I started this post a couple of weeks ago and then I got distracted halfway through it. I wasn't sure if I was ever going to finish it, but all this recent talk about "the guy in the padded room" encouraged me to continue. It turned out to be a long one, but hopefully you can permit some reminiscing by an Old School Fool, and if not, feel free to skip to the next post. What triggered the trip down memory lane was this post...
brucedoe wrote in #293659:
Incidentally, we have a gold coin purchased at $550/oz in the early 1980s. From $550 to $950/oz in more than 25 years is not a particularly good investment. One could do better in CDs.
I'm a big proponent of owning gold now. However, the only physical gold that I own is a single 1 oz US Gold Eagle coin that I bought for around $300 in late 2000. The only reason I bought even one coin was on a dare and a whim. This is despite the fact that I have been encouraging people to buy gold for over ten years now and I am heavily invested in gold via GLD, CEF, and several other funds.
For those who don't go that far back on these boards, I was much more active in the late 90s during the dot-com bubble, mostly on the CMGI board (now ModusLink) in the year leading up to the inevitable crash. CMGI may be one of those dot-coms that you vaguely remembering hearing about, but were never sure exactly what they did.
In short, CMGI was an Internet incubator (remember those?) that was one of the fastest growing stocks of the 1990s. Its market cap peaked at over $60 billion. It's an intriguing story, but I'll get right to its spoiler -- it's now worth a little under $200 million, 99.7% off its high. And unlike events in more recent history, there wasn't any fraud involved with CMGI. Despite the absence of fraud, it would not be an exaggeration to say that an investor in Madoff's fund has a better chance of getting more money back from their "investment" than someone who bought CMGI near its peak. The only fraud in the case of CMGI was self-inflicted when people deluded themselves into thinking that a dot-com stock would lead to easy riches.
For some masochistic reason (or I suppose sadistic reason depending on your point view), I was obsessed with trying to convince the CMGI bulls that its valuation was absurd and it would eventually crash. And by "CMGI bulls", I mean nearly every poster on that board except me. (jgc123 can back me up on this. He posts here occasionally, and we both used to frequent the CMGI board back in the day.) The bulls could not understand how a company that owned dozens of companies in an industry with such tremendous prospects for growth could ever crash. I was equally dumbfounded that people thought its valuation (and by consequence, their overnight riches) was sustainable.
I read countless stories on that board by "long-term buy and hold" investors who put a significant chunk (including a few who allocated 100%) of their retirement savings or their kids' college funds into CMGI and expected it to grow and grow and grow until they were ready to cash it in after 10 or 20 years. How could you go wrong with a company with an ownership stake in dozens of Internet companies? It was often called the Berkshire Hathaway of the Internet.
Everybody was very excited about the future of CMGI and full of optimism about the growth of the Internet. And there I was, the lone voice that patiently tried to explain how the most likely outcome was that they would lose over 90% of their money if they continued to hold the stock, which is exactly what happened. And how did people react to what was in retrospect the only sane voice on the board? Their response was commonly to ponder what form of mental illness I must surely be suffering from.
Was I depressed...?
As for Rimpinths, man, my heart goes out to you every time I read one of your posts. It's like I sense a darkness in your soul that just tortures you to disbelief the historical, revolutionary changes going on around you. One must be a very glum, pessimistic person to believe that technology will stop its rapid advance anytime soon.
Was I a megalomaniac...?
I suspect that there is more than a hint of megalomania involved when someone insists that he is right and the entire rest of the world is wrong. Must be a helluva thing to believe something so strongly and to be so consistently proven wrong by real-world events.
Was I delusional...?
Rimpy is not in a manic state; he is in delusional or psychotic state. Mania elevates the emotional state and delusion or psychosis is removed from fact. Rimpy is wrong and if he does not know it, he is very sick. Let's hope he will recover eventually.
Did I have a traumatic childhood...?
Your attitude reveals your negative views of life. Somewhere along the line someone or something has shaped your views and one would suspect that the cause was what one would call negative, or fatalistic. Perhaps a very bad experience or even a parent's influence exerted over a child to shape his way of thinking. It's not your fault.
Or was I simply a panic monger...?
Ironically, his claims of "trying to help people", and "prevent them from losing money", have the potential to create quite the opposite, damaging effects. In effect, they would create nothing but losses, missed opportunities, and badly-timed sells. [...] I believe they should be carefully monitoring and selectively deleting Rimpy's posts. I would go so far as to say banning him completely from commenting on the stock market.
I don't want to give the impression that those were typical posts. They were thankfully the exception, but they were still not at all uncommon. That last post cited above, which was basically a long personal attack about how I was an incompetent investor and that my advice was dangerous, received 50 recs. But overall, the people on that board were nice to me and very intelligent, which is why I stuck around that board for so long, figuring that I just needed to come up with the right explanation because these people were smart and they would eventually understand my point of view.
I tried explaining in a hundred different ways why CMGI's stock price was simply not feasible or sustainable. I would present my arguments based on financial analysis and an appreciation of the history of stock market bubbles. I often quoted from 1929 newspapers, which sounded eerily similar to people's attitudes in 1999. The common response was the four most expensive words in the English language: "it's different this time."
You ever try explaining to a new investor why the intrinsic value of a stock could be significantly different than its last trading price? It's really difficult! I would get exasperated trying to explain book values and discounted future cash flows and dividends, and also that the price of stocks was also affected by the prices of competing investments such as bonds.
I would try to explain how the future cash flows from $50 billion in treasury bonds (the equivalent of CMGI's market capitalization at the time) would be much greater than any profits CMGI was likely to generate, and therefore boring old bonds would be a better investment than an exciting Internet incubator. That seemed laughable to the CMGI bulls, but what really caused them to double over in spasms of laughter is when I would claim that gold would be a better investment than either of them.
How could I talk about book value and dividends and future cash flows, and then claim that gold was a good investment? This was the source of endless amusement on the CMGI board, as exemplified by this post:
Went down to the basement to check on the gold in my Rimpy Anti-Speculation Port. It was cold in the basement, a nice change to the sticky, LA summer. I asked the gold when it was reporting earnings. It didn't answer. I assume that it's in a quiet period right now. Perhaps there is a secondary offering in the works.
That was written by a former poster named Newtopos. He raised a lot of good points. One of his pet stocks was NITE, Knight Capital Group, which is a company that provides electronic stock trading services. Needless to say, that was a very, very good business to be in during a stock market mania like the one we had in the late 90s. Newtopos and I made a short-term bet about the performance between NITE and gold in July of 1999...
For tracking purposes, we'll assume that $10,000 has been invested in NITE shares and gold. As of Friday's prices, we have:
$10,000 = 183.48624 shares of NITE @ $54.50/share
$10,000 = 39.44773 ounces of gold @ $253.50/oz
I easily won the bet in the six-month time frame we had established. Newtopos was at least smart enough to pick NITE instead of CMGI, but a $10,000 investment in gold at that time would now be worth about $38,600 compared to about $3,200 for a similar investment in NITE.
I think that may have been the best timing I've ever had in my life because $250/oz is pretty close to the lowest gold price for the past 30 years. That's especially remarkable because timing is not my thing. Anyone that knew me during that time knows that I called for the crash ANY DAY NOW about twenty times between the fall of 1998 and when it finally happened in the spring of 2000. I admit that I blew a lot of my credibility by being so emphatic and urgent with my warnings, but the crash could've happened any day in 1999 and I'm surprised that the bubble went on for so long. This poster captured my doomsaying beautifully and I found this post to be hilarious...
So anyway back to the gold coin that started this story. Even though I had encouraged people to buy gold, I didn't own any myself, mainly because at that point in my life I didn't really own much of anything after having recently finished two years of Peace Corps service in Africa, and then after that I was back in school studying for my second degree. I dabbled in some stocks of gold mining companies, but that was about it. I wanted something to put under my proverbial mattress, so I felt like I should own at least one piece of gold. After much egging on by others, I bought that single gold coin in 2000 for what is now the bargain rate of $300. I get the feeling that I will keep that coin forever as a memento of that time.
But even with the run up in gold, it's hard to explain why it's a good investment. Gold doesn't generate any cash flow. It doesn't do anything productive like a company, nor is it used to fund productive activities, like bonds. It just sits there. Its only value comes from the fact that it's highly desired as a form of money and I can't really explain why that's so, other than that's the way it's been for the past 5,000 years. (Actually, you can explain it in terms of scarcity of reserves, high unit value, and limited new production, but gold is still essentially a shiny rock that Yahoos fight over.)
It's certainly easier now to talk about why gold is a good investment and sound somewhat credible. A chart that shows a squiggly line going up is often the easiest case to make for a particular investment, even though a dispassionate investor should look at that same chart and realize that the fact that it is a lot more expensive this year than it was last year is often a reason to not buy it. Every bond investor knows that price and yields (returns) are inversely related, but that's also true of every asset class, including stocks, real estate, and precious metals.
So there are reasons to question gold at these prices. Every gold investor should look at the long term chart of gold prices and note the eerie similarities between 1980 and 2009...
I've often thought that while the existence of a speculative bubble may be difficult to prove, a simple price chart is more often than not the best prima facie case that can be made for a bubble. When I look at what gold has done in the past couple of years, I try to remember what I told other people about tech stocks in the late 90s...
The Nasdaq index is up 107% since its October lows. In my opinion, that single fact is all the evidence you need of a speculative mania. The market just doesn't do things like that unless it is a mania.
If nothing else, gold's rapid rise should make a gold investor very nervous. However, even at these levels, I believe what's going on here is much more than just speculative momentum. It's instead a clear sign that our fiat monetary system may be on its last legs. And that's really what the price of gold is all about: the value of the dollar.
We have unsustainable trade and fiscal deficits that we can only pay for by printing new money. Our incredibly reckless Federal Reserve not only refuses to remove the punch bowl from the party we've had over the past 20 years, but they also make sure that it remains continually filled in the hopes that people never sober up and realize how bad things really are.
Don't be fooled by smart people using terms like "quantitative easing". They are simply printing money out of thin air and any idiot can do that. Forget former Princeton professors or former CEOs of Goldman Sachs, give me some monkeys and a printing press and I could replace what the Federal Reserve and the Treasury have sadly become. And that's what our precious dollar will sadly become as well if we don't stop these policies: a piece of paper created by some monkeys with a printing press.
I'm not going to go into all the details of why our fiat monetary system is going to be in very serious trouble in the near future. Thankfully, that already generates a lot of discussion on this board. It is an opinion based on 20 years of studying the economy and the history of finance. I tell people that they should buy gold not because I am pessimistic person (or depressed or a megalomaniac or delusional or a victim of child abuse or a panic monger), but because I want my friends and family to preserve the wealth that they've worked hard for all of their lives. And that's who really gets shafted during a bout of very high inflation: middle-class families who faithfully save a portion of their income each month.
If people don't want to hear that and they want to portray you as "the guy in the padded room", just stick to your beliefs. When you're one of the few sane people in an insane world, it often feels like you are the one who's delusional but that doesn't mean you're wrong. That's a lesson I definitely walked away with from the CMGI board.
I do think we are getting very close to a tipping point when it comes to the world's attitude about the dollar and by consequence their attitude towards gold. However, just as I shouldn't have been surprised that CMGI went to $1000 after I said it would crash from $500, I will not be surprised if gold sees $500 again before it stays past $1000.
I have strong convictions about where gold (and conversely the dollar) will be in ten years, and that's the timeframe that matters the most to me. I could be wrong about the near future just like I was wrong about the timing of the bursting of the CMGI bubble. I was absolutely convinced that the dot-coms were going to crash by the end of 1999 and I was wrong about that. But even though my timing was off, you won't find any long-term investors that have any regrets about selling CMGI in 1999. I think that gold is poised to take off in the next couple of years and I could be wrong about the timing of that too. But I am confident that regardless of what happens in the next two years, no one in 2019 is going to regret buying gold in the summer of 2009.
Out of the 2,000+ posts that I've written over the past ten years, many of which were tomes as long as this one, there is one post that I wrote in July of 1999 that is without a doubt my all-time favorite for its brevity and poignancy. I will reprint it in its entirety here.
Someone asked: Rimpy, is this the crash you were talking about?
I responded: If you have to ask, then it's not it.
That's what was asked in reaction to a short-term pullback in CMGI from $660 to $485 (oh, the horror!), after which it promptly continued its rocket ride to the moon to $1385 before coming back to earth. That was just one of a dozen times that I was asked that question after a similar 20-25% pullback. After it fell from its peak of $1385 to below $50 within year (and below $5 since then), I was unsurprisingly never asked that question again.
And in some ways I think this applies to the dollar and gold, although I don't think the moves will be quite as extreme. People may constantly question you as gold goes from $300 to $600 to $900, "is this why you've been recommending gold all of these years?" And you can just tell them...
If you have to ask, then it's not it.
There will be a complete change in people's perception of fiat currencies versus hard money such as precious metals. If there was ever a time to use the term "paradigm shift" without being cliché, then this is one of them. Whether it's going to happen in two years or ten years, I'm not sure, but I am sure that the status quo system of fiat currencies isn't sustainable. When that shift does happen, and the dollar suffers while gold prospers, its effect on dollar-denominated savings, the currency markets, and the global economy will be so evident that they won't need to ask if this is finally gold's moment. They'll know.
People thought I was crazy in 1999, but no one would say that in 2009. I hope that those of us in the gold-padded room will still be around here in 2019, and we can look back on these posts of yore and reminisce about how everyone thought we were crazy when we were actually among the small minority of investors who were sane.