“Doubt is not a pleasant condition, but certainty is absurd.” Voltaire
Absolute return small cap investing https://www.thefelderreport.com/2017/05/30/podcast-eric-cinnamond-on-the-value-of-absolute-return-investing/
“Doubt is not a pleasant condition, but certainty is absurd.” Voltaire
Absolute return small cap investing https://www.thefelderreport.com/2017/05/30/podcast-eric-cinnamond-on-the-value-of-absolute-return-investing/
Buffett comments on the shiny metal in his discussion on investors’ choices: The Basic Choices for Investors and the One We Strongly Prefer
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices (In 2011, gold traded at an average price of $1,700 in $US) make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.
Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.
Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.
CSInvesting: I agree with all the above except that comparing gold as an investment to productive companies is not comparing like-with-like. Of course, owning a highly productive company or business that can compound over time will beat a sterile asset like cash or gold, but even Buffett will hold cash if he can’t buy great businesses at a good price. Gold is “money” that can’t be created by governments—by fiat.
An excellent article: Inflation Swindles the Equity Investor by Buffett.
QUESTIONS? Gold as money has far out-performed currencies over the past decades
What are your alternatives? Quality ain’t cheap………..(source: seekingalpha.com)
and….assets to fin assets
|Ticker||Industry Group||Price/ Earnings Forward||% Free Cash Flow/ Market Cap||% Forward Dividend Yield||Debt to Equity Latest Qtr||Financial Health Grade||Economic Moat||Stewardship|
|3M Co||MMM||Industrial Products||21.6||4.7||2.51||1.04||A||Wide||E|
|BlackRock Inc||BLK||Asset Management||18.25||3.06||2.56||0.17||B||Wide||E|
|Coca-Cola Co||KO||Beverages – Non-Alcoholic||22.17||3.57||3.55||1.21||A||Wide||E|
|Colgate-Palmolive Co||CL||Consumer Packaged Goods||25.25||3.83||2.1||—||A||Wide||E|
|CSX Corp||CSX||Transportation & Logistics||23.7||1.45||1.5||0.94||B||Wide||S|
|CVS Health Corp||CVS||Health Care Plans||13.81||9.46||2.47||0.7||B||Wide||S|
|Emerson Electric Co||EMR||Industrial Products||23.98||5.65||3.17||0.49||A||Wide||S|
|Exxon Mobil Corp||XOM||Oil & Gas – Integrated||19.76||1.75||3.67||0.17||A||Narrow||E|
|General Dynamics Corp||GD||Aerospace & Defense||19.27||3.17||1.61||0.27||A||Wide||E|
|Honeywell International Inc||HON||Industrial Products||17.73||4.63||2.13||0.63||A||Wide||S|
|International Business Machines Corp||IBM||Application Software||13.14||8.38||3.08||2.09||A||Narrow||S|
|Johnson & Johnson||JNJ||Drug Manufacturers||17.15||4.05||2.63||0.32||A||Wide||S|
|Nike Inc B||NKE||Manufacturing – Apparel & Furniture||22.22||2.85||1.25||0.28||A||Wide||E|
|PepsiCo Inc||PEP||Beverages – Non-Alcoholic||21.41||4.71||2.75||2.67||A||Wide||S|
|Procter & Gamble Co||PG||Consumer Packaged Goods||23.81||4.26||2.94||0.32||A||Wide||S|
|The Hershey Co||HSY||Consumer Packaged Goods||22.88||3.09||2.28||2.99||A||Wide||S|
|The Home Depot Inc||HD||Retail – Apparel & Specialty||20.24||4.74||2.46||3.97||A||Wide||E|
|United Technologies Corp||UTX||Aerospace & Defense||17.15||1.98||2.36||0.79||A||Wide||S|
|Wal-Mart Stores Inc||WMT||Retail – Defensive||16.47||9.73||2.86||0.54||A||Wide||S|
|Walt Disney Co||DIS||Entertainment||18.45||4.39||1.42||0.34||A||Wide||S|
Data source: Morningstar
I like to have a reference to refer back to a year or five years from now capturing certain points in time. The market seems to be placing peak confidence in financial assets (stocks) vs. gold.
This post continues from a prior post: http://csinvesting.org/2016/11/17/when-no-one-wants-em-search-strategy/
The Bearish Gold Articles keep on coming: http://www.businessinsider.com/heres-why-you-should-never-buy-and-hold-gold-2016-12
http://bloom.bg/2hWukKn Running out of metal.
Even bullish mining investors expect “waterfall declines” and gold going below $1,100. Momentum creates the news: http://www.kitco.com/news/video/show/Gold–Silver-Outlook-2017/1456/2016-12-22/Mining-Stocks-Could-See-Waterfall-Declines—David-Erfle To be fair, he is long-term bullish, but note the “certainty, inevitability” of gold falling in USD below $1,100 or even to $1,000. Since he is probably considered strong hands (better capitalized with more experience in precious metals miners) his view indicates VERY bearish near-term (1 day to two/three months sentiment). As I interprete this news.
Financial risk is increasing on US company balance sheets, but then who cares while confidence is high?
Luiz Alves Paes de Barros is something of an enigma in Sao Paulo’s financial circles. At 69, he’s known around town as the “anonymous billionaire” for quietly amassing a fortune by wagering on stocks almost no one else seemed to want.
In Magazine Luiza SA, Barros may have made one of his best bets yet.
Starting in late 2015, Barros’s Alaska Investimentos Ltda. made the battered retailer one of its biggest holdings, a brazen move in a nation stuck in the middle of its worst recession in a century. It paid off. Magazine Luiza has surged more than 1,000 percent since reaching a record low about a year ago, making it the top stock in one of the world’s top-performing markets. That turned Alaska’s Black Master, which Barros co-manages with Henrique Bredda and Ney Miyamoto, into the No. 2 fund among 569 peers focused on Brazilian equities, according to data compiled by Bloomberg.
Barros’s latest success only adds to the intrigue surrounding one of Brazil’s most storied, but media-shy, individual investors. Early in his career, he traded commodities and was a partner of star fund manager Luis Stuhlberger at what is now Credit Suisse Hedging-Griffo. Barros then spent the next half century investing only his own cash, almost exclusively in Brazilian stocks, and regulatory filings show he personally holds 1.2 billion reais in equities.
When it comes to managing other people’s money, Barros is a rookie, having co-founded Alaska in July 2015. But his investing method remains the same. He only holds a handful of stocks, favors companies with bottom-of-the-barrel valuations and usually jumps in as everyone else is bailing.
“Perfecting patience is all I’ve done over the past 50 years,” Barros says. “I love when things get bad. When it’s bad, I buy.”
During two interviews, first in Alaska’s shoebox office in the heart of Sao Paulo’s financial district and then at his personal office on the city’s oldest business thoroughfare, the silver-haired asset manager explained what drew him to Magazine Luiza and went over the stocks he likes now: Fibria Celulose SA, Braskem SA, Marcopolo SA and Vale SA.
“The market has forgotten these stocks,” he says.
Alaska started building a stake in petrochemicals maker Braskem about four months ago (the stock has surged 48 percent since mid-August after tumbling 20 percent this year before then) and pulpmaker Fibria a few months later. Barros likes both companies because they’re fundamentally sound — and valuations are low. Braskem’s price-to-earnings ratio is 8.3, less than half the level three years ago. Fibria’s valuation is less than half the average of the past two years.Marcopolo, a maker of trucks and buses, is a play on Brazil’s rebound from recession, while miner Vale will benefit as global investors start seeking value again over safety. There’s no economic expansion in Brazil without infrastructure investments, he says.
“Vale won’t be a disaster for anyone. When iron-ore prices rise again, Vale will fly,” he said.
If those stocks return just a fraction of what Magazine Luiza did, they’d count as stellar investments. In all, Alaska acquired almost 40 percent of Magazine Luiza’s free-floating shares, regulatory filings show. In 2016’s third quarter, Alaska unloaded half its stake. What’s left of Alaska’s holdings in Magazine Luiza is now worth about 111 million reais ($33 million).
Asked how he knew Magazine Luiza would do as well as it did, he says he didn’t. “I just knew it was cheap.” The fact that the retailer of appliances and electronics had a market value of 180 million reais even though a bank had offered to pay 300 million reais for the right to offer extended guarantees on Magazine Luiza products made that clear.
“Either the bank was crazy or there was value there,” Barros says.
Alaska’s Black Master fund has returned 143 percent in 2016, compared with a 33 percent gain for Brazil’s benchmark Ibovespa stock index. The gains were also driven by a stake in Cia. de Saneamento do Parana, the water utility known as Sanepar that’s almost tripled this year.
Alaska is still a relatively small player in Brazil’s 2.38 trillion-real stock market. The asset manager employs 11 people (“That includes the lady who serves the coffee,” Barros says). While Alaska oversees about 1.6 billion reais, three-quarters of that is Barros’s own cash. But the fund is actively seeking new clients.
Why now, after 50 years of going it alone?
“Because I’m positive that the market is going to rise,” he says.
I post these charts for a historical reference point. I do not use them to predict where prices will go. Note though that rising CinC (currency in circulation) doesn’t always correlate to rising asset prices.
Update: Oct 6th: A contrarian: http://energyandgold.com/2016/10/04/bob-moriarty-i-am-ready-to-buy-silver-at-16/
Using Technical Analysis for a Fundamental View: https://nftrh.com/2016/09/03/gold-the-good-and-the-not-yet-good/
The Trend is not your friend
There’s an old saying in the financial markets that the trend is your friend, meaning that you will do well as long as you position your trades in line with the current price trend. This sounds good. The only problem is that you can never know what the current trend is; you can only know what the trend was during some prior period. How is it possible for something you can never know to be your friend?
Market ‘technicians’ often make comments such as “the trend for Market X is up” and “Market Y is in a downward trend” as if they were stating facts. They are not stating facts, they are stating assumptions that have as much chance of being wrong as being right.
A statement such as “Market X’s trend is up” would more correctly be worded as “I’m going to assume that Market X’s trend is up unless proven otherwise”. The proving otherwise will generally involve the price moving above or below a certain level, but the selection of this level is yet another assumption and the price moving above/below any particular level will provide no factual information about the current trend.
Mea Culpa: sequoia-may-2016-transcript Not much to glean.
However, a question for you: Is it better to buy franchises or net/nets?
If you could choose between a fair coin that was gold or a rusty tin coin that each paid off 4 to 1 on choosing heads or tails, which one would you prefer?
In October those near Philly Microcap Conference http://microcapconf.com/conferences/philadelphia-2016/
HAVE A GOOD WEEKEND!
Part I: http://csinvesting.org/2016/02/05/analyst-quiz-is-gold-overvalued-based-on-cpi-go-short/ I will discuss in another post and send a gift to all who provided comments.
Mr. Ackman calls you into his office and tells you that he shorted gold three days ago, because he wants to make money to support his positions in VRX, etc. Goldman Sachs promised sub-$1,000 gold in 2015. He ignored whatever you said because you are a “junior” analyst. But today gold is up $50 +. Pershing Square recently installed two hotlines: 1. for investor suicide prevention and 2. for death threats. Phones are ringin’ off the hook.
Also, this morning Janet Yellen had a nervous breakdown during her testimony to Congress. She told Congress that, “We have no clue what is going on.” Then she asked Congressional leaders to join her in prayer, “God, Help us!”
Her testimony: Negative Rates a failed strategy so do it
You recently read:
The above readings you may or may not agree with but you press on to learn more. And you see this:
What do you advise Mr. Ackman to do now?
God, Help us!
Ed Chancellor on the capital cycle…
From his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15, which was released in hardcover today (Dec. 2015):
Typically, capital is attracted into high-return businesses and leaves when returns fall below the cost of capital. This process is not static, but cyclical – there is constant flux. The inflow of capital leads to new investment, which over time increases capacity in the sector and eventually pushes down returns. Conversely, when returns are low, capital exits and capacity is reduced; over time, then, profitability recovers. From the perspective of the wider economy, this cycle resembles Schumpeter’s process of “creative destruction” – as the function of the bust, which follows the boom, is to clear away the misallocation of capital that has occurred during the upswing.
The key to the “capital cycle” approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side. In his book, Competitive Advantage, Professor Michael Porter of the Harvard Business School writes that the “essence of formulating competitive strategy is relating a company to its environment.” Porter famously described the “five forces” which impact on a firm’s competitive advantage: the bargaining power of suppliers and of buyers, the threat of substitution, the degree of rivalry among existing firms and the threat of new entrants. Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.
http://www.marathon.co.uk/global-investment-review.aspx (Read several articles on the capital cycle in investing).
Watch for errors (Interview of the gentleman pictured above)
The Supreme Court’s ruling
Hepburn v. Griswold reached the U.S. Supreme Court in 1869, five years after the war had ended. The Court ruled in favor of Griswold, holding in a 4-3 decision that legal-tender laws violated the U.S. Constitution.
The majority opinion distinguished between money and notes to pay money:
There is a well-known law of currency, that notes or promises to pay, unless made conveniently and promptly convertible into coin at the will of the holder, can never, except under unusual and abnormal conditions, be at par in circulation with coin. It is an equally well-known law, that depreciation of notes must increase with the increase of the quantity put in circulation and the diminution of confidence in the ability or disposition to redeem. Their appreciation follows the reversal of these conditions. No act making them a legal tender can change materially the operation of these laws.
The Court also explained that the power to coin money, which the Constitution delegates to Congress, did not constitute a power to convert promissory notes into money:
It is not doubted that the power to establish a standard of value by which all other values may be measured, or, in other words, to determine what shall be lawful money and a legal tender, is in its nature, and of necessity, a governmental power. It is in all countries exercised by the government. In the United States, so far as it relates to the precious metals, it is vested in Congress by the grant of the power to coin money. But can a power to impart these qualities to notes, or promises to pay money, when offered in discharge of pre-existing debts, be derived from the coinage power, or from any other power expressly given?
It is certainly not the same power as the power to coin money.
With the holding in Griswold, the federal government was left with the power to borrow to finance its operations but without the authority to force people to accept its notes at face value for the payment of debts. Thus, the American people could still protect themselves from a profligate government by expressly providing that notes and contracts could be repaid only in money (i.e., gold coin), not in federal promises to repay money.
One year later, however, the legal situation changed dramatically. President Ulysses S. Grant, who had commanded Union forces during the war, appointed two new justices to the Supreme Court who promptly joined the minority in Griswold. In Knox v. Lee, decided in 1879, the Supreme Court voted to overturn the decision in Griswold and to uphold the constitutionality of Lincoln’s legal-tender law.
The new majority reasoned that the power to enact a legal-tender law was an implied power that fell under the president’s war powers and the power over monetary affairs that the Constitution had granted to Congress.
But as the dissent pointed out, the implied-powers doctrine cannot be used to create new powers. The war power, for example, entails the power to pay for war expenditures but the means by which to pay for such expenditures were limited to those enumerated in the Constitution, i.e., through taxes and borrowing.
As the dissent also emphasized, the congressional power over monetary affairs was specifically limited to the coinage of money and did not extend to the enactment of laws requiring people to accept federal promissory notes in lieu of such money.
In a separate dissenting opinion, Justice Stephen J. Field pointed out the obvious:
The power “to coin money” is, in my judgment, inconsistent with and repugnant to the existence of a power to make anything but coin a legal tender. To coin money is to mould metallic substances having intrinsic value into certain forms convenient for commerce, and to impress them with the stamp of the government indicating their value. Coins are pieces of metal, of definite weight and value, thus stamped by national authority. Such is the natural import of the terms “to coin money” and “coin;” . . ..
… The power to coin money is, therefore, a power to fabricate coins out of metal as money, and thus make them a legal tender for their declared values as indicated by their stamp. If this be the true import and meaning of the language used, it is difficult to see how Congress can make the paper of the government a legal tender.
Field placed the constitutional issue in a historical context:
The statesmen who framed the Constitution understood this principle as well as it is understood in our day. They had seen in the experience of the Revolutionary period the demoralizing tendency, the cruel injustice, and the intolerable oppression of a paper currency not convertible on demand into money, and forced into circulation by legal tender provisions and penal enactments.
Field also pointed out that the Constitution had not delegated to Congress the power to impair private contracts.
With Knox v. Lee the seeds were sown for a monetary revolution in American life — a revolution that would bring the inflationary plunder and moral debauchery that have characterized nations throughout history. The revolution began with Lincoln. But it would culminate in one of most massive assaults on private property in U.S. history — President Franklin Roosevelt’s nullification of gold clauses in contracts and his confiscation of gold from the American people.
It is impossible to overstate the significance of the Franklin Roosevelt administration’s confiscation of gold and its nullification of gold clauses in contracts. It is one of the most sordid episodes in American history. To get an accurate sense of Roosevelt’s actions, it would not be inappropriate to compare what he did with the domestic economic policies of a later 20th-century ruler, Cuba’s socialist president, Fidel Castro.
On April 5, 1933, newly inaugurated President Roosevelt issued Executive Order 6102, which prohibited the “hoarding” of gold by U.S. citizens. Americans were required to turn their gold holdings over to the federal government at the prevailing price of $20.67 per ounce.
Pursuant to Roosevelt’s executive order, anyone caught violating the law was subject to a federal felony conviction, 10 years’ confinement in a federal penitentiary, and a $10,000 fine. Soon after the confiscation, U.S. officials announced that the government would sell its gold in international markets for $35 an ounce, thereby devaluing the dollar by almost 70 percent and immediately “earning” a potential profit of almost $15 an ounce on the gold it had confiscated.
Two months later, Congress enacted legislation nullifying gold clauses in both government and private contracts, thereby requiring creditors in such contracts to accept devalued paper money in payment of such contractual obligations, even though the contract itself stipulated payment tied to gold.
Reflect for a moment on the significance of what Roosevelt did. Gold coins and gold bullion were private property, just like a person’s automobile, clothing, home, and food. On the mere command of the president of the United States, federal authorities simply confiscated gold holdings that were the private property of the American people and made it a grave federal offense to own such property in the future.
Your thoughts on a better monetary system. Why not let the market choose money and set the price?
An Interesting Juncture for Gold Stocks (A good read with links)
Note that CEF in the above chart trades at an 11% discount to its 60%/40% holding of gold and silver bullion after a four year down-trend–note that this is either hyper-bearishness or massive extrapolation of trend-following. Apple’s cash hoard could buy the entire public mining sector. Gold stocks are cheap for a reason: poor capital allocation, poor cost control, and dilution of shareholders revealed in the five-year long bust from an epic boom from 2001 to 2011 caused investors to flee. Since then many managements have gained religion on cost control and capital discipline (Note Barrick, ABX). All cycles turn, but when? If we knew, then no opportunity.
I always hear investors or analysts ask, “So what is the catalyst?” If the market is at all efficient–and I would say that it is except at major inflection points–then if we knew the catalyst, then the opportunity would be arbitraged away. How about the law of low prices or the law of supply and demand.
Ironically, as gold has declined in US dollar terms, it has risen in real terms versus commodities showing its mettle in a credit contraction. TSI BLOG
The HUI, a gold stock index, is showing relative strength versus gold. However, certain gold stocks like Novagold (NG), Sabina Gold (SGSVF) or Agnico-Eagle (AEM) are in incipient uptrends or, at least, vastly outperforming their indexes such as GDX or GDXJ. You must diversify amongst the highest quality producers, developers, and explorers.
This post is not a recommendation but a historical reference point for a hated asset class. I see much less RISK in a terrible industry such as gold mining than wonderful businesses such as Amazon, CRM, or GE.
A Masters in Munger Take the university level course.
What is Mr. Druckenmiller worried about?