Welcome to another edition of ROE The Boat.
Every three months I enjoy reading the quarterly letters from some of the best and brightest emerging public equity fund managers.
These fund letters are a great place to look for potential ideas, insights, and inspiration too.
Most of the letters start like this…
‘Dear Partner, our year-to-date performance to the end of June was 9%.’
This of course sounds great, 9% - not a bad start to the year.
However, there is a problem - it’s not real. Measuring a portfolio in USD or your local currency doesn’t reveal the truth about whether you're increasing your wealth in actual purchasing power.
We all invest for one reason - we are building savings for the future. At some point in the future, whether by collecting dividends or by drawing down the capital, we have to cash in our portfolio to buy real goods and services.
You might see your portfolio moving higher on the chart and increasing in nominal value but that's an illusion.
Below is a chart of the S&P 500 measured in USD.
Looks impressive.
You think the S&P 500 is crushing it. Think again.
Below is the same chart of the S&P 500 but this time measured in gold. For the past ten years the index has gone nowhere - it buys the same amount of gold as it did in 2015.
The Inflation Numbers Are Fake
So how should we measure in purchasing power terms?
Well we could minus the current inflation rate from our year-to-date performance to reveal an ‘inflation adjusted’ performance.
However, doing this we end up encountering another problem - the inflation data is fake and can be manipulated. A consumer price index rarely includes things such as rent rises, tax increases etc. It also doesn’t make allowances for shrinkflation (where the chocolate bar you buy is the same price but 5% smaller in size).
We need a better measuring stick.
The Golden Constant
Alternatively we could measure in ounces of gold as we have done with the S&P 500. As documented by Professor W. Jastram in his book The Golden Constant - gold's purchasing power has remained consistent over the centuries.
However, gold is not a perfect measuring stick as there’s always new gold discoveries. The World Gold Council states the supply of gold expands at about 1.5 to 2% annually.
What about Bitcoin? The supply of Bitcoin is capped at 21 million units, it’s written in the protocol. This makes it a good measuring stick.
Admittedly Bitcoin is volatile, that’s because in the grand scheme of things it’s still young, and has a small market cap when compared to gold which is 10 times larger. However, the longer Bitcoin stays around and the bigger the market cap the volatility should decrease.
Guinness is Getting Cheaper for Gold Bugs and Bitcoiners
We could also measure in a consumer good. As long as this good is consistent over time in terms of weights and inputs such as a kilo of rice, a barrel of crude oil etc.
For a bit of fun lets use a pint of Guinness as an example.
We can all agree a British imperial pint* is a British imperial pint - the size and weight is consistent over time. A pint of Guinness has the same material inputs as it did 10, 20, 40 years ago - water, hops, the same manufacturing process etc. Diageo, the owner of Guinness, would not change the ingredients or process for fear of upsetting Guinness lovers.
Guinness is also available in nearly every country, so you can see how much an imperial pint costs in your local currency.
Below is a table and chart of an average pint of Guinness in the UK measured in pounds sterling, gold ounces, and bitcoin.
Since 2022 the price has increased by roughly 6% per year in pounds sterling. It’s getting cheaper by roughly 6% per year when measured in gold, and 30% cheaper per year in Bitcoin.
While everybody else in the pub is complaining about rising prices, the gold bugs and bitcoiners sit there happily drinking the black stuff.
If you save in or have your salary paid in gold or bitcoin everything is getting cheaper, not just a pint of Guinness.
The truth is like a lion, you don’t have to defend it. Let it loose; it will defend itself. - St. Augustine.
In Summary
By all means keep measuring in fiat, it’s easier to do and less volatile.
However, it’s purchasing power that tells the truth. Just including the consumer price index is imperfect. The best way to measure in my opinion is using sound money such as gold and increasingly bitcoin.
Next time you look at your portfolio ask yourself this question…
At the end of every year, is my stock portfolio buying me more ounces of gold, bitcoin, or even pints of Guinness?
You can also ask the same question of your personal net worth, your own business, or a company you invest in.
You would be surprised at how many public companies, despite their share price moving higher on a chart, are actually shrinking in real value.
Something to ponder on.
Cheers 🍻
Please note the information in this report is for informational purposes only and should not be seen as investment advice. Please do your own due diligence before investing in any asset mentioned in this article.
This is a fundamental point that's often ignored. It's not just about the ticker going up, it's whether the underlying business is growing its real, inflation-adjusted cash flows. The ultimate goal is to own assets that increase your claim on real goods and services. Nice read!
Chocolate bars are DEFINITELY more than 5% smaller!