YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Silver Fever

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Silver fever seems to be in season. Over the last couple of days, the number of shares traded in the iShares Silver Trust, the biggest silver ETF, topped the SPDR S&P 500 ETF, which is usually one the most actively traded ETFs around the world. Silver prices shot past 31-year highs on its way towards $50, up over 169% since last August.

The inflation scare, plus the idea of buying silver as “the poor man’s gold,” continues to attract more and more bubbly speculation. Interestingly, we have recently had inquiries on both sides of the speculation: some about buying a position in silver, and others about shorting silver. At YCG, we feel we’d rather avoid silver and other commodities altogether.

The problem with silver, gold, or other commodities is that they trade purely based on supply and demand. Supply, although not perfectly known, is mostly fixed and can be pretty well estimated. Demand, however, is not entirely made up of its economic value, but instead largely fluctuates on speculative issues such as inflation, currencies, and particularly investor emotions. In short, it is unpredictable and its movements are at times irrational. To us, that sounds an awful lot like gambling.

To sort of recycle an old Benjamin Graham quote, “In the short-run, stock prices are a voting machine. In the long-run, they are a weighing machine.” Unfortunately, since commodities have no cash flow, in the long run we never get to a weighing machine. They are always voting machines since the value of a commodity is simply based on its short-run demand curve. We’d rather not have our investment returns be dependent upon the emotions of other speculators – essentially, the greater fool theory, where you simply hope somebody else will drive the prices higher.

In contrast, businesses in general are much more predictable. Supply is generally fixed to the number of shares outstanding, and in the long run demand will be equal to the present value of the company’s future cash flows. Sure, in the short-run, stock prices are also susceptible to the manic-depressive behavior of Mr. Market. However, after a little medication of long-run patience, stock prices will generally correlate at least with the amount of cash the business generates or returns to shareholders. Any positive bullishness on top of that valuation is just icing on the cake. That is the essence of what Benjamin Graham was trying to teach us with his famous quote.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Mike Yacktman | April 28, 2011 | Permalink

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