have good economics.

      • Andrew
        :

        And may i also add to my post, that emotional attachment to the brand when created is something that can’t be copied to a competitor.

        Strategies to and supply chain processes to be the cost leader, certain products and product quality as well as certain expertise are things that can be copied.

        I think competitive advantage is probably one of the most powerful but misunderstood elements that Roger covers in his book and its something i am extremley interested in and can talk about for ages as might be evidenced by the length of the above post.

      • Ashley Little
        :

        Hey Andrew can you give me the name of that competitive advantage book.

        I love reading this stuff

        Yes Yes I know………….I am a total nerd.

      • Ashley Little
        :

        Thanks Andrew,

        Have not got the book yet but I googles this guy and I got some good stuff on SWOT.

        Thanks for that,

      • David V
        :

        Hi Ashley,

        Porter’s theories are excellent and still used as an ideaology on the theory of Competitive advantage. I’d apply caution in the blanket use of Porter’s concepts in this application. In theory sustainable competitive advantage cannot be eroded over time. A look at the ASX index 20 years ago indicates that very few Australian companies have this ‘pure’ form of advantage. This is a concept (Competitive Advnatage) that always gets my interest (due to the subjective nature of it) and something that I asked Roger about in one of his ASX seminars in Adelaide.
        I can also suggest ‘Strategic Management’ by Hubbard as a good resource to utilise. It is fairly dry as it is a text book, but it covers Porter’s and other’s ideas in this arena.

      • Roger Montgomery
        :

        You are right Andrew when you say: “I don’t think simply able to raise prices and sustain profits without losing customers is enough”. The indication that something of value exists in terms of competitive advantage is not that profits are sustained but are increased! The most valuable competitive advantages are those that allow a company to raise prices each year. And, as you say; “a continuous emotional attachment to the brand/product or service” provides that ability. There’s little value in having something with “a continuous emotional attachment to the brand/product or service” if inflation causes you to incur higher expenses in providing that product or service but you cannot raises the price.

      • Rex
        :

        Great thread

        One stock I was once looking at was Ansell before I started reading Roger’s blog and book. I noticed a buy recommendation on some other publication I will be discontinuing with. Something that struck me was was that in the same publication, in another article, it spoke of the effect on the rising price of rubber. Ansell is a big consumer of rubber as a capital good in their production of their consumables.

        The article endorsing Ansell spoke of competitive advantage in their products however, with the rising input costs they would have raise prices if they need to maintain profits and thus not have an adverse impact on the IV

        They could still raise prices given demand for their products however, what point does it get to before competitive advantage via market monopoly and brand is diminished by rising input costs?

        By the way Roger where does this rate on your MQR?

        Interested for you comments. Over to you guys

      • Andrew
        :

        I am not sure if in my view Ansell has a competitive advantage. I have always viewed them as a bit of a commodity product company.

        I am not sure how many people have a preference for ansell made rubber glove or condom and that any product that can offer a similar quality can take market share off them if they can do it cheaper.

        I am also not sure if Ansell raised their prices for rubber gloves for example to combat inflation whether people would buy them at the inflated price or just get the home brand ones.

        It would be interesting to hear if you can remember what the report said about their competitive advantage as i think the term does get thrown around a bit too loosley.

      • Andrew
        :

        Exactly, it does depend on the product or industry as some make it impossible for you to raise price. But also, it is not possible to really create the same type of attachment i talk about in certain industries as well. Me example is mainly around consumer discretionary businesses.

        Normal everyday people consumers are the people who make this a great competitive advantage to have, they are less rational and more emotionally driven and they will pay a higher price for a product that they have an emotional attachment to.

        Coke can continue to raise prices every year with inflation and people will pay it, and that is because people who drink coke tend to be attached to coke on a more emotional element in my opinion. Fashion is another area, entertainment and sport live off it.

  22. Ian
    :

    “The more you think, the more there is no real answer” Winnie the Pooh.

    Which companies will I own in 20 yrs? Hopefully,ones that I have purchased at a discount to estimated value, that have a sensible management doing sensible things and sticking to what they know, and generating good ROE. How many of those available now will still be around in 30 yrs without failing or succumbing to “Growth ambitions” or without being privatised? I don’t know. What would I buy now if offered at discount? REH, CSL ( I own neither currently).

  23. Andrew
    :

    All this crystal ball gazing has made me think of something. We often hear Warren buffet quotes here and we have used them to guide us in our investing life, no doubt he has with everyone had a big impact on how we approach investing. Another business man who has had a huge impact on my thoughts towards business and a bigger impact on me in regards to life life is Walt Disney and i think a quote of his is relevant to this conversation. Although his attitude towards borrowing money is pretty different to us Value.Able fans.

    “”Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world.”

    I think this is also true when we look forward towards the future or Rogers 2031.

    We will never be able to accuratley predict the future as along with the general unknowns, there will always be someone sitting in a room who has imagined and working on the next big thing. It could be something that we cannot even fathom today. The world and its people will forever evolve and change.

    • Andrew
      :

      And a quote from Walt that i think describes Value.Able

      “There is more treasure in books than in all the pirate’s loot on Treasure Island. “

      • Ashley Little
        :

        Hi Andrew,

        Great post,

        My only prediction for the future that I know with certainty will come true.

        “Great businesses purchased a big discounts to IV will outperform everything else.”

        It has in the past and will continue to do so.

        I loved Lloyd’s post about Yogi Berra :Its tough to make predictions, especially about the future

        My two favorite yogisms are

        You can observe a lot by just watching.

        The future ain’t what it used to be.

  24. Lloyd
    :

    Roger,

    Aside from equity investment in listed companies, what are the other means and instruments available to “retail” investors to play these trends should they choose to do so?

    As always your thoughts on the alternatives would be greatly appreciated.

    Regards
    Lloyd

  25. Rod
    :

    I’m definitely not the person to ask about trends, but I’d like to put in a little plug for IDL (which I own – pre Value.able). Good exposure to Chinese coal and plenty of experience in China, niche products, which mesh well with the current drive in China to boost safety in their thousands of mines. Survived the GFC with only one minor blip, since recovered. Their gas extraction technology de-gasses coal and provides fuel for local energy needs; again a positive since China is clearly taking greening energy much more seriously than some. Not the top of the MQR tree by any means, but not bad either and could be rising. I believe the MOS is slightly negative just now.

  26. Lloyd
    :

    Roger,

    You ask “Which companies do you expect to benefit the most?” if the five trends you identify prove to be correct (a big assumption, but lets work on that basis). So within as far as possible the limitations of the Australian equity market, and without saying anything of share price versus value, my selection of companies follows:

    1. The Best play on Higher Oil Prices
    Australian Exploration and Production sector companies are largely gas rather than oil producers. None have material long term oil reserves with the exception of BHP Petroleum, but then this is not a pure Exploration and Production sector play with the Petroleum division accounting for roughly 25% of the total business. So the search must be based on the producer with the largest, low cost, long life gas reserves, directly linked to oil price via LNG pricing. This brings us to Woodside Petroleum (WPL) with Oil Search (OSH) a distant second. The coal seam gas CSG producers are ruled out by virtue of high cost production and the completely dry (no petroleum liquids in CSG which is why it is more accurately called coal seam methane CSM) nature of coal seam gas.

    That said BHP Petroleum would be my choice if it were a pure play rather than embedded in a resource conglomerate. Of course if you believe the total commodity long term price story then this is inconsequential and BHP gives you both petroleum and pretty much everything else in one business. The alternative is to play the oil price story via the contractor base to the petroleum industry and Matrix Composites and Engineering (MCE) is standout on the Australian listed business front in this respect with Worley Parsons (WOR) a distant second.

    For the short sellers under this scenario the transport sector is the obvious place to take short positions at select times in the likes of QAN, VBA, TOL etc. Conversely you never want to be long these stocks under the long term rising energy price scenario.

    2. Higher Coal and Uranium Prices
    Most of the quality pure play coal producers have been acquired by international interests. Those remaining are second tier asset plays. Similarly in the uranium space Energy Resources of Australia Limited (ERA) has limited reserve life and an unfortunate accident prone management, which leaves the second tier emerging players (with all the inherent associated risk and uncertainty) such as Paladin Energy (PDN). If I believed the uranium story I might have a go at the latter. But then again why not just go with the coal and uranium exposure of BHP and RIO?

    3. Higher rubber prices
    I cannot think of a listed Australian company with direct exposure to rubber. That said I am not sure of your reasoning given that “rubber” in car tyres is largely synthetic rubber a product of the petrochemical industry. So if your into the China vehicle growth story as a driver then better to buy into the petrochemical industry. Again no major Australian players are involved so to play by the equity market investment mechanism you need to go abroad and my backing would be Exxon Mobil (XOM) which is a great way to play the petroleum price play, possibly Royal Dutch Shell (RDSA) and DuPont (DD) for its rubber chemicals. Then again, why not buy into a Chinese tyre manufacture on the Shanghai market (I am sure there must be some listed here)?

    4. Weather, Weather Everywhere
    Short the insurance sector (SUN, IGA, QBE) at least until premiums are adjusted to match the increased risk under this scenario. That said QBE is the saviest assessor and pricer of risk around so I would be prepared to go long it immediately. Under the extreme weather scenario go long the engineering firms such as Leighton Holding (LEI) and Seymour Whyte Limited (SWL) that will be continually rebuilding infrastructure if you believe this scenario. Building suppliers such as plumbing suppliers Reece (REH) will be assured of steady and growing business. Agricultural supply providers and fertiliser companies would be also on the front of the agenda, but the best are to be found listed only on international stock exchanges. Extreme weather leads to growing health problems and concerns – go long CSL, Sirtex (SRC) and Blackmores (BKL) which together with Cochlear (COH) also play to the unmentioned by Roger demographic trend of aging high maintenance populations in the west and emergent young populations demanding better health care elsewhere.

    By the way you’ll want a tough fully kitted 4 wheel drive to handle the inclement weather – think ARB Corporation (ARP) and Governments everywhere will be clamouring for consultancy services on everything from IT to emergency service infrastructure – thing CSV and DWS. And to turn off from the misery I’ll be buying lots of home entertainment at the best place around – JBH while looking for real estate on high well protected ground on RealEstate.com (REA)

    5. Inflation and Interest Rates
    Everything gets hammered. The reality is that just about every growth story of the last fifteen years has been underpinned by easy credit and cheap debt. Reverse this in the next decade and its a secular bear market for equities. The equity investment game truly becomes one of picking quality business with highly competent and ethical management of great integrity and consistency. The banking sector in Australia goes ex-growth under this scenario and life becomes problematic for the millionaires factories of the last decade ( a small positive in my view that arises under this outlook!). Properly run alternative financiers such as Think Smart (TSM) potentially become attractive through increased demand for finance in a time of tight credit.

    So my future proof Australian portfolio looks something like this ( which is pretty close to the current reality of my SMSF): ARP, BHP, BKL, COH, CSL, CSV, DWS, FGE, JBH, MCE, REA, REH, RIO, SRX, SWL, TSM, WPL.

    That is not to say I believe in any or all of the scenarios that Roger outlines, but I look forward very much to the promised MQR’s and IV’s on the noted and nominated companies (including the few international mentions if possible).

    Regards
    Lloyd

    • Liz
      :

      LLoyd, thankyou, nice list!

      I’ve already contributed to this thread re ideas about possilbe trends.
      I have a response ,with respect, even though it doesn’t fit the thread. SMSF needs to provide both growth and stable income (for most people). If one primarily relies on their SMSF for income then, in your opinion, do the stock you nominate, taken as a whole/average return, offer that? My point really is that I might find a share that fits the valuable criteria but I will also need to consider income required. For example, I might have APA in my portfolio because I want FF divvies or DRP for current tax considerations. So, even though I adhere to the valuable philosophy, and want to purchase a stock that fits the criteria, it might be that I reject a stock based on above rather than forward value. Historically, ARG is a classic example of what I’m referring to.
      I’m happy to be enlightened…by you or anyone who cares to rspond. Thank you.

      • Lloyd
        :

        Liz,

        I think it comes down to how you your priority, value growth versus income. It is a trade off and the greater the payout ratio the lower the potential growth in value of the business. That said, all but one of the stocks noted pay dividends with yields from around 0.6% (MCE) to 7% (QBE) calculated pre-franking credits. QBE should have been in my list (I own it and the yield and growth potential make it worthwhile in my view).

        Also many of the financial sector businesses like PTM and IRE which I intended to mention (an oversight on my part) have handsome dividend yields and reasonable growth prospects in my view under the 2031 crystal ball scenarios.

        Remember dividend yield is a function of share price. Buy any of these business at a low enough price and you will get a good yield – patience as much as anything is a driver of effective dividend yield, by which I mean the dividend yield on your invested share price, rather than the current share price. If you bought MCE six months back your effective dividend yield would be twice that calculated on today’s price. Conversely buy any of these quality businesses, than as the business value grows over the long term your effective yield (calculated on your invested share price) can be expected to grow even with a constant payout ratio.

        Disclaimer: none of this is advice. Rather it is my perspective on the inherent trade off between dividend income and value growth potential. You cannot really have your cake and eat it too! So take professional advice on the subject.

        Regards
        Lloyd

      • Liz
        :

        Lloyd, Thanks for your response. I also like PTM over the longer term, and, IRE. It occurs to me that another aspect that is becoming more prevalent as companies globalise, is the issue of currency fluctuations on profit and how well the companies are able to manage their hedging/FEC strategies.

        (We have these issue in our business so where you have international contracts over long time frames where delivery timeframes and hence payment times may change it is something worth bearing in mind particularly as most contracts are written in USD).
        Regards, Liz

      • Greg Mc
        :

        Hi Liz,
        I hear what you’re saying, for sure. There’s a bit of a ‘bird in the hand vs two in the bush’ argument here I think. Perhaps it depends to some extent on whether your SMSF is in the pension phase or whether you’re just short of it, or for that matter whether you’re recently retired or in your 80s (ie. do you need your higher FF divs now or would it be ok if you had to wait a few years for a higher FF div).

        JBH for example has rapidly rising profits and thus have been able to increase their dividend…..and have also started to increase their payout ratio as well. Presumably, as the company matures, the payout ratio will increase further as they run out of organic growth options to spend that cashflow on (and we all hope they don’t do anything stupid). Broker forecasts (for what they are worth) predict that the dividend will more than double to 2013, which would give a yield of over 7% based on the current share price, and that ignores the potential for capital appreciation as well. Will APA give you that, or for that matter the old SMSF favourites the banks?

        And we shouldn’t ignore that potential for capital appreciation in a super fund either. I think sometimes that people base too many of their SMSF investment considerations on the tax circumstances surrounding the dividends – ie. companies that have high current FF dividend yields almost to the exclusion of all else (TLS springs to mind). In his Valueline articles and in other articles before that Roger has commented that even in a SMSF, you’re normally better off owning high quality businesses purchased at prices below IV, with that IV rising at a good clip, and then selling a few of them for income rather than a poor quality company paying a high FF dividend. For example, would you rather have purchased FGE 12 months ago at $2.05 and have to sell a few at $5.40 and pocket the meagre FF dividend, or would you prefer TLS which has paid a handsome FF dividend and seen the share price tumble down the stairs by a greater amount. In this hypothetical example (admittedly full of the wisdom of hindsight) a $10000 investment in FGE would now be worth $26341 plus a $371 FF dividend while the same investment in TLS is now worth $8338 plus your princely FF dividend of $831. GIven that choice, I’m sure you’d say ‘Bugger the FF dividend, irrespective of the tax considerations’. You’d only need to sell less than 100 FGE shares to make up the difference in the dividend and you’d still be well over $15000 better off in capital value.

        So, my view (and take it for what it is worth, which is not much) is that a good SMSF in most circumstances is going to look very similar to share holdings in one’s own name. Our job is to identify those quality companies with bright prospects and little or no debt, bought at a discount to intrinsic value. Now where have we all heard that before?

        And Lloyd, great post as usual.

        All the best,
        Greg

      • Greg Mc
        :

        Actually Lloyd,
        Imagine if QBE employed one RJ Montgomery to invest their float rather than having the bulk of it it lounging around in interest bearing deposits and such, and the rest in duds like Elders. That would be one wagon worth hitching yours to!

      • Matthew R
        :

        create the Berkshire of Australia!

        Challenging task investing such a huge amount of money though – hats off to Buffett and Munger, it is an awe inspiring achievement to be still getting the results they do

      • Ashley Little
        :

        Hi Liz/Lloyd & Greg M

        No one here can give you personal advice on this blog Liz as we just don’t know your personal circumstances.

        That said you mention the nice dividend you get from APA. I would just like to point out that in my view it is not all dividend as they are paying out substainially more than they are earning……So at least some of this money must be referred to as a return of capital.

        Investing purely on the basis of dividend yield will end in the toilet in my opinion…. Just at a guess and I don’t have any figures to back this up but my gut feel is that if you invest solely for yield then term deposits would have outperformed over the last 5 years with much less risk.

        One of my favourite Montgomery quotes is that he likes businesses at big discounts to IV and the IV rising at a good clip. Unless it is an absolutely outstanding business (Think Sees Candy) Then the higher the dividend the less likely the businesses IV will rise at a good clip.

        With that said there are some outstanding businesses (MQR rating of A1) with high dividend yields……Just don’t expect the IV to rise at a good clip.

        Hope this helps Liz and I know APA is very popular atm but from a value.able point of view it does not tick too many boxes

      • Liz
        :

        My thanks to all for their responses.

        Back on topic of big picture trends…Very briefly, I would add fresh water scarcity as a growing trend.

        Veolia? An index fund?

        More research for me!

      • Matthew R
        :

        I agree Greg

        And imagine if you were a berkshire shareholder…. no dividends for over 40years. As a result, if today’s shareholders want to cover a year’s expenses, they sell a share, and if they want to have a great year, they sell two.

        If you have done your research and are happy with the quality of management, then that passive reinvestment of dividends is a great wealth creation strategy and very tax effective….

    • Lloyd
      :

      My brain and fingers hurt by the time I reached Trend 5 – Rising interest rates to the extent that I did not do this topic justice.

      Let me say this is the one long term trend that I have faith in and take to account in investment strategy. It also correlates also to higher inflation and a likely weaker AUD.

      Well run businesses with strong pricing power are the preferred order of the day. Higher rates in the US also means lower AUD – another long term trend? Profits on currency translation of businesses with strong offshore earnings streams (e.g. COH, CSL and SRX) will strengthen. Then look at the dramatic positive impact on the return on the QBE float! So plan your investments to 2031 with a view to hedging rising interest rates and a degree of weakening of the AU dollar. Of these aspects I am pretty confident as a long term trend.

      Regards
      Lloyd

    • Steve I
      :

      Lloyd,

      Very well reasoned and comprehensive.
      Two points: firstly, although WPL should be well placed, it doesn’t seem to stack up on the valuation metrics for me. Secondly, if we have sustained high oil prices – wouldn’t there be less demand for 4x4s?

      • Lloyd
        :

        Steve,

        As I said at the outset “…and without saying anything of share price versus value, my selection of companies follows”. Hence WPL is placed in the list without regard for price vs value.

        Yes large capacity 4 wheel drive demand would be hit by higher oil prices, but 4 wheel drive vehicles comes in all sizes and efficiencies and owners like to option them up to the hilt. When oil went to $150/bbl a couple of years back ARB’s earnings grew! Remember ARB is as much about 4 wheel drive fashion as it is practicality and everyone loves fashionable bling on their SUV, no matter what the engine capacity!

        Regards
        Lloyd

      • Steve I
        :

        It would be funny to see a change in trend to cars with <2 litre capacity (or even hybrid/electric) completely kitted out. Would be a definate change of scenery.

  27. Alan Bildos
    :

    Very interesting to see the companies presented. For me I think Cochlear will continue to grow as the baby boomers continue to age. Great work everyone.

  28. costas
    :

    Hi all.I would like a copy of the paper mentioned above!!!
    Roger any good books u would recommend to read (i have read yours).

      • Lloyd
        :

        Worth repeating here because it sets the historical context for the secular credit contraction, inflation and rising interest rate environment that will hammer asset value growth for decades to come …

        QUOTE

        The policy of artificial credit expansion central banks have permitted and orchestrated over the last fifteen years could not have ended in any other way. The expansionary cycle which has now come to a close began gathering momentum when the American economy emerged from its last recession (fleeting and repressed though it was) in 2001 and the Federal Reserve reembarked on the major artificial expansion of credit and investment initiated in 1992. This credit expansion was not backed by a parallel increase in voluntary household saving. For many years, the money supply in the form of bank notes and deposits has grown at an average rate of over 10 percent per year (which means that every seven years the total volume of money circulating in the world has doubled). The media of exchange originating from this severe fiduciary inflation have been placed on the market by the banking system as newly- created loans granted at very low (and even negative in real terms) interest rates. The above fueled a speculative bubble in the shape of a substantial rise in the prices of capital goods, real-estate assets and the securities which represent them, and are exchanged on the stock market, where indexes soared.

        UNQUOTE

      • Ashley Little
        :

        Yep Lloyd,

        That’s why you shoulkd be very very careful in selecting RR of 10% no matter what the asset class.

  29. Lloyd
    :

    Roger,

    It find it a little strange that everyone is confident of rising commodity, energy and food prices, while predicting this will be accompanied by economic abundance and world economic growth approaching nirvana through to 2030.

    Spot the flaw in the reasoning!

    And then no one mentions the social and political upheaval and even war, which are the time immemorial outcomes of the very features our prognosticators are happy to predict! If I take the prognostications of the price bulls at face value, then it is more likely that we should be contemplating the riders of the economic apocalypse bearing down upon us.

    There appears to be a flaw in the logic of thought, if not a complete disconnect in the reasoning underpinning the conclusions we seem to be drawing from the 2030 crystal ball gazing.

    Thinking caps on please ladies and gentlemen!

    Regards
    Lloyd

    • Ash Little
      :

      Hi Room,

      Lloyd as usual has made lots of great comments on this blog topic..

      Always remember despite which way the current is flowing for the industry you still need to be in the best boat.

      Thanks for you thoughts Lloyd.

      Great Companies and big discounts……………..Been working a treat for decades……It will continue to do so

      • Peter Kruckow
        :

        Hi to everyone from the land of the ‘Tambo Teddies’

        I’m with Lloyd and Ashley on this one . I’m only new to this, but the way I see it for the next 20 years we’ll be looking for businesses with Strong competetive advantage, good cashflow,little or no debt, rising ROE and IV rising at a good clip, plus all other requirements to slot into the value investing scheme of things.

        Cheers
        Pete

    • Steve I
      :

      Commodity, energy and food prices are an issue for this decade. To be honest, I don’t know if it’s possible to say what the issues are in 2030 as it depends on the solutions and outcomes to the current problems.

      If these issues are not resolved adequately then there can be no nirvana and instead considerable social unrest throughout the world.

      We are certainly living through interesting times at the moment. I think that higher prices should lead to solutions which previously would either have been uneconomic or previously unthought of.

      I don’t think these issues are predictions, it is my view that they are a current reality and that food and primary commodity supply issues inevitably lead to tension and war.

      However I have no idea what we face in 2030.

  30. Allan C
    :

    Hi Roger and fellow bloggers,

    In my lifetime in horticulture I have experienced the results of climate change over the last 25 years. What % is natural and what is man induced is the question.In the 1890’s the “Tim Flannery’s” in England had the data to prove that London streets would be under 3 metres of horse manure within 2 decades. Richard Branson has a $25 million prize for the individual or group that
    demonstrates the ability to the net removal of greenhouse gasses.
    60 years ago the famous long range weather forecaster, Indigo Jones, predicted the great end of the century, 10 year drought in Eastern Australia followed by massive flood rains –without any reference to global warming.
    So Roger, I suggest you heed Buffett’s creed to be greedy when others are fearful and reconsider that block of land in n/e Victoria.
    I think the great task to tackle for mankind is overpopulation.
    I believe education is the answer.

    What shares for the future? Banks, resources, aged care, health care, all types of service industries. New technologies we can’t yet imagine will emerge.I am not prepared to nominate which equities will be in my portfolio in 20 years.

  31. Ash Little
    :

    Hi Guys,

    This is a great blog…..Where will we be in 20 Years.

    I know that the ASX 200 will be a vastly different place than it is now……Businesses, Industries and Words that where never heard of in 2011 will be in vogue in 2031.

    If you don’t believe be then just think……was bloging around in 1991 and the verb google or google it did not exsist.

    20 Years ago i was i wide eyed very young man who thought he knew everything……….Weatpac was nearly bankrupt and the best bank by a country mile was NAB……..Bond corp and Quintix were still a major part of out index …….. BHP was totally out of favour because commodity prices were at lows and about to get lower. The word Rio tinto was thought to be a latin dance…… Telstra or should I say telcom austrlia was still owned by the government…………at the time i was working for Price Waterhouse in Brisbane and we had loads of typewriters and from memory 1 computer…………Mobile phones had hand carries because they were the size of two footballs and weighed heaps………..The word internet was not heard of and microsoft windows was only a very young product…….The major spreadsheting package(thinks excel) was lotus and the major document product(think word) was word perfect…………Excel and Word were not widely used if in use at at all(actuallt they probably did not exsist at all)…………the vast majority of our states has Investment banks which would all go bust in future years…………The brokers hardly ever recommended a mining compnay because their was just zero money in commodities……….The australian econony was the laughing stock of the world……..Don’t know if this is an exact quote but we were called white asian trash by some thailand prime minister…………………

    emails were non exisistant…….It would be more than 10 years before they become popular. Not not mention facebook or twitter

    Oh how things have changed and the rate of change for the next 20 years will be ever greater.

    The more things change the more they stay the same…Rogers investment principal go back longer than 20 years……..Great businesses at big discounts……………Nothing changes

    • Andrew
      :

      I agree Ashley,

      There is a lot of uncertainty about predicting the future although one thing we can be sure of is that it will more than likely look very different to how it does now.

      Continuing innovation of technology along with further R and D in all areas will see that industries pop up that we did not even think would exist. There could be people making millions of dollars trading air and water for starters.

    • John M
      :

      Memories … what a most excellent summary of the past. You should write for the Hitch-hiker’s guide to the financial galaxy.

      We are very lucky that Roger has most graciously provided a T.A.R.D.I.S for us in this blog. It can magically accomodate every person that arrives here, and can send us to and fro through time and space with no real effort at all.

      Ash, you are a most accomplished pilot of Roger’s T.A.R.D.I.S . Thankyou for steering us in the right direction during Rogers holiday break.

      Keep on reminding us to keep sight of the core principles of value investing. I have started making up various poster’s that I display at prominent positions at home to remind me not to lose sight of the big picture and to keep focus on my personal goals.

      • Ash Little
        :

        Hi John,

        You mention making posters

        I would like to share with you and fellow bloggers my list of Buffet quotes. I have a process when I invest and the last process is to read these quotes and if I am still happy with my investment I will go ahead.This has been compiled over a number of years based on mistakes that I have made or have seen other make.

        • A public-opinion poll is no substitute for thought.

        • I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

        • If a business does well, the stock eventually follows.

        • If past history was all there was to the game, the richest people would be librarians.

        • Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

        • Price is what you pay. Value is what you get.

        • Rule No.1: Never lose money. Rule No.2: Never forget rule No.1

        • Time is the friend of the wonderful company, the enemy of the mediocre.

        • We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

        • When you combine ignorance and leverage, you get some pretty interesting results.

        • You only have to do a very few things right in your life so long as you don’t do too many things wrong.

        • In the business world, the rearview mirror is always clearer than the windshield

        • There seems to be some perverse human characteristic that likes to make easy things difficult

        • It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price

        • Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it

        • You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing

        • It’s better to hang out with people better than you, … Pick out associates whose behavior is better than yours and you’ll drift in that direction

        • Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results

        • We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.

        • The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

        • I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.

        The second last quote reminds be reminds me of what is happening in our mid cap miners at the moment………It is one hell of a party and you don’t what to leave it. I am embarrassed to admit that I took my first step away from value investing in several years last week and purchased in this sector.

        Just by pure luck the company is now in a trading halt and there is likely to be a takeover. I will of course take the profits but they are just windfall gains and I could have done this at the race track (Unfortunately the tax commissioner will not agree with my agreements though…lol)

        I strayed from my investment process and I know that next time I do this I won’t be so lucky.

        But thats what punch at a party will do to you.

      • Peter M
        :

        Hi Ash,

        A terrific summation of Buffet quotes. Whilst I’d come across most if not all in my travels, it makes interesting reading when presented on one page. Thanks for sharing and your many other outstanding contributions to the blog.

        Peter

      • John M
        :

        Any chance of sharing some of your process that you follow when purchasing shares Ash. I think everyone would benefit from your experience.
        I have the Buffett quote poster up on the wall in the office above computer so I see it every day.

        Thanks again.

      • Ashley Little
        :

        Hi John,

        The Investment process is a very personal thing and you don’t really need mine. My circumstances are way different to someone else so it really can’t be shared.

        In fact I would be embarrassed to share some of these.

        But saying that, there is nothing new under the sun and Value.able has all the info you need to set up your own.

        I hope this helps

      • John M
        :

        Now you have me intrigued. Everybody will want to know now what parts of your process that you find embarrassing. :)

      • John M
        :

        My equities plan is relatively simple. Long only and no gearing (pretty much as you said – mostly using Rogers principles.

        Shorting scares me, but only because I haven’t done enough studies into it. With my limited shorting knowledge, I see the possibility of infinite losses if I take the wrong side of the deal; whereas going long the possible losses are finite ie. going to zero (protected by employing Value.able’s technique’s.

        Saying that, if shorting is done correctly I imagine it could be wonderfully profitable and a handy form of insurance. Jim Chanos uses shorting for a living, looking for bubbles and overvalued assets and then profits from these, Enron is one of his famous shorts that comes to mind.

      • Ashley Little
        :

        Hi John,

        I really don’t want to take the focus off the long only value investing that Roger has given us.

        Stick to the valu.anble principals and as Roger says if you are not in too much of a hurry then you will do very well

        That said for me I find that just like when real value slaps you in the face. extreme over valuation slaps you in the face as well.

        I have already commented on the blog about US 30 year T Bills.

        Would you loan money to the US government for 30 years at a little over 4%?

        Will US 30 Year T Bills rates rise over times.?

        100% certain fact…….

        Will the rates halve from here………

        A possibility because the market is just totally irrational in the short term.

        I do this myself but I could not possibly recommned it to others.

        That is why you can’t have my investment process.

        You may laugh but I still consider this value investing…….Looking for mispriced assets.

        Hope not too many bloggers read this cos I am really blushing now

  32. Duncan
    :

    Hi folks

    Does anyone know of a Jim Rogers of the property markets? i’ve read a bit of Steven Keen. He paints a gloomy picture but more people are starting to say similar thinks now. I Rent and am looking to buy but i’m very nervous of doing so at the moment!!!! i piece in the Courier mail state the international monetary fund say australian houses are 10% over priced. if keen is right it could be 40%.

    thanks for your time
    Dunc

    • John M
      :

      My favourite Aussie property guru is Margaret Lomas. She is a regular speaker on Channel 602 as well as doing seminars. She also has authored many books, has her own property business franchise (I won’t name it to keep things independant) as well as having her own personal investment property portfolio of over 30 properties.

      After that intro I thought I should disclose that I have no interests in anything related to Margaret Lomas, only that I have a keen interest in learning about all forms of investment.

      I personally don’t use dollars when deciding whether property is expensive or cheap. I like to use another asset to compare property to, eg. Gold vs Property. Gold tends to keep its value relative to inflation so it can be a good gauge to use. For this example, if you look at the long term cycle, at the moment, (and history is no guarentee of future performance) property could have more downside (see link below) in an inflation adjusted sense (not necessarily in dollars) – but you must form your own conclusions as no advice is possible or allowed on this blog. Always remember to get personal professional advice.

    • Ashley Little
      :

      Hi Dunc,

      This is in no way advice so reach your own conclusions.

      Despite what people tell you in the absence of leverage, propery prices over time just can’t grow faster than the average weekly wage. They just can’t it is just totally impossible.

      Since the Mid 1990’s propery prices have increased at a rate much higher than this. The main reason is that pre this period Banks required 20% down before they would even look at you.

      A few years ago leverage was like 95% or in some cases 110%.

      The lessons from the USA has put a stop to this silly lending but leverage still remains at 90% to 95%.

      In the past property markets in Australia have had very extended periods where they, in real terms have done absolutely zero. You can probably google this so if you can go have a look at Sydney realestate prices in the 1970’s.

      My View is that we are in for one of those extended periods where Property prices do nothing in real terms…….and if the banks decide to reduce thier leverage ratios back to 80% then Steve Keen will be right…………I consider this unlikely as the Banks are very much aware of the consequences of doing so.

      Hope this helps and it is just one persons view

      • Steve I
        :

        But debt levels can increase perpetually can’t they?

        On a serious note, wait till we get high interest rates and see how it all washes out.

      • Ashley Little
        :

        LOL Steve very funny,

        I would love to rock up to the bank and buy a $300,000 property and get a $600,000 loan.

        That would be fun.

        Just my view and these floods could change this but the next move in interest rates could be downwards.

        Actually it should be downwards………..People speak of the rebuild as adding to GDP…….Staistically this is correct but that is like telling a person who has had his house torn about and then rebuilt that he is better off ……Just garbage someone had to pay for it and we are merely replacing what has been lost.

        ATM everyone is betting on higher interest rates but as buffet says

        A public-opinion poll is no substitute for thought.

        Invert always invert

      • Steve I
        :

        Whilst there is a common view that interest rates will rise, I don’t think the markets reflect it. With global inflation from money printing and debased currencies the price of input items should continue to skyrocket. With international bonds at historically low yields and with bankrupt or almost insolvent governments, yields will eventually have to rise. Also, the international reserve banks will accept higher CPI numbers for now but will eventually have to get interest rates up over and above the rate of inflation. I see a 1970s type scenario evolving except this time it’s global and will play out differently.

        I don’t think that Australia will be different from the rest of the world.

        Ashley, I think the rebuild process will be good for some and devastating for others. It is also a fairly low % of the total population. I guess it also depends on how much is paid out by the insurers.

      • Ashley Little
        :

        Hi Steve,

        I agree entirely with your long term view on interest rates. They must rise. The main reason that we saw very low inflation over the last 20 years is china was exporting deflation. This is no longer happening.

        I remember paying 19% on my home loan in the late 1980’s and it was not a pretty site.

        I am speaking from flood torn Qld so this may be blurring my view but I think it is not a zero % chance that Australia is in a recession right now. I think the consumer sector is doing very poorly and now our exports will be damaged by the inability to get products to the ports. Thence my view that short term rates may ease.

        You are very correct though, long term rates must rise.

      • Steve I
        :

        Hi Ashley,

        Agreed that consumer sector is doing poorly, however living in Brisbane it is my view that this was already the case. Many retail businesses that are geared or indirectly geared to the tourism sector have being doing it tough for a while now.

        From what I have seen so far, many are back to business as usual. Exports should get back into gear and will benefit from higher prices to make up from the stoppage. Food prices were already heading upwards. Perhaps there will be a bumper crop next year.

        Was already a two-speed economy. Don’t think the floods will change that. Some areas of the economy are/will be suffering either way.

      • Ashley Little
        :

        Yeppers Agreed,

        Only thing I will say is that absolutely no coal or grain will leave our area (Darling Downs) anytime soon via rail……It will be the same in many other Qld centres.

        Exports from QLD will be down heaps……That said given MLD annoucement today they are kicking some big goals in WA.

    • Matt
      :

      The IMF and others have been warning of bubbles dramatically popping since at least 2003 in Australia. The IMF’s 10% over-priced (in their opinion) is a reduction on previous figures. There’s lots of debate on measuring house prices, dwelling prices (i.e. including the 25% of people living in flats instead of houses) vs income, wage, house-hold disposable income etc etc. The internet can be your friend here to sort out some of the views.

      One thing to watch is the actual mortgage default rate, which in Australia is currently very low due to a number of factors. The RBA publishes a twice-yearly Financial Stability Review which I find is actually a relatively easy read and discusses this issues plus household debt, interest rates, housing and other related issues.

  33. fred
    :

    Regarding the great U.S.A, don’t they have to sell bond’s to print more money and not just print money from thin air as John M would put it? America is in a time of change and is putting it self in a position to start fighting back. A long the way there will be problem’s but they are a strong hard working and smart race of people that when they put there mind to something, they do it!

    America have a lot of problem’s but they still help everybody and alway’s try to make a better world.

    • Steve I
      :

      They are currently printing money and buying the bond’s with printed money to fund their dangerously large annual decifits. They are in fact printing money from thin air. They are not yet fighting back as their federal and state governments have been unwilling to reduce spending.

      • Ash Little
        :

        Agreed Steve,

        If anyone thinks the USA is in a good state go to this website

        http://www.usdebtclock.org/

        National Debt per Taxpayer is $127K.

        By comparision our debt per taxpayer is about $6K.

        It is much easier to extract $6k per taxpayer over say a five year period than it is to extraxt $127K

        If you think about it the only solution for the USA is to inflate their way out of this big hole. They are doing it now but like a magicians trick they are directing you eyes elsewhere telling us all they beleive in a strong US dollar…..etc blah blah……Their actions are at total olds with their words

        This will have far reaching consequences for the entire world even those asian tigers that hold significant positions in US Tbills that will be worth much much less in future years.

        I must either be the biggest fool in the world or something is seriously amiss because their is absolutely no way I would loan money to the US government for 30Years at a bit over 4% but that is the current 30 Year TBill rate.

        Mispriced assets exsist everywhere but this would be my Number one in the world at the moment.

      • Steve I
        :

        They can print or default. Printing is the easy option politically with the duel benefit of assisting with the big banks capitalisation. Bernanke says that they are aiming for a ‘wealth effect’ but the truth is clear.

        China has ceased purchasing US TBills and the Fed has made up for the difference. I personally think that it would be worse if the world’s attention wasn’t currently focused on the European sovereign debt crisis. It seems to be one problem at a time.

        In the 1970’s US government bonds crashed and the longer dated bonds around 45% of their nominal value. I don’t see how it could be a better scenario this time.

      • Steve I
        :

        They are both forms of default however I’d argue that printing is inflationary and default is deflationary. Both destroy capital but printing is more dangerous.

      • Ashley Little
        :

        Agree Steve

        If you really like this topic there is a book called “This time is different…….Eight centuries of financial folly”

        The Book was published in 2009 and predicted these government debt problems because it is never different this time.

        The authors argue that there is fairly high corelation between external debt defaults and high inflations.

        The main reason why countries that default have high inflation is that they try to get their currency very low so that the country can be competitive again forcing up the price of imported goods.

        The problem with doing this is that if everyone else in the world is trying to get their currency lower then it is all a nil some gain. The Japanesse would like a lower yen, the US want a lower dollar and the EU want a lower Euro. They all can’t have what they want.

        The world has not to seen vast number of countries with major debt probelms for a long time and it did not end well last time.

        The authors are no Matthew Reilly so the book is hard work but well worth the effort.

        All that said no matter what happens to the world great companies ant big discounts will see you through

  34. Simon
    :

    I nominate WOR as they will continue to gain contracts in all forms of mining – land and sea.
    As for food and the prodUCtion and distribution there of, the large retailers are always best placed to mange and profit and therfore WOW benefit.

  35. Adam
    :

    Although there will no-doubt be ups and downs, our ever increasing population over the next 2 decades will increase demand for home goods, both essential and discretionary. I think Nick Scali Furniture (NCK) is in a good space to take advantage of this, particularly given it’s higher ROE compared to any direct competetor I can think of. I believe The same could be said of JBH.

  36. Tony
    :

    Magellan Flagship Fund: MFF is a good way to invest in great global companies that already have a strong position in China and India and are exposed to significant long term growth in these markets.

  37. Dave v
    :

    Exposure to gold as an inflation hedge can be obtained through Medusa Mining (MML)

    Situated in the Philippines, Medusa is a low cost (approx US$200 an ounce) producer currently producing approx 100K oz a year with plans to produce 300K – 400K oz a year.

    Company has been growing rapidly over recent years with ROE around 40%

  38. MarkH
    :

    Hi Everyone, Happy NY!

    Predictions for next 20 years? Nothing like a topic to get you focused in the new year :-)

    I’ll be brief and concise and quote Buffet:

    “I have seen no trend toward value investing in the 35 years I have practised it. There seems to be some perverse human characteristic that likes to make easy things difficult.”

    My prediction is for this trend to continue for the next 20-30 years!

    Ash – Read your points up there in QLD. Very touching. Next week at work I know we have morning teas, bake-offs and gold coin challenges to raise funds every day. I’m sure other companies are organising similar activities.

    Regards,
    MarkH

    • John M
      :

      I totally agree with the Buffett quote.

      As has been mentioned here before, the problem in a relatively small market such as ours is that too many fund managers are chasing only a small portion of the market (those companies making profits). While ever fund managers have their hands tied behind their backs by the allocation rules they have to abide by (trying to match the All Ords for example), they will always have to include stocks that don’t make the investment grade.

  39. Rob
    :

    Wow, Roger what a can of worms. There are certainly some very informative posts in this thread.
    I always worry about doomsday sayers. I often wonder at commentators such as Peter Schiff and Marc Faber as to how self serving their prophecies really are. A stopped watch is right twice a day.
    There is no doubt the US is in deep doo-doo and how they recover I’m non too sure.
    This link is great article about US bubbles and financial manipulation. It’s by Matt Taibbi of Rolling Stone magazine.
    http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
    We are coming through the Information Revolution and weaving our through its various arms, globalisation and social media.
    Still to come will be the Environmental Revolution, this will see bubbles in Renewable resources and (God forbid if the financial sector manages it) carbon trading.
    The irony is that, in my opinion, the Environmental Revolution will not begin until the greenies and the environment lobbies give up on the global warming debate. This futile debate is the worst thing that could have happened to the health of our planet. As long as they are bogged down arguing as to 1) if there is global warming and 2) whose fault it is nothing will get done.
    The fact is we are a small planet with 6.5Bn people and a growth rate of about 1.14%. If that meagre rate continues, our population will double in less than 62 years. Global warming or not, we will have an impact on our planet and we should not need an excuse to look after it.
    If you want to scared out of your wits there are plenty of doomsday sites to help you along. You could start with Chris Martenson to see how some people are preparing.
    I can recommend videos by Prof Al Bartlett called “Arithmetic, Population and Energy” In them Prof Bartlett explains man’s greatest threat is our inability to understand the exponential function. It’s good, simple eye opening maths and can be viewed through his website or on youtube.
    In the meantime the world moves on and each day billions of $ changes hands. There will always be value investors and fortunately for them there will be many more punters using TA or black or grey box systems in the hope that price action will make them a fortune.
    Cheers and a happy 30 years
    Rob

  40. Edward Vesely
    :

    My current thoughts are to do with the insurance industry. I don’t have any particular expert knowledge on this industry (and I don’t work in the industry) but I do wonder if the correct action to take will be to have little or no exposure to insurance companies. I think a continuing exposure (to some degree) in a diversified portfolio is warranted for a couple of reasons:

    1) Because of (not despite) natural disasters, there may be increased demand for insurance. I’d like to emphasise the word “may” here but, for some people and businesses, there may be no option other than to be insured for earthquakes, floods and the like where they were under-insured previously,

    2) The higher risk presented by weather-driven events such as cyclones, drought and of course flood may mean an increase in premiums to cover the increased risk taken on by insurance companies. This may also increase margins.

    So yes, on one hand, having investments in insurance companies may mean the big hit will happen from time to time (such as in Queensland and northern NSW currently), but the actuaries at these companies will be pricing and re-pricing this risk appropriately for the future. Every risk will have a price and I feel the best investments in insurance will be those companies that:
    a) get this pricing right AND
    b) have operations that are diversified by product line, industry, and geography to minimise the affect of any one disaster on the financial well-being of the whole company.

    Again, these are just opinions but I do wonder if anyone agrees with my line of reasoning here.

    With Australian insurance companies specifically, I feel QBE is better placed than IAG or Suncorp (for example) because of its greater operational diversification and history of an excellent underwriting discipline.

  41. ron shamgar
    :

    Hi Roger and Everyone,

    These are my predictions for the next few years. but to make it more fun and interesting i will write them as newspaper headlines as they will appear in the future. enjoy:

    “Private equity calls their bid final for Matrix composites. the Beggley family finally accepts $19 a share offer”

    “George Soros claims oil is ‘the mother of all bubbles’ at $300 a barrel”

    “Jim Rogers calls the end of the commodity bull run as commodities are no longer priced in US dollars”

    “JB Hifi directors recommend shareholders accept Woolworths’ $30 a share offer”

    “Forge group rejects private equity’s $15 bid, board recommends placement to Clough at $7.50. shareholders outraged.”

    “BHP says integration and synergies from the acquisition of Rio tinto and Fortescue are well on track”

    “Roger Montgomery’s blog hits 200,000 users. His third book sells out in 4 days”

    Good luck in the new year!

      • ron shamgar
        :

        Due to popular demand, here are some more future headlines:

        “Gold rallies to $9,000 an ounce as Ben Bernanke declares QE 8”

        “Westpac announces ‘St George bank demerger’ to enhance shareholder value”

        “Westfield Holdings to merge with Westfield Retail Trust. Announces $4 billion capital raising. Lowy family will not participate”

        “Fairfax declares ‘Historic day’ as last ever newspaper rolls off the printing press. Announces $2 billion goodwill impairment.”

        “Jim Chanos releases his long awaited book: ‘The big short – How i successfully predicted the biggest property bubble in history’ “

    • Andrew
      :

      “Transurban announce capital raising”

      “Transurban shareholders wonder where it all went wrong”

      “Kerry Stokes takes over full control of seven after refusing to sell into share buy back leaves him as the only remaining shareholder”

      “Ten shareholders realise you only get one James Packer in your life as Kerry’s son pays obscene amount to purchase 100% of Channel Ten”

      “JB Hi-Fi goes head to head with Apple in Australia in online Entertainment retail space”

      And in an extremely small blurb as it is no big news item and was absolutley expected:
      “Woolworths announce forecast net profit to grow by around 5-10%”

      And seeing how we are talking about long into the future there will be a sad headline:
      “Worlds Richest man Warren Buffet passes away, Berkshire shares plummet, followed by intense buying as value investors see a bargain”

  42. Will
    :

    Hi All,

    I just thought I would post a company that hasn’t been mentioned yet, Boart Longyear Limited (BLY). Its a company that supplies mining equipment/services.

    2009 was a flat year for the company but in the previous years they had a ROE of 60%+. I work for an automation company that supplies BLY with all of their electrical equipment and I know for a fact that our orders have increased 10 fold during 2010.

    I’m having difficulty calculating its IV so if Roger or anyone could help that would be great.

    • Ash Little
      :

      Hi Will,

      I have IV raising to a bit over $2 in 12 months time.

      Go have a bit a of a look at what management have done to shareholders wealth over the last few years………………not pretty.

      Don’t just look at the story from the broker et.al

      Look at the business as well. Plus the risks…….

      Hope this helps

  43. Rainsford
    :

    Hi Roger. Thanks for your insights which I pretty much agree with. Like another blogger I think Healthcare is probably another major theme.
    Anyway, onto my holiday research. I have been looking at gold miners and in particular Kingsgate (KCN) and Dominion (DOM). The latter has been mentioned by you in the past as losing it’s A1 status. KCN is about to absorb (take over) DOM.
    My IV for KCN is around $11 which is close to it’s current price. DOM on the other hand had a very bad year and it appears its IV has crashed from around $6.50 to $1 verus recent price of $3.18.
    however it did take an extra $26 million hit on depreciation and amortisation during the last reporting period and I would be interested in your comments on how you would treat this in your valuation process.
    I then studied your book again on the issue of goodwill. It appears KCN will pay $376mill for DOM to acquire net tangible assets of around $122 mill. So does the balance, about $254mill, become goodwill and if so,what does that do to KCN IV? And why would KCN want to pay 3x Equity or 7x Gross Profit or 11 x NPAT for this company. By my calculation the EQPS post merger will increase slightly from $3.16 to $3.29 which confuses me even more!.
    i thought this example might be a good one to discuss on the blog seeing as DOM was a MQR A1 company and you have some strong views on Goodwill. Would appreciate yours and others insights.

    Keith

    • Steve I
      :

      Medusa Mining (MML) is my pick – still trading at a reasonable discount to my IV. Seems to have a world class management team that respects their shareholders. Growing production and one of the lowest cost producers in the world. I have a large weighting to this company.

      I also have a smaller holding in Ramelious Resources (RMS) and even smaller again in Focus Minerals (FML) – both trading at a discount to my IV.

      Had a look at Kinsgate a while back and the numbers didn’t stack up for me.

  44. David H
    :

    Hi All,

    I’m a little lost here.

    I have been very happy with my recent investment in the 2nd Edition of Value.Able but I must admit I was expecting to see a section on the Montgomery Quality Rating (MQRs), yet there was none.

    It is regularly mentioned on this blog. Has it been published somewhere? If so can someone please point me in the right direction. Thanks in advance.

    • Nic Arena
      :

      Hi David,

      The book doesn’t contain exactly how Roger comes to each MQR. But I believe he has shared an incrediable amount of information anyway (especially for $50). In any case in the book still gives how to find outstanding companies while avoiding bad companies. I personally hope Roger never gives away his “durable competitive advantage”. In the book he tells us how to find great companies and how to value them. I believe it is important that we actually do some work towards our own style and not just copying someone else’s style!

      • Sean Saul
        :

        Hi all,

        Please also don’t forget Roger has made no secret of the fact that he’s offering us all a leg up and not a hand out! I think he’s been more than generous with his offerings in 2010 (I for one may not have come across MCE, FGE, MACA if not for following this blog) and has forever changed the way many of us view investing in shares. Nothing in life that is worhtwhile comes too easily. There’s plenty of other muppets in all forms of the media offering advice on dog shares that you’re more than welcome to follow if all you’re after is stock tips. Which leads me to another bugbear of mine. Don’t take shortcuts; IMO; always take information required for IV calcs from the actual financial statements; Lloyd I think it was kindly provided a great guide. I’ve found that all finance sites (while very good for other things) and broker produced figures can be wildly inaccurate. It’s pretty easy to float downstream with the other lemmings but takes a bit of guts & grunt to swim against the tide. Happy hunting!!

    • Ash Little
      :

      Hi David,

      I am fairly sure The MQR rating system will remain a secret,

      Still loads of go info in the book and you can start doing your own rating system like many of us on the blog do.

      I like Andrews best so far……….Platinum………….Gold………….Silver……………..Trash.

      I think their is loads of businesses in andrews last category

      • Andrew
        :

        You forgot Diamond which is the top but this itself is only a stop gap measure for me at the moment and is extremley simplistic at the moment so i wouldn’t want people to pay to much attention to my quality rankings. Even i am beginning to re-think it and not use it. But yeah your right, there are a lot that fit into trash, its extremley easy to fit into that column. I will probably completley overhaul this as i get more and more companies into my database but i might keep the classifications in some form or another.

        Also as per the MQR, i think it will remain a secret but also believe it should be, as a believer of protecting competitive advantages i think Roger should keep it a secret as it is part of his competitive advantage and something that is extremeley valueable to him and could lead him to making a lot of money.

        David, the exact way Roger comes up with the MQR has not and i don’t think will be ever put in public but he has talked about what he is measuring which is the chance of a “liquidity event”. You can find various comments and posts about it by Roger on some blogs, he has also talked about it on Sky News and there should be a video of it on youtube.

      • Ash Little
        :

        Hey Lloyd,

        No i am fairly sure that this will never be published.

        This is their competitive advantage………They are not going to publish it……..ever

        Just my view

      • Lloyd
        :

        Ash,

        My comment was very much tongue in cheek.

        Anyone with any investment smarts can establish their own quality ranking based on well known balance sheet and financial performance metrics. I have mine based on a few key financial ratios, plus an overlay of leadership competency and integrity and I can say it pretty much mirrors the MQR as far as it is disclosed by Roger. However, mine is a much simpler with only three categories: Investment Grade, Garbage and Absolute Crap.

        My quality ranking is the first step in my investment process. It takes no more than one hour, usually a lot less less than 5 minutes to establish the quality grade of a company based on public domain data, primarily business regulatory disclosures.

        I have only around thirty listed companies in the first category (Investment Grade). If a company does not make it into my investment Grade category then I don’t waste any further effort on it, although at times I do have a very small percentage of “punting funds” allocated to one or two Garbage category new starts, where I believe the business plan/story has potential to realistically be delivered on and in do so making for a potential “ten bagger” within a five year time frame.

        By the way the vast majority of the 2,300 or so stocks listed on the ASX fall into my Absolute Crap category, so be warned and do your own quality ranking of any business that catches your eye before you do anything else. Sure your can make money in the market speculating and day trading the Absolute Crap, which is what most people attempt to do. However, that is is not my style and the risks outweigh the reward in my opinion, unless of course you’re Gordon Gekko with strong inside connections and are prepared to cross the legal line, which of course takes the risk/reward equation quite a few notches higher!

        I sincerely believe that if a person cannot form an an opinion of the quality of a company and its leadership based on the quarterly and annual public disclosures, then that person should not be pursuing direct equity investment. To do otherwise is blind speculation.

        Regards
        Lloyd

      • Ashley Little
        :

        LOL

        Great Stuff Lloyd,

        3 Categories ….I love it.

        I have about 50 on my watch list.

        I must have some garbage in there.

        I will go have a look.

        I use 19 scoring metrics in my rating system and it actually takes my about an hour to come up with my results.

        But that said I am an accountant and love this stuff. Comparing these to Industry KPI’s isd what takes the most time……….I am think about getting a Gen Y in and automating the process.

        I still have not come up with a decent rating system for Banks yet…..But not too worried about that………..When they get cheap value will just slap you in the face………You wont need to waste the time doing the Maths.

        Thanks again Lloyd…….I love keeping it simple 3 metrics is all you need in my view

  45. Joab Soh
    :

    Interesting way to start the year. Coincidentally I got my hand of a research report on this topic.

    Nothing too far from what we know. There will be significant growth in China, India and other emerging countries. Urbanisation and growth of Asian middle classes. Our family went to Shanghai for holiday over Christmas period, and it is an eye opener.

    What I do find interesting is the report says the urbanisation is a very commodity-intensive process and middles class has significant commodities consumption. Middle class has a typical profile that I believe is the same all over the world. We strive to fulfill a lifestyle which has a long list of items to tick, and accordingly, we are significantly leveraged. From that perspective, I agree that commodities such as oil, coal, rubber, food will continue to increase as a result of high demand, and financial services is these country will prosper from the increasing demand for credit.

    Another interesting point is that this recession caused companies to pullback their capex spend. This implies at some point, the lack of infrastructure may limit the supply of commodities when demand continues to risk quickly, causing prices to rise.

    So what does this means to us? I have been thinking of the past few days and honestly, I do not have an answer.

    What I do know is that our strategy to buy extraordinary business at a discount to its intrinsic value is still the same. So I will neither be looking at commodities producers who are bad businesses with significant debt, nor speculating on companies who claim to have latest alternative energy source but has yet to produce any operating cash flow.

    Perhaps what I will start to do this year is to look for companies who are thinking as far ahead as we are. With that, BHP came to my mind, in view of their recent failed acquisition on soft commodities.

    What really begins to bother me is that I think many Australian companies will not be positioned to take advantage of this boom.

  46. richie
    :

    I nominate lieghton holdings LEI.

    On a sidenote. I find it odd that the last time “peak oil” was mentioned oil went from $150 a barrel to around $30. No one was talking about peak oil when it was trading so low. Now the price is high again “hey peak oil is here”. I think you should replace the word “demand” with “speculation” when it comes to pricing these commodities. I think your right “long term”, but ill give it another 20 or 30 years. I wouldn’t be the least bit suprised to see oil and other commodity prices back in the graveyard sometime soon, and people changing their stories on the “fundamentals” of what is supporting or not supporting the price. “peak” anything is just another way to scare the last mice into the trap before the whole thing blows up and starts all over again, and you can feel it when it’s starting to happen. Rice riots 2007? As soon as people were rioting on the streets about food inflation the prices collapsed. A few months ago everyone was scared the US dollar was going to collapse, and fundamentally rightly so. No it didn’t happen. It rallied! As soon as that happened, Oh look what we have over here, a collapsing EURO…no didn’t happen, It rallied to! Even closer to home, when the government were doubling “first home buyers grants” I thought to myself “peak”. Get the youngest, dumbest people into debt at the highest possible prices by scaring them with “your gonna miss the boat” rhetoric. Just like the stock market a great time to sell (way beyond its I/V!). Anyway its all yet to be seen I suppose.

  47. Ian Bowditch
    :

    Hi Roger and all,
    For longer than I can remember the accecpted wisdom has been that all droughts end in a flood, and the bigger the drought, the bigger the flood. Its happened again so my first prediction is that the old wisdom is best and that man made climate change will be consignedc to the waste paper basket.
    (2) Chinas growth will slow, because of the one child policy that cant be turned around as quickly as will be needed. Millions will be needed in the health care and and food producing industries. More again to produce the goods needed for their own growth.
    (3) China will need Uranium as it cant rely on coal because of the limitation put on it by smog affecting its own people.Also the engineering know how and inovations required for the hydro electricity plants.
    (4) Plant breeders will be assured of a job to develop plants for food and fuel that can be grown with less water and space. Similarly biological answers will be sought for the same reasons.
    (5) BHP would be the most likely company with the reserves to be still around in 2031. Other companies like LEI and MCE are possibles. QBE has the size and breadth to also last. Coca Cola is likely to continue conquering the world. CBA will still be here (if it doesnt get taken over or Australia is invaded and beaten).
    Regards Ian Bowditch

  48. John A
    :

    Hi Roger and All,

    After reading your comments (and thinking about how electricity prices are constantly on the rise) one company that springs to mind is ERM Power (EPW). EPW develops, owns and operates gas-fired power stations, selling electricity to various businesses including QR National and Myer to name a few. It also has a gas exploration business. Using prospectus figures I have a 2012 valuation of $2.60 using the following inputs –
    EQPS – $1.04
    NPAT – $39m
    Payout Ratio – 32c or 7.7c per share
    ROE – 25.6% (to be conservative I rounded down to 25%)
    RR – 14%
    2012 IV $2.60.

    There is little doubt that demand for electricity will continue to grow in the future. The company specialises in gas powered stations which I believe has a lower carbon impact than coal fired power stations. A ‘price on carbon’ would benefit the company making it more competitive against the more ‘dirty’ coal fired powered stations.

    The company is also looking to be ‘vertically integrated’ with some gas exploration sites to boot. Unfortunately barriers to entry seem low, limited to the large capital cost required to construct future power stations.

    I would be interested in everyone’s thoughts on the company. I can declare that I don’t own shares but it is on my watch list. I’m still shaky on calculating IV’s please excuse any mistakes.

    Thanks

    John A.

    • Ash Little
      :

      Hi John,

      If this is the business I am thinking of (Newly listed) then it raised an eyebrow with me as well.

      Not the greatest of balance sheets though ATM

  49. Michael A
    :

    I’m a little disappointed with this blog Roger. There is speculation all over the place. Although its fun to predict I won’t invest any of these companies until their numbers are terrific. Hopefully we can return soon to looking at current events and excellent companies right now .. not ones in 20 years time. Just my opinion.

    • MattB
      :

      From the opening paragraph:

      “I’m going to kick off 2011 with two things that I will unlikely repeat. Rather than look at individual companies today – something I am hitherto always focused on (and always will be) – I would like to share my insights, ever so briefly, into what I think are the major and possibly predictable themes for the next twenty years”.

      I think the blog will soon be back to the way you like it Michael.

    • Roger Montgomery
      :

      Hi Michael, Just managed to find a spot with mobile servicing while I am travelling. One of my criteria is companies with bright prospects. For me that means competitive advantages that are sustainable, rising intrinsic values and, ideally growing markets (if not also market share). Thinking about what will transpire over the next decade or two (higher oil, stronger economy) led to Buffett’s purchase of Burlington Northern. Chat again at the end of the month.

  50. MattB
    :

    My tip is Cochlear. I think Cochlear stands out in many areas. I have picked a couple of them only as this is a stock Roger has spoken of many times.

    1. Competitive advantage. Patents.
    2. I also think the current population is addicted to noise. Everyone has headphones in and some people can’t help having it full blast. Now while this may be very loose reasoning, it makes sense to me that these same people will have hearing problems later in life (20-30 years).

    You only have to look at Cochlear’s website for tips of protecting your hearing:

    – “Never deliberately expose yourself to loud noise”
    – “If you can’t hear people speaking at normal volume while listening to your ipod/mp3, turn down the volume”

    3. The increasing wealth of Asia will result in more people affording decent medical care and this should extend to hearing aids.

    *I don’t own Cochlear shares. I wish I had bought them at a discount!

    • Kim Jordan
      :

      Cochlear is a terrific company, and I’ve been holding off purchase only because it is a bit expensive.
      One fairly recent additional reason that they are attractive is that their biggest competitor recently had a recall!!! Now if you were a hearing medical consultant about to recommend a child have a hearing implant embedded in their skull, would you be inclined to go for Cochlear – or the competitor that had to rip them out of skulls???

  51. Rob S
    :

    A large can of worms you have opened Roger, and a brave move in posting your views for the future to judge.

    I think this issue touches on a central paradox in the practice of valuation. We are attempting to determine the intrinsic value of a company – the word intrinsic suggests there is some objective, absolute truth – but in reality no such number exists. There may be some fuzzy range of values, but the number we come up with is influenced by our views of the future.

    Every time one sits down and thinks about the value of, say MCE, you have to think about the future price of oil. Or for ORL, consumer discretionary spending. All valuations are therefore biased by ones view of the future. Having an informed view of the world, the dynamic forces operating on markets and an idea of possible future trends are essential in investing.

    In my view, the three biggest driving forces for the future are debt, demographics and the environment.

    Debt can help explain the dynamics of financial markets and why we have booms and bust cycles, demographics can help predict spending patterns and suggest when and where boom and busts are likely to occur, and the environment sets a limit to what is possible.

    On the debt side, I am influenced by Steve Keen’s brilliant work modelling endogenous money creation and Minsky’s financial instability hypothesis (see debtdeflation.org/blogs), and other similar economists who recognise the importance of debt and apply a system dynamics approach, like Jim Rickards. The key thesis is that as opposed to the current doctrine, changes in debt level do affect aggregate demand and therefore have an impact on the economy.

    Over the last two decades Western economies have seen an unprecedented expansion in the level of private debt. This has been facilitated both by an increased propensity to issue credit and the availability of cheap credit. Much of this credit went into inflating asset prices (housing, stocks, etc…) and fuelling discretionary spending (due to the increasing wealth illusion). The GFC was a tipping point in the US and much of the Northern hemisphere due to public debt saturation. 2008 and 2009 saw the beginning of the deleveraging process before the world-wide government stimulus measures kicked in.

    The US and EU governments responded to this process by bailing out the banks bad debt and driving stimulus through deficit spending. Reserve banks, in turn have provided cheap credit and liquidity (printed money) to the financial markets (ie too-big-to-fail banks). This did halt a massively painful deflationary depression, but is in effect only kicking the can down the road. All this excess liquidity has gone into the financial markets – not the people who have lost their jobs or homes. Because interest rates are so low this liquidity is out chasing yield in paper-based commodity derivatives, emerging markets, credit default swap markets, and the US stock market.

    The massive inflation we are seeing in commodities is not driven wholly by an excess of real demand or a lack of supply, but due to speculation in financial derivatives. This is why oil is at $91/barrel (as Roger pointed out) even though the US is going so slow and Chinese demand isn’t all that. I expect the commodity boom to continue until the world realises QE2 isn’t working. The US economy will take a turn for the worse, mortgage defaults will increase, and a second banking crisis could result. Rate rises aimed to curb inflation might be the trigger here.

    It is clear that the level of debt in the US (US Treasury, State and Municipality, consumer, and the shadow banking sector) cannot be repaid, and it only remains to be seen exactly how it won’t be repaid. The same applies across Europe too. Short of hyperinflation and the collapse of the US dollar, deflation is the only way out. I think the Japanese situation is most likely. Quantitative easing has been going on in Japan since the 90’s, but the economy is still going backwards.

    Ultimately this is due to demographics. Japan didn’t have a post WWII baby-boom like the rest of the developed world. Their population has been aging and indeed shrinking since the peak of the Japanese bubble in the early 1990’s. As a result, their economy has followed suit. Harry S. Dent provides a very interesting approach to forecasting by looking at a countries demographic make-up and considering spending habits at different life stages. The post-WWII baby boom generation in the US and Europe (and to a certain extent here too) is transitioning from their age of peak spending (46-50), to a leaner phase of saving and retirement. There is a massive generation gap after the baby boom in these countries before a mild Echo boom (gen-X) which is likely to come of peak-spending age in the mid-2020’s. After the 2030-40s, most western developed countries are heading into a long-term population decline.

    Australia faces a similar proposition, but the gap between our Baby-boom generation and the echo boom is much narrower, and we have favourable immigration trends on our side. 2011-2013 could see a downturn as baby-boomers begin to sell down assets and retire, but I predict the echo-boom of the early 70’s (peaking in 1972) will see a further boom for Australia into 2018(ish).

    Australia, due to proximity and resources, will also be heavily reliant on the Asian growth story. In the medium term I’m rather hesitant of this due to the reliance we have on the health of China’s economy. China’s economy is currently driven by investment in fixed assets and infrastructure, stimulated into hyper-drive in the last few years by loose monetary policy since the GFC. There are two reasons this makes me nervous. Firstly, the amount of debt in the Chinese economy is far greater than the official government figures portray ($US hundreds of billions in off-balance sheet debt in various government vehicles and banks, along with a very large un-official loan shark credit black-market) and as we know, high leverage is great in the good times but bites hard in the bad times. There is a potential that debt-fuelled speculative excess could cause a similar credit boom and bust as we have seen in the US.

    Secondly, due in-part to the one child policy China faces serious demographic head-winds. As demographers Jackson and Howe said in 2004 “China may grow old before it grows rich”. The size of the working population in China is predicted to flatten by 2015 and begin to subside from then on. The cost of an aging population and diminishing workforce could see China’s massive rise hit a wall very fast. This will impact the Australian economy very hard and could see the current resource boom reverse very fast.

    India has more favourable demographics, has a democratic political system, and tends to have a stronger entrepreneurial and innovation focus than China. These factors have the potential to provide greater growth than the greying Middle Kingdom over the next 50 years. South-east Asia also has favourable prospects in Indonesia, Thailand, Malaysia and Laos – if they manage to break out of the poverty cycle.

    My final concern is that much of the promised growth we see in Asia and the emerging markets just won’t be possible due to our constantly delayed response to climate change. If we continue along the current trend in growth of green-house gas emissions, civilisation simply won’t survive the next century. We live on a finite world and infinite exponential growth just isn’t possible.

    Following a deflationary stint in this decade, oil (and to a lesser extent coal) is likely to be much more expensive in the following decade, up to a point where renewable energy becomes economically viable. This will draw in the money to renewable technology leading to a final decline in fossil fuel prices (I’m hoping we reach this far by say 2050). Climate change will lead to increasing volatility in weather patterns – more extreme droughts and wet seasons. Habitable land will become increasingly scarce, with our closest bastions Tasmania and New Zealand.

    So investment thesis:
    1. Avoid insurance companies (increase in “natural disasters” likely).

    2. Avoid exposure to real-estate in Australia for 2-3 years, including banks.

    3. Debt-servicing and collection companies are likely to do well – eg Fox Symes and Associates group (FSA), Credit Corp (CCP), possibly lump Cash Converters (CCV) in here too…

    4. Health care and related companies with international exposure – Blackmores (BKL), Cochlear (COH) and CSL are the obvious ones.

    5. For retail, focus on the low cost provider – JB Hi fi is the obvious one.

    6. Renewable tech companies just aren’t there yet so it’s hard to know which will succeed, however one company that provides services to both energy utilities and environmental consulting (as well as IT) is UXC (perhaps best to look at NPAT from ongoing operations for this one, or do a sum-of-parts valuation as I have mentioned in a previous post).

    7. I tend to avoid commodity producers, and prefer to look at companies that service the industry (FGE, DCG, MND, LYL and MCE), but as it stands, it’s a crowded market and I expect a shake-out in this sector in the next few years when commodities drop on US/EU double-dip or China hits the wall. Those with the best cash flow will stand to do the best.

    8. Tasmanian Pinot Noir, preferably from the Coal Valley – The climate will be totally wrong for this grape variety in the next 10-25 years!

    Apologies for the epic rant, but you started it!
    Rob

  52. Adam
    :

    Afternoon Roger and All,
    I believe Thorium will be a big winner. I think hemp may be re-discovered (in the mainstream) and used for paper, plastic, building materials, fuel and even food. Aquaculture should also perform well. Rail should also be re-discovered and all states will be connected with transport nodes for freight and passengers.

    If I had to pick a company I have a limited circle of competence. NWH basically because they are well run (in relation to their peers – Thiess, Macmahons etc) and have a foot in Africa. Africa will be a huge winner in the resources sector to 2031. We will see that if you want to be in Resources or Mining Services you have to be in Africa. I may reach a different view on NWH when I am a Graduate! On the ground they appear to be well managed.

  53. Manny
    :

    Hi Roger

    Great article and it all seems logical.

    I guess the world is focussed more on mining but I feel the pressure on growing FOOD (grains, vegetables, rice etc) demand will be huge and that might be an area to look into. Food inflation is defintely here to stay and grow.

    I have been looking for such companies on our market. I guess AWB and Graincorp come to mind but there track record has not been that great. They don’t qualify the Value.able test. Maybe things will turn around. who knows.

    Does anyone else know of other comapnies in this space.

    Cheers
    Manny

  54. Pat Fitzgerald
    :

    Hi Roger

    Intel [INTC] is my pick. It is a global business that already generates a lot of its revenue from Asia and it will benefit from any growth in Asia. It is a well known brand and I think every PC I have used has had a Intel processor. It spends a lot on research to keep updating its products and this should help ensure its market position. I am interested to know other peoples opinions.

    • Paul Muscroft
      :

      Intel look like they will be coming up against some competition at last (they have had it easy over the past few years). AMD are finally merging their CPU technology with their GPU technology (acquired when they bought ATI) and will be bringing out some very interesting chips. Nvidia the GPU mob realise that this CPU/GPU merge will eat into their business are now looking to start using the Nvidia technology for CPU’s too. And to top it all off ARM chips used in mobile phones could be coming to a laptop near you. Microsoft have announced that they will develop Windows 8 to run on ARM chips. Actually at CES this year there were mobile phones with 2 ARM chips that would give a laptop a run for it’s money. All very fast moving developments that Intel must be concerned about.

      • Pat Fitzgerald
        :

        Hi Paul

        I agree with your comments. Intel have been criticised for being late into the mobile phone and tablet markets, this could mean that management have become complacent which is a concern.

  55. Rex
    :

    Hi Roger

    Pretty much agree with your comments being strongly weighted in the mining and associcated services sector. Curiously you did not mention the effect of the on-liners such as Seek, CarSales and REA who would be looking to take advantage of the trends you describe especially Seek is expanding into China and Brazil to grow its register of on-line employment advertising. It is a tad overpriced but if the growth in those countries goes to plan the current price would start to look cheap.

    Cheers

  56. Matt
    :

    Given that all those electric cars, laptops, mobile phones require lithium I think that’s an interesting pick for the next 10-20 years.

    • Luke
      :

      I agree! Element number 3 is vital to what we want to do with energy even today. So who mines it? Are there any companies listed on ASX?

      The only problem I see here is that Lithium is quite abundant as an element so there may be no competitive advantage available?

      Sorry, all I have is a bunch of questions but I do agree that Li is and will be useful.

      • Matt
        :

        Apparently it’s about as common as nickel and lead. It’s a matter of how accessible it is and how much can be produced in relation to demand.

        If you search for “lithium mine australia” some useful sites show up. That will lead to about 10 stocks. Choices are limited at the moment for investing directly into the commodity.

        Hope that helps.

  57. Ben
    :

    Hi Roger,
    Interesting thoughts there, I might go out and buy the weather makers in fact.

    A question on China – Is there any conflict between what you wrote in a few blog posts on China last year (which would be considered quite bearish re anything related to commodities) and what is contained in this blog post? Have you changed you mind on China?

  58. Brad 17
    :

    A company suggested to be well placed to take advantage of rising global demand for energy is oil producer Stuart Petroleum Ltd ( STU). STU has a history of profitable oil production dating from 2003
    1. Existing productive oil reserves in Cooper Basin – 2010 result NP $6.8M . Future outlook good – noted that 2009 result achieved despite significant interruptions from flooding
    2. Positive results from recent exploration activity in Cooper Basin – latest Acrasia 5 development well brought online in Dec 2010
    3. Port Bonython Fuels major initiative in progress – diesel storage and mini‐refinery to service rapidly growing SA diesel demand – SA govt appear very supportive of project
    4. Company spin needs to be negotiated on potential “world class” Shale gas prospects in CB with 38-60 TCF of gas identified – but only a small % would have to be commercially recoverable to become a strong resource – with strong Asian demand predicted.

    Leaving out entirely potential future revenue from diesel or gas projects and just looking at known oil reserves – what is left is a good set of financials. No debt. Strong cash flow. Positive record of ROE.

    My estimate of ROE for 2011 is 25%. At 20% POR and 13%RR my IV is $1.42 which offers over 100% MOS on current SP. IMO a worthy candidate for Roger’s January list.

    Disclosure – I own a small parcel of STU ( 2.5% of my SMSF)

    • Ash Little
      :

      Hi Brad,

      I don’t mean to be a bit of a wet blanket but STU has a bit of a history of over estimating and under performing………Our esteemed blogger and undoubted oil and gas expert Lloyd made a great post about this company and oil and gas generally about 5 or 6 months ago….It will be difficult to find so perhaps Lloyd could comment again or direct us to these comments

      • Brad 17
        :

        Thanks Ash. Look forward to comment from Lloyd – I’ll put my umbrella up!!! ‘Spin’ is nature of the beast for O&G explorers and yes STU have exercised their fair share over the years. But the past is the past & I have viewed as a positive sign STU’s recent management refocus on lower risk local fields & divesture of offshore exploration interests. And if you can put in the car park current spin re gas prospects and just focus on what is known – STU control productive oil reserves & the price of oil is likely to continue up – then the investment value presents itself with 100% MOS in a debt free cash flow positive profitable business . STU’s negative is that the known reserves are finite but a short fun ride may be available. And as long as you have your eyes wide open , who doesn’t love the addition of a bit of upside ‘bravado’ – as I write this I have a twinkle in mine!!!

      • Lloyd
        :

        Brad/Ashley,

        Rather than write a lot on STU specifically, I will simply note that playing the long term rising oil price under the Peak Oil Scenario via investment in oil and gas producers is fraught with problems.

        As oil prices rise, so cost rise more than proportionally. Government take increases in most regimes (e.g. the PRRT in Australia, Special Oil Gain Levy in China and exponentially escalating price linked oil tax in Russia) and most oil company managements blow their brains out on risky, high cost capital investment development projects, plus ever increasing high cost, high risk, low reward exploration and fruitless (for the shareholder) M&A activity. In this sort of environment you will see the phrases “game-changer”, “company maker” and “high impact” thrown around by management and investment analysts with gay abandon. Run a mile when this happens, because the only high impact are the negative ones on profitability, balance sheet and thus shareholder value.

        If you want to play the rising oil price/Peak Oil game via equity investment in oil and gas businesses, then you need to look for companies with established, developed, low cost, long life oil reserves, accompanied by brilliant shareholder friendly management who have profound understanding of capital allocation and the foresight and patience to see throuh the oil price cycle, which will still exist even in a post-Peak Oil world.

        Does STU fit the bill? That is for you to decide rather than me to tell you. But before you answer the question take a good hard look at the company in light of Chapters 7 and 9 of Value.able.

        But remember, the mugs out there will drive up the share price indiscriminately of each and every oil and gas company during an oil price spike, but this is speculation, rather than long term investment and it will unwind just as rapidly (look at any oil company’s stock price in the period 2004-2009 to see the effect). If you play this speculative game, just remind yourself of the rules of the game on rising from bed each and every morning, otherwise you’ll be incinerated in the long run.

        So are you feeling lucky?

        Regards
        Lloyd

      • Ash Little
        :

        Hey Lloyd,

        Thanks for that…….Your words are so much better than mine………….Particularly with regards to the oil & gas sector.

      • Lloyd
        :

        Ash,

        Happy to help out on the subject, but you greatly overstate my contribution and dramatically understate yours.

        I think it serves us all well to remember that any investment premised solely on the crystal ball trends, or scenarios, detailed by Roger is speculative. The one thing I can guarantee is that by 2031 the then historical trends will certainly be different in detail to any of the scenarios outlined here. Moreover, there will be more than a few other trends added to the list, to which we will say they are so obvious with hindsight that it is incomprehensible that no-one saw them in 2011. As Yogi Berra said ” Its tough to make predictions, especially about the future”, to which I would add that the future is a very uncertain place full of investment risk (even more so when you are a price taker business!).

        Also it is worthy of note that the premise of ever rising energy prices (so loved by naive analysts) is a non-sequitur under the Peak Oil Scenario. The reasons for this are many and beyond this response to detail. Therefore, the conclusions some might draw from Roger’s trends 1 and 2 and the confidence in them might be misplaced.

        On other more important matters, I hope you and the Dalby community are quickly moving towards some semblance of normality after more than a month of upheaval and heartache.

        Best Regards
        Lloyd

      • Ashley Little
        :

        Thanks Lloyd,

        We are slowly getting it back together thanks for your thoughts. The Lockyer Valley is far worse than us

      • Ashley Little
        :

        Hi Brad,

        Hate to say this but have a look at STU asx announcement today.

        leopards don’t change their spots

      • Lloyd
        :

        Not much joy there! But look on the bright side…..if the oil price were to double things would look a lot rosier. Yeah right! To mix metaphors I am reminded of something about leaky rowing boats and and blind accident prone rowers!

  59. frank
    :

    Well, I think education will be a big thing in the future. As China and India grow the number of people seeking education will increase exponentially. Colleges and universities are already at maximum capacity. So education is diffinetely one to look out for I think.

  60. Brian
    :

    Hi Roger
    Welcome back. My sympathy to those bloggers affected by the floods. Awful. Here are my humble stockpicks in answer to your asian query that might help them.
    These are the stocks in my top 20 that might fit the bill and I have put my strike prices in. SST and CNN are the only two I could not acquire at the strike price but I am living in hope. The others I purchased during the year below the strike price in brackets.
    BHP ( $38) it adresses the energy and raw material demands of Asia with a sustainable competitive advantage.
    ORL ($8) Our HK Asians neighbours are 5 times less sensitive to the cost of luxury goods than Australians. The brand may develop a sustainable competitive advantage.
    ERA ($13)Remember it has Jabiluka in the closet and the pressure to develop will become stronger with time.
    CBA ($50)will be one of the big four banks financing the export of commodities, goods and services.
    GCL ($10)and CNN ($90)coking coal to asia
    SST ($19)you need to read the story and see who owns it. Have been trying to purchase it at the strike price.

  61. David V
    :

    Hi Roger and All,
    Welcome back after your well earned break. Thank you for the post. It will certainly be interesting to see whether we continue to see an increase in demand for primary goods and whether this will drive greater opportunity for companies to invest more in developing ‘substitute’ products e.g. ethanol for oil.
    I was recently in Melbourne at one of the local DFO complexes. I was pleasantly surprised to see people lining up to get into the Ororton store, so much so, that the store had to periodically shut its doors, just to control the flood of people. While patiently waiting in line with my wife I started chatting to some other people and shared the Oroton experience (I declare I won Oroton shares). Interestingly they had travelled from Asia and while in Melbourne made a point of visiting Oroton stores. They, like many other Hong-Kongese, prefer Ororton to LV or Prada as there are no counterfeit copies on the black markets. Hence; when other people know it is an original product.
    You may ask what has this got to do with this article? I believe Ororton should benefit strongly in the short term through its Asian expansion when coupled with its strong online presence (the online store is now the no.1 producing store for the brand). Obviously if it becomes over-popular, then it may attract a counterfeit following and hence degrade future growth.
    Another trend worth following over this period will be societies drive to shorten the useful life of goods (particularly electronic goods) as we increase our infatuation with the concept of a ‘disposable society’. Future generations will continue to drive this ethos. Companies who focus on a ‘lean cost/high volume sales’ model (like JBH) will be well placed to perform in this market.
    Finally, I look with interest to see whether history repeats. I read an interesting article that talks about all great civilizations having a century ‘on top’ and then faded away. Some historical examples are the Spanish and the British. The US has now had its century, so I look on with interest to see how long it will be before the world market completely decouples itself from the US and looses complete interest in the $US. Only time will tell.

    • Andrew
      :

      Nice to hear your thoughts re:ORL it is obviously a company that i follow quite closely and have been studying for a while.

      I have seen the same Oroton DFO experience in Sydney so it is good to hear that this is being backed up interstate with people lining up and waiting to get into the stores. As long as there is a line at these stores i am reasonably happy about the future prospects.

      I am not sure however whether there is a widespread preference by Hong Kong people for Oroton over the major European labels. I think if you were to get a girl from hong Kong sit them down, put a gun to their head and say you need to choose either this Oroton bag or this Chanel/Prada/Guccir or LVMH bag they will still go to the latter every single time. However if this preference does exist than i am even more happy about the future prospects.

      My thoughts are that oroton will never be able to compete directly with these European companies anywhere in the world, their brands are too strong, very scary moat around them, however oroton do a good job of creating a niche of having quality bags that are at least close to the european products and at an affordable price.

      If they can recreate this and get the same response as they do in Australia than things will be rosy for a while yet in the Oroton camp. Still, i think this will not be the case. I believe they will be successfull but nowhere near the success they get in Australia. Can’t wait to see what the future brings for them though and i have time on my side so i will be watching from the sidelines and ready to pounce when the time is right for me if their good resutls continue.

      What you say about the countefiet bags is correct. if ORL does have a successfull expansion into Asia than the knock offs will soon follow. However, my thoughts are that very few people who buy the originals will go for the knock offs and the price of oroton bags are not so obscene that people need to worry about the cost of the originals, especially in Asia i think. A successfull asia expansion and getting accepted there will open up dorrs world wide especially in places like the US as well so i am happy to take a few knock offs getting produced in exchange for a successfull asia expansion.

      The ones that try to show off the brand of bag they have to others are funnily enough usually the ones who buy the knock offs. So i don’t actually think that counterfiet oroton products will actually have much of an impact on the bottom line for ORL pleasantly enough. Its quite easy to spot most of the fakes anyway if you pay attention to the small details and know what the orignal products are like.

      Leaving Oroton aside for a moment.

      I would add that a new trend to come in the future going to 2031 would be a move away from traditional store based retailers and move to more of an online basis for all products in one form or another which also leads me to be down on companies like Westfield.

      I do expect fashion stores to hold onto a store based format but this might be in the case of being more of a showroom than a store where people can look at the clothes try it on and then order online at an affordable price.

      Retail companies will start investing less in the roll out of new stores and more into setting up the infrastructure and supply chain processes to allow for lowest cost online retailing.

  62. Craig
    :

    Roger,

    Regarding point 4 I find it impossible to find a precedent where the greater majority of the world’s eminent scientists have colluded to pull the wool over the eyes of the less informed, and so we’d be mad to not at least take a risk management approach to global warming and embrace alternatives to fossil fuels. (And perhaps, at the 2031 Climate Conference in Wollongong, the gathered nations will have resolved to do something other than plan the following year’s junket.)

    However, mother nature has been having her way with us long before now, and so the jury should still surely be out as to the cause and effect of recent adverse events, and also, as to what the future holds for the content those engaging personalities will be presenting to us in the last 2 minutes of the news.

    With much greater certainty, the ever increasing number of humans on this orb will put enormous pressure on food production and energy supplies. It’s going to take an unprecedented worldwide collaborative effort (I can’t see the Chinese methodology being widely embraced) to achieve a sustainable population growth. So, given the UN track record on every matter other than eradicating Polio, expect the demand for all goods and services to march on….at least that component of demand that doesn’t require money.

    Asia will be the driving force, especially China and India, where millions of peasants are in the process of learning to be middle class. (Will this include introductions to food court Lemon Chicken and Rogan Josh?)

    So, under the aforementioned conditions, one company well placed to take advantage of it is surely Zicom Group (ZGL).

    A ROE over the last few years around 20%. (Granted, it says 12% on Comsec for last year, but the Cash Flow was stronger than the Accounting Profit).

    No debt to speak of….10% Debt to Equity, roughly.

    They operate mainly in two sectors:
    – Offshore, Marine Oil & Gas Machinery (They are now turning their attention to Gas Processing Plants).
    – Construction Equipment

    They have smaller operations in:
    – Precision Engineering and Automation
    – Industrial and Mobile Hydraulics

    They have operations already in Singapore, their home base, Thailand, Vietnam, China, Hong Kong, Indonesia, and India. If there’s construction to be done in these countries, Zicom are well placed to participate. They also operate in the US, and Australia (chances are the last Cement Mixer you saw was constructed by these guys).

    There is a buyback of 10% of shares outstanding underway, a no dividend policy, and already a strong presence on the Asian continent. A lot of setup costs have already been absorbed, for example, they have a plant in Thailand churning out Cement Mixers, completed last year.

    And, one last thing, they are cheap!

    OK Roger, I confess. I’m unable to come up with the Holy Grail….a plausible, sustainable competitive advantage. The blade still requires more sharpening.

    Help me out……and thanks.

  63. Jim
    :

    Thanks Roger. The one sector I would add, thinking of baby boomers in particular over the next 20 years is healthcare. I’ve been following MSB (Mesoblast) and its stem cell application potential (they might put me out of business!). This becomes important as a potential driver of population growth and its sequelae for food,fuel and so on.
    And there will be no stopping this getting to Asia sooner or later. I’d be grateful for your thoughts

  64. Sean
    :

    I honestly believe that the new gold is Oil, if you look at the last 15 years the OIL COPPER GOLD and SILVER has tracked together somewhat, there has been some huge fluctuations from in the last 7 odd years with SILVER which has dropped relative to COPPER and GOLD. But in the last 6 months the acceleration of SILVER to meet GOLD has been incredible, However OIL hasn’t inclined anywhere like the others have, its only a matter of time that it does. I think its inevitable. GOLD may be the benchmark of it all, and SILVER and COPPER may be the the highest industrial useful metal… But OIL if you break it down to to the fractions of Distillation, shows how widespread its usefulness is too from plastics to cosmetics… They may have Hybrid vehicles, but theres no Hybrid Boeing A308’s just yet..Nor will there be Solar Marine Shipping…. I’m investing in OIL, and primary industry supported construction industries, as were a resource based ecconomy, and these primary industries will need constructional support to establish themselves to get the good stuff out the ground to sell. Be they profitable or not, they still pay a construction company to build the infrastructure.

  65. Geoff Cruickshank
    :

    Hi Roger, interesting article.

    My predictions have generally been lousy. Investing on the basis of them would not have been a great idea, particularly if the ideas were so great that I had been rusted on to them! For instance I was busy forecasting the ’87 crash for at least two years before it occurred. One evening at dinner, a lady who had heard me on the subject, asked, mischievously, “And when is the market going to crash?” I replied “As it hasn’t crashed yet, I believe it is never going to crash” That was the Friday night before Black Monday or Tuesday, whichever it was.

    I can’t fault your logic on rubber and rice, but I don’t really know how to go about investing in them.

    On weather, Tim Flannery is a persuasive chap, but beyond El Nino/La Nina, I don’t think anyone knows much about it. I enjoyed Tim’s TV trip down the Darling and Murray, and hope he repeats it now that the whole system is ..full. I picked up a book about weather on a throwout table about 1970 which concluded by suggesting that everyone alive at the time had lived through a remarkably calm few decades of weather, and that looking at events in previous centuries we should expect some more extreme events. I think of that prediction everytime I see an extreme event, since then.

    Not a prediction, but a remarkable coincidence: there has been a cattle boom in every year ending in 1 for many decades. A year ago I couldn’t see where a 2011 boom was going to come from, but now I think I can.

    The situation in the US worries me so much that the only remedy is not to think about it.

  66. Greg Mc
    :

    Interesting thoughts Roger, and I tend to agree with the bulk of it…..but then, what do I know? One thing though that I have to take issue with (most sternly) is regarding purchasing a property in the north east of victoria. There is nothing that should stop anyone from buying a piece of God’s country up here. Geez, where else can you go skiing, fly fishing and play cricket all on the same day?

    FWIW, I think oil is going to be the biggest story over the next few years (and decades) and it will be interesting to see what other sectors are affected, or for that matter, appear, over time.

  67. Stephen
    :

    Hi Roger,

    Thank you for your article. There will be, one assumes, the usual cyclical periods for all the sectors you have mentioned in your blog. Despite those peaks and troughs I would expect that in 2031 the standard of living for those in China and other SE Asian nations to have risen substantially. Its worth studying the cultural shift in China over the past 60 years to better understand the attitudes of elderly Chinese and the attitudes developing in the progressive younger generations. The mindset of the more elderly Chinese citizen in one of frugality born during the terrible purges of the Cutural Revolution, whilst the younger generation strive to educate themselves and obtain a piece of what they consider to be their right.

    So yes, China, Vietnam and other Asian nations will consume our resources and provide a rich hunting ground for our banks.

    But one other thing will then happen, the population will start to demand the one thing they need to actually partake of the great largese of their modernisation, and that is life itself.

    People dragging themselves into the modern era demand better standards of health and so my stock pick is CSL.

    A more prosperous and expanding middle class will start over the next 20 years to be able to afford health care. In fact they’ll demand it. The second rate, substandard contaminated products currently being produced by Asian companies and on offer to the people will not survive the demand for clean, tested, and safe bio therapies and blood products. The suite of developments currently undertaken by CSL in blood products, cancer therapies, immunisations, and medications ensure they are in a position to offer these products to a rapidly growing population who soon will be able to afford the benefits they provide.

    In my opinion an expansion of CSL into Asia in the coming years will drive this companies earnings far beyond what we imagine today. Their established position, business models, research and patents give it a competative advantage hard to match.

    • Mike Hall
      :

      In China’s rural regions twenty years ago, the most sought after ‘luxuries’ used to be a refrigerator and a TV. They now have those.

      77% of the US population owns a car. Just over 3% of the Chinese population owns a car. That’s a lot of catching up to do.

      They want, what we have……..both above the ground, and below it.

  68. Liz Barrett
    :

    The macro issues are huge out to 2030 and I certainly don’t know most of them but will try with a few! We don’t know the impact of any new disruptive technologies yet. Fresh water might also be a real issue and the impact of demographics; the economic and social impact of aging populations is real. I recall reading 22% of China’s population – that’s roughly 13 times Australia’s whole population; almost the population of the USA – will be aged 65+ by 2030 so whilst China (and India) are growth stories they both have to deal with the significant issue economic and social issues of aging.
    Growth in sovereign wealth funds, may be another theme, along with the relative shift of wealth from West to East, ethnic shifts/immigration, globalization and protectionism concurrently, democracies v other forms of government (state capitalist societies)…all influences on global opportunities and prosperity!
    I agree re food and energy demand as the global population continues to rise. Commodities: Oil, nuclear power/uranium, thermal coal because it’s cheap relative to other forms of power, met/coking coal for steel making, manganese, potash will likely be opportunities. In terms of stock some of my commodities choices would not fit the valuable criteria.
    What follows probably doesn’t either!
    Ageing and health – Stock: Invocare (funerals), Blackmores(vitamins), Clover Corp(Omegas)
    Waste management is another area of growth. Stock: TOX Solutions.
    Likewise I think there’ll be a shift to smaller energy efficient housing..but I don’t have any stock in mind.
    A great topic, thank you Roger.

  69. Steve I
    :

    Major themes we face:

    – Oil. Peak oil production was hit in 2005/6 and the new sources are more costly to produce (tar sands and very deep water). Even without growing demand from China and India, fuel prices are likely to remain problem. A loss of cheap oil and the acceptance of this fact will also impact on energy supply, food and commodities.

    – Energy. Growing demand and limited oil production capacity mean greater focus on alternative sources – LNG, Uranium, Solar. Energy prices are likely to be high.

    – Food. Population growth and weather patterns have the likely result that food costs will remain high and continue to increase. Changing food demand in Asia to a diet with greater consumption of beef etc. This will also place a strain on fresh water supplies internationally. The current weather patterns should place pressure on food prices due to supply factors.

    – Global inflation and currency debasement. With many major economies virtually bankrupt and unable to repay debts and meet their commitments they can either default or inflate. Inflation is the current path. With increased liquidity in the global system, it should find its way into hard assets such as food, energy and commodities. We are already seeing the impact.

    – Commodities. Likely to continue at higher prices (not sure about Iron Ore) due to all the above factors and limited supply. This can include precious metals and uranium.

    – Precious metals. With global currency debasement, money finds it was into the traditional form of money – gold and silver. This should continue until we have a change from fiat currency to a gold standard and it seems possible that it will happen in the next decade.

    My goal is to invest with these trends in mind with a value based approach as proposed by Roger. That way I’m investing with the right macro outlook and the right businesses within such an environment. It is my view that these are not short term trends.

    I’ve invested in the service businesses (e.g. Matrix and Forge) and also some of the gold miners. However, I find it difficult so far, at least when looking at Australian companies, to find quality undervalued businesses in the areas of food and energy.

    • Emily
      :

      What about businesses that supply to the food industry? I have a very small holding in Incitec (IPL) which has performed well. I believe they have a competitive advantage being the major supplier in Australia for fertilisers.

      • Steve I
        :

        IPL looks to be over-priced based on my calculations. I calculate IV to be around $3 with a 12% RR. The IV seems to be growing strongly, however there doesn’t seem to be enough value in it for me.

        I actually purchased IPL near the bottom of the market last year and had a reasonable gain prior to selling at $3.36.

  70. John M
    :

    Very spooky Roger, you took the words right out of my mouth. It must of been when you were reading the tea leaves (no, that’s right, it was a crystal ball). I have noticed that you have been speaking about Jim Rogers over the last 12 months, so I have been doing a lot of investigations into his and several other people’s ideas. Here is a typical video interview with Jim for the benefit of people who have never listened to Jim.

    http://wn.com/jim_rogers_says_abolish_the_federal_reserve

    I was only just making comments about inflation and the intrinsic value of cash in the early hours of this morning on your blog.
    http://rogermontgomery.com/well-informed-well-rewarded/#comment-7230

    Following is the full version I wrote yesterday but only published an abbreviated version (see link above) as I felt everyone would think I was barmy. Seeing that we are now on this topic I will present forthwith my humble opinion in full – but keeping it brief enough that I don’t surpass 1781 words and risk the wrath of the most gracious editor.

    People talk about cash being the safest investment, but I do not agree. I believe that cash is one of the riskiest asset classes. Even if it was intrinsically valuable (which it isn’t), the best cash rate is still going to keep you behind the eight ball when factoring in the real inflation rate (I am guessing 10% p.a or more).
    Any fiat currency has only the intrinsic value of the material it is printed on. In this case some type of polymer – I am not sure what that goes for. Remember I am talking intrinsic value not price.

    The increase in money supply (inflation) is growing at an ever-increasing pace. It is near impossible for all the governments of the world to pay back all their debts, especially the US – printing more of their fiat currency (pieces of paper/polymer and no longer backed by gold, only backed by a promise – zero intrinsic value) just snowballs the ever increasing the money supply (inflation). The government created fiat currency is only a small part of the problem. Most countries have a fractional reserve banking system, where for every dollar that a bank has on its books, it can loan out roughly nine dollars, and voila, we have the perpetual monopoly money making machine (inflation*inflation=hyperinflation). Yes that’s right – every time one monopoly dollar is deposited, up to nine monopoly dollars can spring into existence in the form of loans. Loans are being spent on goods and services, and therefore money is created out of thin air.

    So to re-cap, we have money that is printed out of thin air and is put in the system (base money supply) and this base monopoly money, that has been printed to pay off debt or buy stuff is loaned out at the ratio of nine to every one monopoly dollar, which is once again spent and enters the money supply. Something has to give in the long run.

    It really gets interesting when you start to dig a bit deeper and find that some banks can get really creative and they have cool things like precious metal leasing. They sometimes hold gold as a hedge for example, but because gold has no income, they lease the gold to smaller banks for a couple of percent . Even though they don’t physically hold the gold anymore, the iou for the gold is still classed as an asset on their books. I doubt they would ever see that gold in a real crisis, there is not enough of the rare yellow metal to go around, especially with all the paper trading that is happening in the markets.

    Time and time again, all fiat currencies have reverted to their true intrinsic value of zero (just like the price always returns to the true intrinsic value of a company – Telstra comes to mind). Have you ever seen a one hundred Trillion dollar Zimbabwe note – once again worth about the value of the paper it is printed on.

    The world is a very scary place at this moment in time.

    If the collapse of corporations is nasty, wait until we start getting sovereign defaults. Then it is going to get really scary.

    We are on the leading edge of the next wave of Sub-prime monthly mortgage resets, so I can see a lot more issues in the US which means bring on QE3,4,5…99 (more inflation). The US government is going to be the biggest landlord in the world, seeing that they own a heap of mortgage defaults. Are they going to go knocking door to door trying to collect rent?

    Europe is a mess. Germany is picking up the tab. But for how long? All the PIIGS are looking very sick.

    I wonder how our national budget would look if our one major source of income had a fiscal hit. As Roger has warned us all, there is a potential Real Estate bubble in China. What if they no longer require our resources on this massive scale – of which we have already have pencilled this income into our future spending. What if China gets sick of paying the prices they are currently are paying. Isn’t it true that in the long run, commodities are valued at little more than the cost of production? In effect we would be price takers, not price makers. What has been saved so far from the resources super profits? Nothing. Not trying to scare anyone, but this is what I truly believe could happen. Can anybody remember the last time that the cost of energy or their rent become cheaper? So I would need a much higher interest rate than is currently available. 6% return on cash just doesn’t cut it for me.

    We could just as easily have a huge hike in our personal tax rates, it is fiscal commonsense. Diminished income from China, and up goes the only other source of income – the taxing of you and me. The higher your personal rate of income tax, the worse it gets for cash.

    What sort of warning would you get if something bad happened. Waking up to the news of nationwide shuttering of banks. What would you use to buy that loaf of bread, bottle of milk or pay the energy bill.

    One particular fiat currency last century was burned as a fuel source to keep warm in winter. Men were paid twice a day and passed the currency through the fence at work to their waiting wives whom would race off to the closest store in the hope that the stack of almost worthless currency in their wheelbarrow would still buy enough food to keep them from starving.

    Throughout history, all fiat currencies have had a terminal decline in value and eventually all reach the true intrinsic value of zero. When I hear the phrase “this time it will be different” I shudder and wonder how all the people will cope. Not being able to afford the necessities of life. Not being able to buy food, energy, clothes etc. In a systemic financial crisis, most people would find it hard to survive, if all of their worldly possessions were tied up in cash.

    I believe it is time to start setting ourselves up to be self-sufficient. Prepare for the worst and hope for the best. That is my motto. I sleep better at night when I know that I am aware of what might happen and am preparing for those eventualities.

    My personal take on the big picture solution has only emerged since understanding the concept of intrinsic value for the first time. Thank you Roger. After reading Value.able I have a framework that I use to understand a diverse range of issues and then place them in perspective.

    Okay, here goes. The number one issue that I noticed is that people are still talking cash and using “price” vocabulary rather than “value” vocabulary.

    My personal solution to this problem is to value one asset class against another different asset class over a long period of time. For example, you could work out a chart or spreadsheet comparing the ASX200 (or better still a specific company) vs. the median house price. Or commodities (say Rubber for example) vs. the US dollar, or any other combination. If you do this regularly and for long enough you will start to notice large cycles in various asset classes relative to one another.

    The most obvious example that comes to mind is in the US, where the Property scene is in decline when valued against other asset classes. Other assets that were relatively inexpensive in relation to property are on the rise while properties are in decline in relative terms. If you chart the relative values of the two different asset classes, a very large transfer of wealth is currently happening at double speed. When push comes to shove the transfer of wealth will happen parabolically.

    This is my definition of a less risky way of parking wealth. By knowing the relative intrinsic value of any asset class vs. another asset class by analysing these relative super-cycles that are intersecting as we speak.

    As an addendum after reading Rogers above post, there are many switched-on analysts that monitor these relative asset cycles. Roger has spoken all year on this topic if you were listening for it, and has let out hints, for example about commodities such as oil (MCE) and rubber (direct commodity exposure). Jim Rogers is another good starting point.
    Jim Rogers personally speaks of the 19th Century belonging to the UK, the 20th Century belonging to the US and the 21st century belonging to China. He has put his money where his mouth is and moved to Singapore to be part of the Asian investment scene, as well as investing his wealth in China. Jim is short the U.S. He has many interesting and intelligent observations that are a good starting point for your own personal investigations.

    Using Value.able and Rogers views as a framework, I have stopped looking at the back of the financial tapestry which is messy and unreadable and have now turned the tapestry over. It is all starting to make sense on a grand scale. My eyes are only starting to focus on the big picture. Warning: if you start to see the picture, it is a very grisly scene. As a consolation, if you start to focus on the front of the tapestry, a massive transfer of wealth will happen in your favour.
    Remember these are my views only, not advice. Always get personal professional advice.

    I must stop now as I have reached 1780 words.

    • Roger Montgomery
      :

      I am still away and only occasionally in an area that receives any form of radio reception. I won’t be back until month end but I thought the time you must have taken to write your post deserved special mention and a thank you John.

      • Ash Little
        :

        Hi John,

        Yes as roger says thank you for your time,

        I like Jim Rogers views very much as well,

        I place him fouth in the world behind buffett, munger, and Montgomery,

        I really like your ideas, The world is a total mess but the good part about that is that opportunities will present themselves……You will need some cash allocation in your portfolio to take advantage of this………

        If Jim roger is right about inflation then stocks generally will not be the best place for your money either…………….If inflation goes to lets say 12% and the RBA cash rate is say 15%…..Then your RR would be getting closer to 20% on stocks you are currently using 10% or 11%v RR.

        Plug that into your currently models and see what you come up with.

        Jim Roger is one of the reasons why I am using a very high RR for lots of stocks particularly our banks

        Inflation and high interest rates is the reason why the DOW went from 864 in 1964 to 865 in 1981 despite the GDP of the USA rising 370%.

        I have posted this before but buffets had a great article in fortune magazine 1999. The link is below.

        http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

        Allways remember to forget all the noise and just invest in the best at a big discount….. they will see you through in the long run

    • Rex
      :

      Hi John

      Agreed and if you want a comprehensive read on fractional reserve banking and its ills on the economy read Money, Bank Credit and Economic Cycles by Jesus Huerta de Soto. (nearly 800 pages but stick with it. yoy can get it off the Mises Institute web site)

      Cheers

      Rex

      • John M
        :

        Wow monumental book, 885 pages.

        I sat up til the early hours of the morning reading. Page 609 resonated with the current (and historical) bank criticisms in the media. To paraphrase it confirms that currency in circulation is much greater than the base currency supply, and guess who benefits from this expansion of currency? Yes you guessed it, the banks.

        If you have never watched Max Keiser, you are in for a treat. Just warning everybody, he isn’t backward in coming forward with what he thinks about the banks.

  71. David and Anna King
    :

    Seven Group Holdings (code SVW) springs to mind. The Westrac side of the business in particular. Kerry Stokes’ Seven Group bought a $250m stake in the Ag Bank of China last June, so doors to good finance should open when selling and leasing billions of dollars worth of Caterpillar machinery in his north-eastern China franchise. The company presently pays me and others close to 10% pa on its ASX listed hybrids, which I feel could well be redeemed at $100 each as soon as cheaper money starts to come his way from the Chinese banking link. Meanwhile the nearly legendary former CEO of J B Hi-Fi, Richard Utritchz, has joined the board of Seven, so if you like the “follow the money-follow the man” style of investing, this has to be worth a look. How does Seven look to you, Roger? ( Disclosure-We have both shares and listed hybrids in Seven Group)

  72. Steve
    :

    The first company which came to mind when I thought about selling financial products and services to Asia was ANZ. Their Asian growth strategy has been talked about often so perhaps this is an example of the type of company which may benefit?

    In regards to higher oil prices obviously MCE comes to mind – a correlation you have made before Roger. The company may have the potential to continue to grow at an excellent rate with the increasing demand for oil.

    And lastly, it seems logical to assume mining services companies like FGE may continue to benefit from providing engineering services to the resources sector which in turn provides the stuff China and India are after

  73. Peter
    :

    I have been searching for some commodities businesses in the past few months. I somehow think that they are so difficult to value due to the uncertainty of future commodities prices. But if I have to pick a few, I would go for CNA (because of their profitability and Comp Adv) or ERA (because of its Comp Adv and it has a massive upside potential in earnings)

  74. Sam Birmingham
    :

    For mine, the defining theme over the coming twenty years will be the rising cost of capital — just as the defining theme for the couple of decades leading up to the GFC was the declining cost of capital.

    Why will the cost of capital rise?
    * Re-pricing of risk
    * Ballooning public debt
    * Fiscal challenges of ageing populations throughout the developed world, as Baby Boomers retire and start tapping Govts for health care, welfare, etc
    * Developing economies’ growth to be driven more by domestic consumption is fine, except that it means their foreign reserves will be smaller. Competition for these excess savings drives up rates paid by the excess spending nations.
    * Re-regulation of capital flows
    * Risk of currency / trade wars
    * Risk of inflation breakout
    * Uncertainty over energy
    * And I could go on and on…

    I reckon we will look back on the GFC as the turning point in what is a long-term cyclical trend.

    What does it means for investing, as a whole?

    I think the impact is negative both on the revenue side (less debt-fueled consumption) and the asset price side (cost of capital – ie. the minimum return you are seeking – being an essential element of value, and all that…)

    Thanks for the insights Roger… I think you’re pretty much on the money!

    • Paul Rehill
      :

      Value investors should be thinking about their own individual required rate of return rather than a cost of capital that is taught in modern finance theory in universities. Quoting page 107 from “Poor Charlie’s Almanack” on Cost of Capital and Opportunity Costs:

      Warren Buffett: Charlie and I don’t know our cost of capital. It’s taught at business schools, but we’re skeptical. We just look to do the most intelligent thing we can with the capital that we have. We measure everything against our alternatives. I’ve never seen a cost-of-capital calculation that made sense to me. Have you, Charlie?

      Charlie Munger: Never. If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs – in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some kick – there’s even a cost of equity capital. A perfectly amazing mental malfunction. Obviously, consideration of costs is key, including opportunity costs. Of course, capital isn’t free. It’s easy to figure out your cost of borrowing, but theorists went bonkers on the cost of equity capital. They say that if you’re generating a one hundred percent return on capital, then you shouldn’t invest in something that generates an eighty percent return on capital. It’s crazy.

  75. Andrew
    :

    Hi Roger, welcome back. Hope you had a good break. I liked this post and found it interesting.

    I personally cannot comment on much of this as it is far beyond what i am knowledgable in.

    I think energy and climate will be the big issue for the next decade. An introduction of some form of carbon tax is inevitable regardless of your thoughts on climate change. This will of course have a huge affect on almost everything and result in people and businesses trying to be greener. There will be money to be made here but i wouldn’t invest in it. This along with what you say about a high oil price leads me to the following prediction.

    I think there will be a trend towards cleaner, greener and more fuel efficient cars. Cars will get smaller and lighter. This could be trouble or could be an opportunity for a company like ARB Corp.

    I think this will also result in a whole range of different construction projects to make things greener. Less concrete and more windows, solar panels etc as well as civil infrastructure and nuclear power generators.

    Also, i think recycling of all sorts of materials will become more common place.

    There are a whole range of companies that fit into and would be affected either positivley or negativley by all of this.

    I could be completley wrong and have been wrong about things i know more about.

  76. fred
    :

    Regarding interest rates Roger I believe that due to now big countries like china buy a lot of bonds the great USA will never want to pay china to much……….Of course I see interest rate’s going up but the intrinsic value of bond’s has drop………

  77. Peter Brander
    :

    Dr Roger Stone (based in Toowoomba) discovered the Elmino etc patterns caused by warming of the ocean currents. He predicts high rainfall for at least another 3 months. As for making Dollars out of the Rural Industry (including the livestock) I have been tup in some way as a stock and station agent (lending as well as selling rural products) and cotton in the St George area and while at St George looked at cotton as gold because of the high returns. Then droughts ,low returns and big debts put a stop to that gold mine. The major cropping of cotton and other crops is in the low cost areas (Pakistan) hey have floods as they have last year Cotton is back to gold levels. Unfortunately agricultural products are the in one way the same as our manufacturing industries , High wages, populations leaving to the coast and fuel costs. These are the reasons that Clyde an collie farms sold their water rights (that was gold) ,when I suspect they were in financial troubles also and saved by Wong & Co. As we have seen in the timber industries ,there is NO future for long term investment (profitable) unless you are a retailer or wholesaler. Old private rural families will continue to do well ,but city run corp never. The old records of the Balonne river until late 1980’s showed a flood every year , that average has been blown out of the water since .

  78. Steven
    :

    Roger,

    the companies that will benefit im going to go with, Macarthur coal and Cockatoo Coal. and for Oil Aurora Oil and Gas and Sundance Energy. Your thoughts??

    • Johanna
      :

      Hi Roger,

      Thankyou for your insights and happy 2011.

      Since there will be increasing demand for oil I would tend to think the Matrix (MCE) will benefit in it’s deep sea oil rig projects as there will be more need for deep see exploration. I also wander if Mineral Resource’s (MIN) IV will rise at a good ‘clip’ over the coming years as they supply and serve mining companies. Forge Group (FGE) is another I would see benefit in the engineering and construction sector.

    • paul
      :

      It is quite simle with Sundance. I have owned the stock for years now and they are worthless. The cost to continue exploration, extraction, infrastructor, transport and shipping far outways any profits. That is why the Chinese pulled out of any interest in the company. As for Coal I had Cockatoo and they look like going side ways until they can make any more money. I have sold them and purchased ENDO COAL. (EOC). They are a new expolrer in QLD. The float was double over subscribed @ .60 cents.They have a huge tenament and they keep coming up with results. I have bought them at a discount to the float and they are still around that .40 cent price. The expectation is they will go to $1.00 per share this year as the results are announced.

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