I enjoyed reading Berkshire -Past, Present and Future, pages 24-28 2014ltr
Mr. Buffett’s anger at Stanton’s chiseling cost dearly because he didn’t sell at the first puff of the “cigar-butt” (Berkshire’s Textile Division). Buffett suffered in a value trap.
Notably, Buffett’s cigar-butt strategy worked well when managing small sums–the best of Buffett’s life in terms of relative and absolute investment performance. However, cigar-butt investing was not scalable or enduring with larger sums. Buffett then turned towards buying wonderful businesses at fair prices or, in other words, franchises with honest and able management.
His investment in See’s Candies was a turning point because the company generated high returns on invested capital which Buffett could then redeploy into other businesses. Note that See’s could only grow profitably within a defined region (Calif.?). A powerful brand coupled with economies of scale makes for a great business.
Berkshire Today (page 29) provides a description of Conglomerates and the mania that occurred in the 1960s with ponzi-scheme pooling of interests accounting and ever-rising P/E multiples–until the game crashed.
Buffett points out the folly of spin-offs, whereby the owning company loses purported “control-value” without any compensating payment. Investment bankers and private equity buccaneers were heartily savaged by Mr. Buffett’s pen.
Before we dig deeper into Chapter Five in Deep Value, I thought we should read Chapter 2 in Quantitative Value so as to not skip over several important points. I will make sure new students receive a link to the books in the course.
Note the plug (page 6) for Where Are the Customers’ Yachts by Fred Schwed. That along with the Money Game by Adam Smith will teach you the ways of Wall Street. Also, see:
Intrinsic Value: Buffett reiterates that it is not a precise number for Berkshire nor, in fact for ANY stock.
GEICO delivers savings to its customers because it is a low-cost operation (source of structural competitive advantage). The company’s low costs create a moat—an enduring one—that competitors are unable to cross. Note Buffett’s comment on the animated gecko, a LOW-COST spokesperson.
Here’s how he explained it:
“In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.)
“During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.”
Buffett said the dawdling resulted in an after-tax loss of $444 million by the time Berkshire was no longer a Tesco shareholder. That, he added, is about 0.2% of Berkshire’s net worth. Only three times in 50 years has Berkshire recorded losses from a sale equal to more than 1% of its net worth.
Unfortunately, we don’t learn what exactly caused the loss. How did Buffett miscalculate intrinsic value? Did management worsen, but if so, then how can an investor sidestep that? I believe the economics changed as customers had more in-home deliveries and other choices coupled with poor store execution from Tesco. I was disappointed with this explanation of the Tesco loss, but Buffett would reply that it was only 1/5 of 1%.
Nominal vs. Real Returns
During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13 cents in 1965 as measured by the CPI (Flawed or whats wrong with cpi)
I prefer measuring in gold grams, because gold is a store of value and market-based rather than concocted by Federal bureaucrats.
There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as the transfer to others of purchasing power now with reasoned expectation of receiving more purchasing power–after taxes have been paid on nominal gains—in the future.” (I wonder why Mr. Buffett makes no mention of the financial repression of ZIRP and NIRP? It is the elephant in the room because of the devastating effect it has on savers and on calculating discount rates for investment.)
The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities—Treasuries, for example—whose values have been tied to American currency. That was also true in the preceding half century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century. Buffett’s comments are backed up by history as shown here:and triumph_of_the_optimists
Stock prices will always be far more volatile than cash equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments—far riskier investments. Than widely –diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong. Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing power terms) than leaving funds in cash-equivalents. That is relevant to certain investors-say, investment banks—whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.
For the great majority of investors, however, who can—and should—invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risk things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon (to panic) are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).
Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary to managers and advisors and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. ….Anything can happen anytime in markets. And no advisor, economist, or TV commentator–and definitely not Charlie nor I–can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.
A plug for Jack Bogle’s The Little Book of Common Sense Investing. Basically, Buffett is saying keep it simple, think and hold L O N G – T E R M, avoid high fees and commissions, and don’t use leverage.
Next, let’s look at Berkshire–Past, Present and Future in Part II
Ben Graham told a story 40 years ago that illustrates why investment professionals behave as they do: An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. “You’re qualified for residence”, said St. Peter, “but, as you can see, the compound reserved for oil men is packed.
There’s no way to squeeze you in.” After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, “Oil discovered in hell.” Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”
Speculation vs. Investment (2000, Berkshire Hathaway Letter)
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities ¾ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future ¾ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.
Last year (1999), we commented on the exuberance ¾ and, yes, it was irrational ¾ that prevailed, noting that investor expectations had grown to be several multiples of probable returns. One piece of evidence came from a Paine Webber-Gallup survey of investors conducted in December 1999, in which the participants were asked their opinion about the annual returns investors could expect to realize over the decade ahead. Their answers averaged 19%. That, for sure, was an irrational expectation: For American business as a whole, there couldn’t possibly be enough birds in the 2009 bush to deliver such a return.
Far more irrational still were the huge valuations that market participants were then putting on businesses almost certain to end up being of modest or no value. Yet investors, mesmerized by soaring stock prices and ignoring all else, piled into these enterprises. It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them.
A Nor’easter is coming my way (up to two to three feet of snow with high winds) so I may be out of contact for two or three days. But push on we must. We continue to study Chapter 3, in Deep Value and Buffett’s investing career.
The best investment article I have ever read of Buffett’s is:
Hopefully, students will discuss in the comments section.
Time to bring out the snowshoes!
It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we’re seeing an abundance of what we call “leveraged mismatches” – a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch.. John Hussman, Jan. 26, 2015 www.hussmanfunds.com
As previously discussed, we have read the Preface and Chapter 2, Contrarians at the Gate in Deep Value where we learned about Graham and liquidations and the great mean-reverting mystery of value investment. Klarman’s writings were also read (Margin of Safety) to learn about his approach to liquidation and valuation. Valuation is an imprecise art where value is no one precise number. Finally, Mr. Market is there to serve us not guide us. Therefore, think of all the pundits, experts, and CNBC commentators we can ignore for the rest of our investing careers.
If readers have questions or comments, do not hesitate to write. I try not to look at my emails but once a week. I neither have a cell phone nor a TV, but time is scarce so I can respond faster (or another student can to your questions) here in the comments section.
Now we transition into reading Chapter 3 of Deep Value, “Warren Buffett: Liquidator to Operator.” Buffett was Graham’s prized student who forged his own way. There are about ten books written on Buffett every year. We will now focus on his early career by going through his Complete_Buffett_partnership_letters-1957-70_in Sections
After Dempster, we will study Sanborn Map and then See’s Candies. Put on your thinking caps. Go the extra mile and find out more about these companies if you have the interest. Focus on how Buffett estimated the intrinsic value of Dempster Mills AND how he managed the investment over time. What made up his margin of safety BESIDES the price discount?
Reader Question: Do I know Toby Carlisle, and do I think his approach works?
Yes, I have had the pleasure of meeting Toby. A nice guy who seems like a Renaissance man similar to Graham but with a darker sense of humor. Toby taught me how to speak Australian English. You don’t thank your host for a delicious meal by saying, “That was excellent.!” You say, “What a belly-bust!” You don’t go out to drink beers, you go out to “rip down a frosty.” I am indebted for those tips. I learned during my working days in Cairns, Australia that fly-crawling was the national sport. If you could choose which fly could crawl the furthest along a wall or ceiling, you were the champ. The game had a huge element of randomness. I digress…
Since we haven’t finished our course of study on Deep Value Investing, I am no expert to comment upon his approach. But Deep Value investing can work since it does the opposite of a naive strategy. Hard-core contrarian-investing is difficult because buying what has been losing or is obscure, despised, and loathed goes against human nature. Are you more attracted to go into a full restaurant than one with cobwebs across the window? So far in our readings, net/nets seem more likely to be small, illiquid securities, so the investing approach may be more suited for individuals with a limited amount of capital who can go anywhere to find bargains.
Even the great Walter Schloss managed small amounts of money using his deep value approach. As his accounts grew, he would return capital to his partners, thus keeping the amounts of money he managed appropriate for the illiquidity of the names he bought and sold. He would also buy and sell scale down and up, I heard.
Why don’t you call him at his firm, Eyquem Investment Management LLC or visit www.greenbackd.com and find his email address. Ask for his record so far in managing accounts. What happens when there are only six or seven net/nets–does he concentrate into those?
–Are my instructions clear?
Addendum: Does Intuition Have a Role in Quantitative Investing?
How to Get a Job on Wall Street (Or anywhere else)
This post discusses getting a job on Wall Street, but the basic principles apply to whatever your area of interest is.
An EPJ reader sent this email to me earlier today:
Tomorrow morning I plan to go knocking on doors at different Private Equity firms in the Houston Area. Those firms do not have a career section on their website, so I have decided to go the old fashion way and knock at their door. Basically, I want to get an entre level analyst position and start from there. Today, I am starting an online MSc. in Corporate Finance, so I hope that could help me.
My question to you is, what tips would you suggest me when I go tomorrow morning? would that strategy work?
I receive many emails like this. Early in my career, at one point, I actually went door to door and managed to get a job on Wall Street that way, but it is extremely difficult. You have to be prepared for lots of rejection, you have to know, going in, everything about the job and firm that you are attempting to get an interview at. You have to be clever, pushy and lucky to get past the receptionist and you then have to make your points, powerfully and succinctly, as to why you would be a good fit for the firm. Then you have to be prepared and have answers to any objections. Did I mention accomplishing all this is not easy?
An alternative might be to contact smaller firms by email or phone, contact the partners, and tell them you are willing to work for free for 6 months to prove yourself. Be a pest.
I also like the idea of working for a temp agency. Befriend someone at an agency and tell them that you are willing to work as a temp in the PE industry, hedge fund industry etc., whatever it is you are interested in, because you want to get in the door. Once you are in the door, you can be judged on your skills. Be a pest at the temp agency, so that you are on their mind.
Another strategy is to start a blog, not an opinion and policy blog like mine, but a blog that shows your skills in the field you would like to enter. If you want to get into the PE industry, write one or two analytical posts per month that analyze sectors of the economy and why it may make sense for the PE industry to get involved in those sectors (or why they should be avoided). If you consider yourself, say, a good stock analyst, then start a blog where you post one or two detailed stock research reports each month. Email links to your posts to the people you would like to work for. I know of two analysts that got their starts this way.
When all is said and done, it’s about being clever and focused and knowing well the person/firms you want to work for, so that you can show them the skills you have that can help them.
I found the profile of Tracy Britt Cool in BusinessWeek fascinating. She clearly had been thinking about working for Warren Buffett for a long time and she went about in a methodical way attempting to get a job with Buffett. And, got it! BusinessWeek writes:
When Warren Buffett bought half of a commercial mortgage finance company in 2009, he hired a 25-year-old fresh out of business school to keep tabs on the investment[…]Now 29, Cool is one of Buffett’s most-trusted advisers, traveling the country to assist a constellation of companies too small to command her boss’s direct attention[…]
“When I first met her I thought, ‘Oh my gosh, this girl’s scaring me, she’s so professional,’” said Teresa Hsiao, a classmate at Harvard College. “Her idea of fun may not be what we consider fun, like looking at 10-Ks,” the annual reports filed with securities regulators.
Cool, who declined to be interviewed for this article, met Buffett through Smart Woman Securities, the group she and Hsiao founded while Harvard undergraduates. SWS aims to educate members about everything from compound interest to preparing a pitch to prospective investors.
Cool and Tiffany Niver, a Harvard classmate from Nebraska, wrote to Buffett and asked if members could visit. He agreed. The pilgrimage has become an annual event for the group, which has expanded to 17 chapters[…]Cool was inspired by Buffett’s value-investing principles when she built SWS, Horne said. “I don’t think that was unconscious,” she said. “She clearly had Warren in her sights.”
While at Harvard Business School, Cool wrote in an essay: “My goal is to work with a great investor, who even more importantly is a wonderful teacher and mentor.”
Think about this. She set her sights on working for Warren Buffett and accomplished that! How many people would kill to get a job next to Buffett? A lot. But she did it. Why? Because she did many things that others don’t do. She had a methodical plan. She developed her skills that would make her valuable to Buffett and then she developed a plan to get in front of Buffett so that she could demonstrate her skills.
Learn about investigative journalism to become better at investing
Alice: Yes, I will give away some of my secrets. People would do well to study investigative journalism. Read something like Den of Thievesor A Civil Action and try to reverse engineer how it was reported.
Here are three other great books on conversing with people, understanding their real motives, and just generally understanding how the human mind works.
You may wonder why analysts at banks hedge themselves so much – on the one hand this, on the other hand that. Partly it can be lack of courage. But someone is always trying to lawsuit-proof your opinion. Decisive statements are lawyered into “may, can, could, might, potentially, appears” instead of “is, does, should, will,” much less “look out below.”
The time pressures that work against quality research are also well-known. You write-up a lot of inconsequential things, especially what I call “elevator notes” (this quarter “X was up and Y was down”). Instead of writing original or probing views, you are really incentivized to spend as much time as possible marketing.
Also, if you adhere to consensus, it does protect your career. There’s an old saying that no one ever got fired for buying from IBM. Nobody ever got fired for making a wrong estimate that was within sell-side consensus.
Whereas, if you break from consensus, you really can’t afford to be wrong very often. That phenomenon really drives the sell-side. It can be overt, such as when we were judged on how “commercial” our work was. This is a veiled threat, because, of course, our work has to be marketable in order for us to have a job. The firms essentially want two things that are incompatible.
Focus on the Essentials
Miguel: It’s funny and I hope one day you can meet my boss. But you can tell him anything in the world (about an investment) but he always circles back to two questions
Is it a good company, and
Is it cheap?
Miguel: I think that I am a little bit like you in that I love thinking about things. But I also find it very easy to get lost in details while forgetting to ask, “Is this something I even want to own in the first place?”
Alice: One trap is not probing deep enough to really answer whether a particular investment opportunity is a good business. It’s easy to make a facile judgment about that based on a summary description of a business. The sheer breadth of different business and investment opportunities in a modern capital market creates an overflow of information that leads many investors to have short attention spans in thinking about companies comparatively.
Curiosity is an inherent kind of arbitrage that no amount of computer technology can overcome. Warren makes it sound so simple to know what is and is not a truly good business – and great business do resonate very clearly when you understand why they are great and especially when they’ve been identified as successful investments by an investor like Warren Buffett and proven so with hindsight – but like many things in investing, Buffett makes it sound easier than it is. When it comes to appreciating something that is special about a business that others do not, I’ve learned that the devil really is in the details.
Miguel: How is Warren different from other value investors?
Alice: He’s more interested in money, for one thing (laughs).
In terms of how that affects his investing behavior, number one, in his classic investments he expends a lot of energy checking out details and ferreting out nuggets of information, way beyond the balance sheet. He would go back and look at the company’s history in-depth for decades. He used to pay people to attend shareholder meetings and ask questions for him. He checked out the personal lives of people who ran companies he invested in. He wanted to know about their financial status, their personal habits, what motivated them. He behaves like an investigative journalist. All this stuff about flipping through Moody’s Manual’s picking stocks … it was a screen for him, but he didn’t stop there.
Number two, his knowledge of business history, politics, and macroeconomics is both encyclopedic and detailed, which informs everything he does. If candy sales are up in a particular zip code in California, he knows what it means because he knows the demographics of that zip code and what’s going on in the California economy. When cotton prices fluctuate, he knows how that affects all sorts of businesses. And so on.
The third aspect is the way he looks at business models. The best way I can describe this is that it’s as if you and I see an animal, and he sees its DNA. He isn’t interested in whether the animal is furry; all he sees is whether it can run and how well it will reproduce, which are the two key elements that determine whether its species will thrive.
I remember when his daughter opened her knitting shop. Many parents would say, I’m so proud of Susie, she’s so creative, this is something of her own, maybe she can make a living at it. Warren’s version is, I’m so proud of Susie, I think a knitting shop can produce half a million a year in sales, they’re paying whatever a square foot for the storefront, and labor is cheap in Omaha.
It was similar when Peter was producing his multimedia show, The Seventh Fire. Many parents would say, wow, my son has pulled off a critically acclaimed show. Warren obviously thought that, but what he articulated was, they’re charging $40 a ticket, I think the Omaha market is too small for that price point, whereas in St. Louis they may cover the overhead, and I think he paid too much for the tent because the audience doesn’t really care what kind of tent it’s sitting in and it hurts margins, etc.
A special situation since there is a change in Board. If ABX can survive its balance sheet by improving its low cost assets, then there could be 100% to 200% upside with gold prices above $1,250. Right now we are in tax selling as well as a weak gold environment. ABX’s management says they will pare down/sell off their high cost mines. If gold goes sub- $1,000, then ABX could really struggle.
“The best thing a human being can do is to help another human being know more.”
— Charlie Munger
“Go to bed smarter than when you woke up.”
— Charlie Munger
Most people go though life not really getting any smarter. Why? They simply won’t do the work required.
It’s easy to come home, sit on the couch, watch TV and zone out until bed time rolls around. But that’s not really going to help you get smarter.
Sure you can go into the office the next day and discuss the details of last night’s episode of Mad Men or Game of Thrones. Sure you know what happened on Survivor. But that’s not knowledge accumulation, it’s a mind-numbing sedative.
You can acquire knowledge if you want it.
In fact there is a simple formula, which if followed is almost certain to make you smarter over time. Simple but not easy.
It involves a lot of hard work.
We’ll call it the Buffett formula, named after Warren Buffett and his longtime business partner at Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They are also learning machines.
Commenting on what it means to have knowledge, in How To Read A Book, (PLEASE follow that link!) Mortimer Adler writes: “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”
Can you explain what you know to someone else? Try it. Pick an idea you think you have a grasp of and write it out on a sheet of paper as if you were explaining it to someone else. (see The Feynman Technique and here, if you want to improve retention.)
Nature or Nurture?
Another way to get smarter, outside of reading, is to start surround yourself with people who are not afraid to challenge your ideas.
Like what you’re reading? Join thousands of others and get a free weekly update via email.
“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” — Charlie Munger
RISK: My grandfather invested his fortune in Russian bonds. This was before the Russian Revolution. At the time, he was told he couldn’t lose money. Because the bonds were pegged to gold. So there was no currency risk. And these were bonds of Russian railways, which were the most solid businesses in the world, and they were guaranteed by the Tsarist government. No currency risk. No default risk. No business risk. They were as close to risk-free as you can get. But when the Bolsheviks took over they seized the railways. They stopped paying the bonds. And they executed the Tsar and his family.”
It didn’t make any difference if the bonds were pegged to gold or not. They were worthless. It just reminds you of how things can go very bad in a way you don’t expect. Who would have imagined a communist revolution in Russia? (Could a Dictator take over the U.S.A.?) www.acting-man.com
The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time — Buffett was 45 when he wrote it and years away from attaining the investment fame he has today — his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient. Full article: http://finance.fortune.cnn.com/2013/08/15/warren-buffett-katharine-graham-letter/?iid=EL
Gold and Gold Stock Capitulation (GLD represents gold while GDX represents an index of major gold producers and GDXJ represents junior gold miners). Note the date of the low prices in End June/Early July. We last mentioned capitulation here: http://wp.me/p2OaYY-25W
Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more thereafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds. As the Bloomberg article mentions:
“Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,”according to an e-mailed response to questions.”
CSInvesting Editor: As mentioned before, I have been unable to find attractively priced franchises so in the past four months I have bought “quality” miners and related companies like RGLD, SLW, FNV, AUY, AEM, NGD, EGO, etc. I place the word, QUALITY in quotes because those companies are not franchises and each struggles with the cyclical risks of their product–metals. So beware, I am biased to seeking out information that bolsters my bullish outlook like Commercial Hedgers having a low short position:
and extremely negative speculative sentiment–a contrary signal.
A very seasoned mining executive I’ve known for years (www.grandich.com) sent me the following email, along with the latest World Gold Council report. He made a very keen observation is his email. Here it is:
“As an aside FYI, attached is the WGC’s first ½ 2013 report – skip to page 14 and look at the highlight yellow I put in. Of ~2000 supply and demand tonnes , ~578 tonnes are sold by ETF’s. If ETF’s sales were zero there would be a 29% supply shortfall. Total mine production is 1377 tonnes, ETF’s sold 42% of all mine production first ½ this year. My math is that if the ETF’s get cleaned up and go to 0 sales, we are looking at quite a gold supply problem. Old fashioned thinking I know, but alas, I am just a simple guy.”
We have a very serious mine production shortfall that has been masked during the gold raids and sell-offs. I think it will get exposed going forward.
I need evidence against my thesis, so please send any negative information against owning precious metals miners and gold. I am reading:
Next week, I will post a valuation on Royal Gold (RGLD) so get a head start and visit the websites of Franco-Nevada (FNV), Silver Wheaton (SLW) and Sandstrom Gold (SAND) to learn about this business.