If you’re one of the many longtime friends and clients of Apollo Wealth Management (“Apollo”) then you know of our frustration with the amount of garbage that passes for clever commentary and prescient thinking.  All too often there’s an inverse relationship between the volume of information and its value.

Conversely when intelligent voices are able to rise above the vociferous crowd of minutia we are at the opposite extreme – we absolutely love it!  One of the sources we value is Tweedy, Browne – a familiar name to many as one or more of their funds are likely holdings in your portfolios and, for disclosure purposes, the portfolios of Apollo employees and their immediate families.

A couple of points from their March 31st shareholder letter were of particular interest.  We’d like to share them with you.

Here’s Tweedy’s take on gold:

Not since the late 1970s has the lust for gold by investors been as great as it has been recently. We thought we would take a brief moment to comment on this phenomenon, lest you feel we were missing the boat by not socking away some of your hard earned capital in this seductive commodity. Inflation fearing investors have been feverishly buying up gold commodity futures, gold coins, gold stocks, gold ETFs and, in some instances, the bullion itself. The price of gold on the commodity futures exchange is up almost 75% since the onset of the financial crisis in the Fall of 2007. Some well known and highly followed hedge fund managers have been building large positions in gold.

We believe there are better ways to address economic uncertainties than to speculate in a commodity that produces nothing in the way of income, costs money to store, and whose value is completely dependent on investors’ continued faith in it. With no underlying cash flow available to support a valuation, calculating an intrinsic value for gold is virtually impossible. We also think that gold’s effectiveness as an inflation hedge has been nothing to write home about. Ben Graham commented on this in his book, The Intelligent Investor, in 1973. Gold did subsequently appreciate significantly in the late ’70s in correlation with our last serious bout of inflation, but like most commodities in general, it has been pretty much a “do nothing” investment ever since, at least up until the last 18 months. From its previous peak in 1980 of $667 per ounce to its current price of roughly $1,500 per ounce, gold has compounded at approximately 2.7% per year versus 3.2% for the Consumer Price Index. On the other hand, common stocks, as measured by the performance of the S&P 500, compounded at an annual rate of approximately 11%, including dividends, over this 30-year period.

When asked about gold in a recent interview, Warren Buffett had this cautionary observation about the value of gold at today’s prices.

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all – not some – all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

In light of yesterday’s questionable economic data and resulting market “selloff” Tweedy’s take on investment decisions during periods of uncertainty is rather timely:

Uncertainty is a constant in capital markets. Sometimes there is more of it, sometimes less. Today, there is plenty to go around… the current instability in the Middle East, the fiscal crisis in southern Europe, growing deficits at home and abroad, a sluggish U.S. economy, spiking oil prices, natural disasters, rapidly rising commodity and food prices, the possibility for slower growth in China, and the possibility of another terrorist attack. The outcome of any or all of these potential risks could have a profound impact on confidence and resulting investor behavior. However, they remain imponderables. Fortunately, at the micro level, professionals who live, eat, and breathe their businesses come to work each day trying to incrementally increase the value of their enterprises in an effort to improve their shareholders’ and their own economic well being. In most of the developed world and in many parts of the developing world, they operate in an environment of freedom, where the discipline of the marketplace provides incentives for rational behavior. This is where we focus our attention and where our investment process is anchored. We have always felt that trying to figure out the value of a business is a much higher probability exercise than trying to untangle the ever present macro risks confronting the world economy.