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Why I Won't Ever "Back Up the Truck" on GoldBy
Friday, July 12, 2013
A lot of financial pundits are talking about when they will "back up the truck" on gold...
The precious metal has fallen from its 2011 high of $1,900 an ounce to around $1,250 today... The experts are saying it will bottom between $1,000 and $1,100.
Whether gold gets down to that level or not, I won't ever "back up the truck" on gold... That's not how I do things.
I buy things that seem attractive in price when I have capital available. I prefer to buy some assets over others. And gold is at the bottom of the list.
Here's the order of things I prefer to buy...
First, I like highly capital-efficient, well-branded companies that have decades of success and are likely to continue raising their dividends for years into the future. We call these stocks "World Dominators."
For example, you can see all the work I've done on chocolate maker Hershey. That's a classic example of a stock I would choose to buy at the proper price. And the proper price for a stock like that, in my opinion, is less than 10 times cash earnings.
When I'm not able to buy those companies at attractive prices, I prefer to buy wholly owned real estate...
When I buy real estate for current income (mostly apartments), I look for deals that generate gross annual income (a gross "cap rate") of at least 12%. During the 2009 and 2010 period, I was able to get into deals offering gross cap rates near 20%. Those returns fell to around 15% in 2011 and 2012.
Today, I can't find any good returns on apartments anywhere, so I'm not buying. It's that simple. You can't squeeze blood from a turnip – but that won't stop people from trying (foolishly).
When I buy "trophy" properties, I'm not looking for current income. I'm buying in the expectation of a very large future capital gain. To capture these gains, I need to find one-of-a-kind properties in great locations... selling for absurdly low prices.
For example, the beach house I bought in Miami Beach in early 2011 is one of only about a dozen homes in Miami Beach that offer both waterfront (a canal, suitable for large boats) and direct access to the beach, via footpath bridges over the canal.
I paid roughly $400 per square foot for this property – just over $2 million. I was able to get an absurdly low price because I had plenty of cash available. When I bought the Miami Beach property, financing was completely unavailable. As credit has returned to the market, prices are soaring...
Currently, the average asking price for a waterfront home in Miami Beach is $6.5 million – roughly $1,000 per square foot. By renovating my property, I can increase the value to something over the median price in the market today. Thus, I should be able to easily double my money by 2015.
If high-quality stocks and real estate are not available at attractive prices, I look for things like discounted distressed debt. Buying the debt of distressed companies at pennies on the dollar can be a very good investment... But you have to analyze the balance sheet to make sure you'll be paid in the case of bankruptcy.
Last on my list is gold (and other precious metals like silver and platinum). It's at the bottom of my list because it's very difficult to determine a reasonable price to pay. You cannot do a discounted dividend model on silver. You cannot know the intrinsic value of gold. There isn't much industrial demand for these metals in comparison to their stockpiles, so supply/demand doesn't help you figure it out, either.
I have no rational basis for knowing what a good price is. The price of gold and silver tends to be driven by people's expectations of inflation and their faith in the currency.
I personally bought a lot of gold at $400 and again at around $800, and I'm sure I will buy more again at some point in the future. I can't tell you exactly what the price will be. It depends on what happens in the world and how much capital I have available.
One of my traditions is to take whatever money I have left in my checking account after I've paid for all my Christmas gifts at the end of the year and buy a little gold. Those purchases are small compared with my net worth and the size of my portfolio. But I just make it a habit to buy a little gold every year. And when I think the market looks attractive, I tend to buy a lot.
Today, I'm not finding great deals in stocks and real estate, and few discounted corporate bonds are available. So I find gold to be an attractive alternative.
Regards,
Porter Stansberry
Further Reading:
Dr. David 'Doc' Eifrig also likes to keep the bulk of his money in productive assets, like dividend-paying stocks. "But sophisticated investors know focusing solely on 'rewards' like income and capital gains is a huge mistake," he writes. "Great investors don't focus on rewards. They focus on risk." And that's where gold and silver come in. Learn the sensible, low-stress way to own gold and silver here.
When gold sold off this year, did you react like a wealthy man... or a poor man? Find the answer in this essay from Doc: Here's What Poor People Don't Know About Gold.
Market NotesTHE HUGE BULL MARKET IN WHOLE FOODS Today's chart offers another example of how the American consumer is doing better than the pessimists would have you believe.
Read financial newsletters for a week, and you're bound to come across articles that say the American consumer is "dead" or "tapped out." But as we've shown many times in the past year, the market disagrees. Profits and share prices of hotels, shopping-mall operators, and swimming-pool suppliers are soaring.
Another example of this spending boom is the performance of Whole Foods. Whole Foods is America's No. 1 "luxury grocer." It's for folks who don't mind paying more for higher-quality food. Whole Foods' products are costly enough that the company has earned the nickname "Whole Paycheck."
You might not spend lots of money on groceries. But our chart shows that many folks do. Whole Foods is doing such brisk business, shares have climbed from $17 in late 2010 to $55 today (a 223% gain). Shares are well above their pre-credit-crisis high. With cockroach-like resiliency, the American consumer lives on... and he's buying expensive food.
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