What is Sound Money?
Sound Money simply refers to a monetary system where governments and central banks do not have the capability to create money out of thin air and therefore reduce the purchasing power of a currency. A sound monetary system is one where the price of money is set by the market, not artificially by a central bank.
For money to be ‘sound’, it needs to be something tangible or real – or in the case of paper money, be backed by something tangible or real. Thousands of years of trade and human interaction saw gold evolve as the peoples’ choice of sound money. No one decreed that this should happen; the market simply decided that gold fulfilled the role of money better than any other commodity due to its well known qualities.
Gold became an international currency, accepted worldwide as payment for goods and services or repayment of debt. Its strength lay in the fact that it was no one else’s liability (unlike today, where the bulk of nations’ currency reserves are liabilities of the US).
Gold’s main strength though was as an anchor for the global monetary system. Because of the metal’s qualities, there was a natural limit on the amount of money that governments could create. Gold restricted credit (debt) growth, which curbed inflation. It should come as no surprise then that governments and central banks are not fond of gold.
Gold’s voice may have been muffled for decades, but the metal still performs the role of money. In the years ahead we believe gold will once again play an important role in the international monetary system.
How does all this help you?
What are Sound Investments?
What are sound investments? A sound investment is one where you have the opportunity to invest in a quality company at a reasonable price. The quality of the company is important, but the price you pay is even more so. Therefore, a lower quality company can still be a sound investment provided the price paid is attractive enough.
It is crucial to understand that the price you pay will be the major determinant of your investment return. You can buy shares in the best company in the world but if you pay too high a price, the investment will not be a sound one.
Identifying sound investments is not just about relying blindly on a valuation model. After all, any such model is only as good as the information that goes into it. Successful investing also requires good judgement, or as we like to call it, sound thinking.
Sound thinking can help investors avoid dud companies that might be current market darlings. More importantly, sound thinking can allow investors to retain their heads while those around them are losing theirs.
Most investors experience losses by letting their emotions get the better of them at the worst possible moment. So sound thinking helps to offset an investors’ largest handicap – their emotion.
Ben Graham was the king of sound thinking. He was Warren Buffett’s inspiration and investing hero. He should be yours too. Fortunately, Ben laid out his thinking in the classic investment book, The Intelligent Investor. It’s well worth the read.
How to accurately value a company
How to accurately value a company remains a mystery for many investors. And for good reason – identifying a company’s intrinsic value is a subjective process.
The valuation methodology you use will differ for an industrial company with an established business model versus a resource company with an emerging project.
More confusing still, if you read the financial press and the output of brokers and investment bankers, you’ll come across any number of valuation techniques. These include ‘sum of the parts’, ‘relative value’, ‘dividend discount model’ discounted cash flow’ etc etc. My advice to you is to ignore these various ‘investment justifications’.
To make matters simple, the starting point for any evaluation for a business is to view it as a whole.
As Ben Graham said,
“Investment is most intelligent when it is most businesslike… every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise.”
Warren Buffett reiterated this view in his famous ‘Graham and Doddsville’ speech given in 1984, when talking about those investors who had followed Graham’s principles over the long term. “While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.”
If you view potential investments as businesses, not just ‘stocks’, you can gain a clearer picture of whether we want to put our money to work in that business.
