Home > Uncategorized > How to tell when you should avoid an asset class

How to tell when you should avoid an asset class

November 14, 2010 Leave a comment Go to comments

As we all know there are few reliable measures of when an asset class is particularly cheap or expensive… but maybe articles such as this one on gold are a candidate?

The story that emerges when you have the ability to link two paragraphs on the same page is an amazing example of mind-bending investment logic:

“Even when gold had turned into the un-store of wealth around the turn of the century, falling to US$252 an ounce from US$850 20 years earlier, he was defiant. […]

He had held and held and held, even as the gold price had plunged and plunged and plunged. He will be pleased with his resolve today, one of countless gold bugs savouring their stubbornly won success [as prices pass $1400]. […]

Of course, US$2,000 isn’t what it used to be. For gold to match the spike price of US$850 in 1980 in today’s inflated dollars, it would have to reach almost US$2,400 — more than 60% above where it now stands.”

Ironically the 40% real loss (over 30 years) isn’t that far from the worst of the stock market drop we experienced in the last couple of years, which certainly didn’t earn a glowing article praising stocks as the investment of the future as far as I remember.

As a parting shot at reason the author goes on to state that since gold has had such amazing returns over the last decade (this is true), it has now arrived as an official “good investment” that will deliver quality returns in the future (I’ll leave that part up to you to decide?).

This is a good illustration of the principles behind my investment plan, in reverse. Most of our investment decisions are clouded in uncertainty – but surely there is some room to decide as a somewhat rational investor when a market has been taken over by logic like this. At that point it would seem like a good idea to reduce participation in that market. Maybe there’s some way to take more profits before the emotional decisions reverse, but I’m happy to take a reliable return and a good laugh from the resulting media.

  1. November 14, 2010 at 8:01 pm

    Interesting article. Thank you.
    I invest the same way I buy clothes, food, and cars. That is, I buy when the product is on sale.

    Gold is at an all time high. Would you run out and buy a car because it was at an all time high price? A smart investor tries to buy when prices are low and sell when prices are high and not the other way around.

    With today’s uncertain economy, do I think gold will increase in the short term? My answer is yes. Do I think gold is a good investment? My answer is no because eventually it will go back down as the economy recovers and investors pull money out of precious metals and back into equities.

    • November 14, 2010 at 8:24 pm

      Thanks for the comment Jackson! You’re absolutely right that it could rise quite a bit from here, but no one knows when it will turn. I actually don’t go out of my way to avoid something that’s only slightly overvalued but then again I’m not interested in gold in the first place so I have no idea how overvalued it is. If a good productive asset is on sale I’ll be there with any spare cash I can find!

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