Poor, Poor Investors and Analysts Who Have Blinders On

By: Michael Kilbach | Fri, Nov 23, 2007
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As an investment, we do not favor gold and silver over US stocks or US stocks over gold and silver, but rather we believe that all investments are cyclical and that recognizing and investing in the long term trend is the key. However, in our opinion bypassing the distorting effects of inflation for a clearer perspective of the markets real performance is the secret.

It is our assumption that most investors reading this article are interested in investing in gold or silver for whatever reason. It is also our assumption that many of these same readers have experienced negative feedback from friends, family and colleagues for their decision to do so. Why? What are these other investors missing? Why do investors seem to be so emotionally attached to the US stock markets while having such a negative, close minded attitude towards gold or silver as a potential investment? Understanding this can not only give us insight into their thought process and therefore give us the potential to possibly help them, but this knowledge can also help us gain confidence in our own decisions; those that we believe will lead us to our goal of profit.

We should first mention that there are plenty of reasons why investors are bias towards one way of thinking when it comes to investing. These reasons have been explained on our website investmentscore.com and are not mentioned in this article. In this article we will focus on one major argument that is regularly touted as a general belief by the public, media, financial networks, advisors etc. "You can't argue with performance and gold and silver have historically been a very poor investment. The gold, Dow Jones ratio may be dropping since 2000 as gold outperforms the Dow Jones but look what happened to gold from 1980 to 2000 when stocks greatly outperformed gold."

Unfortunately most investors put too much emphasis on their recent personal experiences and not enough emphasis on historical data. In our opinion it is human nature for people to want to "stick with what works" and as a result they are very resistant to change. Because investors have recently experienced the emotional 'highs' of the US stock markets bull run from 1980 to 2000 they have a natural resistance to change; the result is that they oppose the idea that stocks were not a very good investment during the 2000 to 2007 period.

Interestingly, these same investors who state "...you can't argue with performance" are much closer to understanding our position than they realize. It is our belief that they base their decision from the overall investment returns of 1980 to 2007, in which case their argument is valid. However, please observe the following charts carefully for another perspective.

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We do not believe one investment asset class is the ultimate winner that should be considered the best investment class over all others. We think this is a fault in the way investments are commonly analyzed. The question is not, "what is the ultimate investment of all time?", but rather "what is the best investment class for this market environment over the next ten or twenty years"? We believe that this is the major misunderstanding for most US stock market and gold bulls. As you can see market conditions do change, and investments are cyclical. We do not advocate owning metals through all market conditions just as we don't advocate owning stocks through all market conditions. From 1970 to 1980 it made sense to own commodities, from 1980 to 2000 it made sense to own US stocks and from 2000 to 2007 it has made sense to own commodities again. But are we in a major long term bull market trend in commodities where an early investor can hope to make quadruple digit returns over the long term?

Unfortunately the challenge in locating these long term trends is finding a way to bypass the distortion that inflation has on the markets, which in our opinion masks the severity of real corrections in US stocks. It is our opinion that since 2000 US stocks have generally been a very poor investment when adjusted for "real" inflation. Just because the numbers of a market is increasing does not mean an investor is making a "real return" on their investment. We believe that one must always consider all elements of a market, including what is happening to the value of the measuring stick of that market. This is the basis of our analysis at our website and a topic for another time.

In our opinion the argument that investors can not "time" the market is a flawed assumption but that is also a discussion for another time. Investors who are interested in some common sense insight to the financial markets can visit us at www.investmentscore.com. Here you may also subscribe to our free newsletter and learn more about our strategies. Finally, if you think this commentary could help someone you know, please do not hesitate to forward a link of this article to them. Thank you.

 


 

Michael Kilbach

Author: Michael Kilbach

Michael Kilbach

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