The Caribou Factor

  In the 1970s, it was feared that construction on the Trans-Alaskan pipeline would disrupt the migratory patterns and feeding habits of the Porcupine Caribou Herd.

Speaking on behalf of their cloven-hoofed brothers, environmentalists held up construction of the pipeline for about eight years. The stretched timetable caused Atlantic Richfield, the pipeline's owner, to re-price the bonds it had issued to finance the project (i.e., to lose money).

Since then, costly complications that turn up halfway through a big project have been referred to in the investment community as "the caribou factor."

When you think about it, though, it's not just the big financial projects where such factors figure. Recognizing the caribou factor is a simple acknowledgment that you don't own a crystal ball, and that you know as much about the future as everyone else--nothing.

All of life is a kind of caribou avoidance and recovery game. From inflation, war and corporate downsizing to icy streets, drunk drivers and empty parking lots late at night. There's caribou everywhere.

Investing, as ARCO learned in the 1970s, is no different than anything else in this life. Consider all the variables most common stock investors watch. Revenues, profits, returns on equity, debt and dividends. Not to mention share volume, intra-day highs and lows and closing prices.

You control none of those things. To you, they're all potential caribou herds, waiting to migrate to your portfolio.

After you buy, your money is out of your hands. It's in the hands of the market and the company of which you've just bought a portion. It's in George Bush's hands, Mahmoud Ahmadinejad's hands. It's in the hands of Ben Bernanke and his inflation, Congress and its tax increases (or decreases), the Justice Department and its anti-trust laws.

Your money leaves your control when you buy stocks and bonds.

Marty Whitman, chief of Third Avenue Funds, refers to you and I (and often himself) as OPMIs. That's Outside Passive Minority Investors. If that doesn't sound like a very powerful position, you're right, it's not.

In a bankruptcy, OPMIs, in their normal role as common shareholders, are last in line. They usually leave empty-handed. The best bankruptcy workout for common shareholders that I've seen happened just recently. I can't remember the name of the company, but 130 of the old shareholders got 5% of the new company. The rest got zip. Their shares--and the money they bought them with--were real one minute, caribou feed the next.

So-called investment professionals can't help you much, either. It's common knowledge that over 90% of all mutual funds fail to beat the market, fail to avoid the caribou. They should call themselves financial safari guides. They seem to find caribou for a living.

Grim as it all sounds, I'd stop short of paraphrasing Lord Keynes: "In the long run, we're all caribou doo." I wouldn't go that far. There is a powerful ray of hope for caribou-phobic investors.

You can call it your timing, or when you buy or even what you buy. No matter how you arrive at it, no matter what incantations you intone or what stars you plot, or how much accounting you know, or how many numbers you run, if you're Warren Buffett or John Q. Public.

Investing boils down to one, simple assessment that you, the investor, and you alone must determine: the price you pay.

Given that the caribou factor takes over after you buy, it behooves you to spend more time on assessing the price you pay, and its relation to the assets in which you seek to purchase an interest, than on anything else.

That goes for any passive investment you make: stocks, bonds, futures, options, MITTs, TIPs--you name it. Your number one concern is what it's worth to you, how much you'll pay. All other factors move across your financial landscaping, on bad days alternately devouring and befouling it, on good days ignoring you, not benefiting you one iota more.

If you want to obsess about something as an investor (and let's face it, we all want to obsess about something as investors), obsess about the price you pay.

Not only is the price you pay the only thing you control. The price you pay determines how much you'll make or lose on a given investment.

Buy a $10 stock trading at half of book value, and you could profit, even if the company shuts down. Buy the same stock at $40, and you're placing a long shot bet that caribou won't like the flavor of your money.

If you buy the S&P 500 at 20 times earnings, and it reverts to its historical mean of 16 times earnings... and then falls in half from there, well, don't be surprised. That kind of price (i.e., high) is a signed, sealed invitation to every caribou in the countryside. When stocks fall well below 16 times earnings, the food supply dries up, and caribou herds thin out. Invest in a company that trades at a market cap of $177 million, and owns a few billion dollars worth of land, and you could still get hit with a caribou infestation. But the odds are against it. Buy the same company for a premium to the fair market land values, and you're playing craps at the Caribou Casino.

In the stock market, tilting the odds in your favor--by controlling the price you pay--is the best you or anyone else can do. In fact, buying low price to book value stocks and selling them every two years produced a 22% average annual return between 1930 and 1980. Those aren't entirely caribou-free returns, but they're as good as it gets.

Buying value at extreme lows in price is one of the most reliable caribou repellents around. Maybe cheap stocks smell like Eskimos. High prices, on the other hand, smell like female caribou in heat.

Fortunately, you get to choose which scent you'll wear, what price you'll pay.

Editor's Note: Dan Ferris is the Editor of Extreme Value, an investment advisory service that uncovers the safest, cheapest stocks in the market. As of February 2006, on average, Dan's recommendations have produced an average return of 57%, just by finding great investments available at a big discount.

For example, Dan has recently uncovered an investment vehicle he calls "The World's Greatest Hedge Fund." You'd never hear about this investment from your broker... yet it alone has made hundreds of ordinary investors into millionaires--like Carrie Anderson, who started with just $10,000... or Roger Samuelson, who made 5,675%.

"Odds are," writes Dan in his recent research report, "no single stock will ever pay you even a fraction of what you'll get over the next few years from this particular investment..."

We recommend taking a look at Dan's full Extreme Value investment report for the details, which you can find here: http://www.stansberryonline.com/redirects/WEVIG200.html





Posted 02-28-2006 9:20 PM by DanFerris
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