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Friday, November 18, 2005
Nothing gets the juices flowing like a good old fashioned speculative bubble. If only we could participate in just one of these wild market moves, we’d be rich beyond our wildest dreams...which brings us to LoBagola Analysis:
As a young boy, LoBagola lived in an isolated village in the tropical rainforests of West Africa.
While playing on a beach one day, LoBagola and his friends spotted a Scottish steamer anchored offshore. Full of curiosity, the young scamps paddled a canoe out to the vessel. When the sailors spotted the canoe, they invited the boys onto the boat and let them explore.
While LoBagola was below deck watching the fireman stoke the boiler, the captain gave the order to cast off. The boy’s companions, already on deck, jumped into the sea and were instantly devoured by sharks. Having witnessed the feeding frenzy, LoBagola had no choice but to stay on the ship and sail all the way back to Edinburgh.
In 1930, having been educated in England, LoBagola published an extraordinary memoir of his experiences, called ‘LoBagola: An African Savage’s Own Story.’
In the opening pages, LoBagola describes in great detail what life was like in the rainforest. In particular, he explains how the villagers defended themselves from the leopards, lions, reptiles and packs of great apes that “would destroy huts and tear apart anyone or anything in their path.”
But it is LoBagola’s story of the elephants that is of most interest to us.
Elephants traveled in groups of 50 to 100, recalls LoBagola. As long as everyone stayed out of their way, there was little to fear. From time to time, however, the elephants would go on a rampage. Nothing could stop them, and the elephants “would uproot, trample and destroy” everything.
Sounds just like a violent market move!
Anyway, there wasn’t much the villagers could do to protect themselves from the marauding elephants. If they trampled the village, they trampled the village. The villagers did notice that, whenever the elephants romped, whether it be a day a week or a month later, the elephants would always return on exactly the same path.
This information allowed the villagers to set traps for the elephants – they would dig pits and camouflage them with bamboo and shrubbery – and then kill the beasts for their ivory should they fall in.
And this is the key: A marauding market price behaves exactly like LoBagola’s elephants.
These wild moves occur all the time in the markets, and in hindsight, they always seem so predictable...
The famous trader, Victor Niederhoffer, calls the act of identifying these predictable episodes “LoBagola Analysis” in his classic book on speculation, ‘Education of A Speculator.’
Do these patterns really exist? And, can you protect yourself and profit from them?
For guidance, we call legendary investor and $90 billion fund manager Jeremy Grantham to the stand. Grantham is an expert on price bubbles and claims, without exception, that prices always return to fair value.
To reach his conclusion, Grantham trawled through “every conceivable” snippet of price data he could find, searching for evidence of ‘marauding elephants.’ He studied currency, commodity and stock prices, going back 200 years, looking for price bubbles.
Grantham identified 36 or 37 such stampedes in the last 200 years. The most memorable, he says, are gold and silver in 1980, crude oil in the early 70s, the Japanese yen in 1995, the S&P in 1929 and 1965, Japan’s stock market 15 years ago and stock market mania of 2000.
“And every single one of them gave back everything,” says Grantham, explaining the survey’s findings. “There are no new eras. Every one of them – most of which were felt to be new eras – gave everything back to trend. There were no survivors.”
Grantham started challenging large groups of financial professionals he would frequently lecture – groups containing up to 140 senior portfolio managers - to prove him wrong. “I beg you, please give one example... irritate me. Stick your hand up. Prove me wrong. If you’re timid send a fax or email.”
“And no one has been able to come up with an exception,” he claims. “Not one has come up with a bubble that didn’t break completely.”
From our perch high above the rainforest here at DailyWealth, we think we’ve spotted marauding elephants in several places this year... especially in the energy and real estate markets.
If you have a large position of your wealth in either of these two areas, keep an ear to the ground. The elephants will come back. Don’t get caught in the stampede.
AN IMPORTANT ANNOUNCEMENT ON GOLD…
To the owners of gold coins… gold stocks… gold anything: You made money yesterday.
December gold climbed as high as $487 an ounce on Thursday… an 18-year high.
Both the short term and the long term charts of gold paint the picture of a well-defined bull market.
The short term (six-month chart)
And the long term (three-year chart):