Financial guru Charles Allmon rates the winners and losers

Financial guru Charles Allmon rates the winners and losers

Stephen Goode

Charles Allmon’s first job was with United Fruit in Honduras in 1941. The 20-year-old slept with a pistol and a flashlight. “It was a great job for a young guy just out of college,” he tells Insight. These days, the 76-year-old Allmon is editor of the 31-year-old Growth Stock Outlook, which was ranked third on a risk-adjusted basis for the 15 years ending March 31, 1996, by The Hulbert Financial Digest, which rates all major investment-advisory services. He manages about $150 million for pension funds and individuals here and abroad.

A contrarian by nature, Allmon predicted a coming bull market in the midst of a very bearish market in 1974. In 1987, he predicted the stock market was about to experience a major collapse. On both occasions his critics called him crazy, but he turned out to be right. Allmon has definite opinions about the investment industry: “The crowd in this business in the long run never makes money. They’re into crowd psychology — and the crowd, in the long run, always loses money.”

Insight: What are we to think of this amazing bullish market we have now?

Charles Allmon: The only thing I know for sure about the stock market is that it always returns to its historic norms, and those norms are a long, long way down. This is one business in which it is preordained that history is going to repeat itself

No one is concerned about value. Nobody is concerned about the rules. All they know is it is going up.

To give you some idea, in 1900 the average dividend yield on the Dow Jones was about 4.4 percent. Today it’s 1.7. In 1900, the average book value was 1.5 times the average price — today it’s about 5.2 times. Just to go back to its historic norms, you’re going to see it go down, 50, 60 percent. Let me put it this way, you’re going to have one nasty bear market worthy of that name, or you’re going to have a sideways market for 10 or 15 years. There’s plenty of precedent for that, too.

I well remember 1964 when the Dow was 800 for the first time. I remember even more vividly in ’82 when the Dow was under 800. That’s a period of 18 years. If anybody tells you the stock market is a one-way street going up, you may assume they believe in the tooth fairy too.

Insight; In your investment letter, you refer to the current brouhaha about smoking as the “tobacco flap.” What’s going to happen with tobacco companies?

CA: With “smokeless tobacco” — I call it snuff — I think in 20 years its investment value will fall on hard times. But Phillip Morris? In 10 years, if Phillip Morris is not selling cigarettes in the United States, I think it will still be growing overseas. It may not be as profitable as the US. market, but the foreign market certainly is growing.

Insight: How did you happen to get into business as an investment seer?

CA: I’d been dabbling in the stock market since the 1950s, sometimes losing my shirt, like everybody else. I’d listen to stock salesmen and realize they didn’t know as much about it as I did. Don’t misunderstand me: I think they serve a necessary function in raising capital for new industry. But there’s an innate conflict of interest with stock brokers because they live off commissions and not on salaries.

I decided the best area for investment would be rapidly growing smaller companies; I’d learned long ago that small companies grow faster than big ones. But it’s a never-ending learning process. As for being a seer, nobody knows where the stock market is going any more than they know where interest rates are going.

I’ve got an article I’m working on for Growth Stock Outlook. It’s titled “Tell Me What to Buy, Not When.” And it means just that. People spend lifetimes guessing where the stock market is going. They come up with formulas, charts, but still nobody can forecast with any regularity. If they could, we’d all be billionaires.

Insight: Is the United States still a fertile land for business innovation, for the creation of wealth?

CA: People don’t realize what an incredible country we have! New businesses come out of the woodwork all the time. Most of them are going to fail, but the ones that survive keep this country what it is. About two-thirds of all jobs in the United States are created by companies with fewer than 400 employees.

I think we may be on the verge of a major breakthrough in energy. One hundred years from now, maybe all our energy will be coming from solar sources. Some bright kid now in grade school or yet to be born is going to come up with that breakthrough.

I wish I were 25 years younger!

Insight: In what ways does present U.S. policy hamper businesspeople?

CA: We have the most unfair tax system anywhere. It’s biased against the small taxpayer in favor of the large taxpayer. If you have lots of money, you can hire the best tax accountant in the world to help you avoid income taxes. The small taxpayer does not have that. The only fair tax system would be a national sales tax. If we had a national sales tax, it would unleash an enormous amount of capital. Right now, nobody can understand this tax system. We are going to have to change things.

I was thinking this morning: Americans are taxed more heavily now than they were in 1776. I see the faint outlines of a tax rebellion. It is so sad when we realize that heavy taxation has changed the whole fabric of our society. We have here in this office mothers who would rather stay at home with their children but are forced to work to make ends meet just to pay those taxes. When you run a wrecking crew through the family unit, as we are doing, you have punched an automatic ticket to massive problems.

Insight: When will we see the stock market’s return to its historic norm?

CA: I have no idea when it’s going to happen, but I do know what is going to happen. When you have 8 8 percent of all money that has ever been invested in mutual funds invested since October of 1990, you’re looking at a colossal bubble — one that in magnitude is unprecedented in world history.

For the cascade to be set off will require a catalyst. I think it’s going to be this massive burden of debt. It is unprecedented here.

We do not realize this country does not enjoy the benefits of being relatively debt that we we had before the big depression. The United States was essentially a solvent nation in 1929. We were the world’s biggest creditor nation — now we’re the world’s biggest debtor nation.

Think about it: There is no Social Security trust fund. It is all IOUs. We must tax people to fund Social Security when the time comes. All the money that was paid in was spent, gone like the March wind.

There’s no Medicare trust fund. There’s no Medicaid trust fund. There’s no trust fund for military pensions or for US. employees and their pensions. All this money goes into the general hopper and is used on a day-to-day basis. At some point the bill is going to come due.

The party will be over.

I grew up during the Depression. I’ve seen people collapse from malnutrition; people who wanted to work but couldn’t find jobs. Now nobody wants to work! If you are not willing to work, you should not have the same benefits of our society as those who do work. We’re trying to level out society. We’re saying to somebody who’s working 10 hours a week that they’re entitled to the same as someone who is working 100 hours a week. This is not how a society functions if it wants to survive.

Insight: Earlier you said you’d like to be 25 years younger. What would you do if you woke up one morning and found yourself a quarter-century younger?

CA: Let me take a moment…. I think I’d stay in this business. I would be investing and trying to manage a small company’s growth into a major corporation. I see it happening all the time. Time and time and time again, I’ve seen something go from $2 million in revenue to $4 billion!

There are one or two areas I think are destined to go up for the next quarter-century. Computer software is one of them. Computer software is open-ended.

The other is agriculture. Agriculture for this country is going to be back once again in a big heyday because the world, as it becomes wealthier, is going to want more food and it’s going to want better food. I see agriculture as a good place to be for 25, 50 years.

Insight: Where should I put my money fight now?

CA: [Sighing.] In six-month T-bills. People don’t have patience. They just want to get rich quick.

Personal Bio

Allmon went from cameraman to managing millions.

Occupation: Editor of Growth Stock Outlook, one of the largest investment services in the country, specializing in America’s fastest-growing companies, Bethesda, Md.

Born: East Liverpool, Ohio, Feb. 9, 192 1. Reared in Mid-land and Beaver, Pa.

Education: BS in agriculture, Purdue University: honorary doctorate, 1994.

Family: Two daughters; three grandchildren, another on the way.

Background: Former photographer, editor, National Geographic; chairman and chief executive officer until 1995, The Charles Allmon Fund (which actually gained in price on Black Monday, Oct. 19. 1987).

Leisure: Allmon, who owns six Nikon cameras, says he likes “to make photographs,” particularly during September and October, the months the family spends at his ranch in Montana. “When you’re looking through that viewfinder, you’ve got nothing else on your mind.”

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COPYRIGHT 2008 Gale, Cengage Learning