By Chief Investment Officer Tom Kelly, CFA.
We all like to consider ourselves investors, but sometimes find ourselves speculators. It can be exciting to predict, tinker, and attempt to outsmart, trying to find the golden opportunities to strike it big. Sometimes it pays off, but many times it leaves us emptyhanded. Good investing is often boring: global diversification in cash flow-producing companies; holding for the long-term; patience in valuations. Anyone can do that, right? Many can, but few do.
Take, for example, the parties in the California Gold Rush of the mid-1800s. Prospectors from all over the world went to California with the hopes of finding that illustrious metal; few made it big, while most ended up with nothing.[1] However, retailers selling the prospecting supplies, merchants, and transporters benefited greatly from the growth of the economy. Samuel Brannan was said to be the wealthiest man in California at the time.[2] His profession? Publicizing the Gold Rush in newspapers and running a store selling picks, shovels, and pans. The difference in investing vs. speculating.
While you might have thought we learned our lesson, the original 49ers aren’t the only speculators in gold. To a large extent, the gold bugs of today are just as starry-eyed as those of the past, betting on gold as an inflation hedge. However, history has shown that over long periods of time, gold has often failed to outpace inflation, even before considering fees. Just look at inflation (as measured by the CPI-U index) vs. gold (as measured by the gold spot price from Bloomberg) returns since 1980.[3][4]
Sources: Morningstar, as of September 2022. Inflation is represented by the Consumer Price Index for All Urban Consumer (CPI–U), not seasonally adjusted. The Gold Spot Price is based on USD returns from composite prices from Bloomberg. See Important Disclosure Information.[3][4]
Since 1980, gold has failed to live up to its luster as an antidote to inflation. The U.S. stock market (as measured by the S&P 500) on the other hand: up nearly 9,000% over that same period.[5] However, it is important to note that the S&P 500 has had periods of up to 17 years when it has underperformed CPI-U inflation on an annualized basis.[6] Nonetheless, while past performance is no guarantee of future results, this may be a lesson the next time you hear others panning the stock markets.
Important Disclosure Information & Sources:
[1] “California Gold Rush“. History.com Editors, 10-Aug-2022, history.com.
[2] “Samuel Brannan: Gold Rush Entrepreneur“. PBS, pbs.org.
[3] The Consumer Price Index for All Urban Consumers: All Items (CPI-U) is a price index of a basket of goods and services paid by urban consumers, including roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force. Returns data sourced from Morningstar.
[4] The gold spot price is measured by composite USD price returns as measured by Bloomberg. Returns data sourced from Morningstar.
[5] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Returns data sourced from Morningstar.
[6] “Are Stocks Riskier Than Bonds?“ Bobby Adusumilli, 07-May-2021, sjsinvest.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
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