Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Protect Me from Myself

Protect me from knowing what I don't need to know. Protect me from even knowing that there are things to know that I don't know. Protect me from knowing that I decided not to know about the things that I decided not to know about. Amen. ~Douglas Adams, Mostly Harmless

My Canadian online broker treated me to this sunny message today...

Increased Margin Buying Power Now Available!

At first I thought it was some kind of cruel trick but the font was green and large, punctuated by an explanation mark to drive home the excitement of this new development. Wasn't margin a way to gain leverage on investments? Leverage is a dirty word in the investment community. Leverage is what created the biggest financial catastrophe known to mankind. Why would the margin "buying power" be increased for over 1,000 securities?

My broker says leverage can:

  1. Increase returns

  2. Provide tax benefits

  3. Allow for greater flexibility and diversification

There were some links below these points that I didn't click until after I started writing this. They mentioned things like risk. Clicking through to a third page led to a download of a 57 page PDF file of service agreements and disclosure. Who has time for legal mumbo jumbo when the market is moving?

And yet... I can still remember speaking at the San Francisco Hard Assets Conference last November where one of the few investable themes was a list of companies that were trading at or below their cash values. Exeter Resources (XRA) was being admonished by analysts for insisting on drilling up their Caspiche property with a 9300 m (30,500 ft) drilling program. Spending C$8 million on drilling with a treasury of "only" C$23 million was viewed as reckless. What would they do in 3 years when all the cash was gone?

Exeter president, Yale Simpson, stood up at a dinner in the Machiavelli Room that evening (which was in the basement Kuletos which seemed like a straight up kinda place) and rebutted his critics by pointing out that the money Exeter was spending would create value for shareholders by proving up resources in a higher grade portion of their deposit. Bigger companies were willing to pay for proved resources and he would be doing shareholders a major disservice by not proving the value of Exeter's assets. Back then their share price was ~US$1.50, yesterday it closed at US$5.55 (and they had C$34.4 million in the till as of June 30th).

Turns out the market has a thing for companies with real assets after all. The romance is turning torrid.

Can I buy Exeter on margin?

As one colleague recently said when I first passed on an IPO, "Oh Jim, Don't think too hard on this one..."

I'm trying not to think too much.

Lord, lord, lord.  Protect me from the consequences of the above prayer. ~Douglas Adams, Mostly Harmless

Reprinted by Permission C 2009 Minyanville Media, Inc.