Earlier quoted context omitted.
Currency is a terrible way to invest. Nobody is arguing that.
Not if that currency is gold. Unless, you don't like turning profits of course.
When is the last time that you purchased a product or service using gold?
Warren Buffett: Why stocks beat gold and bonds
171–180 of 208 posts
Re: Warren Buffett: Why stocks beat gold and bonds
#172Earlier quoted context omitted.
> everyone rushes Who is rushing to buy gold? I'd be surprised if more than 1% of households have meaningful gold exposure.
Look at this graph: http://blog.thomsonreuters.com/wp-content/uploads/2011/04/GL... Is that the sign of an investment that keeps growing in value steadily across the ages or merely the sign of a speculative bubble about to burst? Hint: look at the late 70s as well.
Ew. Is there a version of that graph that's on a logarithmic scale?
Re: Warren Buffett: Why stocks beat gold and bonds
#173Earlier quoted context omitted.
The challenge is identifying "someone like him" before the fact . But if you could do that, then you would know why he's been so successful and you'd be able to do it all by yourself. Most funds do not beat the market in the long term (> 10 years) after costs, and for the same asset allocation, someone who just invests in the market (e.g. through low-cost index funds) will do much better than the average professional…
Investing money produces measurable results. It is possibly to verify that someone is a successful investor without knowing why he is successful.
It is completely useless to verify that someone's investment choices were successful in the past without knowing why. For example, there are enough hedge funds out there that there will always be a few that outperform the market just through sheer luck, and there's no way tell the difference between a fund which has succeeded in the past through sheer luck and one that's actually well-managed. In fact, I seem to recall there's decent statistical evidence that nearly all managed investment funds with a track record of success were successful in the past solely through chance.
Edited: In fact, Warren Buffett has an interesting bet outstanding related to this, see http://longbets.org/362/
Re: Warren Buffett: Why stocks beat gold and bonds
#174Earlier quoted context omitted.
As the money supply increases, all currency is devalued and everything that's denominated purely in currency loses value as well. This is a gross oversimplification. The monetary supply can increase without inflationary effects as long as there is a corresponding increase in the production of value in an economy.
Like computers becoming cheaper and cheaper while the prices of other goods increase? That's just another form of inflation because the computers would be that much cheaper if it weren't for an increase in the monetary supply.
Erm, lets make this simpler. Lets say that in year 10 the economy produces exactly 100 apples and nothing else. And lets say that in the year 20 the economy produces 200 apples and nothing else. If apples were selling at $1 in year 10, then we would expect apples to sell for $.50 in year 20 with a constant supply of money[1]. We call this decrease in price deflation. The money supply does double, we would expect the apples to still sell for $1 and we would call this price stability. If the money supply were quadrupled then each apple will now cost $2, and we'll have had inflation.
[1]Well, in the real world in the short term people tend to be upset by the idea of the amount of money they receive for a good or product decreasing, so prices and wages tend not to decrease as fast as you might expect in a theoretical perfectly efficient market. This is called nominal downwards price rigidity by economists and nominal loss aversion by psychologists. This is the simplest of the mechanisms by which inflation and deflation can effect the state of the real economy.
Re: Warren Buffett: Why stocks beat gold and bonds
#175He's wrong. Stocks do not beat gold once inflation outpaces the rate of average market returns, which is exactly where we're at now. Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock, Apple at the absolute bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and then hold all the way through, and then sell at the absolut…
>Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock $1 in gold 90 years ago: $87 today (by your number anyway) $1 in a basket of stocks that were traded to match the DOW starting 90 years ago: $174 today (from the article's numbers) Keep in mind this includes the recent 5 year period where gold has shot up and stocks have performed miserab…
I must be missing something. The situation described is not a fold. When talking about folding, you're really talking about doubling. For $1 in gold to increase 87-fold, it would have a value of approximately 7.7 times 10 to the 25th power. I'm pretty sure that was not the intent.
What's really being said is that $1 in gold has gone up 8700%. Compared to the same dollar going up 17,400% in stocks.
Re: Warren Buffett: Why stocks beat gold and bonds
#176Earlier quoted context omitted.
The Dow doesn't get to drop GM after it goes bankrupt and then not count its losses. The decline of GM hurt the Dow index just as much as it would have hurt anyone else that bought and sold GM stock when the Dow index added/dropped it. It also represents an average of the market, so the fact that it was hard to mirror it exactly is not particularly relevant. Mirroring it approximately, or buying any other large baske…
The Dow gets to replace GM with another growth vehicle of the modern era. While you take a real beating on the shares, the Dow simply swaps in a new stock (typically one with brighter prospects that can recharge the lost value in the Dow). You can't swap your dead GM shares for the shares in, say, John Deere when it's added to the index. Your money is gone.
There are index funds that swap out exactly the same way the Dow does.
Re: Warren Buffett: Why stocks beat gold and bonds
#177Earlier quoted context omitted.
The Dow doesn't get to drop GM after it goes bankrupt and then not count its losses. The decline of GM hurt the Dow index just as much as it would have hurt anyone else that bought and sold GM stock when the Dow index added/dropped it. It also represents an average of the market, so the fact that it was hard to mirror it exactly is not particularly relevant. Mirroring it approximately, or buying any other large baske…
The Dow gets to replace GM with another growth vehicle of the modern era. While you take a real beating on the shares, the Dow simply swaps in a new stock (typically one with brighter prospects that can recharge the lost value in the Dow). You can't swap your dead GM shares for the shares in, say, John Deere when it's added to the index. Your money is gone.
You, simply put, utterly fail to understand how indexes work.
Re: Warren Buffett: Why stocks beat gold and bonds
#178SO I was recently trying to figure out why Bitcoins could be considered a rational investment (sorry to bring up that dead horse again =P). Much to my surprise, I realized that reasons for investing in them are much the same as the reasons for investing in gold.
* Relatively stable, predictable supply over time
* Not controlled or regulated by any institution or central authority (government or otherwise)
* Value determined entirely by market
* Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged
* Value not tied to the utility of an underlying asset[1]
The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time.
For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments.
[1] Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.
Re: Warren Buffett: Why stocks beat gold and bonds
#179He omits the only valid reason any non-speculator would own gold - it holds it's value through times of political turmoil - holds it's value over millenia rather than decades or centuries. A coup d'etat may result in seizure of private companies, rendering your stock worthless, but not touching the value of gold. It would be speculating to put all your assets into gold, but a small amount is like an insurance policy.…
Unfortunately it is worth noting that FDR instigated the greatest private wealth seizure in the history of the planet when he stole all of America's privately held gold with force. If you've got a government that is willing to plunder like that, there's no great way to keep your wealth safe except to get yourself and your wealth out of the country.
And given that such a thing can happen even in the US, which all things considered is very free and democratic compared to most of the world, what does that say about a strategy based on the allegedly intrinsic value of gold?
Re: Warren Buffett: Why stocks beat gold and bonds
#180SO I was recently trying to figure out why Bitcoins could be considered a rational investment (sorry to bring up that dead horse again =P). Much to my surprise, I realized that reasons for investing in them are much the same as the reasons for investing in gold. * Relatively stable, predictable supply over time * Not controlled or regulated by any institution or central authority (government or otherwise) * Value det…
In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened.
I'm not so sure that works.
With gold, it was not the case that everyone just "agreed to agree" that it was valuable.
Rather, gold was valued independently of its "investment value" due to its use as a status symbol/decoration/jewelry.
Likewise, because of that, there's no risk of everyone suddenly "disagreeing" that it's valuable, causing a huge collapse.
With bitcoin, it's unclear to me that there is a way to either bootstrap this "agreement" in the first place, or to sustain it.