Peter Schiff’s New Book: (4) Buy Foreign, But Not ADRs

So, what’s the moral of the Peter Schiff story?  Buy commodities and foreign dividend-paying stocks.  And consider investing through his company Euro Pacific Capital (no, this is not a paid series of posts).

Now that I’ve finished reading the Little Book of Bull Moves in Bear Markets, my sense now is that I’ve pretty much got all the information I need to from Peter Schiff.  But I’ve been following him for years.  If you haven’t done much reading on the markets, let alone Peter Schiff’s work, I highly recommend you check it out.  Schiff explains things in a clear and engaging way.

So let me summarize some of the main points that I took away from the last half of the book.  I’ll present these in a somewhat unconnected, but chronological manner.

Stick with Companies That Can Export or Have Addicted Consumers

During 1930, every stock in the DJIA (Dow Jones Industrial Average) declined except three: one tobacco company and two food producers (Liggett & Myers, General Foods, Borden Co.).  But by 1931, every stock in the Dow was down.  Those who held onto their stocks had to wait until the 1950’s for asset prices to fully recover. Nevertheless, food, tobacco and gold stocks still did better than the others during this time.  The type of deflation that occurred during the Depression was in consumer goods prices, which is a good type of deflation and not one that the government should be protecting us from.  It can insulate us and our standard of living from the rest of the economic downturn.

Schiff says to keep a close watch on the prices for domestic goods and services which are not exportable: haircuts, movie tickets, theme parks, health memberships, and college tuitions.  Are these prices rising or declining?

Avoid “like the plague” any U.S. stocks largely dependent on American consumers,” especially regarding discretionary purchases or repaying their debts (eg., financials, retailers, home-builders).

Ride the Commodity Bull

Similar to Jim Rogers (with a slightly different timeline), Schiff thinks we’re still in the early stages of a secular commodity bull market that will last “at least another decade.”  What’s important about commodities is that they are a true hedge against inflation because they represent tangible things always worth something (unlike stocks, which represent real assets, but whose worth fluctuates).

“The most recent bear market in commodities was between 1982 and 2002, coinciding with the record bull market in stocks.”

Commodities Include:
-natural resources companies (energy; oil)
-raw materials (copper, cotton)
-agriculture (fertilizer, farm equipment, livestock (sadly))
-precious metals (gold, silver, palladium, platinum, rhodium)

There are many ways to invest in commodities, but about half of them aren’t suitable for average investors.  Average investors (and I’d definitely include myself in this category) can only really invest in commodities indirectly, through index funds, stocks of producers and their support companies, and dividend-paying stocks of companies in resource-rich countries (Canada, Australia, Brazil).  Of course, Schiff recommends (and I do think it’s sincere, he does have to promote his means of making a living) working through his own company, Euro Pacific Capital, since Schiff has negative views on ADRs.

Buy Foreign, but Stay Away From ADRs

This is probably the most pertinent take-away message I got from the book.  I have to admit, I need to learn more about how ADRs operate for non-US investors like myself.  Here’s what Schiff says:

“Banks incur costs in issuing ADRs, and they may deduct from dividends to reimburse themselves.  Another factor is that ADRs are subject to the same onerous and costly regulations as American companies: many well-run foreign companies, therefore, choose not to sponsor them.”

I knew neither of these points.  But there’s two other good ones:

• they are issued by the biggest (usually) and most visible foreign corps., so like most blue-chips, “they are normally fully-priced, so you won’t be getting any deals on them
• as they earn a good % of their profits in the U.S., their short-term earnings will be affected by a weakening US dollar and the collapse of its consumer-driven economy

I didn’t think of these either.  It reminds me of a thought-experiment I’ve been doing in order to figure out what is supposed to happen to my own ADR investments if the US dollar tanks.  Say I own 100 ADR-shares of China Mobile and bought them at $50.00 USD.  Say it cost me $60.00 CAD in order to do that.  If the USD drops significantly against the CAD, it will be much cheaper for me to buy the ADRs.  But since they’re reflecting the USD-Yuan relationship, I suppose there is a double risk involved and I can’t really calculate what they’ll be worth to me.  If the USD also drops against the yuan (which China really really doesn’t want to happen), I think it means that the value of my investment will fall (at both steps: USD and into CAD).  What it comes down, to, I guess, is that I have to just wait and see what happens in order to figure it out.  It seems like it should be simple, but it’s quite slippery.

I’m going to leave my discussion of Schiff’s book at that – I’ll save commentary on the last 50 pages or so for those of you who want to buy the book yourself.  Schiff’s is a compelling argument, and whether you’ll end up disagreeing or agreeing, I think it’s a perspective well worth acquainting yourself with as we move ahead in very uncharted economic waters.  Let me know what you think of it!   I appreciate some good debate, too!

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Tagged as: books, Peter Schiff