Thinking Mental Models; What Do Investors Want in a Gold Stock?

Check out: http://thinkmentalmodels.com/

then click on various categories to view other mental models.  You don’t necessarily need to pay $2.99 per PDF, but you can learn more about the particular lesson/mental model.  Become an expert.

How has Nike maintained a moat over the years selling fashion/sporting goods? NKE_VL and NKE_35 Year?

What Do Investors Want in a Gold Stock?

Mark Twain once wrote “A gold mine is a hole in the ground with a liar on top.”

http://www.viewfromtheblueridge.com/2009/10/07/a-gold-mine-is-a-hole-in-the-ground-with-a-liar-on-top/

Note that none other than Klarmen of Baupost has an interest in Allied Neveda Gold (ANV).

ANV

 

Worth a read if you ever want to “speculate” in gold mining shares.

What do Investors Want in a Gold Mining Stock

Gold is in a bubble:

pbergn says:

Gold is in a bubble: It is traded vastly as a commodity–subject to the supply/demand rule… At about $1,500 the World demand for gold has flattened. This was a signal that the gold price is moving into the bubble territory… The prices are also driven higher by paper gold, such as ETF’s… The true appreciation percentage can be discerned from gold mining company stock valuations, which are indicative of the actual demand increases and monetary inflation expressed in the US dollars… Those Libertarians or so-called Free-Marketeers who delude themselves with the idea that gold is money are woefully wrong– gold is not money, since one has to exchange it into one of the hard currencies to be able to exchange it for goods and services (try paying a drycleaner or your local grocer with a hunk of gold and see what happens)… The idea that gold will be the only currency left after all fiat ones finally explode in hyperinflation supernova is neither original nor true. The Say’s law on neutrality of money suggests that a currency is as good as many products and services there are in the market that it can be exchanged with. The money is neutral–that is it has no intrinsic value… However in case of gold and other precious metals, they do have intrinsic value as a commodity used in jewelry, electronics and medical industries… Of course, the lion’s share of demand for gold originates as demand for jewelry, especially from the traditional cultures valuing the noble metal as very special, such as in India… However, the demand for gold as a commodity or as a jewelry is inelastic upwards. That means that the demand curve is bell shaped and is bounded from above… At a certain price point, the demand for new gold will proportionally decrease, being compensated by recycling and dilution of content of the items made from it… IMHO, the fair price for an oz of gold today expressed in US dollars is around $1,400 – $1,500 as suggested by flattening demand for the new mined metal as a commodity at that price point.

 

10 responses to “Thinking Mental Models; What Do Investors Want in a Gold Stock?

  1. About nike, customer captivity. Tied with addidas if you are a 13 year old into soccer (the boots cost upwards of 200 and are built NOT to last. If you are a 20 30 something sporty woman, you dont want to sacrifice fashion for comfort. Brand association. Years of subconcious association with personal experiences and public sporting success.
    They “feel” more comfortablr is the effect not to mention real differences between nike and other brands.
    I bought a pair of nikes after being forced to throw away thr old pair in korea over the summer and when i went home, those shoes hadnt been released in the market. In the locker at the gym, it was quite interesting to detect shoe envy from guys.
    Object of desire and association.
    Hard to compete if you are china brand (li ning)with aspirations to target the same market. Recently last ear, china’s shoe brand closed it’s flagship store in singapore and consolodated back to china. Maybe better to target cheaper segment. It will be interesting to see wha nike does. Wil it go the cheap route? Unlikely. But it brings to mind one of your ase studies John. Harley and the Japanese motorcycles.

  2. I think its 2.99 for the full PDF of all models. I have an old one which is 145 pages. Guess they have added new models. Its certainly worth it.

  3. Dear Kevin:

    That is what Buffett calls “Share of Mind”. The product is associated with an image/feeling with the customer–thus customer captivity links with economies of scale which link to advertising. A virtuous circle. A goldmine if you can create and maintain.

    You buy a Coke for the “good” feelings of when you had a Coke after your big baseball win. You buy See’s Candies because Betty Lu gave you a greasy kiss after you gave her a $25 box of chocolates. You ride a Harley because you are a MAN. When will you get a Harley Tatoo?

    • Thanks John.

      I’ve been reading Lowenstein’s Am Capitalist and Snowball (halfway) back to back, supplementing with your case studies (Dempster, sanborn, see’s.) It’s been a long time since i’ve had such an immersive and fun reading experience like that. You mentioned 2 margins of safety in the dempster buy. I know cheap price to adjusted valuation was one. You didnt mention the other in your answer.

      A tattoo on me would look like a ranch stamp on pork.

      I prefer the ladies to have the tattoos to be explored.

      • I didnt get to my point. Sidetracked by tattooed ladies.

        The nike valueline shows that mr market has priced 9% growth over the next 10 years, maybe factoring china’s new consumer and “lux” focus.

        How does that stack up against Mr. Buffett’s 2.xx% lowish yield expectation on heinz.

        A lot of the companies I’m looking at are “fully valued” like that (back of napkin and not looking at asset valuation).

        Are you finding many opportunities in the us? Japan on the other hand still has bargains (butvyou lose on the yen). We all know their debt problems (kyle bass presentations etc), but i dug some and found a tokyo uni paper about the sovvie default risk. Pegged as inevitable but not till 2036.

  4. The gold guy’s mental model is quite skewed by the xx years of uninterrupted rising gold spot prices. “Don’t hedge, you can’t beat spot…” yeah, sure. A blow-up waiting to happen.

  5. I own a closed on fund on japanese small caps. Yes, the yen hurts it but I am doing OK. Gold is rising in terms of the yen

    I am being forced to look at NG, ANV, AEM, YNGFF. I have no opinion on gold but these are being priced AS IF the price of gold goes to $800/oz. Most cash costs are $550 plus so I will take a bet that prices in a massive decline. There is a panic going on in gold mining shares that may end in a week or a year. Who knows, but panic is there. Complacency reigns in bonds. I can’t predict tops, I just try to find lop-sided bets or where there are too many people leaning one way in the row-boat.

    What you are seeing is MASSIVE MALINVESTMENT. What happens when the $%^& hits and any bailout lead to rising prices AND rising interest rates–see Europe as a recent example (Greece).

    The central bankers are out of their minds-IMHO. Please give me reasoning against my thesis/thoughts. Because I want to see a happy ending.

    The gold price is just the reciprocal of currency depreciation and people’s willingness to hold fiat money. People now have less fear, so not a surprise that gold would be sold.

    I will diversify and lightly tread, but this is where I am finding value. If Gold made a top two years ago, it will be the most unusual top in commodity history.

    But I am not finding much value in franchises unless a 6% return is OK, so cash is building up and I take long walks and read.

    Doing nothing is better than being stupid though I will, of course, not be immune to mistakes. I just know to be fearful not that the world will end (I may live in a cave with my ammo and spam but what’s the point of living then?) but that risks are quietly rising as the VIX declines.

    PS: what has been the rate of increase in the average grocery store item where you shop? I see 12% increases from apples to garbage bags.

  6. Wrt to the Mental Models discussion, I signed up for a class on Coursera with Scott Page that focuses on this and starts in March. It may not be primarily investing focus, but seems like a good use of time.

    I am also reading Poor Charlie’s Almanack and is really good so far. It’s not only packed with business and investing lessons, but life lessons as well (when you borrow a man’s car, make sure you refill it!)

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