Well, I'm back. I hope you will forgive the long absence as my wife coordinated a wonderful and extended weekend for my birthday. Let's start where we left off.
In my last post, I discussed precisely why I saw gold as a good investment. Let me state plainly that I do not believe you should make gold your entire portfolio. It should be used in concert with other appropriate investments. That being said, how does one go about investing in gold? Should we go door to door and offer cash for old and/broken jewelry? Should you buy gold coins and bury them in your back yard? I have heard a lot of strange ideas and strategies. Here is what I think is the best way to take advantage of inflation.
There are ETFs (Exchange Traded Funds) and gold funds out there that allow you to invest in a fund that owns actual gold. I think this is a viable way to invest in gold and certainly has its place in your portfolio. I also think that you should invest in gold mining companies. While a downturn in the market would most certainly drag down gold stocks as well, eventually, the company's earnings would reflect the higher price in gold and the company's stock would eventually rise to reflect their higher earnings. Wall Street pays a multiple for earnings. Basically, this means that we can make more by owning company's that produce gold rather than owning the gold itself. Now, there are inherent risks with owning a company rather than the gold itself. However, both investing strategies can be useful and should be deployed. For specific companies or funds, email me directly and I will point you in the right direction.
I received a call from a really frustrated client today regarding the overall market. This individual was frustrated that many of our stocks were not performing as well as the overall market. I have to admit, I share this frustration and this phone conversation threw me into an afternoon of thought and introspection. I came to this: when we see insanity occurring, we must abstain from joining the party. This market has exploded in the past two years despite record unemployment and spectacularly out of control government spending. The endless pump of government money into this market has skewed the reality. I have sat and watched companies like Netflix endlessly rise despite the fact that their earnings are no where close to justifying their share price. I firmly believe that we are in the middle of another asset bubble that has been created by easy money. I will forsake short-term gains for long-term security and so should you. We must focus on quality companies, preferably those paying dividends, and investments that will protect us from inflation. We must not be tempted and coerced into chasing performance. We must stay disciplined and stick with the fundamentals. I learned this lesson 4 years ago while I was doing market research with a finance professor. At the time, the market was at all time highs and most pundits were arguing it was going higher.
"This is not the Tech-Boom. This bull market is fueled by earnings. Earning multiples are still conservative and this market is going much higher."
Sound familiar? I, along with the help of the good professor, began researching this very statement and inadvertantly stumbled on some alarming facts. We could not argue with the record earnings that company's were posting at the time. We wanted to know where the earnings were coming from. We found that the overwhelming amount of new jobs that had been added to the economy over the past 7 years were directly due to the real estate market. Banks and financial firms were making record profits, the overwhelming majority of which were from real estate loans and the various mutations thereof. Everyone and their mother was making up to 100% of their normal income by flipping a house or two. How many of you know someone who purchased a boat or a car by refinancing their home? The point is that nearly every aspect of the economic boom was directly attributed to the housing market. At that time, the housing market was appreciating by nearly 20% a year. History showed us that this was completely unsustainable and would come to a disastrous end. I promptly liquidated every investment that my wife and I had at the time (except our gold stock!). I even met with a portfolio manager at the mutual fund company that I worked for at the time and shared with him my findings. I was brushed off and told that nobody can time the markets and earnings were healthy. Within the next year the market had fallen nearly 50% and the whole financial system hung precariously by a thread. I don't tell this story to proclaim my financial genius but rather to point out the irrational exuberance that almost always accompanies a rising stock market.
History is repeating itself. Consumers are in bad shape. Most of our homes are underwater. Unemployment is really near 17% (I will explain this statement and the unemployment rate in a later post). High oil, sugar, wheat, coffee, and corn are putting an additional strain on our budgets. Rising interest rates are on the way. So, why is the market going up? What has changed? The fed is pumping money. It can't continue forever. Be VERY careful and keep an unusually high amount of cash in your portfolio. Eventually, the fundamentals win out. Some argue that the government can continue pumping and "stimulating" this economy back to health. I will leave you with a quote from a man who was much smarter than I--
"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." - Winston Churchill
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