Saturday, March 21, 2009

Stocks vs. Gold

From a historical perspective, it is hard to imagine a worse place to put your money than the stock market.

Gold being a static asset typically preserves your buying power, but no more. Since Ancient Rome, one ounce of gold has typically traded for a fine man's suit (or Toga), a pair of well made shoes and a belt. This relationship has held true through the brief but storied history of the United States, as well.

Quick stats:
1932 - Gold $20/oz
2008 - Gold $1000/oz
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50:1

1932 - Dow 40 (P/E = 6)
2007 - Dow 14,300 (P/E = 20)
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350:1
100:1 (adjusted for earnings at peak)
50:1 (adjusted for earnings, today)
The Dow doesn't really tell the story of owning stocks, since like all rotating indexes, it is designed to be a sales pitch. All IPOs are, after all, an exit strategy for the private owners who feel the company's electric growth period is over. Like all indexes, as Dow stocks perform badly, they are quietly replaced. The current Dow only has one stock (GE) in common with the 1932 Dow, the other 29 were kicked out or went broke. So in simple terms, the 1932 Dow went from 40 to below 10 (GE's current price). Realistically, 10 is too low since not all of the 29 dogs have gone broke. On the other hand, 10 is way too high since 10 today, according to gold, is worth about 20 cents.

Another way to compare stock performance to gold is to price the stocks in gold. In 1929, the Dow was worth about 20 ounces of gold, today it is worth about 8 ounces, a 60% decline. That doesn't account for index rotation. If you were lucky enough to buy the only Dow survivor, GE, one share cost about an ounce of gold in 1932, today you can sell it for .01 ounces, a 99% price decline before splits.

To figure split-adjusted performance, we can use the Dow index itself by adjusting for the component's weight. If we look at GE again, its component weight is 1.04% or about 75 Dow points, which is a 2009 dollar basis after splits. So assuming you bought the single darling of the Dow, at the rock bottom of the market in 1932 and held it until today, the stock price has fallen from an ounce of gold to .07 ounces of gold, a 93% loss in buying power.

Updating the Dow's performance, minus the usual sales pitch:
1932 - Dow 40 (P/E = 6)
2009 - 1932 Dow 75 (GE P/E = 6)
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2:1 (as of today, in dollar terms)
1:29 (as of today, adjusted for loss of buying power)
Dividends make a difference, but are also eaten by rampant inflation and many stocks don't pay a dividend.

Food for thought, using catalog prices:
1932 - New V8 Ford $800
2009- 1932 V8 Ford $32,000 (typical auction price)
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40:1 (plus transportation value)

1932 - Sears 6 room house $2,800
2009 - 1,500 sq ft house, $150,000 @ $100/sq ft
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50:1 (plus shelter value + tax deduction for a banker loan)

1932 Stetson Hat - $4
2009 Stetson Hat - $150
==========
38:1 (plus no sunburn)

1932 - Console Radio - $75
2009 - Stereo Walkman - $5
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1:15 (plus entertainment value)

1932 - Colt .45 Pistol - $25
2009 - 1932 Colt .45 Pistol - $1,500
==========
60:1 (plus dead enemies)

1932 - Wool Blanket - $1
2009 - Two Snuggies - $36 after shipping and processing
==========
18:1 (minus free book light)
The worst performing catalog-commodity is the "tech sector" radio. But a 1932 radio in good condition fetches about $500 today.

I guess it shouldn't come as a big surprise that buying the paper stock sales pitch in 1932, at the bottom of the market, was one of the worst things you could do with your money and actually underperformed a wooden box of vacuum tubes.

27 comments:

  1. are you now suggesting that gold is a buy, or simply stating that stocks are STILL overpriced and are a horrible investment?

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  2. further to above, if a handcrafted suit, belt, and shoes costs only $200 due to deflation, wouldn't one ounce of gold be worth the same?

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  3. FDR - Don't get it. If Dow was 40 in 1932, and gold was $21/oz. (soon to be raised to $35/oz.) that would be a ratio of 2, not 20.

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  4. Seems by your argument that compared to 1932 gold is 4X too CHEAP!

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  5. He's saying stocks are better for preserving your buying power, compared to gold.

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  6. "He's saying stocks are better for preserving your buying power, compared to gold."

    I don't really think he meant that.

    He's on record as saying that Gold is, at least, an OK investment since it actually preserves its value whether being on an inflationary or deflationary environment.

    Moreover, stocks are not designed to make you rich or make money for you, at least not on a rigged setting like the one we live on. If you don't believe this, just think on the many, many working Americans who have seen their 401K wipe out by over 50% in the last year.

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  7. Actually if you consider that gold has increased in value 50-fold since the GD and the Dow 30 is down to GE which is trading at under $10 - it really blows the "buy and hold" model to bits.

    Only way to keep a stock portfolio above water would be to continually reinvest in new Dow companies - wonder how that strategy would play out. My guess is it still might not be greater than 50-fold

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  8. FDR, could you expound on the differences between holding physical USD and Treasuries. In your recent post you said we should take note of the feds intent to purchases Treasuries. What advantage would the fed have in holding the Treasuries over the USD on the other side of this crisis.
    I suppose this means that there could be a meaningful divergence in the value of USD and Treasuries if I'm reading into this correctly. If you could, please expand on this as I may very well be looking at this in the wrong light. Thanks.
    We need to get more of the old MW crew over here for some lively commentary. Janpaul, SaveCD, and some of the posters that I've forgotten about since I stopped checking MW regularly late last summer.
    Anyhow look forward to your response.

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  9. FDR, could you expound on the differences between holding physical USD and Treasuries. In your recent post you said we should take note of the feds intent to purchases Treasuries. What advantage would the fed have in holding the Treasuries over the USD on the other side of this crisis.
    I suppose this means that there could be a meaningful divergence in the value of USD and Treasuries if I'm reading into this correctly. If you could, please expand on this as I may very well be looking at this in the wrong light. Thanks.
    We need to get more of the old MW crew over here for some lively commentary. Janpaul, SaveCD, and some of the posters that I've forgotten about since I stopped checking MW regularly late last summer.
    Anyhow look forward to your response.

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  10. touting gold as a better investment than the market is ludicrous.

    a global reversion to gold would be a monumentious step backward for planet earth.

    there is a cost associated with throwing away the delicate hierarchy of trust that exists throughout the world.

    a representative currency is a necessary and evolutionary-dependent abstraction from physical money.

    gold is great because it shows us the last thing we did right: establish a relatively-finite, timeless resource that represents a static amount of moola.

    the unbelievable incompetence of the present world financial gurus should not be understood as evidence against abstract money.

    instead, as you suggest, we should return to the basics, except gold should be the benchmark, not the solution.

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  11. I think the arguement of the post is that stocks are a bad investment that will lose you money over the long-run, whereas gold and hard assets will MAINTAIN purchasing power (not really an investment). Eg. you should purchase gold to protect your CURRENT purchasing power. But remember you will NOT increase your nominal wealth. Eg. gold may come down in price but you will be just as rich as before because you can buy the same amount of assets.

    That said I think gold is going down in nominal terms, so I am actively shorting it and even more so silver. Best proof is that Paulson is at the other end, yet gold is still not rising... http://business.theglobeandmail.com/servlet/story/RTGAM.20090317.wrgold0318/BNStory/energy/home?cid=al_gam_mostemail


    A little contratian to my views, but please read Hayman Advisors recent letter to investors. Great research
    http://pragcap.com/hayman-advisors-quarterly-reports

    All the love,

    Armagedon

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  12. "FDR, could you expound on the differences between holding physical USD and Treasuries. In your recent post you said we should take note of the feds intent to purchases Treasuries. What advantage would the fed have in holding the Treasuries over the USD on the other side of this crisis."

    The only reason to hold Treasuries in a deflationary environment (interest rates near 0%) is the convenience of not having to protect the physical cash. Banks are not an option since they've lost so much money they'll have to steal yours (above the FDIC's commitment to pay banker losses).

    In an inflationary environment there is no reason to hold a lot of Treasuries/cash, since the 5%+ rate is not competitive relative to the inflation you can reap in the stock market. Plus cash dwindles in buying power during inflation, instead of growing at 100%/yr like today.

    There is only about $800B in physical cash in all the world, so the Fed accumulating $300B in physical cash isn't realistic.

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  13. There is only about $800B in physical cash in all the world, so the Fed accumulating $300B in physical cash isn't realistic.

    ...and they can't print their own without laundering it through a borrower, since (for the time being) that is still a crime.

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  14. The moral lesson learned here is buy Dow futures.

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  15. I don't think you understood the lesson. Unless you know a broker that will sell you 10 year calls on the Dow at a discount.

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  16. The moral lesson is never to buy and hold stocks, and to short as appropriate to augment the 100% return you are getting on cash position.

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  17. "The moral lesson is never to buy and hold stocks, and to short as appropriate to augment the 100% return you are getting on cash position."

    That is the idea. But I wouldn't say "never" buy and hold - the last 20 years of a multi-century inflationary cycle is a great time to try it. Pass it on to your great great great grandchildren.

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  18. FDR,

    Thanks for all you do. Looking forward to your next Elliot thumbnail.

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  19. FDR,

    For how long have you been doing this? Did you ever work for money? or you have always been rich?

    I am just curious....because the section of your blog that reads about you doesn't say much about yor experience, your age, how you acqired all of your knowledge, if you ever got a degree on something since you critize and don't like how the education system works.

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  20. "For how long have you been doing this..."

    Maybe you could post your name, experience, age, education and your opinion, since you criticize an opinion that many of us are extremely interested in. Listen and learn... or leave.

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  21. numbernine - those were fair questions to ask in my opinion. Can't someone be curious about another's history?

    You actually are the type of person (quick to judge) that makes me not want to visit sites such as this. I thought this site was those far above types likes you. So sorry.

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  22. My intention is not to make anybody mad by asking those questions. I really respectec everybody's opinion or points of view. Do not get me wrong, FDR's comments and postings are very helpful and I have learned a lot from them.

    However, don't you feel sometimes that there should be a better connection between author and reader, and maybe that connection is knowing a little bit more about a person that you adimire, trust, believe, look up to, or whatherever the ituation.

    If FDR does not answer the questions, it's ok with me and the other hundreds of readers, the woorld will not end because of that and we will continue reading and learning from his maginificient knoweledge.

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  23. "My intention is not to make anybody"

    sorry that I did not spell check my postings!

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  24. In my opinion, I don't really think it is necessary for FDR to reveal his identity, real name, or anything like that.

    Although at the beginning I might have felt apprehensive to believe what some anonymous person on the internet could say, without any credentials, I think FDR has been correct and on the spot more than enough times for everybody to carefully consider, analyze, and believe on his "unconventional financial wisdom".

    However, given all this financial fog, deceptions, and plain financial lies on which we live, and on which I actually believed until reading and understanding FDR's posts on MW, it is interesting, to say the least, how could anybody see through all of this and learn what it is hidden from everybody else?

    I think it is just plain human curiosity.

    In my opinion, I think that all of us miss on this real financial knowledge because we all start and jump unto the "Rat race" early on in life as Robert Kiyosaki aptly says.

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  25. As well as his extraordinary intelligence, FDR has given you clues as to how he reaches his conclusions: See Elliot thumbnails.

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  26. FDR - any comment about the latest talk at MW with Goldman Sachs apparently insisting on payment from AIG for CDS while already having sold the mortgage backed securities, thereby not having any risk to insure.
    In other words they didnt lose anything but still want the insurance paid in full. Like insuring your car, selling it and then claiming it was stolen I would think. All while holding the financial system to ransom.

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  27. I know FDR's posts. He is not changing gold sides. Once he makes a prediction he doesn't change it. Gold will go down along with everything else. This doesn't mean that Gold will lose its value. Gold will still be gold. This is exactly what he has been saying. The Dow is heading lower. Basically history repeats itself. Billionaires will soon be millionaires. The bottom line is that they will still be rich. Well not all of them those who cling to the "buy and hold" stock mkt strategy will most likely go extinct.

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The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

 
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