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An interesting article published by Warren Buffet argues that stocks are the safest type of investment over the long run:
Why Stocks Beat Gold and Bonds
There are a lot of BS articles in finance, but I find the rationale for this to be particularly sound. The fundamental thesis is based on how risk is perceived and defined for a typical investor:
"The riskiness of an investment is (measured) by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk."
By his definition, zero beta assets such as cash, money-market funds, bonds, etc. are actually more risky due to the potential loss of purchasing power over time. They become by definition depreciating assets in low rates, high inflation environments. For people who are familiar with the basic concepts of investments, this is nothing new.
I find his second argument against holding non-growth assets such as Gold particularly interesting:
"Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
...
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
I feel a lot of people who are buying gold today do not understand this. It is not a real investment as it does not grow. Its value correlates heavily with general market sentiment, the fear of regime collapse and inflation. I don't think the demand for inflation hedging argument can justify where gold is priced at today. There are other forms of real assets such as real estate that do just as well during high inflation, and are relatively cheap resulting from the collapse of the housing bubble. For investors who have a longer term investment horizon and are not in need of immediate liquidity in the portfolio, it makes very little sense to invest in gold compared to growth assets.
Of course, all these arguments rely heavily on the assumption that the holding period is long term. The goal is not to time the market, but to increase long term purchasing power.
P.S. I should probably contrast this article with an opposing argument for the sake of completeness:
Why are the Chinese Buying Gold?
  
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No one buys gold as a long term investment. It's used as a secure guarantee of value during times of great market volatility. You buy gold or Treasury bonds when the opportunity costs of leaving your money in those safe investments don't put you at a disadvantage as compared to purchasing stocks or bonds.
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On February 10 2012 01:44 pebblebeach wrote:
No one buys gold as a long term investment. It's used as a secure guarantee of value during times of great market volatility. You buy gold or Treasury bonds when the opportunity costs of leaving your money in those safe investments don't put you at a disadvantage as compared to purchasing stocks or bonds.
I wouldn't say no one as there are institutions who started to use gold as a part of their strategic allocation... There are certainly many individuals who think it's a smart long term investment... It's basically like putting money under the mattress when you don't have faith in the money holding up in value over time.
I don't believe gold to be a safe hedge during great market volatility though, as its own prices can fluctuate quite a bit that's not correlated with purchasing power whatsoever.
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I'm of the opinion that property/real estate is always the safest long term investment.
It's almost impossible to lose money if you do your homework and manage your property intelligently.
There will always be risk in the stock market. And there is definitely risk in real estate, but in my experience (even after taking a big loss on my first house when the bubble popped) property always represents positive cash flow.
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On February 10 2012 02:05 MrBitter wrote:
I'm of the opinion that property/real estate is always the safest long term investment.
It's almost impossible to lose money if you do your homework and manage your property intelligently.
There will always be risk in the stock market. And there is definitely risk in real estate, but in my experience (even after taking a big loss on my first house when the bubble popped) property always represents positive cash flow.
I'd be careful here. Private properties don't generate any cash flow. When people talk about real estate investment, they are talking about commercial/rental properties that generate rent on a consistent basis. Rent over the long run should converge with inflation, and the underlying building as well. The rental income makes it a growth asset compared to gold, where only the underlying asset converges with inflation without any cash flow.
The risk is of course the loss of occupancy due to deteriorating economic/market conditions, coupled with the relatively expensive fixed cost of maintaining a property will bring down the value of the investment significantly, similar to stocks and other risky investments.
In terms of private housing, even though it is not a true growth-asset, the demand for houses will always be there, whereas the same can't be said for gold, where the only tangible demand is jewleries (and maybe a tiny bit of industrial production), which accounts for only a small fraction of the gold market.
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On February 10 2012 02:10 Glacierz wrote:Show nested quote +On February 10 2012 02:05 MrBitter wrote:
I'm of the opinion that property/real estate is always the safest long term investment.
It's almost impossible to lose money if you do your homework and manage your property intelligently.
There will always be risk in the stock market. And there is definitely risk in real estate, but in my experience (even after taking a big loss on my first house when the bubble popped) property always represents positive cash flow. I'd be careful here. Private properties don't generate any cash flow. When people talk about real estate investment, they are talking about commercial/rental properties that generate rent on a consistent basis. Rent over the long run should converge with inflation, and the underlying building as well. The rental income makes it a growth asset compared to gold, where only the underlying asset converges with inflation without any cash flow. The risk is of course the loss of occupancy due to deteriorating economic/market conditions, coupled with the relatively expensive fixed cost of maintaining a property will bring down the value of the investment significantly, similar to stocks and other risky investments. In terms of private housing, even though it is not a true growth-asset, the demand for houses will always be there, whereas the same can't be said for gold, where the only tangible demand is jewleries (and maybe a tiny bit of industrial production), which accounts for only a small fraction of the gold market.
Obviously you're not going to generate cash flow with your personal residence, but if you buy intelligently, and upgrade accordingly, you will add value to your home.
And for other investment properties (I manage 7) yes, certainly there is risk when it comes to losing renters, but this is no different from any other kind of business.
Take care of the people that rent from you, be fair, keep up with the market, and you should be able to keep it in the green.
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intrigue
Washington, D.C9933 Posts
a newbie question - what does it actually mean to invest in gold? are you getting physical pieces of metal that are redeemable, or is it going into the industry, etc. i can't see how gold would be a good long term investment, unless the market is constantly going crazy.
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On February 10 2012 02:43 intrigue wrote:
a newbie question - what does it actually mean to invest in gold? are you getting physical pieces of metal that are redeemable, or is it going into the industry, etc. i can't see how gold would be a good long term investment, unless the market is constantly going crazy.
Technically speaking, you can't invest in gold if you're American, but that's semantics at this point.
nm I am an idiot.
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On February 10 2012 02:43 intrigue wrote:
a newbie question - what does it actually mean to invest in gold? are you getting physical pieces of metal that are redeemable, or is it going into the industry, etc. i can't see how gold would be a good long term investment, unless the market is constantly going crazy.
Who better to answer this question than gold's number one poster boy Ron Paul!
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People who buy gold are retarded. Plain and simple.
User was warned for this post
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Properties are always good, especially in a place like India, where population keeps growing and land available keeps shrinking...the value of land multiplies unlike anything else over time. But as other people mentioned, it is not the easiest to get rid off when you want fast cash.
Gold is a bit more stable that stocks..but gains arent that high..and gold is always useful(social etc)....and it's instant cash.
I think it also depends on the country your in.
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On February 10 2012 03:08 See.Blue wrote:
People who buy gold are retarded. Plain and simple.
but who wouldn't want a sick pile of gold bars...
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I think investment in gold can be "ok" in a well-diversified portolio as a long-term investment, as it can serve its purpose albeit minimally.
Otherwise, if you're going to buy lots of it and speculate, you better know what you're doing.
I get what Buffet is trying to say. But it's an analogy that doesn't work for many reasons. Buffet is a genius and a personal hero of mine, but I think this should be taken more like a whimsical old wise man thinking outloud. He's at the point where he thinks about markets as a whole, while most people are merely thinking about advancing (or retaining) their financial position as an individual.
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On February 10 2012 02:43 intrigue wrote:
a newbie question - what does it actually mean to invest in gold? are you getting physical pieces of metal that are redeemable, or is it going into the industry, etc. i can't see how gold would be a good long term investment, unless the market is constantly going crazy.
Most investors would buy gold ETFs, which are designed to track the prices of gold. There aren't that many places that allow you to buy physical gold, plus storing them incurs a pretty high cost (I'm assuming you need to have a safe deposit box just for a very small amount), which can even be argued as negative cash flow.
There will always be uncertainties in the market, some more pertinent than others, but that's not a reason to stop buying stocks and dump everything into gold over the long run.
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I think it's easier to think of gold as a type of currency, it's basically the medium of exchange when the US was under the Gold Standard. Investment in gold is mostly speculative, just as making a play on any currency. You don't expect it to generate income, you are basically trading off the macroeconomic developments around the world.
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On February 10 2012 02:38 MrBitter wrote:Show nested quote +On February 10 2012 02:10 Glacierz wrote:On February 10 2012 02:05 MrBitter wrote:
I'm of the opinion that property/real estate is always the safest long term investment.
It's almost impossible to lose money if you do your homework and manage your property intelligently.
There will always be risk in the stock market. And there is definitely risk in real estate, but in my experience (even after taking a big loss on my first house when the bubble popped) property always represents positive cash flow. I'd be careful here. Private properties don't generate any cash flow. When people talk about real estate investment, they are talking about commercial/rental properties that generate rent on a consistent basis. Rent over the long run should converge with inflation, and the underlying building as well. The rental income makes it a growth asset compared to gold, where only the underlying asset converges with inflation without any cash flow. The risk is of course the loss of occupancy due to deteriorating economic/market conditions, coupled with the relatively expensive fixed cost of maintaining a property will bring down the value of the investment significantly, similar to stocks and other risky investments. In terms of private housing, even though it is not a true growth-asset, the demand for houses will always be there, whereas the same can't be said for gold, where the only tangible demand is jewleries (and maybe a tiny bit of industrial production), which accounts for only a small fraction of the gold market. Obviously you're not going to generate cash flow with your personal residence, but if you buy intelligently, and upgrade accordingly, you will add value to your home. And for other investment properties (I manage 7) yes, certainly there is risk when it comes to losing renters, but this is no different from any other kind of business. Take care of the people that rent from you, be fair, keep up with the market, and you should be able to keep it in the green.
Tough to do, unless you make a lot of money IMO. Most people get a mortgage to pay for their house, so they inevitably end up paying significantly more than what the house is worth due to interests. Sometimes literally twice the price of the damn thing.
Then, like you mentioned, bubbles. Right now I want to move to Montreal but they're constantly talking about the "bubble" there, which is supposedly about to pop.
Making money off of real estate requires a lot of liquid money... Anyway, it seems to me.
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On February 10 2012 04:05 Djzapz wrote:Show nested quote +On February 10 2012 02:38 MrBitter wrote:On February 10 2012 02:10 Glacierz wrote:On February 10 2012 02:05 MrBitter wrote:
I'm of the opinion that property/real estate is always the safest long term investment.
It's almost impossible to lose money if you do your homework and manage your property intelligently.
There will always be risk in the stock market. And there is definitely risk in real estate, but in my experience (even after taking a big loss on my first house when the bubble popped) property always represents positive cash flow. I'd be careful here. Private properties don't generate any cash flow. When people talk about real estate investment, they are talking about commercial/rental properties that generate rent on a consistent basis. Rent over the long run should converge with inflation, and the underlying building as well. The rental income makes it a growth asset compared to gold, where only the underlying asset converges with inflation without any cash flow. The risk is of course the loss of occupancy due to deteriorating economic/market conditions, coupled with the relatively expensive fixed cost of maintaining a property will bring down the value of the investment significantly, similar to stocks and other risky investments. In terms of private housing, even though it is not a true growth-asset, the demand for houses will always be there, whereas the same can't be said for gold, where the only tangible demand is jewleries (and maybe a tiny bit of industrial production), which accounts for only a small fraction of the gold market. Obviously you're not going to generate cash flow with your personal residence, but if you buy intelligently, and upgrade accordingly, you will add value to your home. And for other investment properties (I manage 7) yes, certainly there is risk when it comes to losing renters, but this is no different from any other kind of business. Take care of the people that rent from you, be fair, keep up with the market, and you should be able to keep it in the green. Tough to do, unless you make a lot of money IMO. Most people get a mortgage to pay for their house, so they inevitably end up paying significantly more than what the house is worth due to interests. Sometimes literally twice the price of the damn thing. Then, like you mentioned, bubbles. Right now I want to move to Montreal but they're constantly talking about the "bubble" there, which is supposedly about to pop. Making money off of real estate requires a lot of liquid money... Anyway, it seems to me.
There's definitely a difference between buying a house to live in and investing in real estate. Most investors take loans to buy commercial properties too, it's just a form of leverage like everything else.
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Whenever someone comes to me at work with a trade idea, the first time i ask them is "what is your time frame?"
It is true that if you have a time frame of 20 years or more, then intelligent stock picking for longevity is certainly the way to go, as you are exposed to basically beta of human progression
But to a trader like me, even something like a few weeks is "long term", so it all depends...
If you're talking about a few years, stocks are not the safest investment by any means
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EPT
