Stocks vs. Precious Metals vs. Bonds vs. Real Estate

I have this theory that the stock market basically exists to lets a small group of insiders cash out quickly the lifetime POTENTIAL value of the future company profit, leaving the stockholders holding the bag for all the years or decades of risk and opportunity cost. Thus I think the long-term hold strategy does not pay. Speculation gains from "greater fool" waves generate real gains only for those who have the discipline to buy low and sell on near-term peaks. The degree of risk (speculation), will correlate to the degree of real gain and also the frequency of failure. A speculator who stays in the game long enough, eventually sees a big payoff, but due to their very nature that allowed them to stay in the game, they may not cash out before their luck runs out again.

I set out to start some preliminary research on whether this theory is true or not. I know Warren Buffet has mentioned Coca-Cola (NYSE:KO) as one of those type of companies he likes to buy and hold (forever is his preferred holding time). Yahoo Finance reports the share price was 1.98 on January 2, 1962. I plugged this into the ShadowStats.com Inflation Calculator (using the SGS adjustments for correctness), I see the inflation adjusted price as of Sept, 2008 is $41.25 ($14.44 for incorrect BLS inflation). I see the share price today hit $41.50.

So all the price gains in Coca-Cola stock since 1962 have been due to inflation. No stockholder has made a real inflation-adjusted penny in equity in Coca-Cola in 46 years. I have read that Coca-Cola pays a dividend of about 2 - 4% per year, which I bet just about has kept up with world population growth since 1920. The point being that the investment would take about 25 years to double, adjusted to inflation.

Gold since it was un-pegged from a govt mandated price in 1971 of $40.80, has a inflation adjust price as of Sept. 2008 of $640, yet recently gold has been between $750 to $950. However, a 3% inflation adjusted annual yield would be $1911. So clearly gold is under performing Coca-Cola thus far.

Thus clearly Coca-Cola has thus far been a superior investment than gold, yet Coca-Cola still has not been a fabulous investment so far during my lifetime. But physical gold in my hands, has less risk than Coca-Cola, because it can't nationalized, frozen, nor debased with hyperinflation. I pay for this lowered risk, by expecting gold not to yield anything but keep pace with inflation, which it has done.

But when the govt is hyperinflating, as they are now, then precious metals should out perform every other investment class, because gold will always pace with the inflation (over a long enough window of time). Hyperinflation means hyper gains in gold relative to other asset classes. In a true deflation, where the value of fiat is increasing (supply of fiat is decreasing and/or demand increasing), then gold could decline in value, but we by no means have that, as all major fiats of world are being debased at double-digit rates, and demand for dollars should decrease precipitiously as global trade in dollars abates.

So one aspect of my initial thesis is dubious, in that buy & hold works for stable large caps, but I was correct that it is not very lucrative. It is like being average in society. And gold is an even better buy & hold asset during times of hyperinflation (when inflation is not successfully obscured from the general public). And regarding stocks, the only way to get ahead of average is by being earlier in wave of influx into a stock, or by owning a company that truely grows faster than people expected it to when you bought it. Who is smart enough to pick these stocks and who is just riding the wave or creating their own waves? I think it is instructive to view a stock promoter's performance on all his/her picks, not just while he/she held them but what they did after he/she sold them. A good performing (low risk, high reward) pick would be one that continues to significantly outgrow inflation even after sold by the promoter, not one with a stock price that returns to below the price the promoter initially recommended buying. And this is the metric by which I will judge any person who promotes stocks. I think it will be very sobering for me.

Shelby wrote:...I think it is instructive to view a stock promoter's performance on all his/her picks, not just while he/she held them but what they did after he/she sold them. A good performing (low risk, high reward) pick would be one that continues to significantly outgrow inflation even after sold by the promoter, not one with a stock price that returns to below the price the promoter initially recommended buying. And this is the metric by which I will judge any person who promotes stocks. I think it will be very sobering for me.

This is to combat the Gambler's Fallacy:

http://skepdic.com/gamblers.html

...gambler's fallacy is the mistaken notion that the odds for something with a fixed probability increase or decrease depending upon recent occurrences...

In other words, some years ago there were, as there always are in any given point in time, there were many people making many varied bold predictions and investments, different from each other, but overall covering the gamut of possible outcomes. As is always the case for "hole in one" type boldness, most of them failed, but there are always in any given outcome, a few who got lucky, maybe even made $millions and started to believe them self to be omniscient. Such a deluded gambler will likely deny his/her lack of omniscience until the over-time average odds of the casino have humbled the gambler into destitution.

Caveat emptor.

Watch the video, and keep your eye on the ball, if you can:

http://www.free4him.org/dougblog/?p=306#more-306

The ties into my prior 2 posts in this thread.

Btw, I failed the test, because I let my emotions get involved, as you will see. Maybe also because I only have vision in 1 eye.

I think this explains why people missed this credit implosion, and continue to miss how much worse it will get.

Thanks to Jeremy for posting this to the Hommel forum, wish he had posted in this forum as well.

Shelby wrote:Watch the video, and keep your eye on the ball, if you can:

http://www.free4him.org/dougblog/?p=306#more-306

The ties into my prior 2 posts in this thread.

Btw, I failed the test, because I let my emotions get involved, as you will see. Maybe also because I only have vision in 1 eye.

I think this explains why people missed this credit implosion, and continue to miss how much worse it will get.

Thanks to Jeremy for posting this to the Hommel forum, wish he had posted in this forum as well.

You beat me to the punch. i just signed in to post this.

http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25119820

I programmed that rule automatically into http://Miningpedia.com, but the problem is that our projections may be wildly inaccurate in either direction. The more stable the business, then usually the lower the standard deviation of the forecast, but also usually the higher the P/E ratio and thus already fully valued and perhaps only keeps up with inflation in the case of Coca-Cola example:

http://goldwetrust.up-with.com/general-f1/stocks-vs-precious-metals-vs-bonds-vs-real-estate-t11.htm#17

So again I maintain as in the linked post above, we rarely beat the market, and we do not get ahead in stock market, we just ride the population growth rate and inflation. Only investors who buy based on inside or intimate knowledge of a business, typically do better over the long-haul, e.g. Warren Buffet.

Face it, we are mostly just speculators, gambling with the money we made from our brow in real work.

Btw, I assert it is this reality of risk, and hard work it takes to invest to be better than average, that drives so many people to bonds (usury), which is what drives a paper fiat economy via credit and eventually into the ground every 100 years or so. There have been 100s of paper fiat currencies, and they all ended up at their intrinsic value of zero after usually much less than a few decades. This is a sad fact of reality of the way economics works and some people even have a religious slant on that (but let's not go there as that is not focus of this forum).

Warren Buffet's major holdings all depend on favors from the establishment, so you can ignore everything he is saying lately because he is forced to say these things in order to keep the establishment happy.

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aMFK0L7_PtRA

..Wells Fargo & Co., Berkshire's No. 2 investment...

http://www.nypost.com/seven/11182008/business/governments_cant_handle_global_run_on_go_139306.htm?page=0

...investigate whether some government officials who formerly worked at Goldman let their "relationships" cloud their judgment during the merger of Wells Fargo and Wachovia...

...Specifically, Grassley is concerned about a tax code change that paved the way for the acquisition of Wachovia by Wells Fargo...

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aMFK0L7_PtRA

...American Express Co., the credit-card company that is one of Berkshire's top 10 stock holdings..

Didn't American Express just recently get special permission from the govt + Fed, to become a bank so they can borrow a Fed Funds low interest rates directly from the Fed?

...$37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500.

Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements...

I remember writing when he made those agreements in 2007, that Buffet was beholden to the establishment now.

...The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, has more than tripled in two months.

The swaps jumped to 475 basis points today from 129 points two months ago, according to CMA Datavision. That translates to $475,000 a year to protect $10 million for five years...

Buffet is not a free man.

http://www.kitco.com/ind/willie/nov262008.html

Jim Willie - 'Golden Jackass' wrote:...A VERY QUEER ANOMALY

We are working toward a nasty climax of historic proportions. Notice that the US Treasury Bill has an artificially high price, with staggering huge volume, which is backwards. This condition defies Mother Economic Nature. Notice that gold has an artificially low price on the paper contracts, with staggering huge demand for physical metal, which is also backwards. This condition defies Mother Economic Nature.

The US Treasurys, given the staggering high volume, should be valued lower. The gold bullion, with its staggering high demand, should be valued higher. Something must break, and break soon. Regard these two anomalies as temporary distress symptoms of ass-backward price mechanisms. The natural tendencies of man, full of human emotions like vengeance and retribution, will soon be unleashed to correct the PHONY HIGH USTBILL PRICE AND PHONY LOW GOLD PRICE. All kinds of key evidence points to a COMEX default in December, discussed in the November Gold & Currency Report. The keys are in the Open Interest, which for gold is collapsing. But the December OI is holding up at relatively high levels. The interpretation from Mr Market, who is a distant cousin of Mother Economic Nature, is “The paper gold market is flawed, and people want no part of it. What physical gold becomes available is being grabbed immediately.”...

Here is what I had written about this recently:

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-15.htm#351

Shelby wrote:....So the more important question is what does the world demand next?

In my view, the world (including China & Russia) will resist a hard money (e.g. gold & silver) standard for as long as possible, as it is not in any one's interest. And thus there will be a dearth of hard assets (resources), by the time the world finally goes kicking and screaming to hard capital money.

So the relevant question is not inflation or deflation, as these are relative terms that can never have precise meanings when on a rubberband credit system.

The relevant question is, how far will the world go in malinvestment before it returns to hard money?

The longer the delay, the more astronomical the value of hard assets will be in the end. And thus the more dangerous it will be to hold/own them...

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-15.htm#438

Shelby wrote:....The big question is how long does it take to occur.

The hyperinflation will manifest as soon as the world's bond holders become aware that they are being debased at double-digit negative real interest rates (see the money base inflation chart above, note M3 inflation is still in double digits as well). It seems that bond holders are currently focused on the imploding credit, not on the money supply. It is going to be whiplash in the bond markets sometime in 2009 or 2010. Then all hell will break lose...

Seems to me if someone wants leverage at this time, more than just buying physical gold & silver (which will inherently leverage the bond reversal), they would want to leverage short on Treasuries, or derivative interest rate arbitrage opportunities:

http://www.gold-eagle.com/editorials_08/baltin121208.html

http://www.frontlinethoughts.com/article.asp?id=mwo121208

http://www.gold-eagle.com/editorials_08/morgan121208.html

...Jimmy Rogers states, "I'm now selling long-term U.S. government bonds short. That's the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn't. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back."...

However, I am staying away from that, as it is not risk free, and the hardest thing now is to predict the timing and specificity of "Black Swan" events. Also it may be hard to get more leverage on margin, as credit is harder to find.

http://www.runtogold.com/2008/12/a-problem-with-gld-and-slv-etfs/

expands on what I had written:

https://goldwetrust.com/?commentary=Silver+Story

> remember i ask you about my friends stocks? i guess she want to get out
> from that stocks and get a better one...i told her that you will
> tell me or you to buy silver coins and keep it....should i tell her
> that???

Let her read this.

If she thinks oil price will go back up, she can buy the stock:

USO

If she thinks the silver price will go up, she can buy stock:

SLV

Those are supposed to track the prices of oil and silver, but the problem is that if things gets really bad, then Obama may be forced to block the selling of stocks and money could get stuck. Also both of those ETF stocks are known to not really have the oil and silver, thus they are going to fail in future (but maybe not for year or more). She could buy those temporarily, but don't hold them more than several months and be ready to get out them.

I am getting ready to launch a new business:

CoinATM.com

People will be able to hold real silver and gold metal at a vault company by simply clicking a button and wiring money. Then at any time, they can take delivery of the actual silver and gold bars, or they can take delivery of 1oz coins of silver if they prefer. These means they are sure to be able to get their money no matter how bad things get.

I suggest your friend hold some of each.

Also many of the commodity stocks will rebound and do well, while the general stocks will continue to crash. I would suggest top/largest gold stocks, but she has to be careful because some of the gold mining commpanies are a fraud, such as Barrick. I think Yamana and Agnico-Eagle are good ones, but I haven't looked at their charts lately to see if they are at good buying points. Producer stocks are more risky. Maybe she should stick with buying the actual commodities, such as oil, gold, and silver. There will be a massive fight now in the world for resources, as China and India will dehitch from the US dollar, the US will fall apart.

We have been moving down Exter's pyramid. Google it "Exter's Pyramid". Everyone just moved to Tbonds which caused the dollar to go up. The next big move after March (or now!) is to gold and silver. Silver will go up more than gold (but it also goes down more after it peaks). Oil should also rebound because billions of people in the world are moving from farms to modern life in Asia and Latin America. The deflation we are seeing is only in debt-inflated assets like housing and american luxury life. The developing world is dehitching now.

When the fiat economy crashes and gold will buy the DOW, perhaps the dot.com names will see faster appreciation from their bottoms than real estate. For example, many of the 4 letter .com names (e.g. Zaag.com) are for sale right now for about $5000, but I bet 1oz of gold will buy them easily in few years.

Then contemplate this about real estate versus "e-estate":

http://goldwetrust.up-with.com/precious-metals-f6/how-will-we-physically-trade-gold-silver-at-5000-500-t61-90.htm#1094

I am rebutting (responding) to this article:

http://www.investmentu.com/IUEL/2009/February/shorting-gold2.html?o=1652087&u=7445297&l=1605124

Here is my logic:

Thanks for your thought provoking article.

But consider that the 30 million oz in GLD is only $30 billion. Figure there are maybe 100 million global investors with access, so $300 each on average. Is that saturation in a "death of financial system" scenario? They've got $trillions in net worth in fiat.

Short-term correction yes. Secular bubble for gold, no. The move up has been a little too fast, correction to give time to build up more participants from the next wave of fear and the eventual run from long-dated Treasuries once inflation heats up. And that means other investments may have more upside than gold which just peaked at all time highs in most currencies, specifically silver which is still way off it's recent highs even in other currencies.

Of course there are better shorter term speculations than gold (e.g. shorting long-dated treasuries if you know what you doing, picking small caps, etc), because gold's role is to be a smooth interperolation of the transformation of the current global financial system. Other things are priced relative to gold, and thus will have more price action, including fiat itself.

But long term, gold is the currency, always has been, always will be. And if you want a play on that with more leverage, then silver leaves the monetary world periodically but always comes back with a venegence.

It depends on your investment goals. For me, I need my savings to represent stored labor, not extract more labor from me, chasing investments 24 x 7.

In my current thinking, the simplest play right now, is buy silver and sit back. It is coming back to play it's historical role as money, as it always does.

Why? Because the financial system is a Ponzi system in extremis (read the logic at VaultOz.com -- apologies for the plug because that site is not taking orders yet).

I make my living programming software, not as an investor. And I want it to remain that way. I want to protect my stored past labor. And equities have not out performed generally over time.

I set out to start some preliminary research on whether this theory is true or not. I know Warren Buffet has mentioned Coca-Cola (NYSE:KO) as one of those type of companies he likes to buy and hold (forever is his preferred holding time). Yahoo Finance reports the share price was 1.98 on January 2, 1962. I plugged this into the ShadowStats.com Inflation Calculator (using the SGS adjustments for correctness), I see the inflation adjusted price as of Sept, 2008 is $41.25 ($14.44 for incorrect BLS inflation). I see the share price today hit $41.50.

So all the price gains in Coca-Cola stock since 1962 have been due to inflation. No stockholder has made a real inflation-adjusted penny in equity in Coca-Cola in 46 years. I have read that Coca-Cola pays a dividend of about 2 - 4% per year, which I bet just about has kept up with world population growth since 1920. The point being that the investment would take about 25 years to double, adjusted to inflation.

Gold since it was un-pegged from a govt mandated price in 1971 of $40.80, has a inflation adjust price as of Sept. 2008 of $640, yet recently gold has been between $750 to $950. However, a 3% inflation adjusted annual yield would be $1911. So clearly gold is under performing Coca-Cola thus far.

Thus clearly Coca-Cola has thus far been a superior investment than gold, yet Coca-Cola still has not been a fabulous investment so far during my lifetime. But physical gold in my hands, has less risk than Coca-Cola, because it can't nationalized, frozen, nor debased with hyperinflation. I pay for this lowered risk, by expecting gold not to yield anything but keep pace with inflation, which it has done.

The following comment is thought-provoking:

...On gold, I said it would rise, as it has. I had the timing accurate. I said EVERYONE will be talking, and buying, gold. Then it will drop, bottoming in June 2010…a higher bottom. Around $550 to $650. Then will begin an erratic rise, that will become steeper and accelerated from 2011 till peaking in 2013. That will be the point of global depression, marked by inflation here, and deflation abroad…the opposite of the Great Depression. In 2013 will be the start of a 3 year world war. Again…all these were said in 1999. Also, I stated that people that are jumping into gold en-masse would lose their shorts. And when it becomes time to really take the plunge; no one will listen. Much like in 1976, June, when I said that gold would go to $300 to $400 for certain, maybe even $500 to $600. It was $120 at that time, and 20 major publications came out saying that gold was dead...

Especially if viewed in context of this commentary:

http://www.gold-eagle.com/editorials_08/ash030109.html

And the scenario that could possibly make gold top temporarily, would be rising long-dated treasury interest rates (as gold performs better under negative real interest rates, although an exodus from Treasuries has to go some where and gold is next lower on Exter's Pyramid), as people abandon them in hyperinflation for either higher returns in equities and dividends (and possibly commodities) and/or safety of short-term 0% interest treasuries (you can hold them to maturity so no capital loss). So maybe shorting long-dated Treasuries is a good diversification right now. But keep in mind that is speculative because it depends on the velocity of money. We do know Paul Volcker is in there, and he knows to raise interest rates and has said the biggest mistake made in 1970s was not capping the gold price. But what will long-dated Treasury interest rate rises do to the financial system? Massive defaults or does that get the credit moving again because there is enough return on risk? Seems that fits into the game plan of forcing the masses to a socialized economy. This could also send the dollar up (appears to be nearing a break up or down at 88 resistance) as EU has to cut interest rates to stop disintegration of their union. Many questions that I don't have time to develop scientifically thorough answers to. I like silver on any dip below $12. The worst downside is probably $9, and the upside is tremendous, especially if holding to 2010 when any dip in gold will be finished.

Consult your own professional advisor, and do not hold me responsible for anything you do after reading my personal opinions above.

This response may appear as an editorial published at financialsense.com and gold-eagle.com

All the best,
Shelby

My prior post got published:

http://financialsense.com/fsu/editorials/2009/0303.html

Shelby wrote:I have this theory that the stock market basically exists to lets a small group of insiders cash out quickly the lifetime POTENTIAL value of the future company profit, leaving the stockholders holding the bag for all the years or decades of risk and opportunity cost. Thus I think the long-term hold strategy does not pay...

But if the bag is physical silver, then the last entrants to the pyramid will still have real money:

http://goldwetrust.up-with.com/goldwetrustcom-f1/which-logo-is-best-for-new-coinatmcom-t85-45.htm#1136
http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25475371

I have registered the domains:

agpyramid.com (silverpyramid.com is taken)
reapsilver.com
silverreap.com
gainsilver.com (silvergain.com is taken)
reapgold.com

Registered these to stop copycats:

reapbullion.com
bullionpyramid.com
gainbullion.com
growbullion.com

I did not register:

sowsilver.com (sosilver.com is taken)
harvestsilver.com
silvergravy.com

Perhaps I discovered the Silver Pyramid (see link in prior post), I imagine it grows like a profit virus, faster than the bankers can crash and steal the economy with TARPs, capturing the losses of the implosion as profit, forcing hyperinflation instead of the banker preference for totalitarian deflation, eating all the toilet paper money as it grows, freeing the people from the artificial slavery which is nothing more than a mirage concocted by mass media mind programming and mind manipulation.

Imagine Exter's Inverted Pyramid, where the very tip is silver (below gold), and that tip is (actually a very small inverted pyramid) growing faster than the gold pyramid at bottom, and both are racing upwards to consume all the paper trash above them on the pyramid:




Join the Silver Pyramid and watch all the fabricated problems of the world go POOF and vanish into the diabolical imagination of the paper money masters.

All investments are pyramids (early investors profit off later investors), Exter's inverted pyramid is actually just silver and gold pyramid growing in size and sucking in all the worthless paper value. The difference is the metals pyramid is always 100% based (not fractionally backed) by real value, so the last investors still get what they paid for.