Two thoughts for the day:
Number 1. Here’s the problem with contrarian investing: even if you read the books and agree with the abstract notions of doing things like “buying fifty-cent dollars”, it’s hard to actually execute on that in real time.
If someone wants to engage in value investing with the big ole’ American stocks, you’d find yourself working towards Citigroup and Bank of America, two companies that will eventually merit textbook entries on wealth destruction when college students in 2045 read about corporate (mis)management at America’s leading financial institutions leading into the 2008 financial crisis.
But you already know that story. I’ll give you an optimistic tidbit that you might not know. Bank of America has returned 6.33% annually since 1986, giving a $10,000 investment a total value of $55,000. I find that shockingly good, given what happened. In 2008 and 2009, Bank of America doubled its share count so that every dollar the bank generated in profit would only generate $0.50 on the shareholder’s behalf for eternity or until the Board decided to use new cash profits to buy back the stock and mop up the product of its past sins.
Oh, and it also hung an albatross around its neck by purchasing Countrywide so that all of its lucrative profits from its core banking operations would be entirely ignored due to the addition of a brand new mortgage unit that was losing billions of dollars and was about to make the parent corporation legally liable for tens of billions of dollars. Instead of predicting Saul’s downfall in battle, the Witch of Endor could have brewed a better curse by placing Countrywide Financial on the House of Saul’s biblical balance sheet.
Double Share dilution + ongoing billion dollar losses is the worst two-step I have ever seen a large American company take. Those should be permanent causes of financial distress, but yet, by expanding your time horizon to the super long, you’re still able to eke out a positive return. What happened was this: from 1986 to 2007, Bank of America compounded at a near 14% pace, turning $10,000 into over $150,000. That created such a huge mountain of capital appreciation that even the severe management missteps during the Great Recession could not take it down. And that leads to the $55,000 you’d be sitting on time. When time invested in a stock goes up against managerial blunders with a stock, time invested has a tendency of winning almost every time.
Number Two. Value investing with gold: You know how no one talks about gold investing, anymore? In the summer of 2011, an ounce of gold sold for $1,800-$1,900 per ounce. Now, it’s down to the $1,275-$1,300 range. When the stock market has been roaring for five years (and boy did it roar in 2013 when investors generally increased their paper worths by 30% if they had a typical blend of American companies accounting for most of their net worth), no one cares about gold anymore. It takes a contrarian streak that frankly, a lot of people don’t have, to recognize that if you were to speculate in gold, you would do so at a time like today. You don’t wait until the S&P 500 falls 30% and people rekindle their love for the shiny yellow metal to consider it.
Would I buy gold? No. The problem with gold is that the only way you can make money with it is by getting people to pay more for it than you did. There’s no growth component to gold. If you put a 10 oz. bar of gold in a safety deposit box at the local bank today, it will be the exact same stinkin’ thing in 50 years, and you just have to hope that someone is willing to pay substantially more for it at the time you decide to sell.
That’s why I prefer businesses because (1) you get to benefit from a growth component, (2) the growth component capitalizes upon itself, so that people will be willing to pay more for it over long periods of time, and (3) if it pays a dividend, you are allowed to benefit from owning something without having to give up your ownership to receive the benefit.
When gold falls from $1,800 to $1,275, there is not a whole lot you can do to receive a benefit from it. Maybe you can invest in gold rosaries and pray that the price goes up, but that’s about it. When Chevron fell from $104 per share in 2008 to $55 per share in 2008, you still got paid $2.53 for every single share that you held to your name. The downside of owning sound businesses is so much more fun than the downside of gold prices—if anything, you can re-invest your Chevron dividends at $55 per share so that suddenly you’ll have more cash coming your way the next time. It’s not until your investment of choice hits a bear market that you realize how great the phrase “cash-generating asset” truly is.
Originally posted 2014-06-20 00:46:12.