Alex Green: why gold does not have a ‘fair value’
Alex Green is a Senior Editor and Analyst at the Oxford Club. . He’s the author of four national best-sellers, including The Gone Fishin’ Portfolio and The Secret of Shelter Island.
Alex isn’t your usual gold bug. Although he believes in owning gold as insurance, he says there’s no way to tell whether it’s cheap or expensive at any particular time. He also believes the macro-economic outlook isn’t as gloomy as many think.
Following up on our last interview, I talked to Alex while he was in Charlottesville, Virginia.
Many of you may wonder why we’re featuring Alex’s comments, since he’s more gung-ho about US stocks than we have been recently. As the S&P continues to march higher, the rally in US stocks is our ‘elephant in the room.’ We can’t just ignore it. Many investors, like Alex, believe you’d be crazy to sit out a potentially big rally in the S&P and Dow Jones.
You are likely hearing this viewpoint already, from various sources. In my opinion, the bullish view on US stocks doesn’t adequately explain why wages and household incomes for most of the US population are stagnant or falling.
Though he’s bullish on the stock market, Alex concedes that gold can be a hedge against disaster. He just doesn’t believe that a disaster greater than some temporary turbulence is very likely.
Alex, you’ve said to never believe ‘market oracles’ who claim that a particular asset is about to rise, or that the market is going to crash. Yet, you tell your readers to stick with stocks – why are you confident in the outlook for US stocks?
Well, when I say to not believe people who are saying “the market’s about to go up” or “about to go down,” I’m talking about people who are looking out days, weeks, months, or even a few years. Over the long term, stocks definitely go up because sales, earnings, and profits go up. Share prices follow earnings, so it’s a pretty safe bet that the market’s going to go up in the long term. What the market is going to do week-to-week or month-to-month is anyone’s guess.
The reason I see a favorable tailwind for stocks right now is simply that we have an environment with very low inflation, rock-bottom interest rates, and a dollar which has hit a five-year high against the euro and a seven-year high against the yen. We have a strengthening currency and an energy renaissance where we have so much oil and gas that the price is plunging. That’s good for utilities, good for transporters, and good for manufacturing companies. It has all kinds of positive implications for businesses and consumers who save money on their heating bills and at the pump. They’re now going to spend that money elsewhere – and that’s favorable, too.
We have record high and rising corporate earnings and record profit margins. You just have so many positive things happening that while people tend to dwell on the short-term negatives – and there are plenty of those too – there’s a very positive backdrop to stocks overall. I’d be the first to say, however, that the market can always trip you up or surprise you in the short term, no matter how good the outlook.
So, if I understand your investment thesis correctly, businesses get better and better with time, which causes shareholder returns to rise steadily. Over time, you expect businesses to improve on average. Do you try to distinguish between good businesses and bad businesses?
That’s really all that I do.
Can you elaborate on how you do that?
It’s Patrick Henry who said that there’s no way of judging the future, except by the past. If you look back at history, over the last 75 years the companies that have shown the biggest gains – companies in different industries, with different businesses, run by different groups of people – have shared several common features. What I do is to scan for companies that have the same characteristics as the companies that have performed the best in the past.
A few of these features are as follows. They have double-digit sales growth, because you can only increase profits by cutting costs for so long without destroying the underlying business. They have had 20 percent compounded earnings growth for the last three years. Their recent quarter’s earnings are up 25 percent or more. They tend to be generating a return on equity of 17 percent or better (return on equity is earnings divided by book value, and it’s an excellent measure of management’s efficiency with firm capital).
These companies also tend to be innovators who create new services or products that attract consumers. A perfect example is Apple, which came out with the ipod, then the itunes music store, then the iphone and the ipad. They just keep putting out new products and new iterations, which drives strong top-line growth and ends up creating massive bottom-line growth. As a result, Apple’s been one of the top-performing stocks of the decade.
These companies tend to have strong institutional ownership (from mutual funds, pension plans, hedge funds, and so on). I tell investors to remember that the vast majority of the volume on the New York Stock Exchange and the NASDAQ is not from individual investors like you and me, but from these big institutions. You don’t want to be buying when they are selling – that’s like swimming against the tide.
These companies tend to have strong technical indicators – increased buying on rising volume –, insider buying, and stock buybacks. Buybacks are a positive because when a company reduces the amount of shares outstanding, you get higher earnings per share. These are just some of the things that I’m looking for – companies that are at the top of their industry and are very solid financially. I have no interest in finding beaten up ‘fallen angels’ that people think are going to spring back from the dead. There are people who can do that with some success, but what I do is look for companies that are already doing well and could produce positive surprises – earnings that are higher than people expect. And that’s essentially what I’m looking for.
Turning to the political climate, you’ve said that politicians almost always pursue their self-interest first, which is generally a bad thing for people who are affected. What are your thoughts on the impact of the mid-term election for investors?
It may be mildly positive. First of all, don’t make any investment decisions based on politics. Washington is so dysfunctional and to me both parties are just so inept and corrupt that I have a hard time cheering for either side. Congress is now in the control of Republicans, but they don’t have a veto-proof majority. They’re not going to give Obama what he wants, and Obama’s not going to give them what they want. I think we’re in for two more years of gridlock. That’s not necessarily a bad thing. Gridlock means that bad ideas don’t get passed into law, but it also means that important problems don’t get solved. In my view, the latest elections are a neutral factor.
In your writing, you ‘call out’ people who you say are overly bullish on gold and too pessimistic on the economy. There are some examples though of long-term economic declines happening – just not in the US. For instance, Japan has been stuck in an economic slump for decades. Argentina has yet to recover from its currency disaster in 2001, and its economy is still deteriorating. Even in the US, the bottom 90 percent of households are barely better off since the ’08 crash – if at all. Doesn’t this show that the US economy could ‘hit a wall’ and begin to decline?
By Henry Bonner
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