I’ve a few lessons to share in today’s commentary. People (like yours truly) are nuts. I suppose you knew this already, but it doesn’t hurt to be reminded on occasion.
One of my favourite investment funds reporters, Shirley Won of the Toronto Globe & Mail wrote a column about precious metals funds today with the headline: “Why pay a premium for a commodity?” She listed a number of closed-end gold bullion and silver funds that are trading at ‘premiums’ to the underlying assets. For the laymen out there, this means as an investor you could: a) buy physical silver (bullion) for $37.50 an ounce (for delivery in May) or units in a silver bullion fund for an equivalent $44.63 per ounce. So why would anyone pay MORE for an ounce of silver? This is supply and demand hard at work.
In my just released book “A Maverick Investor’s Guidebook” I summarized an number of lessons I learned managing money over thirty years, and here is one of them:
The stock price of a company goes up because people are buying it. In fact, the price of anything goes up because there are more buyers than sellers.
However a thing (like an iPad2) is nothing like an investment. I am an idiot – I paid an extra $50 for an iPad2 by buying from a third party vendor (operating out of his home) – yes I paid a premium to the underlying net asset value (NAV). But then, tomorrow I fly to Arizona to ride Harleys with a few buddies and I wanted it specifically for keeping track of our trip; being able to actually read the hundreds of emails I get from my investment analyst and strategist friends quickly (at 55 years age, printing has to be huge, scalable, and access easy after few bourbons and beers). I equate the extra fifty bucks in this case to the amount I’d spend on gas for a couple of trips back to the Apple Store (waiting for the iPad2 to be “in” stock) and maybe a lunch. And after all, I don’t go to Arizona every day. So what we’re talking about might be a stupid consumer purchase, but hardly an ‘investment.’ It’s unlikely I will be disappointed.
On the other hand, paying way too much for what is supposed to be an ‘investment’ is just absurd. Using silver as an example (could be copper, wheat, pork bellies…whatever) the price of silver has to go above $45 before you’re making any money. Ah, but the premium (19% above the current price of silver) has to also remain constant. If the premium decreases while the price of silver rises, you might just be chasing your tail. Worse, if the silver price falls, you will likely lose that AND the premium you paid. I can promise the premium will become a ‘discount’ if the silver price plummets. BUT wasn’t this an investment? There are so many things that have to happen all at once in order to make any money at all by buying units in a commodity fund at a premium that I get a headache just thinking about them.
We can witness the same crazy stuff in stock prices too. Yes I bought the iPad2 at a premium, but does this mean I’d pay a premium for the stock of Apple?
Although tech industry analysts and the media (even Steve Jobs) love to compare Apple and RIM and Microsoft based on their product features, in reality RIM and Apple in particular address two very different audiences. AAPL is about coolness and entertainment, and RIM is all about business. The Playbook looks like it will be smaller than the iPad, but like the iPad will have a new and improved operating system. Most important, the Playbook screen is bigger than the Blackberry screen (more business people are myopic – figuratively and literally) and is capable of wirelessly ‘talking’ to a business person’s other RIM device (contacts, moving documents around, editing them etc.)
The below quote is just a couple of months old:
“Thanks to the open nature of the Android platform, vendors from HTC to Motorola to Samsung are building more powerful hardware than Apple, and soon the iPhone will be relegated to a small percentage of the market, and Apple will be in trouble once again.”
Avi Greengart, Research Director, Consumer Devices, Current Analysis, 17 November 2010.
Bottom line? Buy yourself an iPad2 – it’s way cool if hard to navigate for us older farts as a consumer, but perhaps buy shares of Research in Motion as an investment – at least for the next few months.
Anyway, I’m off to Arizona’s bike week to ride a rental Harley around in 30 degree weather for a few days. With any luck, the below (see photo) won’t be a feature of this trip.
Invest to Live; Live to Ride.