[outmywindow]

Lining up to invest? I'm inclined to look the other way

In the early '80s I was working as a stock analyst at Bache Canada, the local outpost of a U.S. old-line merchant bank. I sat among the retail brokers who hustled for a living, and these people taught me 50 per cent of what I know about the market. (The other 50 per cent the market taught me, and not politely.) It was fun, too.

For example, once a year, just before Christmas, the brokers presented the "Aorta Award" to the one among them who suffered the worst illness in the line of duty. For the presentation, an old broker who invested in violins and old wines brought his Stradivarius from the bank's safe, and played a gypsy tune. One such event occurred after I had been lucky enough to have issued a sell on Mitel before it cratered and, as a reward, I was handed the Strad and allowed to play. (When I was in the first grade the harmonica teacher was absent, so I ended up playing the violin.) That's how I and the Strad owner (whom I'll call Ernest) got to know each other and, a few days later, he taught me a memorable market lesson that remains very relevant today.

That old Bache office was on King Street East in Toronto, the same as the office of Deak Pereira, dealer in precious metals. As I came to work on the day in question, I found myself having to squeeze through a thick throng of people clutching envelopes full of cash and certified cheques, or holding onto thick wallets. I asked one of them about the lineup. Why, said he, they were lining up to buy gold, which had just broken $800 (U.S.) an ounce on the way up to $2,000, surely, maybe even $3,000. Cash, said he, was no good, what with inflation in the double digits, so one had to rush and get gold.

And no, gold was not the only precious metal going up. Silver, too, was zooming, having reached more than $40 an ounce - mainly because two Texan brothers, Albert and Bunky Hunt, bought as much as they could - with financing facilitated by Bache in the U.S., it so happened - and so created a short squeeze. Silver, no doubt, was also going higher. All this seemed exciting stuff, and so I went in and asked Ernest whether I should also go buy myself some gold and silver with my hard-earned savings. "Before I answer," said Ernest, "please go look at those lining up, and describe them to me. Don't ask questions, just do it." Perplexed, I went out, then came back and reported: "Scuffed shoes, wrinkled clothes, very few ties, and nary an overcoat in sight. So what?"
"Ah," said Ernest. "The pros are selling to this motley crew. Who is left to buy, then?" The revelation was like a flash bulb, and it stayed with me until today. Since then, whenever I see non-wealthy folks lining up to buy from the wealthy pros, I recall old Ernest and try to do the opposite - or at least keep away from what the liner-uppers are buying.

You probably know that the 1980 gold price of $800-plus was the peak for a long time. The following year gold fell, as Federal Reserve chairman Paul Volker choked inflation with steep interest rates, and it continued to fall for many years. Only in 2007, more than a quarter century later, did gold's price rise again above $800. If you take inflation into account, the price of gold price has not yet surpassed what that motley crew paid for it in 1980.

Silver, too, soon buckled after 1980, the brothers Hunt lost everything and soon, as the saying went, were down to their last million. And Bache itself, laden with bad paper due to the silver gamble, was almost taken over by Canada's entrepreneurial Belzberg family before running to the arms of Prudential Insurance.

Now, why I am telling you this story? Because just last week I saw another such lineup, like the 1980 queue for gold. It was on Toronto's Bloor Street, near the Yonge Street intersection, and eager persons stood up all night in order to buy condominium futures. (Why futures? Because buyers were asked to fork over a down payment of a few hundred thousand dollars in order to buy the condo in 2010 or 2011 for full price. Just like buying gold futures, or pork belly futures, or soy bean futures.) The condo's future price? Oh, at least half a million to start, and up to five mil at the top. But then, what's $5-million compared with the privilege of living in the heart of that vibrant metropolis Toronto, which is (as Peter Ustinov once said) New York run by the Swiss? After all, someone surely would soon pay more than five mil for it.

It is here that memories of gold buyers lining up before Deak Pereira in 1980 keep running through my mind, and bring up the nagging thought: Can this be the top of the million-dollar-condo bubble? It is, of course, possible that it's not, and that a four-room (as yet unbuilt) Toronto condo would be worth $10-million - maybe more - very soon, just as it was possible that an ounce of 1980 gold would be worth north of $800 soon after. But just as the gold of 1980 revisited its price only 27 years later, those lining up to buy downtown Toronto condos today may also find they must wait several years - perhaps many - before they get their money back.

Or is it my value investor bias showing? If so, I apologize. But it is the best investing method I know. -Avner Mandelman is president and chief investment officer of Giraffe Capital Corp. and the author of The Sleuth Investor

Nautical Moment:
Poland's 491 km of Baltic Sea coastline is exposed with little shelter from the prevailing winds. Majority of the Country's boating is done on it's thousands of inland lakes and rivers. Poland's low wages have created a niche market as a subcontractor builder for major European and US boat builders with about 90% of all boats produced destined for export.