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A Few Notes on Buying at the Point of Maximum Pessimism

June 15, 2010 • Posted in Fundamental Valuation

In his May 2010 book Buying at the Point of Maximum Pessimism: Six Value Investing Trends from China to Oil to Agriculture, author Scott Phillips “introduces a half dozen investment themes that should maintain their fundamental appeal over the next five to ten years. The purpose of this book is to answer the question of what to buy during future bouts of market volatility. In sum, these themes could be thought of as CliffsNotes to be used in preparation for future tests in the stock market. These themes should help investors, at a minimum, inventory a list of investment ideas that may be applied over the years to come.” Some notable ideas from the book are:

From Chapter 6, “China: Ready for Prime Time” (Pages 128, 133, 136): “For all intents and purposes, the Chinese are in the process of constructing a new urban population over the coming 15 years that is greater than the entire population of the United States. As this demographic shift continues from the rural areas to China’s cities, it will bring with it new markets and a need for new goods and services to match urban consumption patterns. …although all this urbanization will drive continued demand for commodities and raw materials for infrastructure construction, the real sea change and new opportunity will unfold in the emergence of increased consumerism. …when it comes to selling products to the Chinese consumer, local firms that understand Chinese tastes and customs have an edge. …the Chinese consumer is nearly rabid for consumer technology…online shopping in and of itself is an important consideration when discussing the Chinese consumer.”

From Chapter 7, “Proteins and Agribusiness: Billions and Billions to Be Served” (Pages 152, 154, 161, 164): “Brazil has been winning in the global agribusiness trade for two simple reasons: its world-leading low cost of production, and its ability to expand production. …Brazil ranks first among the major producing nations for possessing the largest amount of unutilized arable land… Brazil has established itself as the dominant producer in the global trade for protein, and China appears to be the key demand driver. …high oil prices stimulate potentially higher grain prices, as well as fertilizer demand to match the pursuit of increased yields and plantings. …Farmers also require equipment such as tractors, harvesters, combines, and sprayers to raise their yields and expand their operations. …many of these businesses can take on relatively defensive attributes compared to other pro-cyclical businesses. Furthermore, because the industry is tied to food commodity prices from the demand side, these businesses can also provide some buffer from inflation…”

From Chapter 8, “Formula for Success: Rise Early, Work Hard, Strike Oil” (Pages 182, 184, 191): “Given the ubiquitous nature of oil in the world’s economy, oil is well positioned as a store of value during a period of monetary expansion and any resulting inflation. …one of the primary focus points for an investment would be firms that possess the balance sheet and proven expertise to expand production over time. …currently no forms of alternative energy can simply step in and totally supplant our need for oil. …these alternative forms of energy also require relatively high prices of oil over some period of time to maintain their commercial feasibility and expand production in a meaningful way.”

From Chapter 9, “An All-Too-Common Tragedy” (Pages 209-211): “…the world’s fisheries have been thoroughly prospected for product, and supply will remain relatively fixed going forward. …demand will remain strong over the next five to ten years thanks to the consumption drivers of rising standards of living in the developing markets and increased health consciousness in the developed markets. …the world has found an answer in the business of aquaculture, or fish farming. …the subcategories of diadromous fishes and marine fishes are particularly relevant from a growth perspective and likely will receive investors’ attention.”

From Chapter 10, “What Happens When 700 Million Students Want Extra Help?” (Pages 234-237): “the market for education in emerging markets is entering an exciting growth phase. This will create a wide array of opportunities, including private-market solutions extending to students, societies, and investors alike. …the scale of this fundamental growth backdrop is important because it gives investors confidence that, in the future, when the market and economy appear shaky, they can rely on the steady presence of a long-term secular growth trend in the for-profit education market that resists cyclical pressure. …investors should take an opportunistic approach to purchasing shares in the education services stocks. On occasion these stocks become depressed…”

From Chapter 11, “A Rare Opportunity” (Pages 244-245, 249, 253): “…the constant drive toward product innovation generates a steady demand for the rare earth materials…these raw materials are also significant because of growing demand from a trend that is under way in the developed markets relating to…all the manifestations of environmentalism in the form of technology application. …One country ostensibly controls the entire world’s current supply of rare earth China. …the supply-and-demand relationships…create a bullish scenario for rare earth prices, as well as for producers lying in the upstream to midstream portions of the value chain that can pass along price increases. Moreover, in accompaniment with the rising demand dynamic, China is progressing in ways that will limit the future amount of rare earth available on the world market…the rare-earth industry presents a growing opportunity for investors to participate in the rapid growth of technology.”

In summary, Scott Phillips’ Buying at the Point of Maximum Pessimism offers six long-term investing themes based on extrapolation of some major global sociopolitical and economic trends.

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