Friday, May 1, 2015

Gold vs Stock Market

Thank you readers and to those who participated in the book contest.
I ll do a short write up on Gold vs Stocks.

Gold vs Business

As you'll have mentioned, gold is an unproductive asset and it actually has no intrinsic value. When one buys gold, he/she is hoping someone in future will offer a high price to it.

I like the way Motley Fool puts it and I was also kind of looking for this in the answer:

One who buys gold is hoping for the greater fool to buy it from them for a higher price at some future date. But that's not investing -- it's gambling.

Click here for the link.

But it is different when it comes to buying a share of a business. Be it the stock price goes up or down, it doesn’t matter to Warren Buffett because he is more interested in the cash flows the business brings about, not about how much the business is valued in the stock market. In fact he is even happy when the price drops, so he could attempt to buy more at that lower price.

Warren Buffett on IBM:

"It's kind of been doing exactly what I like ever since we started buying it," Buffett told CNBC's "Squawk Box" on Monday. "People have this misconception that—when we buy a stock—we want it to go up. That's the last thing we want it to do."

The value of gold is purely speculative and depends on how much others are offering. As for a business, there is an intrinsic value it on the basis on its future cash flows it can potentially generate.
He is also very consistent in his philosophy in value investing and this also explains why he doesn't chase after the latest car models or owns big houses.

 “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”
- Warren Buffett

Predictability of Future Earnings

So how to know if the company will continue to generate cash flow? It can go bankrupt..
Well there is no guarantee that company will always stay profitable, but Warren Buffett buys into a company which he understands very well and their earnings are predictable.

 “Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.”
In every crisis , some business will eventually fail due to the competitive landscape chances. However some companies are resilient and have longer life spans. For instance Wrigley gum is a business in a slow changing industry.  Consumer taste for gum may change, but the gum industry is unlikely to experience a radical shift other than changing flavors and ingredients. Same goes to Coca Cola & MacDonald’s. If these companies have been around for 100 years going through all stock market cycles to emerge stronger each time, chances are that they’ll still be around for the next 100 years. Can you'll think of listed companies in Singapore which will still be around for the next 20-30 years. For those who have yet to start investing, probably that share could be your first investment. But do also consider the valuation too. You can read up on the PE ratio by clicking here , which is one of the oldest and most frequently used metrics to value stocks.

I would like to end off with my favourite quote by Benjamin Graham:
Investment is most prudent when it is most businesslike

So true...

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