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He's wrong. Stocks do not beat gold once inflation outpaces the rate of average market returns, which is exactly where we're at now. Gold is up 87 fold over 90

by shingen 15y ago

He's wrong. Stocks do not beat gold once inflation outpaces the rate of average market returns, which is exactly where we're at now. Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock, Apple at the absolute bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and then hold all the way through, and then sell at the absolute top. On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes (you have to constantly shift your investment strategies for all sorts of reasons: age, family, economic conditions, and so on). Few people are skilled enough to do that well. With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing' (to pay for entitlements, to devalue national debt, to fund deficits, and so on). There are very few things you could leave for your grandchildren that will retain their value, real estate and gold are two prime options. If you had bought and held the stocks that make up the Dow over 60 or 70 years, you'd have gotten demolished because the Dow constantly shuffles its index. That is to say, you can't look at the Dow from 70 years ago and compare it to today, because the index is completely different, and the average investor could only easily purchase index ETFs in the last 30 or so years. In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers). The dollar has lost 97% of its value since the Fed came into existence. There's no way you can outrun that unless you hit homeruns in the stock market, which is what Buffett did, and which is exactly what your average investor cannot do regularly. The majority of people that invest in the stock market lose money. That's tracking since the late 1960s when the US went off the gold standard and inflation skyrocketed (sending oil, gold, and nearly everything radically higher). Buffett hasn't made most of his wealth in the stock market anyway (nor that of Berkshire). He has made it by using insurance company float cash to purchase other high float companies, and then rolling that ball forward. Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario.

dman 15y ago
Are you taking dividend yields into account?
- shingen 15y ago
  Yes. The S&P for example has had a roughly 2% average dividend yield on its basket of stocks over the past several decades. That helps, as without that dividend value the real return for stocks would be even worse the past decade. For dividends to work in an inflationary environment, you need serious yield. AT&T and Verizon as common stocks would get you close with their 6%x yields. Most people these days of course can't get access to good yield on anything with interest rates on the floor (corporate debt and select few dividends being nearly the sole safe exceptions).
illumin8 15y ago
Why are you being downvoted? Your comment is spot-on. Look at the market performance of 2011 and you will see why: Stocks: +0.93% US Treasury Bonds (Long Term): +33% Gold: +10% He's exactly right about Buffet. Buffet makes all his money because Berkshire Hathaway collects all of these insurance premiums and he can use the cash flow float to make a few extra points of interest (above inflation). Do this with enough $billions for long enough and you will own all of the money in the world.
- lotharbot 15y ago
  Single-year performance is a terrible measure of the value of an investment.
EricDeb 15y ago
So what is your investment recommendation then? Avoid the market and invest in Gold?
- shingen 15y ago
  Not exactly. If you're asking as a skilled money manager or investor, I'll give you X advice. If you're asking what I think the average Joe should do (someone with limited time and skill when it comes to money management), I'll give you Z advice. A lot of it depends on how hard you're willing to work to protect and grow your wealth. If the market is near 13k like it is today, with corporate profit margins at all time highs (cyclically impossible that they'll stay up there), I'd say you should be out of the market. Corporations are accumulating debt at the fastest pace in history (which is one of the reasons they're also hoarding cash, as an offset). When rates spike higher as they eventually must, those companies will get demolished. Far better to wait for the next plunge and be opportunistic, than to hope for a few more points on top of this already huge several year run. Buffett's mantra works very well in that case: be greedy when others are fearful, and fearful when others are greedy. Buy gold on big drops, like when it fell from $1900x to $1530x recently; but never chase it when it runs. Keep it a modest part of your portfolio (10% to 25% depending on your particularly preferences). It's not a growth vehicle, it's a wealth protection device. Corporate debt is a great place to get good yield right now, but again you have to know what you're buying. It's perfectly fine to take an annual hit on inflation against liquid dollars (granted that's under, say, 10%); better to have opportunity cash available. Typically people miss big opportunities because of a lack of cash. Really big opportunities are not that rare, they come around every 3 to 5 years, and the returns you can make off of them are extraordinary. You buy the Dow at 7,000 when everybody else is writhing in pain from the ride down from 14k. Own commodities when they're occasionally cheap. For example, when potash crashed during the global implosion a few years ago, you could have purchased stocks like POT for 80% off. When oil was $10 or $12 circa the late 1990s, the common 'wisdom' was that oil was dead, a terrible investment, and so on. In reality, cheap energy is almost never a terrible long term invest. The human desire / need for cheap energy will continue to be infinite, which ensures that prices will swing up at some point (even if it takes several years). Right now, I'd tell most people to look around themselves and invest there. Get a strategically better education perhaps; or find a good business to purchase or invest into. Something you can directly apply your sweat equity to with multiplication potential. Shield your wealth until you find the right opportunities; people seem to often undervalue patience. You don't need lots of homeruns, you need very few. In this environment, it's all about having liquidity to be opportunistic. The volatility in the global economy is almost guaranteed to produce wild swings over time. When people panic, be there with your cash.

by shingen 15y ago

dman 15y ago

Are you taking dividend yields into account?

shingen 15y ago
Yes. The S&P for example has had a roughly 2% average dividend yield on its basket of stocks over the past several decades. That helps, as without that dividend value the real return for stocks would be even worse the past decade. For dividends to work in an inflationary environment, you need serious yield. AT&T and Verizon as common stocks would get you close with their 6%x yields. Most people these days of course can't get access to good yield on anything with interest rates on the floor (corporate debt and select few dividends being nearly the sole safe exceptions).

illumin8 15y ago

Why are you being downvoted? Your comment is spot-on. Look at the market performance of 2011 and you will see why: Stocks: +0.93% US Treasury Bonds (Long Term): +33% Gold: +10% He's exactly right about Buffet. Buffet makes all his money because Berkshire Hathaway collects all of these insurance premiums and he can use the cash flow float to make a few extra points of interest (above inflation). Do this with enough $billions for long enough and you will own all of the money in the world.

lotharbot 15y ago
Single-year performance is a terrible measure of the value of an investment.

EricDeb 15y ago

So what is your investment recommendation then? Avoid the market and invest in Gold?

shingen 15y ago
Not exactly. If you're asking as a skilled money manager or investor, I'll give you X advice. If you're asking what I think the average Joe should do (someone with limited time and skill when it comes to money management), I'll give you Z advice. A lot of it depends on how hard you're willing to work to protect and grow your wealth. If the market is near 13k like it is today, with corporate profit margins at all time highs (cyclically impossible that they'll stay up there), I'd say you should be out of the market. Corporations are accumulating debt at the fastest pace in history (which is one of the reasons they're also hoarding cash, as an offset). When rates spike higher as they eventually must, those companies will get demolished. Far better to wait for the next plunge and be opportunistic, than to hope for a few more points on top of this already huge several year run. Buffett's mantra works very well in that case: be greedy when others are fearful, and fearful when others are greedy. Buy gold on big drops, like when it fell from $1900x to $1530x recently; but never chase it when it runs. Keep it a modest part of your portfolio (10% to 25% depending on your particularly preferences). It's not a growth vehicle, it's a wealth protection device. Corporate debt is a great place to get good yield right now, but again you have to know what you're buying. It's perfectly fine to take an annual hit on inflation against liquid dollars (granted that's under, say, 10%); better to have opportunity cash available. Typically people miss big opportunities because of a lack of cash. Really big opportunities are not that rare, they come around every 3 to 5 years, and the returns you can make off of them are extraordinary. You buy the Dow at 7,000 when everybody else is writhing in pain from the ride down from 14k. Own commodities when they're occasionally cheap. For example, when potash crashed during the global implosion a few years ago, you could have purchased stocks like POT for 80% off. When oil was $10 or $12 circa the late 1990s, the common 'wisdom' was that oil was dead, a terrible investment, and so on. In reality, cheap energy is almost never a terrible long term invest. The human desire / need for cheap energy will continue to be infinite, which ensures that prices will swing up at some point (even if it takes several years). Right now, I'd tell most people to look around themselves and invest there. Get a strategically better education perhaps; or find a good business to purchase or invest into. Something you can directly apply your sweat equity to with multiplication potential. Shield your wealth until you find the right opportunities; people seem to often undervalue patience. You don't need lots of homeruns, you need very few. In this environment, it's all about having liquidity to be opportunistic. The volatility in the global economy is almost guaranteed to produce wild swings over time. When people panic, be there with your cash.