As it tends to do in tumultuous times, gold is once again shining brightly.
There was a sort-of Mea Culpa recently by one of my favorite financial authors, Jason Zweig, in the Wall Street Journal. Reflecting back on a comment made five years ago disparaging gold as an investment, he admits that the 10.5% annual return has since enjoyed made a hash of that prognostication. And while still urging caution he also offers up some valuable insights. Most important is a reflection on how diverse – and often contradictory – theories on why gold is being recommended at any given time.
At the opposite end of the “why buy gold” spectrum today was exemplified by a recent note from a less informed and more fanatical newsletter writer suggesting Now is the time to buy gold. As it tends to be in these politically extreme publications, the lack of logic is stunning. In the middle of July, a warning is sent about a bill introduced into the House of Representatives in March but now “redacted” (the correct word is “retracted”). But the bill could be reintroduced at some undefined time in the future, and if passed could cause the dollar to crash in value: so, Buy Gold Now. Why was there no recommendation to buy gold in March at less than $1,500 an ounce when there was actually a possibility of the bill passing? Why Buy Gold Now at $1,900 an ounce with that threat/justification gone?
“You can buy stock in companies that mine gold, or companies that sell gold. You can buy futures contracts and gamble on the direction of gold prices without ever taking ownership of anything physical. And, of course, there are mutual funds and exchange-traded funds – some own real gold, others just paper proxies and still others holding both.”
More worryingly over the short term is the simple statistic that one year ago exchange-traded funds held $118-billion in assets and today those same gold ETFs hold $215-billion. That represents a lot of new gold owners buying at a time of record-high prices. Now, just for grins, I offer up a couple of paragraphs from an Invest-Notes blog post on August 4, 2014, discussing some thoughts around asset allocation. This was prior to Zweig’s disparaging comments on gold as an investment:
Perhaps the easiest way to demonstrate this concept is gold.
You can just buy physical gold as bars, coins, or jewelry. You can buy stock in companies that mine gold, like Newmont (NEM) or companies that sell gold, like Tiffany’s (TIF). You can buy futures contracts and gamble on the direction of gold prices without ever taking ownership of anything physical. And, of course, there are mutual funds and exchange-traded funds – some own real gold, others just paper proxies and still others holding both.
However, when gold finds itself out of favor, all of these “diversified” assets will decline in value. In the last ten years, the price of an ounce of gold has been as low as $400 and as high as $1850. Gold has lost nearly a third of its value in the last 18-months. TIF was clearly an outlier in the list above, yet it has seen its share prices move between $19 and $100 over the same time.”
(A quick update; last ten-year pricing for an ounce of gold $1000 to $1,900. For TIF the stock price has been $38 to $138.)
Gold is simply a diversifier that can easily fit into most portfolios in a number of different forms but should be kept to a single-digit percentage of your overall holdings. Personally, I’ve got a couple of dozen gold coins purchased over the last twenty years, and there’s usually a junior gold mining stock somewhere in my equity portfolio. In fact, gold coins like the $20 Saint Gaudens are gorgeous as a physical object and could be classified as either a commodity or an artwork – depending on how specific you get with your asset allocation preferences. More important is knowing that successful portfolios tend to be built over time and rarely by making big additions (or sudden reductions) based on the latest shout-out from the crowd.
Finally, for your consideration, in Investnotes #5 from November 13, 2007:
One of the most successful family dynasty’s of all time, the Rothschild’s, have followed a very simple formula for diversification that has proven robust for over 400 years. There is a benefit to working with this model, even if just as a mental exercise, because it allows for considering the bigger picture. It is too easy to look at a stock portfolio or collection of rental houses while overlooking the many other things of value that are owned, or that can help create a truly diversified collection of assets.
1. One-third in cash; this includes equities, bonds, mutual funds, foreign currencies, certificates of deposit, and pretty much everything else represented by paper.
2. One-third in real estate; this includes a primary residence(s), vacation home(s), income-producing property, and raw land.
3. One-third in art and antiquities; this includes not just paintings and Greek pottery, but jewelry (think gold, precious gems, wedding rings, and wristwatches), furniture, fine china and flatware, and pretty much any object that has a market value.”
|Successful investing is almost always a result of critical thinking and patience. When you decide to purchase any financial investment the reasons you would sell are just as important as why you are buying.|
An unfortunately common story heard from investment managers is about the tendency for people to panic during market drops. The problem is multifaceted with otherwise sober investors suddenly trying to time the market, taking losses on stocks, giving up dividend income and possibly generating unnecessary tax bills. And when the panic ends? How to determine when to start purchasing equities again, yet another opportunity for market timing – an activity long demonstrated to be harmful to your portfolio.
This is not to say an investor should never sell, just that any decision to make changes in the holdings of a portfolio should be a result of planning, done deliberately and with intention. Not during a time of emotional and financial stress. And while tax implications don’t apply to IRA or other retirement accounts, we must still be mindful of what an unrealized gain means.
So, let’s do a thought experiment today. We’re going to look at a gold coin (let’s make it a one-ounce American Gold Eagle) and ten shares of Apple stock (AAPL). Let’s assume that these assets are in a retirement account that is unlikely to see any withdrawals for another decade. Today that gold coin is worth about $1,450, and the ten AAPL shares around $2,000. Now for the fun…
In 2016 that gold coin was valued at $1,100, but in 2011 it was about $2,000. It is the same coin and has never been removed from the safe deposit box since 2006 when you originally purchased it. With a current value of $1,450, have you made $350 or lost $550? Yes, a trick question, since you only paid $600 for that American Gold Eagle in 2006. Same with AAPL; in 2016 the ten shares were worth about $950 and in 2012 they were worth $750. But in 2006 you paid $150 – yes, one hundred and fifty dollars for ten shares.
In summary, for both the coin and the stock over the last ten years each has been worth more and less than their value today. Selling in a panic could mean you create a tax liability further diminishing any gain. In a taxable investment account, if you sell the coin or the stock you immediately owe tax on any gain but can deduct any losses against profits from other equity sales. In a retirement account, you don’t owe taxes, but if you sell at a loss, you cannot use that loss as a tax credit to offset other winners. In theory (and real-life) you can buy a stock, sell it for what you paid for it, and still lose money. Or take big losses that can’t be used to offset profitable trades.
Until you sell an asset it is only worth whatever anyone will pay for it. Gold has demonstrated an ability over very, very long periods of time to be an asset that holds its value. Consider that Benjamin Franklin wrote that in his lifetime an ounce of gold would buy a very nice suit. And a bespoke suit can be had today for $1,500. Holding gold in your portfolio is a way to preserve wealth rather than create it.
As for AAPL, well, the first iPhone was sold in 2007 spurring a revolution in communication that led AAPL to become (on-again, off-again) the most valuable company on the planet. But whether a share costs $12 or $200, it still represents only a minuscule ownership stake of a publicly held company that has demonstrated a highly volatile price history. AAPL has also shown, that like the overall markets, while the water is often choppy, it has historically gone up more than it has gone down and continues to seek a higher level. A poor earnings report can mean a dive in the value of individual shares but is as likely to be temporary as not. Until such time as AAPL begins to underperform consistently or suddenly faces formidable competition, a snap decision to sell could prove to be an expensive mistake. AAPL is in your portfolio with an eye towards making a profit.
Whether either investment should have a place in your collection of assets is determined by your goals. And when you decide to purchase any financial investment the reasons you would sell are just as important as why you are buying. Successful investing is almost always a result of critical thinking (don’t panic as markets move dramatically up or down) and patience (it’s a marathon, not a sprint). Heaven is not the day after tomorrow.
|“Avoid the unforced error, nail the basics and don’t take outsized risks” might be the best advice the individual investor can follow.|
An often-underestimated influence on equity and bond markets is the heavy hand of luck. Frankly, you can do everything “right” and still get bad results. And since luck can’t be controlled, knowing how to react – whether that luck initially appears to be good or bad – can separate winners from losers. But just because something can’t be controlled doesn’t mean it can’t be managed.
We all know bad things happen that are beyond our control to foresee or influence. Fires, floods and financial crisis come to mind. So we buy insurance, avoiding home purchases in areas prone to flooding and create investment portfolios that are well diversified with a healthy dose of cash savings. But what else?
One of the best thinkers on this subject, and a terrific writer to boot, is Michael Mauboussin. The man knows how to think about how we think – especially as it relates to investing. I read his terrific 2012 book, The Success Equation, when it first came out. Subsequently, the opportunity to hear him talk about his book in person helped to clarify some of his more nuanced arguments and observations.
One of the many surprises that will be found in The Success Equation is an important reason why individual investors should look to exchange-traded funds as their best bet to achieving financial goals when using the stock markets. Discussed in many posts here at Invest-Notes, by choosing to invest in indexed funds smaller investors earn the market averages over time with much less risk or cost than owning individual stocks or traditional mutual funds. Remember, for as long as equity markets have been measured, they have gone up more often than they go down.
Let the Big Dogs Bark at Each Other Instead of You
As noted recently in The Economist, 70% of U.S. stock markets are now owned by large institutions like Blackrock, Vanguard, Fidelity, pension funds and hedge funds. That percentage was just 35% in the 1980s. This means the self-described investment professionals are competing against each other more fiercely than ever before. As Mauboussin intriguingly suggests, the more skill involved in a competition the bigger the impact of luck on the outcome.
As a reality check, the following is from the prospectus of an initial stock offering (IPO) for a high-tech company that went public in March of 2017. Hyped by many, including the original investors then in a position to sell their much-appreciated shares, this quote sounds like a fair warning in my books, “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.” But if this is such a great investment, why would the private owners want to sell their stock in the company? If you had purchased shares at the IPO, you paid the original investors around $26 per share. Your investment is now worth about $13. So, as two of the biggest money-losing companies on the planet begin selling shares, no names but they provide ride-sharing services, best to avoid this ride.
By being honest and observant about the outcomes of our investment strategies – repeatedly and over time – we can create mental models that help anticipate the unexpected (to minimize risk) while expanding opportunities (to maximize upside). You can easily improve your overall return just by minimizing costs like fees and commissions (nail the basics). You can stay calm and remain inactive during times of great stress (avoid unforced errors). You do not have to go head-to-head with the pros (no outsized wager on a hot stock tip).
As Rudyard Kipling noted a century ago, just ”…keep your head when all about you are losing theirs…”
More on… “The Success Equation”-Michael Mauboussin:
|”Those looking at art purely as an investment might first consider looking elsewhere.” -Melanie Gerlis|
The last line in a thoughtful book by Melanie Gerlis, Art as an Investment?, does not do her work justice, “Those looking at art purely as an investment might first consider looking elsewhere.” In fact, she makes a cautious case for those interested in fine art who also have an interest in investing. But first, full disclosure since I am biased. Both fine art and antiquities constitute a meaningful portion of my investment portfolio. As I write this note, works by Max Beckmann, Chuck Close and Sol Lewitt surround me. A visit to the San Antonio Museum of Art will find a dozen Egyptian antiquities from our collection on display.
Another quote to provide some context for the following conversation comes from another great read, The Value of Art by Michael Findlay, “A collector has one of three motives for collecting; a genuine love of art, the investment possibilities, or its social promise” (quote by Emily Hall Tremaine). Anyone not meeting all three criteria is unlikely to enjoy the rest of this note.
Gerlis undertakes a laudable enterprise by comparing artwork acquired for investment purposes with other asset classes. An editor for The Art Newspaper, she is a knowledgeable commentator on the business of art. Her book makes one-on-one comparisons of fine art to; equity markets, gold, wine, real estate, hedge funds and, intriguingly, luxury goods such as jewelry and watches. By defining each investment’s attributes – such as market transparency, liquidity, market makers, and valuation metrics – she creates a context useful in determining the differences between these investment options.
We’ll focus on the world of fine art starting from a time around 1850. However, a caveat is in order here since the art market is a complicated subject and rather than try to qualify remarks that obviously have exceptions (most of them), let’s just assume that all comments below are, “generally speaking.”
The quick and the dead in art.
Following Gerlis, it seems appropriate to use metaphors taken from the world of investing herein. Conceptually there are two distinct markets with an important overlap. On the one hand are dead artists, the majority of which have some standing in the cannons of art history and criticism. Then there are the living artists whose reputations will evolve for better and worse, as should their artistic output, over a lifetime. In between are the few long-living artists who have achieved accolades likely ensuring their place in history. This can be viewed similarly to that of value and momentum stocks, assuming a gray zone here as well.
Value artists would include names like Cezanne, Pollock, Warhol and, of course, Picasso. Like a big established multinational corporation, the price of the art will fluctuate over time, but there is an expectation of enduring intrinsic value. Both the equity and art markets experience good and bad times, but the trend over long periods is upwards. Categories having demonstrated value over time include Old Master and Impressionist works. The place of post-WW II abstract expressionists also appears to have been firmly established, with Pop Art probably not too far behind. However, much like gold, art tends to maintain value over time, also contributing to the value in art. Paintings, in particular, have a curious tangential value as insurance. During times of crisis, paintings can be quietly transported across borders, their value not being linked to any particular currency, unlike real estate or some equities.
Momentum artists, on the other hand, remain an unknown entity as far as their long-term valuations are concerned. A look at the dot-com stock era is a good context for thinking about contemporary art – where hopes and dreams intersect with savvy marketing to create the “next big thing.” Or not. As one professional dealer put it, the worry is whether a work of art is even worth displaying five years from now.
With the rise of mega-dealers like Gagosian and Zwirner, who make a lot more money than many of the artists they represent, the hype is an ever-present danger. We hear about the unknown artist who finds their work suddenly fetching high prices at auction, but not their peers watching prices drop in the same market space. The books listed at the end of this essay give many examples of just how far a new superstar can fall. And how fast. There is a difference between a fad and a trend. Fads come and go, often with little in the way of residue. Trends are indicative of long-term shifts in taste or behavior. People generally tend to “get” Impressionist paintings. Not so much with “video art.” With contemporary art, the winner can more often be the dealers rather than the artists.
Currently, there is much conversation – and sales activity – being defined by issues unrelated to the value in art. Contemporary art originating in the Middle East and Latin America are hot art commodities right now even if their shelf life is unclear. A decade ago contemporary Chinese art was a market darling, just as the Aboriginal art of Australia had been twenty years before that. On the cutting edge in trendy art markets like New York is work by the alternative lifestyle crowd who now enjoy accolades instead of opprobrium for being LGBTQ. There is also a geographic risk when discussing a “local” artist as these tend to more often be about the person instead of their art. So, what is the value in art?