Posts tagged gurus
Why I own gold…
Feb 10th
Why do people freak out so much when you tell them you own some gold in your portfolio? It’s as if you had just told them you killed a dozen people before lunch. The hyper-ventilation you hear from some when you even mention this topic is just nutty. It usually starts with some juvenile comment involving tinfoil hats. Then they pull out some quote from an economist (usually one that loves inflation to solve all problems) about how useless gold is. They may even hit you with the ol’ “gold is not a form of wealth but just a shiny metal” lecture (ignoring the bulk of human history, and all major central banks, that disagree with them). Then they tell you how “risky” gold is when their own portfolio may be loaded to the hilt with junk bonds, emerging market debt or other complicated investment products. They must think the Nigerian stocks they hold in their Frontier Market fund are a sure thing (assuming they even know what’s in the funds they own).
Well, I own gold and I admit it. I feel comfortable owning gold in my portfolio. I sleep well at night knowing I own gold even though it could drop in value. I understand that in a balanced portfolio gold is a useful tool. I trust gold to protect me in high inflation more than indexed linked bonds (TIPS) ever will.
Gold has no interest or dividends. I admit these things and acknowledge that this is one area that makes gold different than stocks and bonds. However, this does not make gold useless for diversification.
Gold maintains real purchasing power over time and it’s really good at doing this. No other asset on this planet has such a long history. I don’t worry about politicians printing trillions of dollars of gold. This is because politicians can’t print gold. Gold can also be owned directly without any obligations attached to it. These are unique attributes for an asset class when used properly in a portfolio (and properly does not mean 100% gold).
While gold does not have the interest or dividends of stocks and bonds, it has other benefits that can work at certain times to protect a portfolio that does hold stocks and bonds. Gold for instance does very well under high inflation when stocks and bonds do not.
Gold has risks just as stocks and bonds have risks. I understand what these risks are and how they fit in a diversified portfolio. Yet, I do not rely only on gold in a portfolio. I also own stocks and bonds to drive returns when gold is performing poorly. In diversification there is safety which is why I own all these assets and don’t get religious about it. I accept gold’s quirks because I know when it comes time for it to perform it will do so better than all its contemporaries.
The empirical evidence says that owning some gold in a portfolio is not the death sentence academic literature would suggest. In fact, at certain times having gold can be a tremendous help. So, either reality is wrong or the academic theories are. Given a choice between the two, I’ll take reality. That reality is that all portfolios should hold some gold for diversification against stocks and bonds despite what critics state. That’s why I own gold.
Strategize, analyze, optimize and lose money all with one tool!
Jan 25th
I just saw an ad on TV talking about TDAmeritrade’s new options trading tool. They had some hipster guy walking in with a bag full of groceries in his hand. He was very serious and lecturing about the need for strategy in trading. They then cut away to some other beautiful people talking about keeping up with the market first thing in the morning and watching some blinky lights on the computer monitor giving them information.
One lady looked intensely at a “heat map” that showed where the money was going that day. I thought she was playing Tetris but the commercial says this is part of the trading strategy. It looked more like a video slot machine, which I suppose it actually is in some respects, but it certainly wasn’t investing.
Well, it was just too much to bear so I took a quick look at what other pretty charts their software can make from their website above.
The “Heat Map” feature. Here you can see where the hot money for the day is going in the market so you can be the chump jumping in after everyone else and be left holding the bag:
TDAmeritrade's "Heat Map"
This chart is a representation of your money being sucked down a black hole by doing options trading:
Options Black Hole
The website says: “See a clearer picture of the potential profit or loss of your options trades.” Is this chart clear to you:
Options Huh?
Here’s a chart they left out:
Bad Option
That’s my projected returns on $100 for most options traders.
If the information in TDAmeritrade’s “heat map” and other technical indicators was worth anything, why would they be telling it to you? Why wouldn’t they use their secret insight into the markets and make a killing themselves? They’ll just have to be happy with their per-trade commissions while their options trading customers are pulling down the big bucks. I guess they’re just being nice guys.
I know people who lost their life savings trading options. Stay far away from this stuff.
Soothsayers…
Jun 7th
Market Gurus
I do get tempted from time to time to listen to an investing show even though I follow the Permanent Portfolio. Some shows feature investment advisors who have some neat strategies or ideas I hadn’t considered before. Further, I believe that some investment advisors can be useful for things such as informing you of more tax friendly ways to invest, estate planning, etc. Unfortunately, it seems many investment advisors are in the market predicting business and this type of advice should be ignored.
I was reminded of this today when a well-known market prognosticator was being interviewed and he rattled off all sorts of predictions about stocks, bonds, precious metals, currency exchange rates, etc.
I thought to myself: “How does this guy know these things before they’ve even happened?” Of course he can’t possibly know. He was just good at sounding confident that he knows.
After hearing this, I came inside and dug up a quote about market prognosticators from Harry Browne that I thought you’d enjoy. I found this quote in a great e-Book collection of his newsletter writings called: Investment Strategy in an Uncertain World:
…a prediction implies a certainty, a precision, that doesn’t exist in the real world. It encourages you to place a bet that can pay off only if the prediction turns out to be correct. Such betting is no wiser in the investment world than it would be elsewhere. The strange thing is that most people aren’t concerned with predictions in other areas of life. One sets goals, rather than predictions, for his income, personal relationships, and living conditions — and tries to satisfy his goals. But only a foolish individual places bets on the future — such as making a purchase based on a prediction of a higher income that will pay for it.
And yet, when one enters the investment markets, the first thing he does is to look for a fortune-teller, someone who can predict next year’s gold price. In other areas, the fortune-teller is an object of amusement. But nine out of ten economists and investment advisors attempt to make their reputations as soothsayers — and nine out of ten investors spend their lives trying to find the soothsayer who’s genuine.
Harry Browne’s Special Report – March 2, 1982
As quoted in: Investment Strategy in an Uncertain World
When people ask me what asset X, Y or Z are going to do my answer is always the same: “I don’t know.” This isn’t a very exciting answer, but it’s an honest answer.
My advice is to ignore fortune tellers in the investing world the same way you ignore them in other areas of your life. Instead, build a balanced and diversified portfolio and get out of the market predicting game. Your investment portfolio will be far better off and you’ll be a lot less stressed about your finances.