Still Available: Double-Digit Yields in Canada
By Tom Dyson
June 7, 2007
In 1968, the Baltimore Colts were the best team in the NFL.
They won their final 10 regular-season games, beat the NFL record for fewest points allowed in a season, and thrashed the Cleveland Browns in the NFL title game to get to the Super Bowl.
I just finished reading Amarillo Slim's memoir. Slim is the world's most famous gambler. In his book Amarillo Slim in a World Full of Fat People, Slim spills the secrets on sports betting and shows how he's made a fortune off the bookmakers.
His most important rule: Always bet against the public.
"The Colts looked like a damn juggernaut," recalls Amarillo Slim. With Don Shula coaching and Johnny Unitas throwing the passes for Baltimore, everyone thought the Super Bowl would be a blowout.
The betting lines started with Baltimore at an advantage of 17.5 points. Then "Broadway" Joe Namath – the Jet's quarterback – taunted the Colts, calling their defense "predictable and easy to deceive." And three days before the big game, Joe stood on the podium and said the famous words:
"We're going to win Sunday. I guarantee you."
People couldn't wait to see Joe Namath eat his words. "Hell, I think what Joe said made people bet against him," says Amarillo Slim. By game day, the bookmakers had Baltimore beating New York by 21.5 points.
The change in the line from 17.5 to 21.5 showed Slim that everyone was betting on Baltimore. So he bet $400,000 on New York. You already know what happened next: The Jets won the game 16-7.
Underdogs don't always win. But as Slim's story shows, they always offer the best betting proposition because the public likes to bet on favorites, regardless of the odds. It just feels better to take the favorite. Slim says most of the bookmakers he knows add an extra half-point on the favorites for just this reason.
It's the same way in the stock market. The public loves to buy the hot stocks.
Me? I only buy the underdogs. In my newsletter – The 12% Letter – I've bought all kinds of underdog stocks in the past nine months. We've got a hated fast-food empire in our portfolio. We own a bank with low moral standards and a poor leadership team. (At least, that's what the public thinks.) Shame no one cares that it sells for two times its book value when most other banks sell for double that. And earlier this year, we jumped into subprime lending with both feet when everyone else was running for the exits.
All these investments have paid off big time for my readers. The fast-food empire is up 22% in six months. The lenders are all rising and paying us yields of 10%.
But possibly my favorite underdog investments right now are Canadian royalty trusts.
The Canadian government set up the trust structure in the mid-'80s to develop investment in the nation's resource sector. The trust structure allows companies to avoid all taxes and direct 85% of profits back to investors in dividends each month.
Investors loved this model. Unfortunately, on Halloween 2006, the Canadian Finance minister, Jim Flaherty, tried to quash it with a new piece of legislation. The next day, the whole sector fell off a cliff. It has rebounded a bit since then, but basically, the income trust sector is still trading far below its October 2006 levels.
Here's the thing: Flaherty's plans are far from certain. First, the previous Labor government tried this the year before. It ran into heavy opposition and had to back down.
Second, this proposal still needs to be approved by Parliament. Right now, it remains just a grand idea.
Third, the plan includes a grace period. Whatever happens, we know these stocks will keep pumping out large dividends (north of 8% for many) for the next four years.
Finally, four years is a long time in politics. There's a strong chance the government will amend this plan or change its mind altogether. Look, it created the trust program for the resource companies in the first place, and the affair only blew up when banks, retailers, and telecoms started converting to income trusts. So I suspect it might exempt resource companies from this new legislation and just thwart the regular businesses.
So basically, the royalty trusts are the underdogs right now. But it seems to me there's good reason to expect they can win this game. If I'm wrong, we make great dividends for the next three and a half years when the legislation kicks in. If I'm right, investors will rush back into the sector, and we'll make large capital gains as well as double-digit dividends.
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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