Weekend reading

Good reads from around the Web.

A lot of stock market pundits have been dancing on the grave of gold bugs recently.

I’d warn: Not so fast.

The key fact: The price of gold has fallen by as much as 38% from its peak in dollar terms – from over $1,900 to below $1,200 – before a slight ‘dead metal on a trampoline’ bounce took it back above $1,200 again.

So that’s a big fall that’s happened fast. A genuine plunge! And since the most vocal of the Internet’s gold promoters boasted of only owning gold (with perhaps a smidgeon of silver to make their gold look golder) it must have been a 2008 experience for many goldinistas.

Even more diversified portfolios have struggled with gold. The permanent portfolio asset allocation – which became far more popular after gold’s five-fold rise – was negative in 2013. (It wasn’t helped by having a 25% allocation to government bonds, as well as 25% in gold.)

In contrast, those invested primarily in shares made out like bandits. Given how often shareholders were called ignorant fools by gold bugs in the past few years for believing the economic world wasn’t about to end, you can understand why there’s some schadenfreude.

The danger of being ‘all-in’ anything

One reason not to dance on the grave of gold bugs, however, is because most of them aren’t dead.

A 38% decline is not a 100% decline. Unless they were leveraged up into gold (and I’m sure some of the vocal minority were) then they still have nearly two-thirds of their money left.

Gold has had a terrible year, but it hasn’t been evaporated.

And that’s important, because the critical thing is not to make the same mistake that the 100%-in-gold crowd did.

Sure, it’s easy to feel gold bugs earned their comeuppance. As Barry Ritholz put it in his 10 Reasons the Gold Bugs Lost Their Shirts on Bloomberg this week:

More than any other investment, gold seems to involve a stream of fantastic tales of imminent societal collapse. Every potential problem gets blown up into a coming apocalypse. Fiat currency leads to worldwide collapse, as the dollar falters and hyperinflation appears. All paper money is going to be worthless, so you better have some gold if you want to feed your family.

Except that the fear-mongering is always backward looking. The dollar had already collapsed by 41 percent from 2001-2008; we had very strong inflation in the 2000s, and much more moderate inflation after the financial crisis.

Here speaks a man who has clearly encountered the most devoted investors in gold – and I speak as one who knows from experience.

Yet the rest of Ritholz’ article is an excellent primer on why nobody should get too besotted with any asset class.

He discusses how people create narratives that they believe no matter how the facts change. How they ignore prior price moves and assume it’s a one-way bet. How they attack the skeptics and construct elaborate theories to explain it when things don’t go exactly as predicted. And so on.

He could be talking about the late 1990′s Internet bubble as much as the recent gold rush.

Beware becoming an equity bug

For me, the takeaway from 2013 is not that it was wrong to own any gold, or even that it was wrong to put 25% of your money into gold, as with the permanent portfolio. That particular asset mix has seen negative years before, but it’s done perfectly well over the long-term.

The lesson is don’t put all your money in any one asset class – or at the least don’t do so without knowing you’re taking a big risk.

After 2013′s blistering run in the stock market, that’s something for equity investors to think about, not gold bugs.

As for the yellow metal, I think I’m a buyer now. Small amounts, for the long term, for diversification.

Or, heck, and for trading with Mad Max for petrol in the desert.

Is this how it starts? ;)

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Holiday destination of the week: The pound has been strengthening against other currencies, as signs of spunk in the UK economy increase the odds of an interest rate hike. Bali tops The Telegraph’s list of places your pound goes furthest abroad, followed by Portugal and the Czech Republic. Bottom of the list: Australia and New Zealand.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Swedroe: Take the plunge or drip feed with a lump sum? – CBS
  • A bull market in passive investing – Morningstar
  • What did we learn from 2013? – NY Times

Active investing

  • Investment trust discounts at a 40-year low – Telegraph
  • US stocks look over-valued versus GDP… – Business Insider
  • …but emerging markets appear cheap on a CAPE basis – WSJ
  • Hedge funds’ fat fees are basically a tax on the 1% – MarketWatch
  • Hedge funds (attempt) to justify themselves – FT Alphaville
  • Top 100 list of hedge funds in 2013 [Hands up if your own returns beat most of them!]Bloomberg

Other stuff worth reading

  • Beware: The past is not the future – WSJ (by Mike)
  • Why we should give free money to everyone – De Correspondent
  • What if you’ve still got all your money in cash? – Forbes
  • How to tackle your late tax return – Guardian
  • Classic cars, watches, and art beat shares [Search result]FT
  • 5 economic reforms worth fighting for [Warning: Essentially communist agitprop, but a sign of the times]Rolling Stones

Book of the week: If you Google “Amazon Investing Books” you get this list. The entire top 10 are for active traders, with many concentrating on the dubious art of technical analysis. There’s not a single passive investing book mentioned, so fans of Smarter Investing or Investing Demystified can at least be happy they’re like Nirvana fans before the release of Nevermind.

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  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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