Centre Street Cambridge Corporation

Private Investment Counsel


July 1993

In these commentaries I have tried to write about subjects which I thought would be instructive to my co-investors, giving them insights into how the financial markets operate, thereby helping them to avoid certain obvious pitfalls and perhaps come to a better understanding about how good investment opportunities arise. Instead, I'm afraid that I've turned my readers into cynics who think the investment world is full of gullible lowbrows and con men. Well, some of the shenanigans of the past several months will probably reinforce this view.

History constantly repeats itself in the investment world, with more and more new names and faces crowding out the old. Lessons learned are soon forgotten; fads and mindless speculations eternally recur.  One of the latest incarnations has been, ironically, the gambling business. Someone down in Louisiana noticed how popular casinos built on riverboats and barges had become and concluded that the possibilities for expansion of the concept were endless. Such excitement tends to breed, among other things, new stock issuance and a number of gambling companies entered the public realm. One such company, Presidential Riverboat Casinos ("PREZ"), sold shares late last year at about $11 each and saw them rise to over $40 by May, at which point they were selling at about 70 times earnings. Then, as similar outfits geared up and more states began to permit gambling (i.e., supply increased), some holders of these things realized that the potential for the casino companies may not be as open-ended as assumed. PREZ fell to about $30 in what I suspect is but a mild setback compared to what is eventually in store for many casino operators.

Now I admit that watching such activity is exciting and it makes you wonder how one can get in early enough to be able to catch the ride up. But it is precisely this kind of thinking that is responsible for the endless new generations of suckers who get caught up in the stampedes and get trampled in the process. The question which should be asked is, how can one invest in these ventures? The answer is that unless you are an insider who understands the business there really is no way. The public investor is dealing with an enterprise that typically has little in the way of operating history or earnings and, hence, is in a situation which is inherently speculative in nature.

The gambling craze also reached gold stocks this year. Gold is interesting because the industry lends itself to investment analysis in much the same way that oil exploration does (see Oryx), as I will now explain.

Gold has traditionally served as a hedge against inflation, meaning it is a store of wealth which is supposed to protect one from the cheapening of paper money. So, the price of gold reflects, in part, expectations regarding the future value of currency. Now, shares of gold companies, like shares of oil exploration companies, represent ownership of reserves of the corresponding commodity.  Early this year, when inflation fears were virtually non-existent, both gold bullion and gold shares were relatively inexpensive. In fact, by purchasing the shares of certain gold companies you could have owned an ounce of gold for less than the cash cost of producing it from the ore (we came very close to doing so and the fact that we didn't is my biggest error of omission this year.).  Sometime in February or March, the environment changed: people began to notice that commodity prices were creeping up (a possible harbinger of inflation) and comments about the expansive policies of the new president were heard. Suddenly, the possibility of INFLATION became worrisome and gold and other precious metals stocks soared. Soon, advertisements touting gold funds appeared in all the newspapers and predictions of big rises in the price of the metal (usually made by those who had some kind of interest in the subject) came to be taken seriously. Make sense to you? Do you really want to hedge against inflation when the price of the hedge itself has already climbed dramatically? I think not and for the same reason that life insurance is cheapest when you appear to need it least.

There's more, but I'll spare you since you are probably wondering if I ever have anything positive to say about this business. Actually, one of the main reasons I am pursuing this line of work is because I know and know of a number of people whom I admire, who work hard, act, as I hope I do, according to sound principles and do well. It is a great endeavor and always challenging.

From the outside it probably appears that I don't do much, but that is misleading (promise!) --the search for good investments is continuous. I have examined, in more or less detail, literally dozens of companies this year; but I find little to attract my interest. There is, in addition, an inventory of companies I monitor and for which I have purchase price targets in mind, but this group is priced beyond my means as well. In short, continuing high average prices, as well as my limited intelligence, make it hard to come up with good ideas.


Dennis Butler, MBA, CFA