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Jeffrey Robinson
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Investor and technical analysis author. Articles presented on long term investing signals, sentiment and stock ideas. Master of Science, Business Administration (MSBA), Quantitative Methods. Be sure to check my StockTalks and Instablog for bonus unpublished material.
  • The Best Investment In The Last 50 Years 0 comments
    Mar 25, 2013 2:05 PM | about stocks: DBO, DIA, GLD

    Real estate salesmen will tell you to buy real estate, stock brokers will tell you to buy stocks, and gold merchants will tell you to buy gold. All of them will claim that what they are selling is the best long term investment, but who is actually right?

    In this article I will attempt to answer the question: Which asset rose the most in the last 50 years? In order to simplify, I will only be looking at nominal prices. I will include CPI, so it will be clear which assets are running at higher rates than the government's definition of "inflation". I did not look at every possible stock or commodity but did cover some of the most popular investments.

    Nominal Price Increases in the Last 50 Years

    (click to enlarge)

    *All commodities are priced in $/cwt

    Here are just a few issues that could be raised with this nominal price data:

    1) The gold standard was removed from the US in 1971, so for nearly 10 years of this data, gold was fixed at approximately $35/oz.

    2) The Dow Jones does not include dividends. Returns are higher if you include dividends and even higher if you assume reinvestment. However, without knowing the exact percentages of people who actually did reinvest, I would not assume that in the calculation. As for adding a small average dividend payment of perhaps 2% per year, the totals are not significantly higher.

    3) Real estate does not include rental income. Again, even assuming 10% returns per year from rental income, the overall ranking would not change. It would be closer to the return from stocks at about 1,380%.

    And the Winner Is...

    The best investment in the last 50 years was clearly gold, and there is really no contest. Buying oil futures would be the next best thing. For all the bad-mouthing of gold as an investment, the numbers don't lie.

    Many will claim gold is in a bubble right now, so you shouldn't invest in it. The main catalyst for gold in the last 50 years was probably the removal of the gold standard in the US, which enabled the Federal Reserve to print dollars without restriction. This caused assets priced in dollars to rise in nominal terms. That was true of all assets priced in dollars, though, not just gold. Stocks are priced in dollars, yet they didn't rise as much. Certainly other commodities priced in dollars didn't beat out gold. The price of gold is definitely tied to rising debt and money printing, but there has to be more to it than that.

    Warren Buffett loves stocks and seems to have a lot of negative things to say about gold, yet anyone holding gold since 1962 has vastly outperformed those who only held stocks. Here's one famous quote from Buffett on gold:

    "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

    Warren Buffett is a talented investor, but his head is in the sand a bit when it comes to gold. Stocks have done very well in the last 50 years. Gold has done better. Buffett is missing something important, but what is it?

    The Principle of Scarcity

    Gold is up 4,600% since 1962. Oil is up 3,100%. The Dow is only up 1,900%, and indeed, since the Dow is composed of oil stocks (or other stocks that theoretically would benefit from rising natural resource prices), some of the Dow's gains can be attributed to increasing commodity prices.

    What is unique about oil and gold?

    1) Oil and gold are scarce and costly to extract
    2) Oil and gold are impossible to reproduce

    Agricultural commodities have not even kept pace with CPI, which is up 660% since 1962. For example, corn is only up 550% and wheat is only up a measly 288%. The global population is up 123%. Wheat has barely kept pace with population growth. The reason is simple: You can create more animals and plants. You cannot create more oil and gold.

    In that sense, if we assume continuous demand, gold and oil are the investments least likely to erode over time due to forces of supply and demand. Anything with a fixed supply and increasing demand due to population growth is naturally a good investment. The demand side of the equation is the part that is very difficult to predict. Energy use could shift from fossil fuels to other fuel sources. Gold could one day lose its luster.

    Conclusion

    For people concerned about inflation protection, the following assets rose at rates greater than the government's CPI figure in the last 50 years:

    • Gold
    • Oil
    • Dow Jones Industrial Average
    • US real estate

    These instruments are good proxies for gold, oil and the Dow Jones:

    • SPDR Gold Shares (NYSEARCA:GLD)
    • PowerShares DB Oil (NYSEARCA:DBO)
    • SPDR Dow Jones Industrial Average (NYSEARCA:DIA)

    Perhaps an equal-weighted investment in all of these ETFs, plus a real estate investment, would enable a retiree to sleep well at night knowing their nest egg is safe from the forces of inflation. However, as stated in the beginning, it's impossible to know if this trend continues, or even if these assets will continue to outstrip inflation. Fundamentally, it makes sense that this trend will continue, since the prices we pay for everything are deeply rooted in gold, oil, stocks and real estate.

    There is a famous saying: "The trend is your friend." Hopefully, this article shed light on exactly what the trend has been in the last 50 years. Invest accordingly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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