Anyone attempting to invest in risky assets like stocks finds uncertainty one of the great obstacles to success. Even when the stocks are doing well, investors must consider whether to sell some of their best performers to â€œtake profitsâ€™â€™ or let them ride ever higher. When a holding is not performing as well as expected, investors must weigh the benefits of selling in order to cut losses. And how many times has an investor sold a disappointing holding only to watch it run higher later? If only we could remove some of the uncertainty, investing would be so much easier. If only we could find that one sure thing, the investment that would surely go much higher in the future. But can we?
Does the perfect investment exist somewhere, just waiting for you to load up and simply wait for the profits to roll in? And if such an opportunity existed, would you recognize it as â€œthe real thing,â€ as opposed to just another high-flyer as likely to disappoint as so many other â€œcanâ€™t missâ€ investments from the past?
And even if you found that wonderful, once-in-a-lifetime opportunity, how would you determine how long to ride along with it before succumbing to the instinct to sell and preserve your gains? (And lastly, how many more stupid questions am I going to ask before getting to the heart of this subject?)
Okay, thatâ€™s the last question. But this could be one of the most important topics an investor could ever investigate. If you could find that one sure thing, the investment fated to perform like no other ever has before, it could mean really big things for your familyâ€™s financial future. In the past, fortunes have been made by investors who chased one golden opportunity and held it long enough to realize stunning returns.
Oh, I would be the first to admit the role of luck for any investor earning such stellar returns in the past. If this investment opportunity was so obvious, many others would have taken positions in it too, and stories would abound on investors who struck it rich.
But, letâ€™s play â€œwhat if,â€ and that means â€“ more questions! What if an investment opportunity, or better yet, a small set of them, had the potential to produce returns far in excess of normal expectations? What if fate absolutely dictated that this set of investments would deliver the gains most investors only dream about, without really expecting to achieve them?
Iâ€™m guessing that all of you would find this possibility exciting. But I wonder how many would have the courage to buck the crowd, most of whom would consider these opportunities rather low on the list of smart things to do. Of course, few would check to verify that virtually all of recorded history supports this premise. Yet to me and other investment â€œBears,â€ this approach is as close as it gets to a lead-pipe cinch, the closest weâ€™ll ever come to a sure thing.
What I refer to are â€œhard assets,â€ more commonly seen as components of most baskets of commodities. While the list of what constitutes this asset class can be rather long and its components can make for rather difficult investing, the short list is what we are concerned about.
Topping this list are gold, oil, natural gas, copper and real estate. I would remove real estate from the list for the near term, given its recent run-up in prices. But should we see another time in the future when the crowd turns away from real estate, after speculating and losing money in it, that would be a great time to go bargain hunting again.
But others from that commodity list are now selling at rather low prices, historically speaking. Gold and energy sell for less now, on an inflation-adjusted basis, than they did 25 years ago. (Hey, did I just say that naughty word â€˜â€™inflationâ€™â€™?) And, in my opinion, inflation is what makes commodities, especially gold and energy, such â€œsure things.â€
Inflation is the loss of the dollarâ€™s purchasing power. And as much as I like focusing on secular, long-term trends as the best possibilities for investors to make solid, risk-adjusted returns in risky assets, gold has demonstrated the strongest, longest-lasting secular bull market for more than 100 years.
For that matter, throughout all of recorded history, nothing has held value better than gold. And nothing has steadily lost value as regularly or as predictably as paper money. Letâ€™s look at the dollar, for instance, and consider how inflation affects the clothes on your back.
No matter how far back in time we go, research shows that an ounce of gold will always buy a decent manâ€™s suit, just as it did 50 and 100 years ago, too. From what I have read, this was also true 500 and 1,000 years ago. But what did a suit cost 50 or 100 years ago in dollar terms?
The history of paper currencies shows consistency in purchasing power. They all lose value with time, and virtually all of those created have failed, at some point, due to over printing. Gold has outlasted every form of paper money ever devised. And since 1913, when the U.S. Federal Reserve was created, the dollar has lost nearly 95% of its value, compared to whatever it was buying.
But not just the dollar is losing value at increasing rates this century, as short as itâ€™s length is. European exporters are demanding action from their governments to do something about the falling value of the Japanese yen. Of course, a falling yen is exactly what Japanâ€™s central bankers want, since this help its manufacturers export excess production abroad. Recently, new leaders in Thailand adopted currency controls to keep the Baht from getting stronger, which also hurts its exporters.
But it is not just for the sake of exports that paper money is purposely weakened. Consider Germany, after World War I, when it suffered from strangling economic conditions imposed in the Treaty of Versailles by the warâ€™s winning powers. Since Germany was forced to pay reparations far in excess of what it could afford, the country, in frustration, simply printed the money needed without limits.
The temptation is great when we can create something of value from nothing — and at no real cost. But, really, how can we create something of value at no cost? It seems that the central bankers and Federal Reserve have become the alchemists of modern times. Instead of making gold from a common material like lead, they create dollars from paper and ink.
And the more paper money created, the less it is worth, considering the law of supply and demand. And this factor exacerbates inflation, which is why we reminisce about how cheap a candy bar — or a manâ€™s suit or a new car, etc. — used to be. And while inflation is bad (since exactly the opposite happens regarding what the science of economics was developed to avoid: a lowering of the lifestyle of paper money holders), deflation is considered even worse!
Japanâ€™s recent history shows the corrosive effects of deflation. After seeing its financial markets and other assets, like real estate, climb far higher in prices — too high to be sustainable, prices fell alarmingly back to their current market-clearing values. Since deflation results from falling prices, imagine how badly it affects manufacturers.
Of course, deflation is good for consumers, whose paper money will buy more food, gas and other consumer products. But who is in control in a capitalist society? Will governments do whatâ€™s best for consumers — or for their largest benefactors? And while inflation is bad, it does give the illusion of economic growth, so politicians can point with pride to growing economic statistics, even though the true value of production and value transferred between buyers and sellers diminishes over time. But who notices?
But since we all know that inflation is a really bad thing, central bankers raise interest rates to make credit more expensive, thus slowing the economy until prices stabilize. But can you imagine that the Federal Reserve will raise rates considering the mountains of debt existing now? We heard again recently that the savings rate among Americans is negative, at its lowest point since the Depression. Where would money come from to pay higher interest costs?
Of course, higher interest rates also support the value of the dollar. But with that option virtually off the table under threat of what higher rates could mean to consumers already up to their chins in debt (and the Federal government running a Ponzi Scheme of sorts, with borrowing money just to pay interest on past borrowings), the value of the dollar will be sacrificed over time. The best hope for the Federal Reserve now is that the fall of the dollar will happen slowly, as opposed to a sharp correction towards its intrinsic value of zero.
Buying hard assets like gold, silver and oil wonâ€™t be the easiest investments we make. Sharp corrections always happen along the way, combined with insipid talk from the financial media whose interest in moving stock prices higher is made difficult by higher commodity costs.
But is there any thing more likely to occur than the falling value of paper currencies, since history shows this happening with alarming consistency? If there is, I havenâ€™t seen it.
Have a great week, Bob
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.