The Dines Letter 2010 Annual Forecast Issue

by JDH on January 16, 2010

This was a horrible, horrific week for the residents of Haiti. The devastation is massive. It now appears likely that country in uninhabitable, and most residents will literally be required to leave the country, never to return. I can’t imagine or comprehend these circumstances, and since I am so far out of my league on this one, I will confine my comments to the markets. Since not much happened again this week in the markets (other than a big dip on Friday, which was not a big deal for me, since I did covered writes on my gold stocks on Tuesday, and they expired worthless after the close Friday, so I mitigated some of my losses), I thought instead I would comment on the The Dines Letter‘s 2010 Annual Forecast Issue.

Why? Why I am commenting on a newsletter written by a man who many of my readers would say is out of touch with reality, given the beating his stocks took in the 2008 debacle, while all the while he insisted on holding on, an “iron hand on the tiller”?

Two reasons. First, if you look at the list of Most Popular Posts at the bottom of the right hand navigation menu of this page, you will see that the most popular post was my posting from January 15, 2008 entitled: The Dines Letter – Thoughts on Mr. Dines and the Annual Forecast Issue. (For you computer geeks out there, the list isn’t really accurate, because most readers either read the site by going to the home page, not a specific page on the site, or through an RSS Reader, which doesn’t count their views. However, for people who found this site by searching for a specific topic, it is the top ranked post of last year, presumably because a Google Search for The Dines Letter rates that post just behind The Dines Letter website itself). So, if that’s what you want, that’s what you get.

Second, I found the issue to be quite interesting.

But before I give my specific comments, allow me to provide some background.

I have subscribed to The Dines Letter since at least 1999. There were many years where his picks earned me a great deal of money. In fact, as my portfolio performance page indicates, the 52% profit I made in 2005, and the 94% profit I made in 2006, were due largely to Mr. Dines’ picks. I suppose you could make the point that those were great years for the markets in general, and anyone with a dart board made money in those years, so perhaps Mr. Dines was just lucky, but I am willing to give credit where credit is due. I followed his picks, and I made money.

Of course I lost 34% in 2007, and 45% in 2008, and many of the stocks I lost on were also his picks. I was only slightly better than break even in 2009, since I was in cash for most of the year.

The classic example, I believe, of a bad pick was what I described on July 28, 2008 in my post on Volatility, Dines and Pinetree:

I can’t pass up the opportunity to quote James Dines from yesterday’s The Dines Letter. He spends most of the letter explaining that markets go up and down, so even if markets go down for a few years that’s no reason to sell. Here’s the classic quote:

“Our recommendation of PNP.TO – Pinetree Capital Ltd. at 0.795 cents (Cdn) subsequently rose 1,931% to $16.15 (Cdn) nearly two-thousand percent in only 17 months, such that a $10,000 investment would have risen to $203,145.”

Unfortunately he didn’t finish the thought, which should have gone something like:

“Ever since that peak I have had a Buy recommendation on Pinetree. I even moved it from my speculative list to my “good grade, moderate risk” portfolio. As of today it is trading at $1.82 (Cdn), so if you had followed my advice and bought it at $16.15, you would have lost 89%, such that an investment of $200,000 at that time would be worth $22,538 today.”

Even better, there’s a letter to the editor in this edition from some guy who spends the first 20 lines of his letter praising Mr. Dines, but then asks why one would continue to hold a stock that adds no value to the companies it invests in (Pinetree is basically just a venture capital firm), has no technical indicators to recommend buying, and has no truly great assets.

Dines then spends half a page explaining that yes, some companies go down, but if their investments start paying off, it will go up. He ends with the classic “You have lost nothing if you own the stock and the price fluctuates.”

Yeah, I guess that’s true. But if you had sold a few dollars ago, the money could have been redeployed and earning you money. It’s called opportunity cost, and it is real.

For the record,
PNP.TO – Pinetree Capital Ltd. is currently trading in the $2.17 range, so holding the stock for another year and a half from the $1.82 it was trading at when I wrote those words in July, 2008 would still not have produced much of a gain.

So what do I think of Mr. Dines? What do I think having both made money and lost money based on his advice?

I am of the view that he is good at identifying big picture trends, like the bull market in gold, uranium, and perhaps rare earths. He is not good at identifying massive market crashes. He is good at identifying when to buy; he is not good at determining when to sell.

If Mr. Dines read that last paragraph, he would say that “it’s up to the reader to determine when to sell; sell small percentages all the way up, to get your original investment back”. That’s fine, and I don’t disagree. However, if a stock is listed as a “buy” or a “hold”, that does not mean “sell”, and a stock that fell 89% should have been sold long ago. If he won’t advise his readers to sell when a stock drops 89%, when will he ever advise a sale?

He doesn’t have a great track record over the last few years. In his 2008 Annual Forecast Issue he spent the first 15 pages talking about how great an investment uranium would be over the next year or two. He was exactly wrong, and anyone who bought what he was advocating in 2008 lost a lot of money.

(Peter Brimelow selected The Dines Letter as the newsletter of the year in 2006. The following years were disasters until 2009. But Brimelow is back, selecting TDL as newsletter of the year for 2009, presumably due to a recovery from the previous horrific results).

I also worry that he has close relationships with the managements of the companies he recommends, and is therefore profiting from promoting a stock in ways other than simply profiting when a stock goes up. For example, it is not inconceivable that he could take a position in a company, and perhaps get warrants or options as well, and then tout the stock. I have no proof that he does this. But it makes me queasy nonetheless.

Part of my queasiness is derived from the disclaimer at the end of every The Dines Letter:

The Dines Letter, James Dines & Co Inc, James Dines
and their respective entities, family, friends, employees, associates, and others may have positions in the securities mentioned, or discussed, in this publication. James Dines, The Dines Letter,
James Dines & Co Inc, and their respective officers, directors, shareholders, employees and affiliates will from time to time, buy or sell the securities (including options and derivatives of such
securities) mentioned herein, without notice and if this concerns you, then do not follow our recommendations. These positions may involve debt and/or equity positions of every conceivable
nature whatsoever, including, but not limited to, options to acquire positions at below market prices.

I have no objection to a newsletter writer buying shares in the companies he recommends. In fact, if he isn’t willing to put money in shares that he is recommending, why would I want to buy them? However, holding “options to acquire positions at below market prices” may be perfectly legitimate, or it may be where the newsletter writer is actually making his money.

My final criticism of his methods is that he very rarely explains the rational for buying a particular stock. He generally simply adds a stock to one of his lists, with no detailed explanation. Other newsletters, such as Casey’s, give very detailed explanations of management, the product, financing and so on to prove they have done some research, and to allow the reader to make their own decisions. Dines just says “buy this”, leaving us to wonder if he has done a detailed study of the charts, or whether he’s simply getting a commission for recommending a stock. More talk about details, and less talk about nebulous “high states” would make for a more informative letter.

The Dines Letter 2010 Annual Forecast Issue

Enough background, let’s talk about the 2010 Annual Forecast Issue.

WARNING: I know that I will get a bunch of posts on the Buy High Sell Higher Forum telling me that I should not be disclosing anything from his newsletter, since I am stealing information from paying subscribers. I agree. However, here’s the fine print, from the bottom of the last page of every The Dines Letter:

The Dines Letter may not be reproduced in whole or in part without explicit permission in writing from a
duly authorized officer of James Dines & Co Inc, except by established publications that wish to quote brief passages for purposes of review.

So don’t worry. I’m not going to talk about any of his stock recommendations (most of which have remained unchanged for the last few years anyway. In fact, of the 44 stocks that appeared on his supervised lists in the 2008 Annual Forecast Issue, 28 still appear on those lists today. Given the intervening stock market crash, that’s remarkable).

Here are my thoughts:

I found the first page to be absolutely remarkable. A review of the last ten years of his newsletters reveals a common writing style. He always refers to himself in the third person. In 2008 he used phrases like “TDL marches to it’s own drummer”, and “as we pondered” and “as we contemplated.” He likes to refer to himself as “your editor”.

What was most remarkable in this year’s issue was that he, for the first time ever, has used the first person. On page one he says they “laughed when I first dared to recommend gold”, they “were furious when I went to China”, “I refused to be stared down” and “I mystified many be declaring that I’d discovered a new Major bull market.” On page one he uses the first person “I” and “my” 18 times. For the last 50 years this guy has written in the third person, and now, after 50 years, he uses the first person 18 times on one page! What gives?

We know that Mr. Dines is a shameless self-promoter. In fact the first sentence of this issue is self-congratulatory:

It is not easy to accept that the first decade of this new
century has already hurtled past, but we are grateful that
our Goldbug! book was our glittering reward.

Yeah! Look at me! I wrote a book!

Throughout every The Dines Letter he has always referred to himself as the “Original Gold Bug”, and the “Original Silver Bug”, and the “Original Uranium Bug”, and the “Original Rare Earth Bug”, and whatever else he was the first to discover. (I think people have been investing in gold for over 5,000 years, but let’s not quibble on that one).

But this time it’s different. It’s not just patting himself on the back. He is not using the third person to tout his accomplishments. He is saying “I”. Why the change? I have some theories.

First, it could be that Mr. Dines didn’t actually write the lead article. I can’t find any reference on the internet to his age, other than Brimelow’s article referring to him as “well over 80.” I guess at “well over 80” it might be time to hand over the reigns to someone else, and someone else would have a different writing style. However, by page six he has reverted back to his previous third person style, which is indeed curious. If someone else wrote the letter, would they not have written the entire letter? Or does the introduction get written last? Mr. Dines wrote the letter, and then someone else finished it off by writing the first six pages? I don’t know.

James Dines has always closely guarded his privacy. We don’t know how old he is. We don’t know if he is married or single. He did let slip on page one that leaving his Wall Street job “stunned a prospective father-in-law”, so at some point in the last sixty years we know he at least had a date. But that’s it. We know no other personal details.

Could his insistence on the chest-thumping use of the word “I” be his swan song, his final argument for immortality amongst newsletter writers? Is he giving us his resume, so we will remember him forever? Is he writing his own obituary?

I have no idea.

I do know that his arrogance remains intact. Only once in the 35 pages issue does he admit he was ever wrong, and then only in one sentence, buried on page 3:

Nonetheless, I’m lucky but certainly not infallible, as I
later did not take the huge profits built up in uraniums
because I didn’t see any connection between crashing real
estate and uranium mining.

He goes on to admit to the realization that in a general market crash, everything crashes; the good and the bad. Yes, that’s what a crash is, and you would think someone with 50 years experience would realize that.

Another interesting point: on page one is a box with the words “Double Issue”, and indeed it is; 35 pages as compared to the usual 17. Of course the 2008 issue was a triple issue at 54 pages, as was the 2009 issue at 51 pages, so I guess times are tight even in the newsletter business; annual forecast issues aren’t what they used to be.

As for the actual forecast in the issue, it was exactly as expected. If you have read any of his work, you will know the themes by heart:

  • The government prints fiat money, which will inevitably lead to the collapse of the currency (which he has predicted for years);
  • Gold will go up;
  • Uranium will go up;
  • Rare earths will go up.

I don’t disagree with any of those conclusions. He did have a brilliant description of government deficits:

Do you know how much money one-trillion dollars is? If
you spent one-million dollars every day, a million dollars
went through your hands every single day, back to the birth
of Jesus, you could not spend one-trillion dollars. And the
American Government’s deficit for the year 2009 alone was
1.4-trillion dollars.

Well put.

So, after this long winded post, what do I think?

I think spotting trends is great, but you can only profit from a trend if you know the time elements associated with a trend. Saying that we will have deflation, or inflation, at some point in the future is no actionable intelligence. Saying that uranium will go up is only valuable information if you say “uranium will go up next week, so buy this stock this week.” It’s great that he predicted currency devaluations back in 1980, but being 30 years early is of little help to me.

In fairness, we are in un-charted territory, and I don’t know of any guru who has a stellar track record over the last few years.

Clearly I have been completely wrong, missing the crash of 2008, and missing the recovery of 2009.

But then again, it doesn’t cost you a penny to read my ramblings, and I have never pretended to know anything. I’m just some guy who gets up early on Saturday morning to pound out my thoughts, entirely for my own benefit, to clarify my thinking and assist me in deciding how to invest. I have a big ego, but not so big that I think I’m brilliant.

So why do I still subscribe to The Dines Letter, even though I haven’t followed his advice for at least two years? I subscribe because I have always subscribed, out of force of habit more than anything else. And I read it because it’s important to get insights from numerous people. I agree that Mr. Dines is good at spotting trends, so his work is valuable for that purpose. I don’t believe his work is valuable for making sell decisions, so for that, you are on your own.

I am already on record with my predictions for 2010 (so whatever I predict, do the opposite). After reading Dines Forecast issue, I’m not really sure what he’s predicting, so we will only know when he tells us whether or not he was right.

I think a printed newsletter is now old technology. He should create a website, give subscribers a password, and post his thoughts there.

Am I too harsh on the old guy? Is it unfair for me, a non-expert, to criticize a guy who has had success over a 50 year period? Perhaps, but this is my blog, so I get to ramble as I see fit.

I’ve enabled the comments section below, and you can comment on the Dines section of the Forum, so feel free to disagree with me as you see fit. See you next week.

{ 6 comments… read them below or add one }

designer January 18, 2010 at 12:39 pm

Most excellent and well written expose on the self appointed “everything ” Bug!
He is simply too full of himself to make any more sense of any of his claims.
The Buddhist philosophy refers to the ego as the elephant riding the mouse!

auggie January 21, 2010 at 10:49 am

I can’t add anything to your post…count me a ditto head! Perfect analysis.

Davejack February 22, 2010 at 9:07 am

A lot of good insights, I’ll be holding on to a lot of these stocks for years before I see any gains. Yet while many of his stocks are down 80% from the date I purchased ( on his recomendation ) not one has gone bankrupt. I was a subscriber to a penny stock site before, and every stock I purchased became worthless.
I unluckily bought Dines stocks a couple of months before the crash.
He did predict the recession, but not a crash.
While I’m very disappointed with these urainium stocks, I still hold these hedge funds managers responsible, along with incompetent bank managers.
I still can’t believe american taxpayers bailed them out.

tanjunse November 3, 2010 at 2:10 am

All those who did not bail out during the 2008 crash did not have a technical stop loss. That is the fundamental error of buy-and-hold longterm investing. In contrast to technical traders who would go straight into cash if the stock price continues to break support lines, buy-n-hold’s strategy of overcoming crashes is to keep buying at the lows, so as to reduce average cost. If you had done that you would be very profitable and not blaming Mr. Dines for your losses. I think you deserved your lack of profit and this article sounds like a loser’s whine, certainly not reflecting a professional traders’ mindset.

JDH November 3, 2010 at 4:23 am

tanjunse: Thanks for your comment. Yes, you are correct, all investors or traders are responsible for setting their own parameters. The trick is to determine the parameters. Do you sell when the stock is down 5% from it’s high? 10%? 15%? 10% may work well for a blue chip stock, but be far to tight a stop for a junior stock with more volatility. And which trend line do you wait to be violated? The one month trend line? The multi-year trend line? In real life it’s not as simple as “sell when the trend lines are violated.”

As for blaming Mr. Dines, you can’t have it both ways. You can’t give Mr. Dines credit for buying at the right time, and then not blame him for not selling at the right time. Buying is only half the trick; you must buy and sell to make a profit. My criticism of Mr. Dines during the crash of 2008 is that a stock like Pinetree dropped 89%, which obviously violated every trend line there was, and yet the king of “Visual Analysis” never flashed a sell signal. (I don’t blame him for Pinetree; I was out of that stock long before the bottom). To truly evaluate an advisor’s worth, you must analyze both their buy and their sell recommendations.

cesar November 14, 2011 at 2:38 am

Great post! Thank you for your insight.
( by the way PNP.TO trading at $1.83 as at Nov. 11, 2011. I guess that’s what they refer to as ‘dead money’)