The objective of the trust was to provide its current beneficiaries with an income stream while preserving the inflation adjusted value of the capital for future generations. In this case, the trust knew its objective and created its own benchmark. I once worked with a taxable family trust that held an equity portfolio with many positions with very low cost basis (and therefore large capital gains liability if the position were to be sold). The story of this trust is an example of an investor knowing his objectives and sticking to them. To be successful, an investor needs to identify the Phoenix candidates and correctly time the turn in the market. The obvious quantitative way of finding Phoenix candidates is to screen the market for shares of companies that are at risk of insolvency. However, it is a deceptively simple way of screening for Phoenix recovery candidates. Allow me to illustrate this in a simple example: in a private company, I will not sign a deal of US$20million if I know I am going to suffer a loss of US$2million; it makes zero economic sense for me. I roughly confirmed these results by running a backtest using the current components of the Russell 1000. Had you bought the lowest decile by the boutique price in December 2002 and held them for a year, the median outperformance compared to the top decile was about 110%. This simple study has problems, mainly in the form of a survivorship bias.
Since the line is near the bottom of its historical range, it suggests that gold stocks are a bargain compared to gold. In response, I analyzed the question of the relative value of gold stocks compared to gold bullion. The above chart shows the ratio of the PHLX Gold & Silver Index (XAU), which has a longer history than the popular Amex Gold Bugs Index (HUI), to gold bullion. In 1929, one of the darkest times in stock market history, as well American history took place. Back in 2006 I wrote a research report (How to Watch for Signs that the Gold Correction is Ending, 15 March 2006; if you are interested in the full details email me and I will send it to you) detailing how to make a synthetic gold stock. Back then I bought BPY and I’m glad I did, because today PLZ’s shares are 10% cheaper.