by Travis Johnson, Stock Gumshoe | May 3, 2015 7:22 pm
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O.K. Travis. I am willing to accept being mocked to ask these three questions.
1. Can you direct me to a site that laymen can read and understand the 10K for a company they are interested in investing in as a minimum?
2. Some of the Stansberry newsletter writers suggest having 5% of your assets in gold is that reasonable?
3. As far as I can tell no one has ever said what happens after the dollar disintegrates and the gold you have stashed somewhere (5%) has gone through the roof in value – annnnnd how to use it. If you talk to ordinary people and ask can I pay this bill with gold coins, or even silver for that matter, they look at you and say huh? To my knowledge there is no system in place to facilitate the use of gold and silver in the ordinary course of doing business. Yet all of the newsletters you research and debunk usually will encourage you to buy the hard asset to protect yourself – insurance they call it. Some of our ancestors remember the “New Deal” The same president said if you have gold it is illegal to hold any more and labeled those who had the presence of mind to hold gold in these unusual circumstances as hoarders. And lets face it, the uncertainty that the gold you or anyone else has is “good coin” and not tungsten enters into the reticence of the recipients accepting what you have as a legitimate payment.
That sure is a dump on to you isn’t it. But screams the need for dialog on the issue. As a reader of your forum I think about things like this and need answers. Then I say where can I obtain a legitimate answer on this subject. Here at GumShoe. Why. I trust you above all these other newsletter writers (your not a newsletter writer) I read to find a satisfactory and honest answer.
If you want to opt out of this one just say so I’ll understand.
Dear johnnyb,
You have directed your inquiry to Travis and he can surely answer you, so please forgive me for “butting in”. I hope to do so in a helpful way.
I think the recommendations to own some physical gold as “insurance” is valid if one is concerned about a really chaotic social, financial, or economic crisis. This is because throughout history, gold has shown itself to be a reliable store of value in the most chaotic situations. Your point is valid that in our country there is not such easy access to “marketmakers” in gold, and and in normal situations you will lose a lot in transaction fees when buying or selling it. But in nearly every imaginable situation, you will be able to find someone who will give something of value for it.
Silver is likely to be a more practical emergency currency in the blackest scenarios, because it will be useful for smaller transactions needed in everyday life.
I think also that the amount of gold and silver one should have depends very much on the size of your investable assets. First of all, such holdings should be regarded as savings; so if your savings are small, I’m not sure the transaction costs on gold and silver
are wisely borne. I think the best return for many people will be in the reduction of debt, which in the case of credit card debt will return a sure 20% return if paid off. On the other hand, a person with sizeable assets may want low-cost debt, to obtain leverage, or as a hedge against a declining dollar, or free up cash for investments that will return a profit higher than the interest on the debt. What I am driving at is the proper amount of precious metal holdings will vary considerably depending on your situation.
Investments in gold miners, precious metal royalty companies, and other “paper gold”
vehicles are more speculative, and their validity depends on your outlook. Generally they will respond with more volatility than the underlying commodities, so you must be able to withstand some pretty violent swings even if the long-term trend is in your favor.
So again their suitability depends largely on your own situation and temperment.
Speaking for myself, I was very heavily invested in gold, gold mining, and royalty companies most of last year, and the positions did not do well. However the size of my positions were not so great, nor were they so highly leveraged, that I became emotionally unhinged when they went against me. As a matter of fact, my gold and silver investments gave peace of mind, even when temporarily moving the wrong way. As Travis called out in his recent article, it is important to be able to maintain your emotionional equilibrium when investments you believe in go against you. This is mostly a question of position sizing and long-term belief in the premise of the investment.
I agree….I think. Physical assets should not be viewed as a trade-able asset…….its insurance and you dont sit around trading your endowment policy do you? It really doesnt much matter if its value goes to near zero during good times; what matters is that its a store of value that will zoom when and if the bad times come. Just like any insurance, it has no value until the roof falls in….then its invaluable.
As for the other 2 parts of jonnyb’s questions: No, I truly dont believe we will ever see the day when we need to carry a block of silver around and shave off a few grains to buy the groceries. The silver (say) will have a relative value to some fiat currency. While it may cost 1000 devalued dollars to buy a pack of cigarettes, a few grains of silver will command a value of $1000. That transaction/conversion would simply happen at the bank against your silver holding.
And Q2/ Ditto ” Can you direct me to a site that laymen can read and understand the 10K for a company they are interested in investing in as a minimum?” There are a gazillion accounting metrics…..which are the vital ones? I simply cant believe that if WB says ‘Investing is easy’ if he needs to use of them all.
There’s no reason to mock, those are good questions.
The 10-K, I think most people will find, is far more understandable than feared. The raw numbers in tables — the cash flow statement, income statement, and balance sheet, in the main — are (or should be) the same thing you’ll find in more readable form in Morningstar or YCharts or other places, and you might find it easier to browse the numbers there, seeing the progression of debt and income and gradually getting an idea of how much profit and positive cash flow they have.
The textual sections, with the introductory letter form the Chair and the management discussion and analysis (MD&A) will explain very well how they see the business, and will give you a good notion of how the business operates and what the different levers are that make income go up or down, or that require more or less capital investment.
And the risks section, where the company and it’s lawyers run down all the risks to the business that they can think of, is perhaps the best thing to read if you’re a person who has trouble looking skeptically at stocks — that section, though it always includes boilerplate risks that every company faces as well as the real and decent-probability risks that this particular company faces, is chilling enough to make you go back and reconsider, “OK, how compelling is this investment, really?” If nothing else, reading these things takes a bit of time — and investments that you intend to stand for more than a few days should take time and difficult thought to consider. Some people think far more about the next refrigerator or electric drill they’re going to buy, reading through reviews and specifications and comparison shopping, than they do about the next stock they’re going to buy. If those of us who are long-term investors could be as diligent and patient with considering a new stock investment as we are with buying a new car, thinking always about the fact that we’re essentially committing to a five or ten year relationship, we’d probably be better off.
There’s a lot of other stuff in the 10-K, and once you skim through a few of them you’ll get a much better idea of what should jump out — like the tables that tell you when their big debt maturities are, or footnotes that explain why the huge loss in a particular year was really “non-recurring” even though they end up with similar losses every other year, but they are really not as complex or daunting as they appear at first glance. Here are a few articles from other folks about how to read a 10-K:
http://www.cnbc.com/id/101360337
http://www.kiplinger.com/article/investing/T052-C000-S002-our-10-k-cheat-sheet-how-to-speed-read-a-company-s.html
https://www.thefinancialist.com/deciphering-the-10-k/
And on the gold stuff, I do hold a bit of physical gold and silver — and I buy a little bit as part of my savings plan every month or so, just as I put some into savings bonds or savings accounts (and I always put a lot more into “cash” savings than into precious metals). I consider this a way to hedge a bit against the depreciating dollar, which is as certain as time and tide over the long run but is certainly not predictable in the short run. I’ve tried diversifying my savings into other currencies from time to time as well, but that was largely ineffectual for me and certainly not worth the cost and risk in retrospect — particularly now, when we appear to be nowhere near the end of the race to the bottom as major economies try to drive down the relative value of their currencies. Indeed, if the federal reserve does go ahead and begin raising interest rates there’s every chance that the dollar will rise in value against the Yen and the Euro even further — since money goes where it gets the best return.
I do not expect a collapse of the dollar, nor a collapse of Western Civilization, hyperinflation, or a wave of merchants who suddenly begin demanding silver or gold or bitcoins instead of dollars. I’m far more optimistic than that … but it doesn’t mean we won’t have crises of confidence, or very weak economic periods when the dollar lurches sharply downward in value. I picked up a 1970 edition of Life Magazine entitled “Your Dollar Problem” and I’ve been flipping through it, for a reminder that the stuff we were hearing a couple years ago about growing your own food and generally becoming more self-reliant is not a new reaction to worry (though they were mostly thinking about how to save money every day as inflation rose — and it wasn’t all that high yet at the time, less than half the peaks it would reach in the mid and late 1970s). That was a growing crisis, and we’ve had several others since — but to a large extent, we work through them and it’s those who make big, non-diversified bets on the future who either win very big or lose very big, the rest of society muddles along, adjusts, and copes.
The mechanics of that possible reality of a dollar collapse are probably talked up too much by the fearmongers — because imagining yourself with a fistful of dollars, unable to buy a loaf of bread, is jarring and spurs panic, and that forces decisions (like, say, buying a newsletter). None of us knows what the next real crisis will look like, or where it will come from, but I’d say the odds are pretty good that it will be different from past crises and I can’t add much to my life by worrying about potential bogeymen. I diversify, I try to make sure that my family won’t starve if the electronic banking network collapses for a while, and as a small part of that I assume that gold, over a period of multiple decades, will probably continue to be similarly loved by human beings and, therefore, will probably retain whatever purchasing power it has today. That’s not a guarantee, of course, and the long history of gold has had many, many very long periods where that didn’t work… but over centuries it has been a relatively resilient store of purchasing power.
Of course, if we go to a gold standard in the future, as some people anticipate (I cannot imagine any scenario in which that gets through any political leadership in the world… but my imagination is limited compared to some), then all bets are off — if governments regulate gold exchanges and prices, it could be worth a lot less or a lot more. Modern governments need inflation to sate modern capitalist societies, I think, so it would take a catastrophe to bring that kind of discipline to monetary systems… and my guess is that such a catastrophe would have to be severe enough, beyond widespread war and beyond massive terrorist attacks, that no one would want gold, either — they’d just want water and fuel and whatever it is you use to kill other people who want your water (or the zombies, I suppose). I prefer not to plan for that, since being in the first wave of casualties of that kind of catastrophe seems to be a much better result.
And lest you think that’s a prognostication, I should make clear that I also didn’t expect interest rates to go to zero and stay there for six (soon to be seven) years.
Mock? Certainly not me. I am mystified by the ‘numbers’ ….truly a total dunce. But what are the key metrics? They cant all be important, or at least, there must be a % pecking order. Isnt there a spread sheet somewhere, where they all get fed in auto and ‘DING…Its a winner !’ comes out?
I will read the links avidly. Thanks Travis.
Perhaps you could take some (any) companys 10-k and analyse it so we can ask questions to dispel doubts. Apart from the thinkolator, that ability is what makes SG so special….we are allowed to ask questions and actually get real answers.
Thanx
That’s why you read the management discussion and listen to the conference calls — to learn how the business works, which will help you understand which numbers are important. There is really no great way to understand the financial structures of companies unless you look at a lot of them over time and build up some context for what things are outliers. Numbers tell a story, but usually in the SEC filings the management tells a similar story and explains the numbers pretty well — often with a heavier dose of optimism than you might spread on the income statement, but still explained.
Damn, and I thought this was gonna be easy money 😉
Basically for me, first I look at revenues. Revenues come from selling and if revenues are down, then selling is down-not a good sign(must ask why, and if the cost of the recenue is low profits can actually be up, but probably not for long). Then I look at profits, ie net revenue. How much did they spend to make that revenue, cause if they are spending more than they are making, then it is not a good sign. But if they are spending more on capital expenditures, ie expanding their business then hopefully profits will go up and the net worth of the company goes up and the stock is worth more. Then of course, if they had to borrow the money for expansion, can they reasonably pay it back and will it pay off (long term and short term debt). Cash flow is a bit complicated and of course basically more is better depending on where the money comes from and where it goes.
Try a site called http://bitethebulletinvesting.com I found how to read a 10K pretty understandable by the explanation given there. He will explain everything from start to finish from a very basic point of view.
Thanks for sharing your thoughts on Berkshire Weekend, Travis. Wise words indeed. I’d love to experience it for myself one year.
Thanks, Travis. From my own experience, I can agree for sure that one’s emotions and
changing opinions are incredibly destructive to our results, even more than whether out picks are right wrong.
I would really like to hear more about the experiment with the MBAs and peoples’ reaction to prices when bubbles are created or prices are moving strongly in one direction or another. The willingness to ride the stock all the way to zero surely has something to do with the “need to be right”, and I can easily imagine that the higher the level of education in an individual, the more that individual may value being “correct” and be self persuaded of their interpretation of things.
It has taken me a long time to see the importance of sentiment both in my own emotions and in the prices of stocks and other assets. As long as human nature remains as it is,
the role of emotions will continue to have a major role in the performance of our investements and in our own decision making. Best to try and keep your own emotions in check, that at least may be within one’s control.
I’ll look up my note on that presentation and read some of the guy’s work — he’s a professor out at Berkeley, if memory serves, who has done more than most to actually make replicable behavioral finance experiments that provide real data. Will write about it soon, I hope. Thanks for the feedback!
Again, common sense applied by a logical individual. Thank you, Travis. As I am not the brightest bulb in the investing chandelier, it is encouraging to know mistakes can at times be valuable learning experiences, if you take the opportunity to learn from them, and not repeat them.
johhnyb, I also had the basically same question. If gold is worth 1200.00$ an ounce, but the dollar is worthless, what’s gold worth?
I think Mr Market will decide that for you…..but it certainly wont be $1200 an oz
What does an ounce of gold buy today, in terms of the work of a person or an amount of grain or cloth? That’s probably pretty close to what it will buy in 100 years, if human history continues on a similar trajectory to the past several hundred years. The famous explanation is that an ounce of gold has always been about enough to buy a good men’s suit — and that’s largely true, though of course there have been lots of things that impacted the price of both suits and gold over the last couple hundred years (and there were probably some reasonably long periods of time for which that wasn’t true).
Unfortunately, while those trends generally play out over 100 years they don’t necessarily play out over five or ten or more years, perhaps $1,900 was the all-time high for gold in dollar terms and it goes down for 20 years and we have deflation and a good men’s suit costs $200 in 2030 instead of the $1,200 it might cost today. (I try very hard not to buy suits, so I’m making up those numbers to some degree — you get the idea, I hope).
My thanks to hendrixnuzzles , Travis, Bennie Hill & others. I too appreciate the comments on our struggles with emotions investing in the equities with good value. It feels good to belong to this family of yours Travis. Thanks again.
Travis –
Is there an interest in diamonds, or diamond stock, as a hedge? I bought Dominion Diamond a year ago after having the history of the company explained to me, which included the transition from Harry Winston and Aber. The dividend yield is nice, about 8%, and seems to be a solid company.
I would like to add my thanks for the notes from Omaha. You do a terrific job!
jk
PURCHASING POWER OF GOLD I have been working on a survey of the purchasing power of gold over the last 100 years and I can say that my preliminary findings are that gold has more than held its own in terms of purchasing power. My point of view is that our thinking about prices is habitually backwards. Everything, especially dollars and currencies, should be priced in gold, not the other way around. The reason this is not done is because gold it is truly impractical for use at the large scales of today’s financial transactions, but also because the government and financial establishments wish everyone would abandon the idea THAT GOLD IS MONEY.
But in terms of our everyday life, up to and including residential real estate, the price of gold does have relevance as a measure of value.
As a practical matter, there are a few problems with physical gold, mainly related to transaction costs. High commissions, conversion, or buy/sell spreads make physical gold or silver somewhat unsuitable as investment. Whether the amount is small or large,
I want to own it, but paradoxically hope I never have to use it or sell it, because if I do it means everything has gone to hell in a handbasket. So what I put into physical metals needs to be money that I do not foresee needing in the near future. It is insurance.
The other problem with physical is that it is suitable for intermediate amounts of capital, not too small or too large. A few gold coins will not get you through the storm or make a big difference; on the other hand, you probably wouldn’t want to deal with more than
$ 250,000 in physical gold either, unless your second car is a armoured Brink’s truck.
On the other hand I am enthusiastic about gold- and silver-related investments, which
carry the usual risks of securities and in most cases are leveraged to the underlying commodity prices. But I cannot recommend them to anyone who does not have a stomach for sudden price reversals. I will trade these investments as opposed to the
physical, but mostly they are long-term positions for me.
I respect the opinion that a financial meltdown is more likely to be in the next headline of your next newsletter solicitation, as opposed to the intersection of Wall Street and Main.
But I am worried about it, and also about the likely social reaction our country should things deteriorate markedly. For anyone who would like an interesting read on our situation and the historical context of governments being bad, I recommend
Willem Middelkoop’s book The Big Reset, U of Chicago Press 2014.
________________________________________________________________________________
Now about my gold purchasing survey. In the last 115 years there have been a lot of
events that dramatically impacted gold and consumer prices. You have recessions, depressions, monetary inflation, wars. We also had two major revaluations during that time, Roosevelt’s outlawing private possession in 1935, and Nixon’s closing of the gold window. And during this time there have been tremendous technological advancements that make some comparisons extremely difficult. Many of the products we can buy today simply did not exist 10 or 20 years ago, let alone 50 or 100 years ago.
1. PRICES What I decided to do was to look at prices on ten and twenty year intervals: 1900, 1910, 1920, 1930, 1940, 1950, and so on. Fortunately these intervals skip some of the major dislocations, in particular WW1 and WW2. And even for these intervals, it was necessary to take averages, both for the price of gold and the price of the commodities in dollars. Sometimes the prices I found were for the year before or after. So the exercise is one of approximations and averages.
Also, dollar-denominated price surveys have copious footnotes about “adjustments” for inflation, or conversion to “today’s dollars”. This hocus-pocus is also based on estimates. The process of “adjusting for inflation” is completely unnecessary when converting to gold…gold is the constant, dollars are just another commodity whose supply and value are subject to the manipulations of the central bankers under the aegis of the Fed.
2. PRODUCT The second issue was the comparability of product. How can I relate a 2010 BMW 330 to a 1920 Model T ? Or a 2010 Samsung 50″ flat screen to a 1960 Magnavox 19″ tube TV ? Or even something as simple as eggs. What size? white or brown ?
Or the proverbial “one good men’s suit”….Robert Hall or Armani ?
The issue of comparability is much emphasized in the literature I saw.
This issue is bewildering at first, but in the end I have concluded it is not so complicated as to render the exercise impossible or invalid. Essentially the improvement in many products is a function of technology or manufacturing progress. So my method is simply to err on the side of technology, that if a better product is available today for less than yesterday, we will give the modern day gold purchase the burden of the cost advantage or disadvantage.
For many commodities, this “product comparator” issue is non-existent. Many useful commodities are close enough in 1920 or 1970 to take the comparison at face value.
With the caveat that my study is far from complete, permit me a few examples:
COTTON: a staple commodity, a proxy for clothing.
1912-1915 avg price .09 /lb 1 oz AU $ 20 gold buys 222 lbs
1920 avg price $.26 /lb 1 oz AU $ 35 , buys 135 lbs
1950 avg price $ .38/lb 1 oz AU $ 35, buys 92 lbs
1960 avg price $ .34/lb, 1 oz AU $ 35, buys 103 lbs
1980 avg price $ .72/lb 1 oz AU $ 475 avg, buys 659 lbs
2000 avg price $ .56/lb, 1 oz AU $ 285 avg, buys 508 lbs
2000-2015 avg price $ 1.00/lb 1 oz AU $ 900 avg, buys 900 lbs
Anecdotally, I am shopping for a car. In the Morris County Daily Record, October 1940, there is an ad for a new Pontiac 6 cylinder for $ 828. At $ 35 per ounce, this would take 23.6 ounces of AU. At today’s AU prices, say $ 1185, this would leave me just under
$ 28,000 to shop with.
In passing, I just saw a very nice 2009 MBZ C300 with 51,000 miles for $ 16,800.
Not bad for 15 gold coins. And cars like this weren’t available in 1940.
Spot on HN: 1/ Gold is an insurance……buy it and never consider converting it till Hell freezes over. 2/ You can pass it to the kids tax free (opps, you never mentioned that as a bonus) 3/ Think of gold as the standard……all else increases/decreases against it.
I bought my boat/home 14 yrs ago for £180k. Had I bought gold, it would now be worth over a million……my boats about a third of that. But Id have to had paid rent for 14yrs, so Im not sure how that computes. Property is another constant. During the last UK property crash, I heard people bemoaning the fact that their home was worth less than they paid (negative equity). I thought this was nonsence….they bought a roof for over their head, and they still had a roof over their head. If they wanted to move, the house they wanted to buy had gone down every bit as much. Its all relative. Given enough time and the £ will increase/decrease. But they can NEVER cash in till they no longer need a roof over their head…ie the kids will inherit and pay tax on the gain. Its a mistake to compare money with essentials. Own the essentials outright…….pay off debt….grow carrots that you can swap for peas. End of problem.
Benny…Agree 100%…living in the house, change in value irrelevant except to my heirs. Gold tucked away, can go up or down or sideways, don’t care….it gives some peace of mind.
I’ll get excited about PVG or NEM, but I’m not converting my physical and I need a place to sleep at night.
Can you explain Vatican Accounts,according to the Unconventional Wealth news letter,your money increases during stock rallies,but does not decrease on stock drops. Do you consider them and the companies that provide them safe and sound,
Thank You
Never heard of them. What does the newsletter say about them ?