Students of Roger Montgomery's (Buffett's) intrinsic valuation method

[Tightwad]

Value is more art than science, of all the rules for picking a stock you can break some of them some of the time.

I'm pretty sure Roger has pointed out with banks that you want to buy at a high margin of safety and they are leveraged, and also the probs with retail. He's picked decent retailers and avoided the dj's and myer.

My real issue is with the other value buyers out there jumping in on a stock when I want to buy it 10c cheaper.

 

[Tysonboss1]

Macro's,

we will agree to disagree then.

I certainly do not hold the same faith you do in Gold, I may be wrong.

I think you are putting to much faith in the "crash of the dollar". I can see it a bit like peak oil. Alot of people got hit hard by investing in the oil companies based on oil prices that were really high.

The thing is even if you are right in the direction, you may be wrong in the timing.

 

[waimate01]

Agreed that investing in gold producers is different to holding physical gold.

One has a yield, one does not.

Kinda the same that investing in tulip producing farms is different to holding physical bulbs.

The yield of the producers is dependent on the health of the product. Same for retailers, for that matter. The underlying issue is that which has already been highlighted:- has gold gone up or currency gone down? Bit of both in my book.

Gold is a placeholder for wealth in the same way that a tribe on a remote island might use blue shells. We would laugh at them doing so, and the fat man with the largest hut carefully guarding his large pile of blue shells would be an anathema. How silly to covet blue shells. We covet shiny metal instead.

But gold is not a placeholder for wealth. Wealth is created by building something or doing something.

You cannot increase the wealth of the world by digging a hole and finding something at the bottom of it, any more than the island becomes more prosperous by finding another reef of blue shells.

 

[Tysonboss1]

You cannot increase the wealth of the world by digging a hole and finding something at the bottom of it, any more than the island becomes more prosperous by finding another reef of blue shells.

And there lies the truth.

outside of the jewellery and the few industrial application gold has no real value, except that people have faith that other people at some stage in the future will give them real assets for them gold.

And there is so much gold stock piled around the globe already, it would cover the industrial uses and jewellery for hundreds of years.

 

[Intrinsic Value]

I have no problem with Roger's valuation techniques or assessment of businesses based on sound fundamentals. However, I would like to point out here that a big flaw with Roger's approach, and many value investors, is to avoid the big issues. Roger states that he is a terrible economist, but I think understanding the economy and direction is a very important factor with investing.

I used to use Roger's blog on a regular basis but have found that Roger has has somehow turned it into a resource that caters to popular opinion. With investing, everyone has a different view, but it doesn't mean that every view is correct all the time.

For some reason, many value investors love retail companies. Roger states that they have a sustainable competitive advantage and can create economic moats. Well what has happened to David Jones? Where has their moat gone? Was it ever there? DJS is down from over $5 in Sept last year to $3.15 today (-37%). I'm not surprised in the least. Retail stocks are suffering due to a structural issue in that we have ended an exponential credit expansion cycle. This is a big problem! The adjustment to online retailing etc is, in my opinion, based primarily on consumers adjusting to lower cost options as a result of the massive change to the credit cycle.

Given that valuations are driven by earnings strength and direction, is it not of vital importance to have an indication of where earnings are likely to head?

Also with the banks. Why does Roger like banks? They are also supported and liked by many 'value' investors due to their apparent safety and high dividends. In my view they are a terrible place to be given the credit cycle and global credit issues.

Roger mentioned that he either owned, or was looking at a gold producer. It wasn't very clear and gave the impression that it was a temporary issue. Why are companies such as BHP and RIO acceptable, yet exceptionally profitable companies such as Medusa MML and Ramelius RMS frowned upon. The gold thread that Roger started was closed fairly quickly, and instead of addressing the issue, it was treated as wild speculation.

If you aren't seriously looking at gold producers, then you have your held in the sand with regards to the global debt crisis which is ongoing and will end with a bang. Yet somehow, gold producers and gold in particular, is seen as almost sacrilegious to many value investors. Why? This is not a religion. As an investor one should never close their eyes to the big issues or have preconceived ideas as to what is good or bad.

If one can accept that the big trends are important, why is it that retailers = safe and profitable gold producers = speculation? Surely it depends on the environment and economic landscapes which can last for many years if not decades.

Thoughts?

From your post I dont think you have read RMs comments on his blog very carefully or fully understood what he is on about.

I dont think he avoids the direction of the economy rather he finds it more beneficial to look at the medium to long term picture when investing in individual businesses. To put it more succinctly there will always be recesssions,booms and headwinds of various types but these will pass. So what you need to do is concentrate what you have control over and that is investigating businesses and looking at their fundamentals eg debt,roe, cash flow. competitive advantage etc and then apply the formula and buy only those business who have a large margin of safety and the best fundamentals. As long as the fundamentals continue to point to a margin of safety then all things being equal he will continue to hold. In the short term he is not worried about share price as he believes over time the share price will revert to its intrinsic value.

Re retail stocks. I dont think he is invested in any retail stocks. He was keen on JBHIFI at one stage but not now and he did make a lot of money out of the Reject Shop but again he doesn't think there is any margin of safety on this stock at the moment.

Does Roger love banks? I have never seen that but if banks were trading at a significant discount to their intrinsic value then yes he would probably buy the banks providing of course that there werent better companies at better margins to safety available.

As for gold or any other commodity for that method he has consistently maintained that in the main part he steers clear of price takers and true to form the stocks he has spruiked over the last year or so have been mining services companies like FGE, and MACCA.

I suggest you get a copy of his book valueable because from your post you only really half understand what he is on about.

 

[So_Cynical]

And there lies the truth.

outside of the jewellery and the few industrial application gold has no real value, except that people have faith that other people at some stage in the future will give them real assets for them gold.

And there is so much gold stock piled around the globe already, it would cover the industrial uses and jewellery for hundreds of years.

Fact is all people covet gold to a certain extent...where as only people on the island covet blue shells, Gold has some real value because its has a global audience, global cultural significance, high production costs and is a currency that cant be printed.

 

[Tysonboss1]

Fact is all people covet gold to a certain extent...where as only people on the island covet blue shells, Gold has some real value because its has a global audience, global cultural significance, high production costs and is a currency that cant be printed.

Yes, I agree.

All those lovely points do not mean it is impossible for it's price to be to high and have a correction.

My posts if you read them were simply saying the following.

1, Gold fails as an investment because it generates no income, so at best it is a speculative play for capital gains or can be used as a store of value and hedge against inflation.

2, If it is at a speculative high it will probably fail as a store of value and an inflation hedge

3, If it is at a specualtive high it will also fail as a capital gain play.

4, Gold producers can be investments, but do have high costs of production, so a fall in value may wipe some of them out and make the remainder crummy investments. So when valuing them using an all time high gold price is unwise.

Gold is just a commodity, it is not magical. It's price will rise and fall along with supply and demand, At the moment their is massive demand from speculaters and fearful people, this may pass eventually and demand will turn to excess supply as people unload.

There is also crap loads of supply coming on market from new mines, this too will add to supply.

All I am saying is make rational, dispassionate assessments. Follow facts, not fear and greed.

I know you follow BPT, what happen to their share price when the fear and greed of the peak oil spec bubble collasped, and that happened to a commodity that is essential to life as we know it, it being pumped out and destroyed at a rate of 83 million barrel daily, not stock piled by the tonne and collect to be sold later

 

[Tysonboss1]

Gold does fall,

look at this chart of the late 70's boom. it certainly is a tale of boom and bust rather than the safe stable store of value people make out.

 

[Macros]

Julia - thanks!

SKC - thanks for not posting a multi-point response The problem is that many are becoming exceptionally profitable in the next couple of years - on the condition that they meet their stated objectives and control costs.

Tysonboss1 - you use the word faith, which I find interesting. This is not guesswork or belief. If you really study the problems then there are certain rational conclusions that can be made in terms of potential outcomes and the approximate timing involved. Basically, from a timing perspective, these issues are happening right now and already have significant momentum. So I really don't worry about timing - this is a issue for now and the years to come. The problems are huge and aren't going away with a magic wand.

Tightwad - you say:

I'm pretty sure Roger has pointed out with banks that you want to buy at a high margin of safety and they are leveraged, and also the probs with retail. He's picked decent retailers and avoided the dj's and myer.

My point is that you don't want to own banks at all in this environment if you have looked at what is happening to the credit system. Regardless of margin of safety as you have no idea what that margin is in the next few years.

My point about retailers is that they will be a great buy soon, but being aware of the issues that they face and that are starting to flow through to earnings like the banking system.

waimate01 - you say:

But gold is not a placeholder for wealth. Wealth is created by building something or doing something.

Gold does not increase wealth, it is a STORE of wealth. Gold is simply money in the function of a long term store of value.

You cannot increase the wealth of the world by digging a hole and finding something at the bottom of it, any more than the island becomes more prosperous by finding another reef of blue shells.

Sorry, but that is rubbish. Our whole human experience has been improved by expanding our resource usage and improving our understanding how that can be better used in everything we do.

Tysonboss1:

outside of the jewellery and the few industrial application gold has no real value, except that people have faith that other people at some stage in the future will give them real assets for them gold.

And there is so much gold stock piled around the globe already, it would cover the industrial uses and jewellery for hundreds of years.

Herein lies the problem. You don't understand gold. You don't understand what it does. I find many value investors don't. Gold's only function is a long term store of value. Why do you think that the European Central Bank lists gold as its first asset on its balance sheet? It doesn't really matter if you don't understand why gold should be used as the store of value function for currency, but it matters when the world uses it to perform that function.

My purpose of posting here was not really to discuss gold, but the problem in that many value investors, in my opinion, limit their view of the world. For example, have you studied the global debt problem? Have you studied the usage of gold and the movement towards it becoming part of the new monetary system? These concepts are incredibly important, however most people don't bother to look or just dismiss these issues out of hand.

Please don't go on about gold, because most people haven't done their homework. We could go around in circles and talk forever about it. If you want to challenge me on the issue, I have no problem with that at all - I like my views to be challenged because if I can't defend myself then I clearly haven't thought it through. Please understand me, I really don't mean to be condescending on this issue, however I have no doubt that 99% of people haven't really thought about these issues and tend to just use worn-out lines that others have used, similar to concept that 'property prices always go up'.

Essential reading:
http://fofoa.blogspot.com/2010/12/value-of-gold.html
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
http://fofoa.blogspot.com/2011/05/return-to-honest-money.html


Intrinsic Value

I don't think that you have read in to my own comments vary carefully and judge too quickly. I may be wrong, but I believe that I understand what Roger is on about. I love his work, however these are my criticisms. I've read most things that he has written and have read his book in full.

You say:

he finds it more beneficial to look at the medium to long term picture when investing in individual businesses

My point is this: Roger has stated, and I agree, that in the Australian market we are limited in size and therefore you cannot have an investment time-frame that extends forever as the successful companies become too big and mature too quickly, which rapidly impacts on the ability for them to grow in value over time. Therefore, an investor cannot have a time horizon that goes on forever. Also, the problems and issues that I'm talking about, are big issues and are not one to two year problems. These are decade long problems. Is ten years not enough of a time horizon to be reasonably long term?

I think that as an individual Roger understand the economy very well, however there are issues at stake here that are really important. We aren't talking about the short-term business cycles that we have become accustomed to over recent years with a year here or two years there. These are long term structural problems that could have resulted us being in a world-wide great depression had there not been intervention and a fiat currency system. This is big. An individual business is like leaf floating on the river when dealing with these sorts of issues.

Now, I'm not saying that individual businesses cannot do well during difficult periods, however if you understand the difficulties, I believe that you have a much better capability to judge whether the company that you wish to invest in is able to do well. Why don't we have control over understanding the big trends as well as the individual business? I believe that many limit themselves by not adequately thinking about the issues which inevitably impact the individual.

I understand value investment in terms of looking at profitability etc and competitive advantage. I think those things are fairly easy to determine. But I believe that you need to put the individual in context as a piece in the overall puzzle. My point is that the big issues impact on where the intrinsic value will head in the future years. You cannot invest based on past intrinsic value because it may not be where you thought it was.

Retail stocks. This is something an industry that many value investors love. Not sure why. I have nothing against them, but my point is for the investor to understand where they are headed because it isn't always straight-forward. This is not all about Roger. I agree that Roger isn't a big investor in retail stocks. But many are. My contention is that the issues that I speak of aren't really being dealt with before the problems arise and many simply say 'well, who could have known?'.

Banks. Roger has had banks in his ValueLine portfolio, has supported them and said that he prefers ANZ. None of the big issues that they face have been addressed. I think that he probably knows the issues, but doesn't want to talk about them because many people are psychologically against talking about the problems. For me its a logical extension - there are problems - I'm going to deal with them - but many people will think I'm alarmist or don't know what I'm talking about. My point is that if you look into the problems, you shouldn't be touching a bank right now as a long term investor.

Mining service companies. I just don't get it. I have no problems with mining service companies, but it is so irrational for value investors to say that resource producers are price takers whilst mining service companies are not. This is illogical and makes no sense to me. The revenues of mining service companies are a function of supply demand mechanics. In favourable conditions they will have more leeway over their pricing. In unfavourable conditions they will have little to none. Therefore, the most important factor should be the supply demand mechanics and this applies to producers, service companies, retailers, everything. Think about this - if there are more and more service companies that are created, but limited projects, eventually there will be a surplus of services greater than the demand for projects. This would impact revenues as competition ensues and impacts even the highest quality businesses, who may be able to ride it out, but nonetheless it impacts on the value of their business.

Roger is a smart guy. I think that Roger avoids some of these issues due to the fact that the act of discussing them immediately polarises opinion and therefore isn't the most efficient route of having as many people interested in what you say. All I'm getting at is that these issues are important regardless of whether you think it applies and whether you agree with me or not.

I'm sick and tired of the amount of obfuscation that exists today. It has lead it into the mess that the world is having to deal with. Its not all doom and gloom, but the sooner we start recognising important issues and finding solutions to deal with them, the sooner we can get back to a sustainable pathway.

 

[Macros]

Tysonboss1

Gold is just a commodity, it is not magical."]Gold is just a commodity, it is not magical.

Gold is not a commodity, it has the single useful property of acting as money.

There is also crap loads of supply coming on market from new mines, this too will add to supply.

Wrong. There is a lot of supply coming from small producers, but the global supply is declining - please do some research before assuming this. The increase is around 2.5%pa - what is the global population growth can I ask? I understand that between 2001 and 2008, global gold production declined around 1.3% per year on average - why would this happen with rising prices?

All I am saying is make rational, dispassionate assessments.

This is what I'm saying. My argument is that many who argue against gold are often not making dispassionate assessments.

look at this chart of the late 70's boom. it certainly is a tale of boom and bust rather than the safe stable store of value people make out."]look at this chart of the late 70's boom. it certainly is a tale of boom and bust rather than the safe stable store of value people make out.

You time scale is off. You should have it from the 1800s. The whole credit expansion debt binge that the world has had started in the 1970s as we entered a fully fiat currency system (which usually last around 40 years). Your conclusions are faulty. Please read in full my links on FOFOA. Once you have read it in full and can still state a case why it will not continue to form a role as long term store of value, I'll be very impressed and would love to have an informed debate on the issue (I'm always willing to change my mind if I get it wrong).

 

[Macros]

Tysonboss1

1, Gold fails as an investment because it generates no income, so at best it is a speculative play for capital gains or can be used as a store of value and hedge against inflation.

Sorry but you aren't being logical here. Have you already forgotten that we discussed this point and that gold in a vault is like cash in a vault? It is not until you take on counter-party risk and lend it out that you generate income.

 

[InvisbleInvestor]

Macros, have you read value.able? Because half the things you are saying is what Roger says. It's quite funny actually.

 

[Tysonboss1]

Tysonboss1



gold in a vault is like cash in a vault?

Yes, that is if it is bought outside bubble conditions,

gold purchased at the peak in 1979 and taken out in 1985 is worth much less than the same dollar value of cash put in the vault, so you would have been better with cash.

And if you kept it in the vault 26 years till 2005, it would still only be worth the same dollar amount, even though the dollars had be hacked by inflation the gold had not increased in value.

 

[Macros]

Macros, have you read value.able? Because half the things you are saying is what Roger says. It's quite funny actually.

I read it last year. I mentioned that I had earlier. I agree with what Roger says and I am a value investor. I wouldn't make be saying these things if hadn't as that would be incredibly hypocritical of me.

All I'm trying to get across, is that I don't think that value investment should be applied in a vacuum.

Issues with certain sectors and the economy can be more important than current margin of safety as they drive future earnings and future value. My assertion is that many investors who use a value approach have mental baggage from Buffett and Graham and therefore find it difficult to be adaptive and critically think about issues like gold as a currency, credit super cycle and the implications on all investments such as Australian banks, retail sector, future interest rates, monetary systems, consumer discretionary spending and the impact on retailers, viewing a producing resource company completely different to mining services due to misperceptions on how they should be judged, sometimes viewing resources as an unknown or sometimes worthless when the flow through the whole economy.

I truly do not think that these issues are tackled well at all by the majority of traditional value investors, and my one criticism is that is that Rogers approach is perpetuating this problem. I think they are incredibly important for short, medium and long term term investing.

As a result of my comments on gold, the typical responses indicate a lack of research and understanding of the issues. In no way am I suggesting that value investors should invest in this area, but if you don't understand the full picture you shouldn't be reaching a hasty conclusion. Economic systems are interconnected.

The bank issue is important as you can't invest with a margin of safety unless you are fully aware of the risks involved. I haven't mentioned them here, but I think that most Australians under-appreciate the issues we face.

My suggestion is that these issues are just as important as investing with a margin of safety. An investor should make themselves aware as much as possible and be willing to adapt.

 

[Macros]

Yes, that is if it is bought outside bubble conditions,

gold purchased at the peak in 1979 and taken out in 1985 is worth much less than the same dollar value of cash put in the vault, so you would have been better with cash.

And if you kept it in the vault 26 years till 2005, it would still only be worth the same dollar amount, even though the dollars had be hacked by inflation the gold had not increased in value.

Have you read my links yet to FOFOA? It cannot be explained in one paragraph and you don't have a full understanding of the issue and you will go round in circles.

You are making up arguments that require very specific conditions to achieve the conclusion that you seem to be after. Therefore you are not taking a balanced approach. Just read FOFOA.

 

[InvisbleInvestor]

I read it last year. I mentioned that I had earlier. I agree with what Roger says and I am a value investor. I wouldn't make be saying these things if hadn't as that would be incredibly hypocritical of me.

Righto, must have missed it.

 

[waimate01]

Julia - thanks!


Gold does not increase wealth, it is a STORE of wealth. Gold is simply money in the function of a long term store of value.



Sorry, but that is rubbish. Our whole human experience has been improved by expanding our resource usage and improving our understanding how that can be better used in everything we do.

Improved by digging things up and *using* them. Gold is not resource usage (industrial and ornamental applications aside). We dig up iron and copper and coal and palladium and we *use* them. We dig up gold, shiny it up, and sit it on a shelf in a darkened room.

Sure, gold may be a another form of money, but its an exceptionally inefficient form of money. If wealth is created by doing something, and you need more blue-shell-equivalents to represent the greater prosperity of civilization, you can either print more fiat currency, or you 'print more gold' by stumbling around in the bush digging holes.

The complete silliness of gold is highlighted by the fact that as a wealth-store, it abounds with friction. If the purpose of something is to represent stored wealth, then why choose something that itself consumes (destroys) wealth in the process of obtaining?

Ahh - because it has to be rare in order to act as an effective storage mechanism! Well, no, not really. It has to be controlled and restricted, and indeed the problem with fiat currencies has been amply demonstrated in recent times.

I see little difference between the US pressing the 'go' button on their printing presses, and digging a hole and finding some shiny rocks at the bottom of it. Neither increases wealth. Both increase the 'wealth store' without anything useful having been done.

Oh ok, there is one difference. Running the printing presses is at least cheap. Finding more shiny rocks is costly and inefficient. Both increase the 'wealth-store' by increasing the 'store' and not by increasing the 'wealth'. Gold actually decreases the 'wealth'.

And as for the notion that gold is completely different to blue shells because 'everyone' agrees gold is valuable but not everybody agrees blue shells are valuable, well, really! For a start, ask the people on the fictional island. They'll tell you everyone agrees. But also, have a look what this discussion is about. Not everyone agrees! Bretton Woods?

 

[Macros]

waimate,

Thank you for thinking about this concept in a bit more detail.

We dig up gold, shiny it up, and sit it on a shelf in a darkened room.

Why do you think this is the case? Clearly it is different from other resources such as iron and coal. It has only one function and that is storage of wealth.

Sure, gold may be a another form of money, but its an exceptionally inefficient form of money. If wealth is created by doing something, and you need more blue-shell-equivalents to represent the greater prosperity of civilization, you can either print more fiat currency, or you 'print more gold' by stumbling around in the bush digging holes.

If the most efficient form of money is to print pieces of worthless paper, they will eventually return to their intrinsic value, which is zero. Gold on the other hand requires effort and is limited in availability, therefore is value. The value that is has depends on the requirement for its use as a long term store and this will be dictated by market forces by big money, such as central banks and big money private demand.

The complete silliness of gold is highlighted by the fact that as a wealth-store, it abounds with friction. If the purpose of something is to represent stored wealth, then why choose something that itself consumes (destroys) wealth in the process of obtaining?

Ahh - because it has to be rare in order to act as an effective storage mechanism! Well, no, not really. It has to be controlled and restricted, and indeed the problem with fiat currencies has been amply demonstrated in recent times.

Yes, you are right, it has to be controlled and restricted. Fiat currencies throughout human history have never been up to the task. Bitcoin was a potential alternative but clearly has its own drawbacks that gold does not have. Therefore, on this point I think you are getting to the reason for gold as a store of value and haven't argued against it.

I see little difference between the US pressing the 'go' button on their printing presses, and digging a hole and finding some shiny rocks at the bottom of it. Neither increases wealth. Both increase the 'wealth store' without anything useful having been done.

You can't add another zero in the ground like you can on a keyboard. The gold supply in the ground is limited. The wealth store concept only works if the only real utility is for this very function and why silver isn't ideal.

Oh ok, there is one difference. Running the printing presses is at least cheap. Finding more shiny rocks is costly and inefficient. Both increase the 'wealth-store' by increasing the 'store' and not by increasing the 'wealth'. Gold actually decreases the 'wealth'.

http://fofoa.blogspot.com/2009/10/gold-is-money.html
http://fofoa.blogspot.com/2009/10/gold-is-money-part-2.html
http://fofoa.blogspot.com/2009/10/gold-is-money-part-3.html

From FOA:
"By accepting and using dollars today that have no inherent value, we are reverting to simple barter by value association. Assigning value to dollar units that can only have worth in what we can complete a trade for. In effect, refining modern man's sophisticated money thoughts back into the plain money concept as it first began; a value stored in your head!

So you think we have come a long way from the ancient barter system? Where uneducated peoples simply traded different items of value for what they thought they were worth? Crude, slow and demanding, these forms of commerce would never work today because we are just too busy, right? Think again!

Unlike the efficient market theory that was jammed down our throats in school, we all still use value associations to grasp what things are worth to us. Yes, the market may dictate a different price, but we use our own associations to judge whether something is trading too high or too low for our terms. We then choose to buy or sell at market anyway, if we want to.

In this, we have moved little from basic barter. In this, we are understanding that an unbacked fiat works because we are returning to mostly bartering with one another. A fiat trading unit works today because we make it take on the associated value of what we trade it for; it becomes the very money concept that always resided in our brains from the beginnings of time.

In this, a controlled fiat unit works as a trading medium; even as it fails miserably as the retainer of wealth the bankers and lenders so want it to be."

From FOFOA:
"Modern fiat currency, our modern physical transactional medium fits best in the means of exchange function. And real wealth, with gold as the most liquid, durable and portable example par excellence, fits best in the store of value function."

From FOA:
"We were first alerted to the "gold is money" flaw years ago. When considering the many references to gold being money in ancient texts, several things stood out. We began to suspect that those translations were somewhat slanted. I saw many areas in old texts where gold was actually referenced more in a context of; "his money was in account of gold", or; "the money account was gold", or; "traded his money in gold". The more one searches the more one finds that in ancient times gold was simply one item that could account for your money values. To expand the reality of this thought; everything we trade is in account of associated money values; nothing we trade is money!"

FOFOA again:
"And can we now agree on these three statements at least? 1) Gold is a form of wealth. 2) The pure concept of money fits best within the unit of account function. 3) The word currency best describes what we currently use in the medium of exchange role.

Our modern gold market price illusion is little more than a product of the fiat dollar system; a design that denominates gold credits in a contract form. Is it a free market? Why yes, very free. But... TOO free, in the sense that contract supply is totally unlimited. Investors bought into this market even though they fully well knew 90% of the volume was represented by only cash equity on the other side. Knowing that, they somehow expected that those contracts were limited in creation by the fixed amount of gold in the world. Their mistake, not the market's.

And as we pass through this phase transition, as gold switches from the transactional track to the wealth-reserve track, it will take on a whole new meaning... and a whole new value! The non-dollar part of the world already knows this. This is why they are buying gold now! You see, as a truly demonetized wealth asset, gold has a much much higher value to mankind than it does as a transactional money. To get an idea of the difference, just compare the basic transactional money supply with the vast quantity of so-called "paper wealth dollar derivatives". This should give you an idea of what is coming!"

And as for the notion that gold is completely different to blue shells because 'everyone' agrees gold is valuable but not everybody agrees blue shells are valuable, well, really! For a start, ask the people on the fictional island. They'll tell you everyone agrees. But also, have a look what this discussion is about. Not everyone agrees! Bretton Woods?

Given that we don't live on an island and therefore the island concept is irrelevant to this discussion, we know of many different concepts that could perform a store of value function for currency. Knowing what is out there, eventually everyone agrees that gold is unique for this function.

The complete silliness of gold is highlighted by the fact that as a wealth-store, it abounds with friction. If the purpose of something is to represent stored wealth, then why choose something that itself consumes (destroys) wealth in the process of obtaining?

Because you cannot obtain wealth for free. It requires effort.

From FOFOA:
"What will happen is a paradigm shift. The paradigm shift will be the sudden planetary recognition that the global debt(concept)-based paper investment pyramid is collapsing from its own weight and size. And that the best safe haven retreat is physical possession of the one and only hard asset that is globally recognized as an official monetary wealth reserve, an officially recognized hard collateral asset, a true national treasure, and an historic denominator of wealth with a history longer than recorded history itself!"

 

[Macros]

About the Bretton Woods point and recent history:

From FOFOA:
Gold Exchange Standard

Our most recent experiment with gold as the conceptual medium of exchange ended badly. The purist understanding of money, the common medium of exchange, longs for it to be a real commodity, or at least linked to a commodity so that the actual medium can have a relatively stable value and double as a store of wealth. But when we lock a finite commodity into a parity relationship with an inflating paper currency, we only drag down that commodity's relative value compared to the rest of the real world as the related currency is inflated.

Over time, pressure builds up in this relationship set at par, the same as pressure builds between two business partners where one is lazy and unproductive and the other must carry the business through hard work. Sooner or later some of that pressure must be released and parity must be broken. Perhaps the lazy partner's equity position in the business is cut or reduced to reflect his lack of contribution, buying the ill fated relationship a little more time. This is what Roosevelt did with the dollar/gold relationship in 1933. But eventually these mismatched partners will have to part company once and for all. Just as gold and the dollar did in 1971.

In 1971 official parity was broken, but not forgotten. In the years since, an unofficial parity of sorts has been maintained through the paper gold market. Paper gold, like dollars, can be expanded and inflated while being locked at a par with the real thing. This is still going on today. But the pressure has been building for a long time now. This pressure held in the parity relationship between paper and physical gold is about to blow.


Long versus Short

Today's paper currencies are not just a medium of exchange, but they are still a pretty good store of value in the short term. The greater the rate of price inflation, the shorter the term that you will want to be holding the actual currency. Wealth assets, on the other hand, are the store of value for the long term. This differentiation is understood by almost everyone today. And it is so close to the concept of Freegold that it will not be "a giant leap for mankind" to get there.

The only difference is that right now, most of the public has come to believe that wealth is simply paper ownership of wealth producing industries and paper claims on real assets that can never be recovered at today's values. This is true for most all items, not just gold. And as we hold these paper documents for the long term, understanding them to be better than holding the actual currency because they provide a "yield", the recoverability of the underlying real asset is being constantly eroded away. In other words, we are unknowingly losing principle at the same time as we think we are gaining a yield!

From 1980 to 2001, the expansion of the financial industry far beyond the means of its parallel real world counterpart was a signal that our human instinct to buy things, or assets (even if only paper debt assets), rather than to hold the actual currency, was still intact. But the fact of the matter was that the dollar currency itself was expanding during this time period at a furious pace to meet its global usage demand WITHOUT causing the price inflation that should have accompanied such an expansion.

This strange "pseudo-deflationary" signal (versus gold) during a time of high currency inflation might have told the people that it was okay to hold the currency itself during this period. That something odd was afoot. As the currency was expanding with such ease, but at the same time gaining purchasing power especially against gold and oil. But the people only spent their currency, which demonstrated their natural inclination. To spend currency, and to buy real wealth assets for the long term (even if those assets were little more than a value illusion).

But today a totally different signal is being broadcast loud and clear, and being equally ignored. That gold is now about to resume its historic role and value as a wealth asset, long suppressed by its troubled association with inflating transactional currencies.


Gold Coin Standard

Even the gold coin standard we had leading up to the creation of the Federal Reserve System ended badly. You see, people put their gold coins into the banks and the banks lent them out. And then when confidence suffered a shock and the banks faced a run on gold, the system collapsed, many banks failed, and people lost their gold.

Human people want to be able to borrow money in the present that they plan to earn in the future. Not all people want to do this, but enough to influence the system certainly do. And this practice, by its very nature, expands the money supply beyond its physical commodity limits, even in a pure gold coin standard.


The point here is that our modern understanding of money, or any money concept for that matter, combined with our modern taste for borrowing, lending and trading of credit and debt, may not NECESSARILY be a perfect fit with a pure gold standard. Even a gold standard, with gold as the actual currency, is manipulated by the banks through confidence-based lending schemes. Sure, a gold standard somewhat limits the collective in its more nefarious pursuits, but it also has flaws that always seem to lead to the same conclusion... failure.

Perhaps it is time for us to consider another alternative, even a natural one that is happening whether we like it or not. How about a new, de facto, free market-driven stasis instead of the old de jure (rigged) false parity relationship... how about Freegold?

The Fourth Dimension: Time

At any given moment, a snapshot of our world appears to be only three dimensions; left/right, backwards/forwards, up/down. But with the passage of each and every moment, the world changes. Values change! People change. Everything changes. And all of these changes happen as we move through the fourth dimension, time.

This fourth dimension is very important as we consider the pure concept of money. For it is in this fourth dimension that our pure concept of money resides!

If time was not a factor, then anything accepted as a generic medium of exchange could perfectly perform all the functions commonly linked to the term 'money'. You do your work (somehow without the passage of time) and get paid, and then spend your money on anything within that same moment in which your work's value was judged against the entire universe of real things. A perfect stasis of values would exist everywhere, all at once.

But here in the real world we must be concerned about how far we carry our money through the fourth dimension. Without this vital consideration, we stand to lose everything!

 

[Intrinsic Value]

I read it last year. I mentioned that I had earlier. I agree with what Roger says and I am a value investor. I wouldn't make be saying these things if hadn't as that would be incredibly hypocritical of me.

All I'm trying to get across, is that I don't think that value investment should be applied in a vacuum.

Issues with certain sectors and the economy can be more important than current margin of safety as they drive future earnings and future value. My assertion is that many investors who use a value approach have mental baggage from Buffett and Graham and therefore find it difficult to be adaptive and critically think about issues like gold as a currency, credit super cycle and the implications on all investments such as Australian banks, retail sector, future interest rates, monetary systems, consumer discretionary spending and the impact on retailers, viewing a producing resource company completely different to mining services due to misperceptions on how they should be judged, sometimes viewing resources as an unknown or sometimes worthless when the flow through the whole economy.

I truly do not think that these issues are tackled well at all by the majority of traditional value investors, and my one criticism is that is that Rogers approach is perpetuating this problem. I think they are incredibly important for short, medium and long term term investing.

As a result of my comments on gold, the typical responses indicate a lack of research and understanding of the issues. In no way am I suggesting that value investors should invest in this area, but if you don't understand the full picture you shouldn't be reaching a hasty conclusion. Economic systems are interconnected.

The bank issue is important as you can't invest with a margin of safety unless you are fully aware of the risks involved. I haven't mentioned them here, but I think that most Australians under-appreciate the issues we face.

My suggestion is that these issues are just as important as investing with a margin of safety. An investor should make themselves aware as much as possible and be willing to adapt.

One of the important points that RM makes in his book is about 'turning off the noise' and concentrating on the fundamentals of the company.

Of course that doesn't mean ignoring other factors at play in the greater economy but it does mean not being overly distracted by every prediction, movement up and down and day to day machinations of the market.

In his analysis he talks about government legislation that might affect future earnings. The advent of new technology on a business and of course he has mentioned quite often the downturn in retail as result of lack of consumer confidence and less discretionary spending due to higher energy costs etc.

And whilst I haven't heard RM talk about a GFC2 it seems he must have factored it in to his thinking as his fund is holding predominantly cash or he might rationalise that there are not enough A1s at sufficient discount to their IV to warrant investment.

So really even thou he might say he is not an economist and he is a fundamental investor he is still looking at anything that might affect a business and its future earnings and then factors this into his valuation.

So I suppose Macros it then comes down to what is 'noise' and what is real information that needs to be factored in to future stock valuations?

Finally and fundamentally what you are saying is what RM is for the most part doing anyway.