The Coke Standard
We certainly make our share of mistakes, so don’t misread the absence of any gold mining exposure in our client portfolios as bragging. Regular readers of this blog will be aware of the occasional wrong turn. One of the most insightful lessons of Behavioral Finance is the overconfidence many people have in their forecasts of all kinds of things, from jellybeans in a jar to quarterly earnings. A recognition of how little short term certainty there is creates some humility around position sizing, and hopefully makes the inevitable mistakes small.
Writing about gold when it’s just had its biggest drop in 30 years is only for those who weren’t involved. The all-too-obvious problem with gold is that you can’t figure out its NPV, because it generates no cash. Instead it consumes a lot to dig it up, move it and store it. So we don’t avoid it because we’re bearish, we just can’t figure out its value. From time to time I’ll run in to people who own some gold as their, “when all else is lost at least I’ll have some” investment. The game’s not over, and they may turn out to be smarter than we are. But I always respond that if inflation is your fear, wouldn’t you rather own shares in companies that sell products everybody wants and have pricing power? Like Coke (KO), which reported earnings this morning ahead of analysts’ expectations.
There are some scenarios involving civil strife and a complete breakdown of civilization in which shares in KO or any other financial investment might be useless, and a stash of gold plus an armory a more appropriate position. You can’t be certain of very much, so even that has a probability > 0%. But 5%+ inflation and the discrediting of fiat money is a higher probability (albeit not yet the most likely outcome in our view). A portfolio of investments in companies that look like KO will probably offer a better prospect of holding its value than a lump of yellow metal. Businesses that can sell a little more product annually to the growing consumer base in emerging economies, and can be relied upon to pass through the cost increases that higher inflation might impose, can remind you why you own them each quarter
Gold will not have many days like yesterday, maybe not for at least another 30 years. But if you prefer the Coke Standard to the Gold Standard at least you have some future cashflows to estimate and present value back to today.
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