Paul Winkler: And welcome to the Investor Coaching Show. I’m Paul Winkler. And of course we have not only the show, but the website, paulwinkler.com, where we have video archives. We have the audio podcast. Sure. You can even sign up for a phone call at any of our offices around town if you hear us talk about something and wonder a little bit more about it.
A rush on gold
That’s one of those things. I don’t talk about a lot, but it’s kind of a cool little feature where you can actually literally get on the schedule of one of the people, and, all of the people that I work with. They’re all multi-degreed planners. And so on the website, also just keep in mind that we actually transcribe the podcast and also have the videos and segments of the book that I’m coming out with little by little.
Okay. So one of the things that I want to talk about here is something that I hear and it’s just, it just depends on when, you know, during the 2008 mess in the market and the economy, you know, there was a huge rush on gold people buying gold and people, you know, looking at gold as an “investment.” And one of the things that we find is that when you have some economic uncertainty and people typically are attracted to it, but you know, the thing that I’ve talked about is how gold does as an investment.
But I think, you know, what a great way to really illustrate this and walk you through this. How about take a commercial on this very topic that I saw on the TV the other day and just run the commercial and then just comment on it afterwards. So that’s exactly what I’m going to do. Hang on. Just let me pull this up for you.
A gold advertisement
Gold Advertisement: As the original host of wheel of fortune, I was blessed to be part of building one of the greatest game shows in history. During that time, we handed out millions of dollars to thousands of contestants. I thought, what if we paid the contestants their winnings in gold instead of cash and prizes. Back in 1976, we had a wonderful contestant named Lee whose three-day winnings were valued at $12,850. And you know what? That was a pretty big haul back in 1976. So I wonder what would’ve happened. If Lee had put $12,850 in cash and then put $12,850 in gold in a safe, just sitting there side by side from 1976 until now.
Well, it went back into random numbers. And what I found was amazing. We all know that $12,850 in cash would still be sitting there, but it would be worth a whole lot less than it was in 1976. But that $12,850 in gold, safely stored away, it’s worth $135,000. As of the taping of this commercial. Now that’s more than 10 times the original now, and that’s why I’ve been putting my money in precious metals for years. And I don’t see any reason to stop.
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Is it an investment?
Paul: So what an interesting premise, what if we paid our contestants in gold? Now, one of the things that I talk about on this show quite often is, you know, in investing, when our investments—now investments are vehicles that somebody is paying you to use your money. Now, this is something that if you’ve heard me say this before, it bears repeating, because people forget this. Somehow they think that I’m going to invest in gold. And I say, well, you don’t invest in gold; you buy gold. It’s not, you don’t invest in gold anymore than you invest in a shirt or invest in a car.
They’re not investments. They go up and down. Now cars can go up in value, right? If you have a classic car, it can go up in value. So it’s not an unlike comparison, but you don’t invest in something that just sits. This is the way I look at it. And one of the things that one of my professors actually talked about, he says there has to be a cost of capital is the way he put it. In other words, there has to be a cost to use your money. And when we’re dealing with a CD, you get the cost to use your money is the interest rate that has to be paid.
If I lend money to a corporation, the cost to use my money is the interest that they pay. If they issue a bond, if I buy the stock in a company, the cost to use my money is the fact that the company has given up rights, or whoever owned it before, has given up rights to the assets of the company. And they’ve also given up rights to the earnings of the company going forward. Now with gold. I said, “well, what if we took this money?”
And he’s giving the example of somebody that won a jackpot of $12,850 and saying, what if I paid them in gold? Now there’s a premise when you’re, whenever you’re selling something, a good thing to do is to compare it against something that’s worse. You know? So if I want to get you to revise something, I’ll compare it to something that’s worse than what I’m offering you. And then you’ll go, wow, I really need to do this because this is better than what I’ve got or better than this other alternative.
So what does he compare it to just leaving it in cash? It would be like burying it in the backyard, right? So he’s saying if I had this winner of the $12,850 jackpot or prize today, what would that money be worth while 12,850, if it were buried in the backyard? And then that was all that happened to it. But what if it were put in a gold and wow, how much money would you have? And, it’s $135,000. Wow. Based as at the time of his taping of that particular commercial.
Well, I look at that and go, yeah, that sounds really good. And to the uninitiated that doesn’t understand that 1976, now you could buy houses for $30,000. Now it’s $300,000. You could buy a car, you know, for $3,000. That’s what, that’s what a car cost. So if you look at that and say, well, gee, you know, now a $3,000 car is $30,000. That’s 10 times as much as this tenfold increase on gold.
Let’s say, cause it’s a little bit more than tenfold, but it would be $128,000, right? So $12,850 would be $128,000. And then you go, “Well, that doesn’t, that doesn’t sound like it really did that.” Great. When you think about it that way now does it. Now let’s make it even worse. Let’s say if we put money in large US stocks as measured by the S&P 500, there’s just the 500 biggest companies. What would that hundred, what would that $12,850 be worth? Well, it would be at the end of last year, I’m just using year end numbers, $1.5 million plus versus 135,000.
What about if I put it in the 20% smallest companies, you know, just the, what we call the crisp nine. University of Chicago just tracks this stuff and they have these indexes. So the nine to 10 is 20% smallest, $2.9 million versus $135,000, a U S large value companies, almost $2 million, just shy of $2 million.
How about a small value, $8.2 million. Those are the two academics that didn’t a lot of the research on value stocks. And they have a grouping of stocks that they put together and report on the returns, $8.2 million.
And then, you know, international small companies, I didn’t do value, but that if I had done value, it’d be, it would have knocked everything else out of the water. But, you know, small growth value, international companies, $3.3 million. So you look at that and go, Whoa, wait a minute. Now, why didn’t they do a commercial saying, “well, what if we had done this?” Well, because the reality of it is these people that sell this gold and sell investments—like there, I even called it an investment, Oh my gosh.
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It’s like a casino
Now that they sell this stuff to people, they make huge markups on this. And, you know, I often use the example of casinos. You know, it’s like, they just want you in there gambling. They just want you in there gambling. They don’t care if you win or lose or whether the gold goes up or down in value. They make money on the markup. And you know, I’ve often talked about how, if you look back at the point in time, when we had the gold rush in America and people go West and everybody runs out; they’re trying to make their mark and get a bunch of money by finding gold and then getting rich.
And I often like to point out it is not the person that went out in prospecting for gold that got rich. It was the people selling the implements to find the goals. So, you know, whoever is selling the wheelbarrows and the picks and, and, you know, the, I don’t know, maybe tents and things like that. You know, whatever you use when you’re going out and looking for gold and you have to stay in a tent, are you going, you know, get pickax or, or, you know, have to get something to dig into the ground or the buckets or whatever you need the sifters. Those are the people that make all the money.
And it’s just that they just rely on somebody that is greedy enough to want to go and try to find gold. And then they kind of play off of their desire to get rich. And those are the people that really got rich. That’s the reality of things. But, you know, gold is just, people think it’s a store of value and I’ve used the example that you could buy a good men’s suit a hundred years ago for an ounce a gold. And today you can buy a good man suit for an ounce of gold. It isn’t a really good store of value.
Volatility is important
And here’s the real kicker. If you look at the level of volatility, so, well, you know, you’re all you’re comparing the stock market to gold and the stock market is so much more volatile than, than gold is. You know, it’s not a valid comparison. Now you ought to compare it to something that’s more like it. And I would say, no, actually gold is as it’s just as volatile as the stock market. If you look at the standard deviation or how much the return varies around the mean return or the average return, it is a hugely volatile thing.
So you don’t even get the benefit of decent returns with no volatility. It’s mediocre returns with lots of volatility. And that is why I tell people don’t, I just wouldn’t do this. This wouldn’t be a good, you know, if you’re looking at it, stock portfolio, you’ll have mining companies in that portfolio. You’ll have some exposure to it. If you really feel like you need to have exposure to gold, but at least the mining companies are doing something they’re producing something. Now albeit, it’s kind of rough.
Say no to commodities
When, when gold is going down in value, it’s not so good for them either, but at least they have the ability to cut expenses or do things that will help the profitability of the company. And that’s what you’re buying. When you buy stocks, you’re buying the rights to the profits of the company. So just another reason. And this just is not just gold. You know, when I look at commodities in general, you know, there was a big push on commodities a few years ago, where all of a sudden people say your data, Oh yeah, you need to have this commodity that commodity, you ought to be investing in lumber and pork belly futures, or, you know, whatever commodities in general.
It was a big thing back in 2008, because they had a negative correlation to the stock market. In other words, commodities went up when the stock market went down and all of a sudden people were falling over themselves, the investment industry, trying to sell commodity funds. And one of the points that I made here was like, “Hey, just cause something did this recently does not mean it’s a long term trend and you ought to be jumping on board.” And then of course what happened with the commodities funds? They dropped like a rock. I mean, you know, pun intended because rocks, I guess, would be a commodity, but they didn’t do well.
I mean, it’s just really, really bad returns, but you know, in the investment community that that’s, it’s hard to admit that you’re wrong. Right. And they held onto it and they continued. I continued, I only see this kind of stuff in investment portfolios and I don’t see a strong evidence that it’s a good thing to be investing in by any stretch of the imagination. Again, it’s an investment vehicle. So to speak, if we’re going to call it an investment vehicle, I’ll cave and do that for a second, that doesn’t have investment qualities, which is the cost of capital.
So I would stay away from commodities funds. I would avoid that type of thing. I would avoid commodities, whether they be gold, whether it be silver, whether it be diamonds, whether it be, you know, whatever, you know, it’s not, not something that I would engage in. I think it’s not a good prudent way of investing money and not an investment at all.
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