Seeds of Gold

1/4 Ounce 92% Pure Alaska Placer Gold Nuggets

Lao Tzu said, "To see things in the seed, that is genius." As financial farmers we seek to identify opportunities that will provide us with the greatest return; with high returns, however, also come greater risks. A fine example for today's blog post is the "typical" Alaska placer gold nugget mine operation we see on such popular TV shows as "Gold Rush" and "Bering Sea Gold."

As we begin this discussion, it is vital to understand the acquisition of the very land from which this tremendous physical wealth is mined; originally termed "Seward's Folly" after U.S. Secretary of State William H. Seward, the Alaska Purchase was triggered by Russia's fear of war with Britain. Still recovering from the effects of the Crimean War and having a heavy debt to pay to the Rothschilds, Russia entered into negotiations with the United States to sell what was considered frozen wilderness. Negotiations concluded with a purchase price of $7.2 million dollars, or 2 cents per acre. The check below changed hands on March 30th, 1867.

America purchased an area twice the size of Texas and many in the general population considered it a barren wasteland. In 1896, however, the prevailing attitude changed as gold was discovered in Alaska. It triggered a gold rush which brought greater and greater numbers of prospectors, land developers, businessmen and scoundrels alike north to the virgin wilderness.

Thus begins our discussion of placer gold mining and a link to our Invest Like A Farmer philosophy. The earth does not give up its gold easily, and as previously discussed on this blog, I equate gold with toil. There is no "red-tag" sale on toil, it is constant, unrelating, and always present in the struggle of life. That is gold, toil. As a frequent viewer of "Gold Rush" and "Bering Sea Gold," I fully recognize the difficulty the miners have in acquiring the end product of placer gold nuggets. Hundreds, if not thousands, of hours go into the planning, development, construction, shipping, training, mining, and processing of a single ounce of gold. There is no easy way to consistently and successfully mine gold.

The vast majority of placer gold nuggets that are eventually acquired are generally small, even grain-sized. It is now rare to find large gold nuggets and it has even been said that a 5 ounce gold nugget is as rare a find as a 5 carat diamond. Why? The big nuggets  have all been mined and there is increasingly less virgin territory to mine which could result in large nugget discoveries. From a fixed commodity asset like gold, with an increasing demand from a larger and larger population, this is quite understandable. The natural resources of precious metals and gemstones by their very definition should increase in both real and monetary value based on population growth, cultural demand, and difficulty in obtaining these resources.

As financial farmers we then need to ask ourselves, from a utility and scalability standpoint, what investments do not necessarily have the constraints of a physical resource, yet provide similar increasing returns related to population growth, cultural demand, and difficulty in obtaining/creating these resources? I would argue the next gold rush is, and already has been, in the form of the internet, pharmaceuticals, and portable technology such as mobile phones, tablets, and to an increasing use smart watches. I see these three particular areas as having tremendous long-tail growth for anyone planning to Invest Like A Farmer; their respective scale and utility is nearly unparalleled. Gold, however, still has the timeless visual allure of a pure element, remains difficult to obtain, and has acted for thousands of years as a portable store of wealth. I have no reason to doubt the merits of this trend to continue.

Create A Brand

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I'm often asked by readers of this blog the best (and fastest!) way to make money. I usually respond with the same answer; you can either buy brands or create them, but making money in either situation takes time and patience. Fast money is nice, but it also has consequences; repeatability is called into question, greater risk, and higher taxes on short-term gains are all concerns. Many young investors don't have adequate seed capital to purchase meaningful quantities of shares to help launch their financial farms early in their careers and find themselves in a quandary. How best to pursue creating wealth without seed capital? It is truly difficult to see a global stock rally and not participate in it, but fear not loyal blog readers, all is NOT lost!

One of the most important lessons is that to profit from growth, you need to be in the game in one form or another. That means securing some type of equity position, which generally leads to two choices for someone who wants to Invest Like A Farmer; purchase positions in real estate, bonds, or (preferably) equities OR go about creating your own brand. Many successful financial farmers do both.

What is a brand? It is the (ideally) trademarked name and/or logo of a product or service (or both) which immediately calls to mind what that product or service is when the brand is mentioned (termed a metonymy.)

Why is a brand important? A brand selectively targets a consumer for its product or service, and generally speaking, a branded product is typically sold at a greater premium than a generic product or service which in all actuality maybe nearly identical to the branded product. The successfully branded product, however, has established a greater perceived utility than a generic product and consequently charges a higher price for the good or service. The better the brand, the greater the implied prestige and usually the higher the margin, profits, and market share. Couple this with mass appeal and you may have a winner on your hands.

Assets come in a variety of forms; from physical assets like farmland, gold, and oil to legal assets including shares of stock, debt instruments such as bonds, and intellectual property including trademarks, copyrights, and brands themselves. The prudent financial farmer is always looking to cultivate quality assets on his or her financial farm; if buying a brand isn't feasible, consider creating one.

A Bet on Population Growth

If there has been a "sure" bet, it has been the bet that the worldwide population will increase; indeed, since the middle of the 14th century there has been continuous growth in global population. The United Nations estimates that by 2050 we will have between 8.3 and 11.9 billion people on Earth, from 7.1 billion today.

What does this mean for the individual that wants to Invest Like A Farmer? It is pretty clear to me that following some semblance of "Rapko's Rule's" (see below) should pay off handsomely assuming the financial farmer doesn't interrupt the compounding cycle and also has a reasonable (think several decades) of investable time on his or her hands.

Rapko's Rules

1.  Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.

2.  I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.

3.  Of the four possible outcomes; high margin, high volume is best.

4.  A steadily moving higher and higher left to right stock chart is a good thing; the inverse is not.

5.  Inevitably, and by definition, more time is spent holding a losing position than is necessary. Cut your losses.

In summary, I look for boring, dividend paying companies that have a high margin, high volume business with steadily increasing left to right stock charts. I'm not afraid to cut my losses early.

Now, what do the Rapko's Rules have to do with making a bet on population growth? Everything!

The dynamics of population growth are very interesting because across humanity many of us want the same things; a sense of purpose, good health, longevity of our family, communication, pleasurable pursuits, and the ability to make a positive impact on the world are just a few. Having traveled a fair amount, I can see many, many similarities across the globe. HOW these goals are accomplished, however, varies greatly. Many developing countries have completely skipped the desktop, laptop, and advanced directly to mobile phones for their communication and internet access. The same can be said of medical care, where a drug delivery solution which may have taken hundreds of millions of dollars to develop by some of the most brilliant minds on Earth, can be administered globally with ease.

With a high degree of certainty, it can be surmised that the global population will continue to grow. Will there be drastic breakthroughs? Absolutely. But from the viewpoint of a financial farmer, there are many seeds that can be planted which focus on branding, utility, and scale that should perform very well without necessarily having to take a significant risk in terms of the disruptive technology. Will a disruptive technology create many billionaires and millionaires? Absolutely, but so will focusing on branding, utility, and scale that an ever-increasing population demands.

Cotton Currency

Imagine turning a $365 investment into $31,360,000 whenever you want! Well it is being done every day in the United States when we turn on the printing press and turn a 480 pound bale of cotton (currently trading at $0.76/pound) into 313,600 $100 U.S. Bills! Talk about a bonanza, wow!

Below are some other examples of what can be produced from a bale of cotton from our friends at Cotton.org:

The 313,600 $100 Bills takes the cake though, that is one heck of a return. For the average person trying to Invest Like A Farmer, however, this would be impossible simply because one would need to establish his or her own government and then create a fiat currency.

Nonetheless, a financial farmer can glean some very, very valuable insight into the above example. Namely, the nominal value of currency is almost constantly increasing; meaning there is nearly a constant increase in the number of dollars in circulation. The result of this process is the true enemy of investors, and that is inflation.

As a financial farmer, I define inflation as paying more for less. Paying more for a gallon of gas, milk, acre of land, car, etc. Production efficiency over time helps mitigate the effects of inflation in some products, but fighting inflation is like fighting gravity. So what is a financial farmer to do with this weevil?

Buying physical assets and ownership interests is one way to fight the inflation weevil. By definition, inflation results in the buyer getting less for each dollar, euro, yen, or peso. The extent of how much less is directly related to the rate of inflation; the higher the rate, the less you get over time. This is precisely why gold has typically been such a relevant hedge; there is no easy way to get gold except from toil, and toil is usually a very fixed asset. The same can be said of raw land, cotton, and finished goods.

The better the physical asset, typically the higher the demand it currently enjoys, and the higher the inflation protection it may provide. With that said, the financial farmer should always have planting seed capital available, but also recognize it is truly a wasting resource; high quality land, ownership interests, and commodities offer the dual potential of real value and growth.