Jim Rickards is Senior Managing Director at Tangent Capital where his clients include, private investment funds, banks and government directorates in national security and defense. Mr Rickards is also author of the bestselling book, Currency Wars: The Making of the Next Global Crisis.
In an interview 18 April 2012, Mr Rickards drew attention to one of my pet peeves when he talked about the idiocy of buy and hold investing as it applies to the stock market.
“Throughout the late 90’s and even well into the 2000’s how many times did you hear the expression buy and hold with regard to the stock market? Wall Street was preaching this to investors saying there will be dips, there will be volatility, there will be business cycles and it will go down sometimes but buy and hold, hang in there, stocks for the long run, give us enough time and you will do well.
Well that has turned out to be a complete lie. Stocks are just about where they were in 1999. In 12 years stocks have not gone up at all, and the buy and hold investor has made nothing in the stock market in 12 years, except possibly some dividends, whereas gold has gone up 800% from $200 an ounce, to $1,500 an ounce.
I think that’s beginning to sink in, people are beginning to get it, having said that gold is nowhere near a bubble, people are still underinvested in gold. Institutional allocations are about 1.5%. They might be 60% in stocks, and 30% in bonds, and 10% in alternatives and there is only 1.5% in gold. If institutions just doubled their allocation from 1.5% to 3%, there is not enough gold in the world at these prices to absorb that kind of inflow, and so this is nowhere near a bubble.
The fact is, gold is volatile and it’s not for the weak of heart, but it’ll be the only thing that saves you in the long run because it will preserve wealth, once this inflation kicks in which I do see coming. So I wouldn’t apply buy & hold to the stock market, but I would apply it to the gold market.”
I completely agree with Jim, but I would like to add a couple of things.
Firstly, as I’ve pointed out before, stocks maybe flat in nominal terms, but adjusted for inflation they are down around 40%. Investors need to understand the market environment they are operating in, and stocks are in a secular bear market.
Secondly, institutional allocations may only be around 1.5% today, but as I wrote about last year, in the 1930’s gold made up around 20% of investment portfolios worldwide, and in the 1980’s when gold spiked to $850 an ounce it represented 26% of assets held by institutions. Therefore this gold bull market still has a very long way to go.