During the Annual Value Investor’s Conference (May 1-2, Omaha), Austin, Texas based value investing veteran Arnold van den Berg gave an excellent review on the possibility of inflation and what investors should do to protect themselves from it and even profit from it. In early 1970s, when Mr. van den Berg was just starting out, inflation was still tame. But it quickly ramped up to double digits. S&P 500 lost 50% in three years and the overall market valuation dropped dramatically and stayed low for years. He is seeing similar risks in the current market.
According to his associates, Arnold van den Berg, 74, spent more than a month preparing the slides. The weekends before the presentation, he stayed in the office until 1 am working on it. Mr. van den Berg is a long term yoga practitioner and can do the moves that seemed impossible even to his much younger associates. The presentation was enthusiastic and energetic.
Here are some key takeaways:
- Overall market valuation is dependent on Interest rate, inflation and the fundamentals,
- Inflation can take hold and when it does, it can move quickly.
- US created 3 trillion of new reserves. This has not created inflation, because money is still in the bank. What will happen to the money will decide the rate of inflation.
- Unlike in Europe, Fed may leave the money there for too long due to political pressure, cultural bias.
- Whenever you print money, commodity prices will boom
- 1965, LBJ reduces the gold backing of the dollar from 40% to 25%.
- 1971 Nixon suspends convertibility of the dollar into gold and it became a fiat currency.
- Inflation may take years to build, not showing up. But once it started to show up, it can move very quickly.
- Robert Hetzel: Experience in itself does not make people wise. Economists need to examine and learn from historical experience in order to avoid repetition of mistakes.
- When inflation increases above 4%, stock market P/E will shrink dramatically. Though many people think that stock prices hedge inflation, but it hedges inflation only when inflation is stable, not when it is accelerating.
- Value Line median P/E currently at 18.9.
- If inflation is coming, be careful with stocks, be even more careful with bonds. Commodities is the place to be.
- When inflation is coming, you don’t want companies that have debt because interest rate will move up and refinancing the debt will become more difficult. The interest payment burden will be much bigger.
- Gold study on Century website. The link is here.
- Oil is an excellent inflation hedge. Oil stocks, oil service companies. Gold, gold miners are all good hedges during the ramp up of inflation.
- CRB commodity index vs. S&500 in 1970s
- From 1972 to 1975, oil up 300% while S&P down 49%.
- Most of commodities are not buys right now. They are not down enough.
- Commodities are not for long run, though they are good inflation hedge. From 1960 to 2014, stock market does much better.
- T Rowe Price was the greatest manager. Read his book.
- If things do change, dollar may lose their position.
Arnold van den Berg did bought heavily into good miners and oil producers heavily during the first quarter. These companies include Apache (NYSE:APA), Diamond Offshore Drilling (NYSE:DO), Randgold (NASDAQ:GOLD), Yamada gold (NYSE:AUY), Hecla Mining (NYSE:HL) etc. You can see the complete list of his new buys here.
Here is a link to his presentation.