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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
How To Double Your Ounces Without Investing Another Dollar
January 22, 2020
“Why are so many people on this bandwagon? Why do they lack vision? Why do they become short-term in their thinking? Why do they not care about long-term returns? It’s just about what you’ve done for me lately. It’s growth at any cost, which we’ve done through the debt markets. We’re willing to proliferate the bad, even if that means enslaving our children, our grandchildren, under a burden of debt.”
– David McAlvany
Kevin: David, I’m not much of a TV guy. You know I like to read if I have time to do anything. But when I come home and my mind is fried, my wife knows that I can go downstairs, I can turn on the Western channel and I know who the good guys are, I know who the bad guys are. And even if there is a surprise one between the other, they’ve tipped the hat. The bad guy, pretending to be the good guy, might actually have had a black hat the whole time, tipping him off. There is something about the length and the rhythm of a western, versus what we have today which is just coming at us at light speed.
David: And that is becoming more ambiguous, and it didn’t used to be.
Kevin: That’s true.
David: My kids had never seen any of the spaghetti westerns going back to the 1970s, and Clint Eastwood was a star in many of them, quite a bit younger then. You have the music of Ennio Morricone setting the dramatic atmosphere, and that’s what you have, the bad guys, the less than bad guys, the occasional good guy, and their cattle rustling, their bank robbing and their card playing and their whiskey drinking and gun fighting, and then the cold nights by the fire. And all of them were figures of solitude grasping to survive in a very harsh world. Maybe that’s why it hasn’t been in the Friday evening pizza, movie, and root beer float entourage. Family entertainment? Well, it kinda is.
Kevin: And look at the super hero movie of today. It’s just continual noise, sounds, movement, action. It’s very, very different than, like I was mentioning, the rhythm of a western. You have to take the time.
David: Or lack thereof. What is amazing to me is how long a scene could be extended, and even more amazing how an audience used to willingly sit with it. There were no computer graphics, there wasn’t a thousand special effects to stimulate the brain on a moment by moment basis. There were quiet moments.
Kevin: You stuck with it. I’m going to have to teach you that, David. If you’re not watching spaghetti westerns, I don’t what the problem is.
David: Well, we did watch one. And Mary-Catherine was surprised. She said, “How long is this movie?” Three-and-a-half – it was a long movie. But it reminded me that attention spans have shrunk dramatically, and with that, there has been a change in the way that information is consumed, a change in our educational process. And in the final analysis, what has changed is the way we make decisions and what we consider reasonable time horizons. We have short-termism. That is something that I referenced last week in our conversation, and that was in the corporate world, in the corner offices, in the executive domain. Yes, you have higher turnover, shorter stints by executive leadership, and that has become sort of the norm at many an organization.
Kevin: Life is like drinking out of a fire hose these days. It seems that you just don’t have much time to take time to concentrate.
David: And investors, too, have shifted from years of holding companies as an investor, to months, or to days, or to hours. And you even have high-frequency traders, those firms which are in and out in seconds, and their compensation is not from an investment thesis and owning a certain value proposition, but they’re interested in the rebates, which exchanges pay them to send order flow to that exchange rather than, again, some sort of inherent value proposition.
Kevin: It reminds me of interest rates. People used to pay interest rates. You would loan money out for time, and interest would come back. And at this point, money is free, there is no interest paid. There has been a change, hasn’t there? It’s like stocks. Trading stocks now is about the rebate.
David: That’s right. So as eye-popping results have sort of caught the imagination of investors, you have strategy and plan and process. All these things become secondary to chasing return or chasing a yield, what little there may be. In the final analysis, chasing the dream of getting more money in a shorter timeframe, that’s returns, while at the same time neglecting the implicit cost of that pursuit, which is ignoring risks.
Kevin: When people watch their neighbors or people they know, family members, shifting what their priorities are and actually looking like they’re winning, right? Charlie Sheen – Winning – they look like they’re winning with shorter-term types of things. I wonder if it’s not fear of missing out.
David: “Get me some of that. I want some of that.” So, yes, you can wonder how lemmings run toward danger and the cliff’s edge, and I do believe that in the mind of the lemmings, if you could go there, they just want what they think their neighbor has already discovered. It’s the blind leading the blind, unaware that there is ignorance and hope and whatever that momentum is, as you speed the process, this mass movement of bodies toward the precipice.
Kevin: And I wonder sometimes if what we think is good is actually good. I look at the economy, Dave, and I think, “Well, you know, there are an awful lot of things that would say that it is in a growth mode, but it is costing us over a trillion dollars a year of borrowing just by the government to make it look this way.”
David: And there is good. We certainly have employment low, wages growing, but if we borrow from that Clint Eastwood classic The Good, the Bad, and the Ugly, the good is not actually what it seems. On the face of it you have prices which are high, you have investor bullishness which is at, or near to, record levels. For those who look from a more historical perspective, you look at the difference between bulls and bears and if the differential is 40 points you know that you’re in the excessive part of the market cycle. You’re at the end of the market cycle. And so bullishness is a great thing, but it also is a hallmark of kind of as good as it gets. So there is good, but the mood has been set by something unhealthy, by something unstable. You might even describe it as bad.
Kevin: So it might be the black hat, actually, that is tipping off that in the end of the movie, maybe three-and-a-half hours down the way, you find out that the guy people thought was good was actually the bad guy.
David: I was fascinated, this last week we had some earnings come out from financials and J.P. Morgan kind of knocks the cover off the ball, and it is fixed income trading. They increased their profits from fixed income trading but did not increase profits in lending. I thought to myself, well that’s interesting. A bank that’s making less and less money from lending and more and more money from trading debt. That is just a fascinating commentary in itself. But underlying the good, the bad is this debt. So we have the apparent good, but in this case, it is on top of a mountain of debt which continues to grow.
Kevin: Look at the university that you actually went to. You went to Oxford for a while. They’re borrowing with 100-year bonds.
David: They did that a couple of years ago, 2017 was the first issue, they’re back to the market and they’re kind of tacking on 100s of millions, they may even slip into the billions, of new debt. And what is fascinating is, it is not only 100-year paper, but it is between 2.5% and 2.75% interest, which is nothing over a 100-year period. But it’s not secured, either, so not only does it ignore the possibilities of inflation over a 100-year period, but it is also unsecured. It’s just, “Hey, look, we’ve got hundreds of buildings and quite a history and reputation, and if something should ever go wrong, why wouldn’t the British government bail us out? After all, we’re Oxford.”
Kevin: Right. And there is an insatiable appetite right now for that debt just because nobody can get interest anywhere.
David: Right. So record low rates, and you have the ability of anyone, not just Oxford, but anyone, to get any amount of money they want from the debt markets. I think of Spain, not exactly your best credit, and not exactly the type of country that has been able to contain inflation in the past, the same with Italy, but Spain’s recent ten-year offering was five times over-subscribed. We’re talking about yields on ten-year paper of less than 1%, about 50 basis points, half of a percent. Italy, roughly 20 basis points, four times over-subscribed. People are crawling over each other to get less than a quarter percent of interest?
Again, there is no compensation for inflation, and the notion, the demand for any yield, it’s just a little bit crazy. Demand for any yield in a world of zero yields, and to me, that is creating an internal “market bad” if you will. So we’ve got the good, we’ve got the bad, even though if you’re judging things in terms of price action, the price of bonds has never been better, the price of stocks is perfect. So judging by price action, this is actually very good. Good, and getting better.
Kevin: I wonder if the ugly, though, because you’ve pointed out the good, the bad, you’re playing on this theme, the good, the bad, the ugly. Something that has become ugly that is distressing to me, honestly – I try to roll with the punches, but in this particular area it depresses me, the way people have become short-term, and they have given up disciplines that we know for thousands of years actually have worked.
Our kids, when they were little, we used to watch a show – Riders in the Sky. It’s a western cowboy singing group. In fact, they come to Durango every once in a while and they play at the Bar D, which is a chuck wagon that we have here in Durango. People who have been to Durango usually go. They ride the train, they go to the chuck wagon. And the Bar D Wranglers come. Ranger Doug, who is the key man in the group, always tells the kids, “Don’t do it the easy way. Do it the cowboy way.”
So what they do is, they show stories where you could do it the easy way, the quick way, like what we’re talking about, this fear-of-missing-out way – a quarter of a point for interest. You’re going to borrow money for 100 years? Really? For 100 years? And take all of the risks of Italy, Spain, Oxford, what have you? For just that little bit of gain? Well, not that’s the old-fashioned discipline of buying something of value, something that you know will be there in the future, that you know will have value, a higher value. Ranger Doug would say, “That would be the easy way, but it wouldn’t be the cowboy way.”
David: One of the things that comes up in our conversations very frequently when we’re getting ready for these commentaries is a book you read a few years ago called Deep Work. I will not do it justice, I have not read it, but the idea of slowing down, reflecting, focusing more on the quality of work versus the quantity, the quality of reading versus the quantity, limiting your inputs and quieting down your life a little bit.
Kevin: Putting your phone on airplane mode on a Sunday. That’s what I do every Sunday. I put it on airplane mode. You’re not going to be able to reach me on a Sunday. Cal Newport is the author of Deep Work. It’s a good book. Very easy to read but it sticks with you. One of the things he talks about is, the way we think is being changed because of all the distractions. We can’t think deeply anymore, so we have to deliberately try to work on things that require concentration. You were talking about a movie that is three-and-a-half hours long. I’m not going to say a movie is going to help you with deep work, but three-and-a-half hours with anything these days is almost an impossibility without an interruption.
David: I want to make the case today that you sacrifice nothing in terms of returns on investment if you take a long-term view to growing wealth. And so, disciplines required to make that successful are difficult to maintain, and the strategies are easy. If you have a strategy it is very easy to change mid course when you appear to be out of step with perhaps a more obvious or accessible path to success. So, the tyranny of the present, the tyranny of the urgent, the tyranny of CNBC. There are many ways to succeed in making money. I’m not going to suggest that ours is the only way, it simply is one way that harnesses time.
Kevin: But it requires patience.
David: Yes, and time requires patience. It harnesses value, which requires a contrarian mindset, looking for the inexpensive, not the expensive getting more expensive. And it requires consistency, which means that you are on a course for what seems like an eternity, and you willingly plod along. The basic elements of success in driving that approach are very easy to disregard because they’re not easy to maintain. What is really not easy is maintaining ourselves.
It is not easy to maintain ourselves. We’re often fickle, we’re often fearful, we’re often selfish, we’re often shortsighted, so that theoretically, when we look at how we manage money, there is a mathematical touchdown. We’re going to talk about that. And it’s easy to fumble, and it’s not complete, as the task and the method require some things. They require stability, they require commitment, ideally, not just to a year or two, but through decades, not years, through generations, ideally, and I’ll illustrate that, not just your personal retirement time horizon.
Kevin: Right. I think about this concentration thing, Dave. You remember the movie, I think it was Pixar that put it out – Up – and there was this dog in the movie. He would see a squirrel.
David: We have Ranger Doug, now we have Doug the dog.
Kevin: Is it Doug the dog?
David: It’s absolutely Doug.
Kevin: You have kids young enough to know. But remember, every time the dog sees a squirrel? “Squirrel! Squirrel!” But we do that. We can say, “All right, I’m going to be disciplined about this.” And then we get disappointed about the returns, and we say, “Wait a second. So-and-so is making money in the stock market, he’s making money here.” And we shift gears and forget the original plan. “Squirrel! Squirrel!”
David: You know, this weekend I ran a marathon. And you have to run your own race. It’s even more so the case in triathlon when you’re bringing in three different disciplines, and everybody is training at a different level. Some people do it professionally. Your age-groupers, some are more competitive than others. Some are willing to sacrifice family and business time or whatever else. You just have to figure out how much time you’re going to put in.
Kevin: Who you are, and who you are not.
David: Who you are, who you are not. What you’re willing to give up in order to get whatever it is you want. So you have to, in the end, run your own race. I think it is easy to get set on a particular course and then start worrying about everyone else around you. Somebody passes you – and it drives me crazy – “they passed me like I was standing still.” Well, maybe they’re on a different trajectory. Maybe they don’t have a family and are willing to train 40 hours a week. There are different commitment levels. I just think that issue of the fear of missing out and not running your own race, and changing your disciplines mid-course does have a lot to do with looking around, and by comparison, being unsettled and not happy, not content with what you’ve got.
Kevin: How often have you been passed by somebody, that later you passed? That’s the thing, too, we have to remember as we go through our lives, there are a number of people who look successful for a short period of time, so much so that we start getting nervous, like, “Maybe I’m missing something.” That fear of missing out. And then later in the race, the guy is on the side of the road puking because he overdid it.
Let’s take it back to the markets. Quantitative analysis and all this high-frequency trading, and this, and that. Well, is it really, something that, in the long run, wins?
David: Math is absolutely critical, but we’re not quants, meaning, we’re not tying our methods to mathematical theorizing or algorithmic inference. Math is still the basis for what we believe is a very sound approach to intergenerational wealth management. So it shouldn’t be a surprise there. Math and money are definitely related. But as I have discussed, going back to the book I wrote a fear years ago, Intentional Legacy, what we typically see is discussions and plans for resource management. They begin and end with tangible assets.
Kevin: Real things, not promises.
David: Real estate, stocks, bonds, gold – what have you. My bottom line argument in the book is that regardless of your world view – I have one, it’s clearly stated there – or your baseline assumptions about meaning, significance and purpose, effective management of your intangible resources is critical to long-term success. That is a point that is often missed. You can have all the money in the world and still be a moron when it comes to connecting with people and living skillfully in a broader sense. That is where, again, the management of intangibles is just as important as the management of tangibles.
Kevin: You know where that is tested, Dave? We’ve seen this through the years working with money. People who really have the intangibles down, when it comes time to divide that money up between siblings, or move money a generation down, you have families where it just destroys the family. We have had families literally see kids suing the parents, and then we have had many, many other occasions where the families have already worked everything out. They have had their family meetings, they may have quarterly family meetings, whatever it is, but they’ve worked out the intangibles before the tangibles get passed.
David: Right. It was fascinating, I had a great conversation this last week. I was invited, and I was honored, to be a part of a family discussion. The implications here are for over 100 people when you think of the grandparents, the kids who are on the line.
Kevin: Isn’t that amazing?
David: Great-grandkids.
Kevin: What an impact a family can have, just in size.
David: I’m heading out to Southern California in another couple of weeks to do the same thing, to sit with a family and discuss – these are very important things. But it is too often, families facilitate something different. They facilitate kind of a selfish winner-take-all ethic which pits siblings against each other. Again, sort of cast a vision of the future in only solipsistic terms, that is, the world revolves only around me. I’m not saying this is purposeful. No parent sets out to design that. But if you don’t practice something else, we and others are left to deal with our less good selves.
So what I’m getting at is that wealth is often destroyed by a mathematical function. I want to come back to math and intergenerational wealth management, the importance of math. But typically, what we see is division. Not only division of interests, but division of the money. And when you count the kids, you count the grandkids, you count the great-grandkids, and infuse self-interest – and self-interest is not bad, but it is a real variable nonetheless – you add all those people up and then divide the resource, it’s just normal. Dissipation is sort of the normal course for wealth. Division is the clearest mathematical function that gets you there. And it gets you there in a very short period of time.
Kevin: So you have to counteract that. What is the opposite of division, Dave?
David: Multiplication. And obviously, multiplication is a way to solve for what could be described as sort of the family demographic conundrum.
Kevin: And something that you have talked about over and over, and actually, we have practiced as a firm, at least the 33 years that I have been here, is ratios. Basically saying, let’s take two things of value that we know vary against each other – gold and silver, platinum and palladium, Dow-gold, you name it – and let’s buy the thing that’s cheap and trade out of the thing that is expensive.
David: So ratios are at the heart of our conversation today and the beauty is, about half the audience has already checked out because it’s not scintillating enough, it’s not obvious enough, it’s not easy enough. It’s not a stock tip – let me go buy 50 shares. It’s not actionable in those terms. It’s very actionable, but it takes time and it takes a long-term commitment. So I want to describe a trade, just as an example, which illustrates how helpful the math is. Again, this solves the demographic problem, it solves the division issue.
As I mentioned earlier, this is a task, it’s a method, it requires stability, and there is commitment, ideally, through decades, not years, even through generations, not just sort of your personal time horizon relating to retirement. So let’s talk about palladium.
Kevin: Right. That’s in the new anyway because it is going parabolic.
David: Since the year 2000, it is up 425%. In the past year it has pushed up 75%, and in the last 30 days – 30 days – it is up 27%. You could describe the rise as parabolic. It is. The rate of change marks it as an asset that is now in vulnerable territory. The faster any asset appreciates, you’re seeing an audience gather in and push the price up higher on a momentum basis. And you’re also getting sooner, on that basis, to running out of new buying. You have to have new buyers come in to perpetuate that price movement. It is a momentum trend. So again, you push higher, and then ultimately it crumbles back.
Kevin: So explain the math – platinum, palladium, and why.
David: Palladium and platinum are used industrially, predominantly in vehicles. We’re talking catalytic convertors, which use the metals, and by using those metals there is an improvement in emissions. The demand is not likely to disappear. Through time what we see is the preference for one metal or the other, driven by consumer tolerances for gas prices, fuel consumption efficiency, environmental concerns. So there are times when people don’t mind paying for regular gasoline. It’s not too cheap – no worries. And there are times when the preference swings toward diesel because you have these huge gains in terms of miles-per-gallon performance, for which diesel is hard to beat. But there are thresholds where consumers care less. We are in that timeframe where there are a lot of people buying regular gasoline engines.
Then you have the auto manufacturers. The auto manufacturers have purchasing managers. They are buying the commodity in advance for production in future vehicles, and they tend to buy large quantities and stockpile them. The recent run-up in palladium is not purchasing managers stockpiling, but it is speculators doing what speculators do. They are riding the momentum train. You have these short-term wins and, from our vantage point it is not negative, but palladium is not compelling, as when you’re trading the ratio and you look at the two, platinum and palladium, now all of a sudden things are out of whack. The numbers don’t translate. They don’t make sense anymore.
Kevin: And I think we should say, platinum can be substituted for palladium and vice versa. I takes a little bit more palladium than it does platinum, but what we have seen through the years is, auto manufacturers will use one for about a decade, and then it gets too expensive and then they switch to the other.
David: Yes, and again, I think there is also the aspect of preference for diesel versus gasoline, which is also a function of the fact – we mentioned VW. VW highlights one of the reasons why diesel is out of favor. Not only is gas cheap, and has been for the last 12-18 months, but you have also had the VW scandal relating to diesel, reporting and what not, so there is a stigma that we are working through. So we have been doing these trades with platinum and palladium going back a long time. There is a client who engaged with us on this back in 2008 and because we just helped transact some things for him this last week I think it is a helpful demonstration. Yes, we have been doing this for five decades, but if you just wanted to focus on the near-term, just to keep it relevant in the present tense, platinum was more than two time, double, what it is today, $23 an ounce…
Kevin: Back in 2008.
David: That’s right. And this is kind of the March timeframe. It’s bouncing between $2000 and $2300. It’s a thousand bucks now, roughly. Because of the excessive ratio then, when platinum was more expensive than palladium, not just in price terms, but again, we’re comparing the ratio, we positioned in palladium. Again, it was the better relative value at the time. The ratio was greater than 4-to-1.
Kevin: You could get 4 ounces of palladium for 1 ounce of platinum.
David: Yes, exactly. Once ounce of platinum had the same monetary value as over 4 ounces of palladium, just to say that differently. You focus on the value side of the equation and this is what helps drive the decision, the mandate that you are always buying the better value and selling the over-valued asset is what goes into the ratio trade. In this case, the initial purchase was palladium. Last week, this client went out of palladium, sold palladium, to platinum, and is getting 2.2 ounces of platinum for every ounce of palladium. So let me spell it out a couple of different ways for you, just to make sure the math makes sense. The original purchase of 10 ounces of palladium was in lieu of 1.75 ounces of platinum. The equivalent value at the time, the ratio at the time, 10 ounces of palladium, about 1.75 ounces of platinum. The same dollars involved for either purchase.
Kevin: About four grand at the time. You could have 1.7 ounces of platinum or you could have 10 ounces of palladium.
David: Yes. Now, instead, the palladium is being swapped for 22 ounces of platinum. So in dollar terms, the client shows a better than five times dollar gain – 4,000, 5,000 – let’s say 5,000, now it’s 25,000 just to keep the math simple. It’s five times the dollar gain.
Kevin: But the ounce gain is twice that. It’s 11 times.
David: And this is what we’re playing for over the long haul. An 11x gain is better than a 5x gain. Would you agree?
Kevin: Yeah. But that wasn’t a quick trade. That’s a dozen years. It’s an 11-fold gain in ounces. That’s beautiful.
David: It takes times.
Kevin: But it takes time. It’s the cowboy way.
David: (laughs) We get older over the course of a decade, right? And we stay busy doing other things, whatever, but that is the patience game.
Kevin: What if the client gets to do that again in 12 years?
David: Right. So 11x gain, each one of those, that’s 100%. So that’s 1,100%? We’re talking about roughly 1,000% return in a 12-year period. That’s kind of intriguing.
Kevin: That is.
David: So now it’s platinum that is the under-value, and the swing is in that direction. If we’re talking about allocating fresh dollars it would be to platinum. Or swapping ounces for ounces. Over the course of the next decade, between – let’s look at market dynamics – supply constraints? Where are you coming from? You’re coming from South Africa, you’re coming from Russia, and these are your two dominant providers of these metals. So between supply constraints and the demand dynamics, those metals should again flip to platinum being the premium asset, and not palladium. Frankly, I don’t think American Express is stressing this in some sort of business rebranding, planning to rename the platinum card the palladium card just because palladium is temporarily trading at a higher number. Platinum is more often than not the premium asset through time.
So if I venture a guess – and again, this is hypothetical, I’m thinking ahead now – if I venture a guess, this client should be able to convert his 22 ounces of platinum, using the ratios again, into 60 ounces of palladium on the next value swing. And let’s just say he teaches his kids to do the same. The next move after that, back in the direction of platinum, should be to 105 ounces.
So step back from this, and now consider that the original difference was 10 versus 2, or 1.75, from what would have been 1.75 ounces to, theoretically, 105 ounces or more. This is what we hope our client continues with and passes on inter-generationally, this idea of compounding ounces, taking a real asset ballast within a total portfolio structure, and not just waiting for the price of gold, silver, platinum, palladium, to increase, which is, of course, a no-brainer. Yes, that is, on the face of it, adding value. Compounding ounces with our clients, that is where the real value is through time.
Kevin: If you’re listening to this and you’re thinking, “Okay, these numbers are going too quick,” there is a report, Dave, that shows this – How to Double Your Ounces – without adding new money, it’s just doubling ounces, in this case it was 11-fold. Click the link in the description below or the show notes – you can click there – or call us, 800-525-9556. We’ll send you the report. But actually, you were talking about value. This is where, hopefully, we, as a firm, add value, too, Dave. We have been through these experiences over and over and over. I remember this client, and I remember the discussion over and over and over. But I remember with him, especially, he wasn’t really wanting to buy palladium, he just looked at platinum’s price at the time and he said, “It’s too high. I’m going to buy palladium, the sister metal.”
David: This is one of the key distinctions between what we do and what we have done for almost 50 years and what many of our competitors do. They can sell a product at a price. I look at our team of advisors, and I think, the value added, this is really where, as they used to say, it separates the men from the boys, separates the professionals from the amateurs. In this sense, we’re the professionals.
Kevin: And there are times you don’t make the swap. It’s not just an algorithm. There are times when you purposely don’t make the swap because there are other extenuating circumstances that only history would know. That is the difference between clicking online and just buying your gold on the Internet from somebody you don’t know versus hand-holding.
David: Platinum-palladium, that’s one example. The same focus on gold and silver reveals a comparable opportunity to compound ounces with that part of your metals portfolio. A metals portfolio should be proportioned and split up in a couple of different ways.
Kevin: And that doesn’t usually take as long. We talked about a 12-year cycle, 9-12 years for platinum and palladium. Silver-gold, you can make a couple of those in a decade, usually.
David: And again, there are talkers and doers in this world, and most people in our industry are talkers at best. They haven’t been around and they haven’t taken advantage of these cycles, so frankly, sometimes the cycles can be discouraging if you focus on the dollars involved and not the ounces. Think about this. The client who bought palladium in 2008 instead of platinum still watched the commodity price fall in half. In 2009 palladium dropped by more than 50% and he said, “Oh, I’ve made a terrible mistake.”
Kevin: Didn’t the ratio get better though, between platinum and palladium at that same time?
David: Right. So good news, bad news. That ratio improved, confirming the right choice in that value proposition, even as the nominal price appeared unhelpful. Again, it just depends on how you want to play this, but over the long-term we have seen this add value.
Kevin: Go back to gold and silver then, because that is probably more familiar to the people who are listening.
David: I’m going to give you a three-generation proposition. This is back to gold and silver instead of the platinum group metals. Don, my father, David, myself, Declan, my oldest son – this is hypothetical. Don starts with 10 ounces of gold. We’re not talking about a king’s ransom, we’re talking about a modest number of ounces of gold. 10 ounces of gold over a 40-year period – 40 years is a long time – he plays the ratio three times, trading not at ideal intervals, because this ratio will be as high as 100 and as low as 15.
Kevin: So don’t plan on perfection, just try to do it within the range.
David: I’m going to say between 70 on the high side, not 100. Between 70 and 35 on the low side. So again, going from gold to silver and back to gold, that is one time. That is a round trip. I’m saying he is going to repeat that two more times. When he passes the baton to me, he has gone from 10 ounces of gold to 80 ounces of gold.
Kevin: Just buying doing three round trips, gold to silver, back to gold.
David: That’s right. I take on the project and do three trades at the same ratio intervals over my 40-year period, and pass along the baton – this time it is 640 ounces of gold – to my son. Declan comes along and repeats the trading, in and out, three times. This actually happens more frequently than three times in 40 years, but reasonable expectations, and actually, the numbers are unbelievable. But Declan comes along and repeats the trading, in and out, three times, boots the family position to 5,120 ounces. So in the first generation there is an 8-fold increase over 40 years. Okay, fine, that’s great, whatever. But building on that, I bring it to a 64-fold increase from the original 10 ounces to 640 ounces total. And then the third generation multiplying, not dividing wealth, bumps the total return to 512-fold from the original 10 ounces to 5,120 ounces.
Kevin: A good way to check to see if something makes sense is to try to explain it to a kid. And I’ve watched you. You have explained this to kids and they get it.
David: I’ve played this math out on a white board for dozens of kids. Every one of them gets it. It’s a game of multiply. Make money a game, not an obsession. Don’t define your significance by it, but see what can be done with it. Define it as a useful tool, something to be stewarded from one generation to the next. This is where this game becomes an expression of intergenerational stewardship. If you’re adding kids, great-grandkids, to the mix, the ordinary math for money is terminal math. It’s going to get used up, it’s going away, it’s going to get divided, subsected, into nothing. People inherit. Typically, they spend.
We work with 60,000 people. Why do we know anything about this? Because we’ve seen so many people inherit money and this is what happens. They typically spend, they dissipate, and other than a few short-term lifestyle improvements, which I’m not criticizing, but there is really nothing to show for an earlier generation’s efforts than a few short-term lifestyle improvements. It is amazing to me the number of depreciating assets that get purchased. There is no method, there is no process, there is no view of the future which flips the division function to multiplication.
Kevin: Just as a reminder, again, call for the report if you want it – 800-525-9556, or just go online, click in the show notes, and get the Double Your Ounces report. That won’t give a full explanation but it will get you started.
David: Right. We’re talking about the same math as it applies to the Dow and gold ratio.
Kevin: Right. You’re not eliminating the stock market.
David: Not at all.
Kevin: It’s just the stock market at this point is too high, based on ratios.
David: Exactly. So we’re talking about multiple themes to have in play within a total portfolio where you own paper assets, you own real things, so stocks definitely factor in here, too. People think the stock market has performed well in recent years, and I’ll sound like a crazy man to say that’s debatable. But the math says that it is debatable. 43-to-1 was the ratio, that is, the Dow compared to gold, in the year 2000. Now it is at 18. So the Dow, in real money terms, the Dow in gold terms, is down more than 50% over the past 20 years.
Kevin: So Dave, you were a stockbroker. The Dow was your life 20 years ago. You saw this ratio. You made a shift, yourself.
David: This is difficult for people to conceive of, because in dollar terms, we have gone from 12,000 points on the Dow to 29,000 points on the Dow, and that appears to be a great gain. Okay, fine, but in real money terms you’re down 50%. Counterintuitive, but the biggest winner was not equities – equity indexes, that is. You can find an individual company that stands out here or there, but the ratio typically swings from the low single digits into the 20s, even the 30s, and as we saw in the year 2000, the 40s.
Kevin: Let me just insert here for the person who is catching up. This is taking the Dow and dividing it by the price of an ounce of gold. How many ounces of gold is the Dow worth today?
David: 18.8 is the number today, and over a 20-year period, sometimes even a little bit longer than 20 years, you will see that ratio swing by 20 points in either direction. What is this, really? Step back from the math. This is the gradual expression of greed and fear in the marketplace, and it is being expressed in the price of assets that are owned when one of those themes, either greed or fear, is dominant. What does that mean? In real terms, the agnostic investor gets to multiply a financial footprint 20 times on one side of the trade, potentially 20 times on the other side of the trade, as well. It’s just fascinating to me that people begin to nitpick a 5% return a 10% return, a 12% return. Are you keeping up with the Joneses? How do you compare to the guy you play golf with? When you’re managing money over decades, and you pay attention to cost basis, those numbers become a little absurd.
Kevin: Dave, we talked last week about, you ask a person what they are invested in right now and they will say, a 2032 fund, or a 2035 fund.
David: A 1732 fund, as you said last year.
Kevin: (laughs) Referencing the bubble. But the point is, those how are passively investing their money right now, just putting it over in Vanguard, they are not understanding what you just now talked about – cost basis. If something is too high, don’t buy it. If something is too low, and it has real value, buy it. That’s what Buffet does. Try to imitate Buffet. That’s what Buffet does, he buys the cheap stuff that he knows should be more expensive.
David: I went skiing with a gentleman in Telluride a couple of years back. His father had been the lead counsel for Phillips Petroleum, which became Conoco Phillips. In the 1920s and 1930s he was buying shares in what would become Exxon Mobile, for 1.50 or 2.00 a share. Now, you look at the dividend of Exxon Mobile today and it is multiples of his cost basis. They have maintained that cost basis as a family through all these decades. The dividend income equals more than 100% of their original cost basis.
So does cost basis matter? Yes. And you said that last week. Cost basis matters. Starting on the right side of a trade, now thinking about cost basis and ratio trades, it is basically establishing a position focused on value. What’s next? The next step is selling out of an overvalued asset once they have appreciated, moving to undervalued assets. For the Dow-gold ratio, you’re talking about a 3-to-1. By the way, when you are doing ratio trades and things like this, it is not as if you are doing it with 100% of your money. It is not an all-or-nothing bet. Correct? The incremental migration toward one asset class is also an incremental migration away, and you may retain some percentage permanently as a part of this permanent family wealth.
Kevin: Even the client last week, going from palladium to platinum. He didn’t do everything, he did half, and he’s going to watch, and he’ll do more later.
David: Again, for the Dow-gold ratio, 3-to-1 – that ratio is, in my view, a conservative target number for this cycle.
Kevin: And we’re at what? 18 now? Roughly?
David: 18. At simple math, a 6-times multiplier in terms of the financial footprint you can gain in gauging the Dow-gold ratio. Moving out of ounces, not all of your ounces, into shares, at that point it has the benefit of increasing your financial footprint considerably.
Kevin: That can happen either way. The stock market could come down, and gold could come up. Or the stock market could go up, and gold could go up more. Whatever the case is, that ratio will narrow.
David: Right. You mentioned this as something I have done. I did choose a very healthy gold allocation at about a 40-to-1 on the ratio.
Kevin: 20 years ago.
David: Yes, so you’re talking $300 gold. That is a little better than a double, so we’ve gone from a 40-to-1 ratio to now 18-to-1.
Kevin: So you actually did better in dollars. The ratio hasn’t really benefitted you fully yet.
David: And this is what is deceiving. In dollar terms it looks better, going from $300 gold to $1500 gold. That’s great, right? But in fact, those numbers are going to get flipped to the other side when the ratio math is at an inflection point. So let me just talk to that. In terms of the shares that I could own now if I moved into stocks – again, I’ve doubled. I could own twice the amount that I could 20 years ago.
Kevin: What if we were at 10-to-1 instead of 18-to-1?
David: At a 10-to-1 ratio – that is, again, going from 40 down to 10 – it’s a quadrupling of the shares.
Kevin: So let’s do it again – 5-to-1.
David: That’s an 8-times multiplier in terms of my financial footprint.
Kevin: And you’re shooting for 3, 2, or 1-to-1, right?
David: Yes, a 3-to-1 ratio is a 13-times multiplier in terms of my financial footprint, and a 1-to-1 is, obviously, I start at 40 – that’s a 40-times multiplier, before we even go the other direction, and as the ratio increases, swap out of financial assets back into gold.
So the ugly – we talked about the good and the bad and the ugly, I think the ugly is really what is happening to the minds of people such that they think only about short-term gains. This year’s returns, this quarter’s returns. We get a monthly statement as a reflection of real progress, only it’s not real progress. And they are not employing any process to their investments. It’s really just a speculative gain.
Kevin: You talked about the book Deep Work. Cal Newport talks about deliberate practice. Have a deliberate practice. What is it that we’re doing deliberately. And the practice in investing, there is a deliberate practice sometimes of just lying in wait. You buy something of value, and you wait, like this investor. You wait 12 years and get an 11-fold return, and then make the move. But that’s a disciplined practice.
David: And part of this is, I think anyone who has been around the block knows that you make money on the purchase. You buy it right. It’s not just a question of buying any asset and being patient for an infinite amount of time. You buy the asset right. You buy an asset cheap enough and you’ll make money. And this is where, again, if you ignore valuation metrics, you’re in trouble. Here’s where the ugly is. We’ve got the price-to-sales ratio, which today is the highest it has been in U.S. stock market history.
Kevin: Right. The stock market is too high.
David: Highest in U.S. market history. There are other metrics which come close. But the ugly is ignorance. The ugly is selfishness. The ugly is short-termism. It’s a lack of vision. It’s a blind belief by the lemmings of our day that wisdom is expressed by the mass movement of people and money all around them, and they just need to get on board, again, that issue of fear of missing out. Everybody must be moving toward something great. The ugly, frankly, is what happens next as a result of the cultural deformation that we are witness to.
And it is caused, in large measure, by the proliferation of what we talked about earlier – the bad. Why are so many people on this bandwagon? Why do they lack vision? Why do they become short-term in their thinking? Why do they not care about long-term returns? It’s just about what you’ve done for me lately. It’s growth at any cost.
We’ve done growth at any cost through the debt markets. So the bad – the debt – we are willing to go there. We are willing to proliferate the bad, even if that means enslaving our children, our grandchildren, under a burden of debt.
