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This billionaire’s “$5 million test” will make you a way better investor

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Posted by Simon Black - Sovereign Man

on Thursday, 19 October 2017 19:16

supertankIn 1982, a man named Jim Tisch bought seven supertankers for $42 million. He found them by cold calling companies he found in the Yellow Pages. 

Yes, $42 million is a lot of money… but these tankers were each four football fields long. That’s a lot of steel. And they could carry between 2-3 million barrels of oil. 

And these ships were built just eight years earlier at a cost of $50 million apiece. 

Jim Tisch is the son of the legendary Laurence “Larry” Tisch, the late billionaire founder of Loews. Corp – a conglomerate that has owned hotels, movie theaters, insurance, cigarettes, oil and watches over the years. 

And like his Dad, Jim had a nose for value… 

Low oil prices in the early 1970’s (around $3 a barrel) caused demand to soar. To keep up with the growing demand, everyone rushed to build supertankers (which can take years to complete).   

Then the Arab oil embargo in 1973 sent oil prices soaring to $12 a barrel by 1975. 

The Iranian Revolution (and ousting of the Shah) followed in 1979… And Iran drastically slashed its output. Oil jumped to over $37 a barrel. 

Now there was much less oil coming out of Iran (and a year later, Iraq), but the tankers were still floating in the water. 

Tisch started sniffing around for tankers in the early 80s, when, according to Tisch, only 30% of the global fleet was necessary to meet demand. 

That’s why he was able to buy at an almost 90% discount. As he said at a 2006 speech at Columbia University: 

[S]hips were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap. 

By 1990, the market for tankers was turning around… too many ships were scrapped and the volume of oil coming from the Persian Gulf was increasing. 

Noting the strength, Tisch sold a 50% interest in his ships for 10 times his initial investment.
 
He still maintained half ownership… and collected enormous cashflows from operating those ships. 
 
When he first stepped foot on a supertanker, Tisch said he formulated the “Jim Tisch $5 million test.” From the same speech at Columbia: 

And what is the Jim Tisch $5 Million Test, you may ask? While on the ship you look to the front and then you look to the rear – then take a look to the right and then to the left –then you scratch your head and say to yourself – “Gee! You mean you get all this for $5 million?!” 

In other words, sometimes a good investment is obvious… 

But where do you find obvious value today? 

The US stock market is at all-time highs… And companies like Netflix (that lose billions each quarter) march higher and higher. 

Bond yields are still scraping the bottom… 

And cryptocurrencies have soared so high many are calling it a speculative bubble. Even if you’re a believer in crypto, it’s still not prudent to allocate a large portion of your wealth to the sector at this point. 

Likewise, you can’t put everything you have into cash or gold. 

But if you do the work, you can find certain securities that are just as safe as cash… 
 
Ed Note: The balance of this article is an offer for a value-investing service which you can read about HERE (just scroll down) 

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