Benny Grossbaum was the embodiment of the American Dream.
Born in London in 1894 during the reign of Queen Victoria, Benny and his family moved to New York City (through Ellis Island) when he was still a baby.
At first the family was well off; his father ran a successful business, and they lived in a posh brownstone on Fifth Avenue in Manhattan.
But Benny was just 9 years old when his father suddenly passed away from pneumonia, and the family lost everything. The rest of his childhood was spent in abject poverty, and he later referred to this time of adversity as “the years that formed my character.”
Living in squalor also lit a fire within Benny to become wealthy; he developed a passion for money… and for study. And from the time he entered kindergarten, Benny’s teachers recognized his strong intellect and work ethic.
Benny Grossbaum flew through school. He was so advanced that he skipped several grades, all while mastering Latin and Greek. And he ultimately graduated from an Ivy League university where he studied mathematics.
This was as time, however, of significant anti-German and anti-Jewish sentiment in America. So the Grossbaum family formally changed its name… and henceforth Benny Grossbaum became known as Benjamin Graham.
You probably know that name well; Graham was a legendary investor who is considered the “father of value investing”. And during his career he taught Warren Buffett, Sir John Templeton, and a host of other prominent investors.
But Graham’s track record was far from flawless.
In 1926 as a young, 30-year old Wall Street hot shot, Graham started his own hedge fund called the Graham Joint Account.
Graham’s fund performed really well for the next few years, returning an average 25.7% per year. Not bad.
But this was the Roaring Twenties– a period of time in the United States were the economy was red hot and the stock market was booming… thanks in large part to the Federal Reserve’s rapid expansion of the money supply.
The Dow Jones Industrial Average rose 2.5x in a roughly three-year period from 1926-1929, and Graham rode that wave.
But even someone as smart as Graham didn’t see the crash coming. In late October 1929, his fund almost got wiped out when the market had its worst decline in history.
The stock market continued to tumble for the next three years, finally bottoming out in 1932; at that point Graham’s fund was down 70%, and he knew he needed to reassess his strategy.
It was from this reassessment… out of his personal failures of the 1929 crash… that modern value investing was born.
Value investing is conceptually very simple. It means we’re looking for a bargain… and we buy assets that are underpriced.
Most people do this every day of their lives. When we go shopping at the grocery store, or browse the Internet looking for discounts, we’re always trying to find a good deal.
In this way, value investors are little different than bargain hunters who research where they can get the best deal on a new pair of shoes.
But it’s been very difficult to be a value investor for most of the last decade; the vast majority of assets in nearly every advanced economy around the world– stocks, bonds, real estate, etc. were all selling at irrationally high prices.
A lot of investments were priced at absurd levels; even junk bonds sold at record high prices. The sovereign bonds of insolvent European nations traded at NEGATIVE yields. And money losing businesses with no hope (and no plan) to ever turn a profit traded at record high valuations.
It was really, really hard to find a great deal in the midst of all that chaos.
But market conditions have now changed dramatically, and there are plenty of great deals out there.
I’m particularly drawn to ‘real assets’ and businesses in real asset sectors– particularly mining companies, energy companies, agriculture companies, and companies that develop productive technology.
Real assets tend to be a great way to hedge inflation… and as I’ve written before in previous letters, I believe inflation is here to stay.
What’s incredible is that there are so many ‘real asset’ businesses that are available at extreme discounts right now… which sounds perfect. And yet very few people are buying.
Energy companies are a great example.
There are profitable, well-managed natural gas businesses right now that are selling for as little as TWO times earnings (i.e. a P/E ratio of TWO).
Bear in mind that natural gas prices in the US are only $2.70 right now… and there’s a STRONG case to be made that prices will rise substantially in the future thanks to the new Liquefied Natural Gas (LNG) export boom.
For decades, the United States barely exported any of its natural gas abroad, due in large part to the difficulties in transporting gas across oceans.
But now that LNG transport has been perfected and new LNG export terminals are being built in the US, it’s very likely that more and more US natural gas will be shipped overseas to Europe and Asia (where prices are MUCH higher).
This trend would leave less natural gas in the US… and most likely lead to higher prices… and even higher profits for natural gas companies.
And yet it’s possible to buy shares in their companies right now for just 2x earnings. That’s cheap. That’s value.
It’s not just natural gas companies; plenty of mid-size oil production companies are also selling for ultra-cheap valuations.
It really is amazing that oil companies had their most profitable year EVER in 2022. Yet nobody wants to own them.
And the reason is simple: it’s apparently evil and immoral now to own oil and natural gas companies. Fund managers (under pressure from the woke elite) have sold off their oil and gas stocks because they’re all terrified of Greta Thunberg.
Other ‘real asset’ sectors are also cheap. There are even some fertilizer companies and agriculture businesses trading for low, single-digit multiples to their current/future cash flow, and price/book ratios below 1.
Value investors have been waiting patiently for more than a decade for great bargains to emerge. And, finally, there are some high quality, well managed businesses out there that can be acquired at a steep discount.