Buying gold and silver coins over stocks and bonds

[Steady Eddie]

Six other candid quotes from John Bogle, the founder of Vanguard, in a November 2012 interview with PBS' Frontline.

I really don't know what to make of this guy, but I will say, if his comments don't make somebody think twice about insanity of investing in the market, then I don't know what will.

1. "Do you really want to invest in a system where you put up 100 percent of the capital, you, the mutual fund shareholder, you take 100 percent of the risk, and you get 30 percent of the return?”

2. "Greed is everywhere; it’s always been with us. I think it’s worse now. A lot of it is built on a bad financial system. An awful lot of the greed is encapsulated in what Wall Street does."

3. "When I joined this business, it was a profession with elements of a business. Today the mutual fund industry is a business with elements of a profession, and too few elements at that."

4. "It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get, because they’re both based on gathering assets and raising fees. The more assets you have, the more fees you get."

5. "The system is almost rigged against human psychology that says [if] something has done well in the past, it will do well in the future. That is not true. That is categorically false.”

6. "Fees, expenses, portfolio turnover inside of the fund, sales loads, advisory fees, operating expenses — take them all out, and the net return divided up by investors is what’s left."

http://www.pbs.org/wgbh/pages/front...the-train-wreck-awaiting-american-retirement/

This sums it up perfectly.

A lot of posters have been talking about a return on investment and using this to infer gold and silver is a bad investment.
But I would say leaving your money in a saving account, use to be a return on investment. You use to be able to get 5% return per annum. Now you are lucky to get 2-3%. These new rates of return come with a fixed gross amount to be invested. Which earns very little.
The fact of the matter is a lot of investors are forced into the stock market looking to find a return on their money.

Jim Rickards, who worked on wall street for 35 years said the history of the stock market is one where you lose 30% of your investment.

The stock market is like an abattoir, only the cattle are desperate to get in.

 

[Albatross953]

Wish I'd seen this conversation sooner. Espi, you and I swap rep a lot and I respect your opinion. But I have to say if you put faith in any organization its vanguard. They are not owned by shareholders, the funds are essentially non profit.
If you really think about it, that's the only way your interests can align with an investment company. I personally have almost a hundred thousand invested with them. I also have ishares, but I'm acutely aware that blackrock serves its owners first.

 

[synergy1]

If the share price goes down from $10 to $5 a share, you have lost money in your investment, whether you sell or not. It's a very simple concept. You have what you have. A loss is a loss. A gain is a gain.

A hypothetical lemonade stand is worth 500 dollars in raw materials and earns 500 dollars. As for goodwill ( the part you can't value), the kid who runs it is a real spitshine, and really rakes in the business. its growing every year! At worst, you could value the business at 1000$ or so. Imagine he issues 10 shares to split ownership at 100 dollars per share.

So 9 other shares are floating around town. Suddenly a batch of lemonade goes bad in flin flon manitoba. Everyone panics and thinks its the end of the world. They are dumping shares at half of what they got it for since its the end of the Lemonade business as they know it. Shares sell at 50 dollars per share.

The same exact business with the same exact raw materials and earnings is now only "worth 500$". However, this is not true. Those who hold onto their shares of a *good business* will see that this spitshine kid keeps selling his product. None of the fears are founded, revenue is up and now people want to buy their shares for over 100$.

The problem with your thesis is that you buy this mindset. You value a share of stock as a price...not a business. Because the "market" values a company at one value one day, and one value another day does *not* mean one has incurred a loss in their holdings.

You think my example is outrageous. It is not far fetched at all, and the very basis for contrarian value investing principles. Real life billion dollar market cap companies go through these wild valuation swings based on perception often times and not any underlying causes. By understanding you are buying the company and not the price, you will never be at a loss for a stalwart company of longstanding history, even though its price is temporarily depressed.

 

[Albatross953]

Its not any one individual stock you should be buying. Buy the Russell 3000. Put your faith money energy into the economy as a whole.
If this failed (possible but unlikely) then all bets are off. Including whatever gold you have that you think you can defend. (You won't be able to).
Enron, breex, Sino forest, Nortel, rim. All failures. Bad ones. Nature of the system. Quit picking stocks or managers.

 

[synergy1]

^^^It's interesting to me that you put quotation marks around $500, as if to denote that the business never lost anything.

How exactly does an average investor know that he is investing in "good business"? Other than their broker's claim? Or their past returns? Emotional attachment?

Do you suppose the investors of Enron stock (i.e. bonds) thought their money was safe because it was a "good business"? Did those Enron investors lose money on that company, which went bankrupt?

It didn't but just because the price changes doesn't mean the underlying business has lost anything. This isn't some imaginary hypothesis, its a reality all the time. National Oilwell Varco recorded *higher* than expecte earnings recently and their stock price decreased. Because most people affix price to gain/ loss on the short term...do those people, they have lost money. Because I view price as a guide, this temporary view from the market means nothing to me and I have not lost anything. However the underlying assumption is that the market *will* eventually recognize a good business which is why contrarian value investing is suitable for those who are willing to invest in the business.

Enron was not a good business. They did not make money. No one knew how they did. Nothing about their reporting made any sense. By investing even a penny into the *company* (not the price), the market will eventually recognize a good or bad company...which it did.

 

[backbreaker]

I guess I'll seen one too many American greed episodes lol but I just don't invest in stock I had netflix a few years ago a little bit of money off that and cashed out haven't bothered to put it back in

I put aside some of my cannabis (wtf google talk lol i meant savings)in my businesses or whatnot and the rest goes into savings if I'm going to bed see anything with me being entreprenuer is going to be myself

 

[hansol]

Synergy has it nailed here. To put it another way, shares are supposed to reflect the underlying assets of a business. I hate when investment "Advisors" use business buzz-words, so here's a simple example:

A company, A-co, holds 50 tonnes of gold. It sits there in a shiny stack in the company's warehouse. 50 tonnes. Pretty valuable stuff. The company does nothing except sit on this gold. Let's say this gold is generally worth $1mil on a regular, average, rational day.

The company issues 1 share to John Smith. JS is now the only shareholder of the company.

The theory goes that JS's single share of A-co should be worth about $1mil, no matter what. In theory, whomever holds that share of A-co has ownership of $1mil in gold.

Now imagine one day there's an earthquake. The thing with earthquakes (and disasters, and any other "big" news) is that they cause markets to do silly things. Markets are made of people, and people are stupid. Just look at all the ridiculous things that are posted on this forum about the craziness of people. So for one reason or another, the market goes "HOLY J**ES H! The sky is falling!", and for whatever weird reason, the markets (ie people.) decide that A-co is only worth $500,000 that day. JS goes "Holy Hell, I gotta bail on this, I want to sell my one share for $500k."

But wait a second. What has changed? A-co hasn't done anything other than sit there with its 50 tonnes of gold. It hasn't changed its business model. Literally nothing has changed, other than people being stupid one morning. On paper A-co holds $1mil in gold - but it's share price is being listed as $500k.

A guy like Synergy comes along, or maybe some other no-name investor by the name of Buffett, and looks at the publicly-available quarterly financial statements of A-co. Synergy immediately notices that a company consisting of literally nothing but gold worth $1mil is for sale for $500k. Synergy buys that one share.

Over the next week, people relax. The markets settle down, people realize the sky isn't falling, and decide that a company holding $1mil in gold, should probably be worth $1mil in value. The single share of A-co now becomes worth $1mil in the eyes of the market. Synergy has done well for himself, simply because he recognized the disconnect between market price vs. underlying value.

Examples like Enron only confirm these disconnects. Anyone who actually looked up Enron's financial statements, and actually researched all the attached notes, and reviewed Enron's publicly filed tax returns, responded with "Wtf is going on here. All this "revenue" isn't real revenue, it's inter-company fake sales." And the irony is that all this information WAS available - a shareholder only had to sift through what was in front of his nose.

The issue with Enron was that the market (again, a bunch of crazy people who act irrationally) decided Enron was a darling stock. It was a feel-good entity. People wanted it to do well. But feelings and emotion aren't a replacement for underlying asset value. At some point, someone like Synergy looks at the statements of Enron, goes "Wtf. This thing stinks" and starts spreading the word. Eventually (and it can take a long time) the markets wise up and bail, and Enron collapses.

This same cycle played out in 2008, with CDO obligations. The information was there, but very few people looked at the writing on the wall.

There really isn't anything magical that a person can do when it comes to investing. Just make sure a person is educated on simple things like how to read a financial statement. How to make sense of a cash flow statement. Make the connection between tonnes of debt on the balance sheet, vs no interest being paid on that debt (likely means payments are being deferred, and there's gonna be huuuuuge repayments in the future. Is the company even able to make these payments?) It's a simple matter of reviewing what's in front of you, and connecting the dots, whether it's a big public company, or a small hardware store in a small town. A good business is a good business, bottom line.

Being able to pick up on good business fundamentals, and connect business value vs. share price, is the difference between a good investor, vs. being a speculator.

It didn't but just because the price changes doesn't mean the underlying business has lost anything. This isn't some imaginary hypothesis, its a reality all the time. National Oilwell Varco recorded *higher* than expecte earnings recently and their stock price decreased. Because most people affix price to gain/ loss on the short term...do those people, they have lost money. Because I view price as a guide, this temporary view from the market means nothing to me and I have not lost anything. However the underlying assumption is that the market *will* eventually recognize a good business which is why contrarian value investing is suitable for those who are willing to invest in the business.

Enron was not a good business. They did not make money. No one knew how they did. Nothing about their reporting made any sense. By investing even a penny into the *company* (not the price), the market will eventually recognize a good or bad company...which it did.

 

[hansol]

"Paper losses" are another way of describing unrealized losses. And the only reason a person "loses" money is if/when they need liquidity. In which case, yes, you're absolutely right. If a person buys for $500k, and sells for $300k, then yeah, $200k loss.

Another good way to look at things is the "chicken farmer vs. egg farmer" analogy by Jim Garland:

For risk-averse investors, certainty is paramount. Dividends represent the proverbial cash-in-hand, pay-me-now component of total portfolio returns. To explain how dividends benefit investors, I’m going to call upon an analogy developed by former colleague Jim Garland about chickens and eggs, mentioned above.

You have two choices for your agricultural enterprise: You can be a chicken farmer or an egg farmer. Chicken farmers are focused on the price of chickens. Egg farmers raise and care for their chickens to benefit from the eggs they lay.

Many investors act like traders and treat their stocks like chickens — they go to the market to buy and sell them every day. Stocks are the assets they currently own but plan to sell someday to pay for college educations, a second home or for retirement. Those investors are chicken farmers.

There is a different group of investors who want to live off the income from their capital. Those people are egg farmers — the recently retired professional couple; the widow who has just received a significant lump sum payment from a life-insurance policy; an entrepreneur who has recently sold his business and wants to pursue other interests; or a daughter who has received an inheritance and plans to use the money as a supplement to pay day-to-day expenses.

Many income-oriented investors (egg farmers) are deluded by what they see on TV, the Internet and in the newspapers. They mistakenly believe they’re chicken farmers.

Who can blame them? Market pundits bombard investors with an endless flow of information, telling them the only thing they should want to do is buy and sell chickens. How often does The Wall Street Journal report on the value of the Dow Jones Industrial Average? Every day. How often does it report on the aggregate dividend income from the Dow? Only once or twice a year. The popular media is for chicken farmers.

But risk-averse investors know dividends are one of the three components of total investment returns in the model that I described in my May 1, 2013, Money and Markets column.

So to help risk-averse investors (egg farmers) maintain their sensibility amid all the nonsense about stock prices, I’m going to describe a different way of looking at the financial markets.

Many experienced investors are familiar with Modern Portfolio Theory and CAPM, or Capital Asset Pricing Model. If not, you can reference my April 10, 2013, Money and Markets column in which I explained that CAPM serves as the basis for most modern investment strategies.

But on our imaginary farm, we use a model called CEPM, or the Chickens’ Egg Production Model.

It’s remarkable how closely the CEPM chart fits the stock market over the past 50 years. Over that time, stock prices have been volatile — especially during the past decade — with the overall long-term trend being up. Moreover, dividends have also moved upward but along a smooth and steady trend line.

The CEPM tells us two important things about common stocks. The first is that stock prices (or chicken prices) are unpredictable and volatile. The other is that dividends (or egg prices) are predictable and stable.

For good reasons, chicken farmers worry about chicken prices. To a chicken farmer, whose first thought on waking every morning is “Should I buy or sell chickens today?” risk is closely related to price volatility.

On the other hand, the waking thought of an egg farmer is: “How many eggs will my chickens lay today and how many will they lay in the future?” For an egg farmer, risk reflects the health of the flock (or the stocks in the portfolio).

Market values matter only to egg farmers because a growing dividend stream requires a growing nest egg (pun intended). And “risk” means “events that threaten dividends.” There is no “maximize returns at a prudent level of risk” mumbo jumbo.

Consider the wonderful consequence of this view — stock-price volatility doesn’t matter to egg farmers. In fact, volatility provides an opportunity to add new chickens to the flock at reasonable prices.

Conversely, chicken farmers (like most investors) worry about market declines.

This whole "beat the stock market" stuff is crap and misleading, but you can find the whole article here. http://www.moneyandmarkets.com/how-...-by-becoming-an-egg-farmer-52765#.VP1_3irImkU

The thing about unrealized losses/gains is they fluctuate daily. If you buy a stock on Day 0, and it's worth 100k, then on Day 1 it drops to 50k, then Day 2 it jumps to 150k, your "loss" as you describe it Espi is completely dependent on if/when you sell. If you're in a tough spot and absolutely need cash on Day 1, then yes, you're in a tough spot. If you wait until Day 2, suddenly the scenario is very different.

This guy, in my opinion, says it best:

"The idea of 'paper losses,' and that you don’t actually lose money until you sell...is a false one. The value of your shares is whatever the value of your shares happen to be at the current time. Just because you paid $20 per share doesn’t mean you have not lost money when the stock price drops to $10 per share.

People in houses who paid $500,000 during the bubble don’t feel the value of their house is still $500,000 if comparable houses around them are now selling for $300,000. In fact they feel that they were somehow cheated when they took out the loan and should not be obligated to continue making payments. Somehow the value of stocks is temporary in people’s psyches but the value of houses is permanent.

https://smallivy.wordpress.com/2011/06/15/you-dont-lose-money-in-stocks-unless-you-sell/

 

[synergy1]

I feel my overall aim has been lost in several posts by espi. My goal is not to push stocks as the road paved with gold to retirement. Its not to put my ideas into the spotlight and enchew others. The fact is we all have our individual preferences and everyone , myself included, should respect that.

The only purpose of my posts is to divorce the idea between stock price and stock value. The two on the short term are almost always incongruent. A paper loss makes no sense when the market itself, which is highly irrational is mispricing things for no good reason. Sure, we can talk about extreme cases and risks...but the same can be said for any equity vehicle. What about the possibility of a bank run? Rampant currency devalutaion via hyper inflation? What if the north and south decided to wage war and not recognize the dollar.

While unlikely, none of these cases are a good reason to avoid any common equity vehicle...stocks included. The argument that stocks go bankrupt more often is true. But to counter that arguement, on a whole since its inception, no equity vehicle as a whole has out performed the stock market...period.

To close my posts, I wish everyone happy investing in whatever you want. As long as you sleep at night, and are better off down the road, than take solace in your choices, and don't sweat someone elses.

 

[synergy1]

This guy, in my opinion, says it best:

"The idea of 'paper losses,' and that you don’t actually lose money until you sell...is a false one. The value of your shares is whatever the value of your shares happen to be at the current time. Just because you paid $20 per share doesn’t mean you have not lost money when the stock price drops to $10 per share.

People in houses who paid $500,000 during the bubble don’t feel the value of their house is still $500,000 if comparable houses around them are now selling for $300,000. In fact they feel that they were somehow cheated when they took out the loan and should not be obligated to continue making payments. Somehow the value of stocks is temporary in people’s psyches but the value of houses is permanent.

https://smallivy.wordpress.com/2011/06/15/you-dont-lose-money-in-stocks-unless-you-sell/

Time is the factor here. I agree. If I have to get surgury tomorrow and incur a huge loss...than I am ****ed. But lets for the sake of argument avoid outliar cases and assume that the current time is irrelevant ( I have plenty of cash reserves) - than I don't care what the current paper loss is. I understand that my money is a long term bet that the people I invest in will do a good job at putting that money to good use. Notice I used the word bet which implies speculation. Ben Graham expounds on that in Intelligent investor, so I will not here for the sake of time.

Like a house, despite what it goes for on the market, in my eyes its a place to do my work, watch TV, bring a girlfriend over, and host friends. How the market views it is irrelevant to me. yes I might have to move or get cash quickly, so price shouldn't be irrelavent. But I own a house because it provides me with an intrinsic joy - not because the price one day is one thing, than another day is different. As long as I can cook bacon in peace and walk to the beach, than all is good in life ( or my future life )

But you are right...the disconnect between housing and stocks is weird. People spend months trying to buy a house, and seconds to buy a stock. Both require due dilligence, and both can erode ones principal.

 

[LiveFreeX]

Buy rain barrels and a huge piece of land to store the water on. Clean water is about to become the most valuable commodity in the world.

 

[prison/con.net]

Govt's in many areas are saying that landowners have no right to store the rainwater that falls on their land. Do not buy land, it is a trap to make you pay taxes. if you don't have the millions of $ needed to develope it, bribe the right pols ,etc, you'll just lose on the deal. Land is always, always over-priced. If you want to make money, buy a huge old house, sub 100k, in an area where you can divide it up and rent out rooms by the week, $100 per week. That's 100k per year gross income and maybe a lot more than that. You can get into this with as little as 10k, if the place doesn't need immediate work in order to be legaly occupied. You need to find a reliable, unemployed vet who is not colllecting (and not going to collect) much in the way of disability pension. he has to have a job before he can get a VA loan. YOU provide that job, managing the house for you. The VET can get the house without the 20k down payment, and need not pay the 6k of closing costs, either. So for a while, the vet is your personal assistant (doing very little) for Minimum wage, until he meets the requirments for the VA home loan.