This comes to me from Michael, a long-time Rule #1 blog reader. Submitted on May 16.
[Bolded items are my emphasis.]
Phil,
How are you doing? I have not written in a few months because I know you are slammed and may not have the time. But, if you do get a chance to read this, I would appreciate it. I have to say I am TOTALLY disheartened now. In a matter of 2 days I have lost 15% of my investment, but I have followed the rules and when I got my 3rd red arrow, which was today, it was too late. I know when you see the stock you are going to shake your head (GG).
I know, I know it is a commodity but the numbers are phenomenal. I could go into the financials and the fact that the company has not debt AT ALL. I know it has no moat, maybe that is my problem, but my problem is much deeper.
I have been watching this stock for a long time and was expecting a drawback to the MA but at the time, I did not want to miss the move. Each day I would wait for it to drop and it just kept going up. I figured that if it was going to drop at all, I would have missed out on the move up. The valuation was great and with earnings expected to be great I was moving strong and fast.
Well, over the past two days I have lost 15% of my money including a limit down today.
So, my question is this, not in reference to GG in particular but in relation to the tools, because I feel like they have failed me here. At the high last week, you had your normal warnings that a move down, a correction have you, would be coming. Even with a 6% loss on Friday the tools gave me a red arrow in the MACD but none anywhere else.
Yet, when Monday comes not only did you get your 3 arrows but you had no way to stop it and bam 15% down the drain. I have spent months just to get positive and in 2 freaking days it is gone. I have to tell ya Phil I am questioning whether or not I have the wherewithal to do this. I mean, look at GG’s chart there has not been such a dramatic drop that I can see.
How can the tools protect you from that? I just spent another 600 dollars to re-new my subscription to investtools and I am flabbergasted.
Can you give me any advice, hell, even a pat on the back? I am so upset now I could spit! Do I sell it now and just eat the loss or wait for the earnings and HOPE to get back to even?
ANY ADVICE would be soooooooo welcomed!
Thank you Phil for letting me rant, most of my folks are avoiding me today, they can tell I am upset!
Michael
My response:
Michael, Michael, Michael. You are investing, as you said, in GG -- Gold -- a commodity -- and you got burned. Man, if all there was to investing was following red and green arrows, why would I have bothered writing 300 pages about Meaning, Moat, Management and MOS? We'd all just buy any old thing and do great. But that ain't how it works.
So let's review the basics and get back on track:
Gold is not an investment. It is a speculation. It's speculative because there is no way to predict a future price of gold with any degree of certainty. Gold's future price depends, for the most part, on inflation. Lots of inflation and the price of gold goes up. You might have beliefs about inflation in the future, but no one knows for sure since the price is pretty much emotional as opposed to rational.
In general, commodity stocks like GG do not, by definition, have a Moat and therefore can not protect the price of the commodity. Therefore the price can crash without notice. [See also: Sanderson Farms post about chicken.]
Commodities do not get a Margin of Safety Price. To know you have a MOS you have to know the value of the business in the future. So what's the value of a bar of gold in ten years? Who knows? It's all emotion.
There is no surplus cash flow that will grow into the future being created by a bar of gold.
There is no product that can be evaluated for its pricing durability.
There is no Moat and so there is no consistency, so there is no way to figure out the future price.
And thus there is no way to know what the Sticker is today or what a MOS price would be today. In other words there is no way to know what GG is worth other than whatever price it has at that moment.
The red and green arrows reflect the movement of billions of dollars. They give us a view of what the big institutional investors are doing with their money.
When you see red arrows it means the big guys are getting out. The only advantage to that for us is if the big guys are getting out in an orderly way. Sometimes when the big guys start getting out they are selling off because they found something bad out that you and I don't know. That is their one special area of expertise -- finding things out before anyone else knows.
In a wonderful business, bad news doesn't happen very often, but when it does, we will almost always see the big guys sneaking out before the announcement. Which means before the stock crashes down.
With something like GG, there is no insider news to help the big guys start sneaking out. So that makes the arrows not so useful. They have very little protective power for us since the big guys don't have the ability to sneak out. They are speculating, too.
So let's get back to Rule #1 basics. Meaning, Moat, Management, MOS. Get those 4 right and you'll do well even if you don't have arrows. Get those wrong (or ignore them like you did with GG) and you are not investing ... you're rolling the dice.
Now go play!
Phil
