The Best Investment?

Keynes:  The market can stay irrational longer than you can stay solvent.

To see how various investments have fared is easy.  Just look in the rear view mirror.  In fact, the "rear view mirror" approach is a very popular investment approach.  What isn't generally appreciated is that it often ends badly.  Ask those that jumped on the dot.com bubble in 2000.

Let's consider some year-to-date returns:

TLT (longer term U.S. Treasury exchange traded fund): +20.79%
GLD (gold exchange traded fund): +29.02%
INTC (intel common stock):  -6.03%

Performance numbers are through 8/19 and were obtained from Morningstar.

The rear view mirror investor has it easy.  Go 50% TLT and 50% GLD.  This portfolio captures the rampant fear in the marketplace based on the dysfunction of global governments and the rise of anger over the continuing request for responsible parties to bail out the irresponsible.  This fear is what has driven the price of gold sharply higher and the yield on longer Treasuries to unprecedentedly low levels.

But what lies ahead?

Consider that the yield on the 10-year U.S. Treasury note is close to 2%. 2%!  Ten years!  Worth mulling over.  With governments having to borrow record amounts as far as the eye can see and rumblings about the possible inflation impact, some  hard reflection would seem to be in order.

Put against this the 4% dividend yield on Intel common stock and the liklihood that the dividend will be increased consistently over the next 10 years.  Furthermore, consider that the whole world wants every bit of personalized entertainment and information at its fingettips via its cell phone.

Of the 3 investment choices, which do you think will have the best performance over the next 6 months, 1 year, 5 years? 

Disclosure:  The above is for informational purposes only.  Investors need to do their own research and or consult a professional advisor before making investment decisions.

Buffett on Gold

Mich, at Beating the Index, presents some comments made by Warren Buffet on the difference between investing and speculating, specifically in reference to gold. Buffett relates the value of gold to real productive resources - the resources from which value is created. This puts the value in "real terms." Understanding economics requires looking at magnitudes in real terms. For example, forget inflation and the value of the dollar for a minute. How long does the average worker today have to work for an automobile or, say, 100 gallons of gasoline, or, for that matter, an ounce of gold?

Think back to '73/'74 and OPEC quadrupling the price of oil overnight. In effect, they were saying a U.S. auto was worth so many barrels of oil and then turning around and saying the U.S. needed to pay 4 times as many autos to get the same number of barrels of oil. Obviously the U.S. couldn't do that, especially in the short-run, and had a choice between paying them funny money, i.e. deflating the currency or going into a severe recession. We chose a combination of the two. Take a look at the inflation rate in the early '80s.

The same sort of analysis was done in the late '80s with respect to Japanese real estate. A square meter of land in parts of Japan was going for approximately $100,000! The sport du jour was comparing Japanese land prices to land prices in prime locations around the world. The end result wasn't pretty.

In his analysis, Buffett figures that all the gold in the world would amount to a cube 27 feet/side. It would be valued at approximately $7 trillion. Compare that to the value of farmland in the U.S., at roughly $2.5 trillion, and 7 ExxonMobiles along with $1 trillion left over. Buffett points out that you are comparing something pretty to look at with something that is productive. Gold is bought not because it is used to produce something valuable but because the buyer hopes someone else will come along and be willing to buy at a higher price.

In the end, Buffett chooses the farmland, etc., and Mich agrees. I agree also. What about you?

Is This a Bubble, or What?

Page 14, Journal of Financial Planning, January issue:

People are coming in to buy 50 or 100 coins at a time, which is pretty hefty for individuals, It is just not rich people , either. A lot of people are putting 30 to 35 percent of their net worth in gold, they are scared to put money in paper assets.

       Mark Oliari, chief executive of CNT Inc., a Massachusetts coin broker, New York Times