1. Given the current huge wave of money printing, what do you think is the best method of investing right now?
2. To me it seems that the best method is to be shorting on the dollar. What is your opinion of that?
3. What about gold or silver? Are these good investments? Why are they good? Is that because we expect the dollar to lose its status as reserve currency and be replaced by gold and silver? Are there other reasons to buy gold/silver as opposed to investing in the economy in general?
4. Now a more general question. If the Austrian school of economics is the only valid school, then I expect most Austrian economists to be very successful investors. Is that the case?
5. What special tools does Austrian economy give us for investment strategy that those who don't adhere to Austrian economy don't have? In other words what is the comparative advantage of Austrian investors as opposed to mainstream investors? What do they know that others don't, and how can they use this information for better investment?
Thanks.
By the way, two more observations:
QE1+2 were several trillions, so that is not vast in comparison to the size of the economy. I think it is plausible that it will not lead to hyperinflation and that's probably why inflation is not currently out of control.
Japan has had stimulus and low interest rates? Why no hyperinflation? Admittedly the Nikkei hasn't done well. But again I advocate a global perspective.
It is true that some (I don't know how much) of the stock price increase is due to inflation. But the recent bailouts also represented a real transfer of money from taxpayers (ultimately a lot of individuals) to a lot of financial institutions. So don't dismiss that. They are real profits! It's better to work for them and get a big salary, lots of stock options and a huge bonus. But I do the next best thing and own the shares (indirectly through index or managed funds, and my pension).
OK I've gone back to look at what I originally said.
I said index funds and managed funds (the kind which have a long track record of being very successful, i.e. outperforming the best asset classes) are under-rated. I didn't even say they were better than gold, just under-rated.
Then I gave an example of how well the London Stock Exchange has done and how I've earned a good return in Fidelity Special Situations (it invests a lot in the UK, but also in some foreign stocks) and aims to outperform the FTSE.
And then I get criticised for apparently arguing the US stock exchange is a good investment. Here is one of the facts I was referring to
http://news.bbc.co.uk/1/hi/business/575349.stm
That is a better return from buying gold. So how do you know when to get out of gold and back into equities?
Sam,
First and foremost, please read this and learn how to quote. The way you are currently doing it is extremely confusing.
Second:
Peter Schiff saw it coming a long time before hand but didn't know which years it would happen. Please tell me if anyone ever correctly predicted like this: "there will be a crash in 9 months." Or "Sell the Dow at 13,500, buy at 7,500." That is what I am doubting. The onus would be on someone else to prove this. Please give a reference if someone did.
Please do not try to flip the burden of proof. You are the one who stated "I think most, if not all, of them called it over such a long time period that if they used it to inform investment decisions, they may have sold a long way below the peak, and we all know the stock markets have rallied over the last few years"...implying that if you saw the crash coming, you were likely to "time it wrong" and lose out from acting in preparation too early. I'm asking you where is your evidence for this. If you don't have any, just say so.
The point is you want to be in equities as they do best on average.
Over what time frame? In what environment? Compared to what? Do you have any idea what you're even talking about?
This is a large part of my point. Based off of everything you've said here it seems pretty evident you have a minimal grasp of economics and very little knowledge of investing. You glanced through Peter Schiff's book and felt you were in a position interpret his recommendations. You read some 12 year old article that basically says "it's better to invest for the long term" and assume it means what, that the US stock exchange is currently a good investment?
My point is I really don't think you are in any position to be giving investment advice.
Let me begin by saying I do not criticize you. And indeed I thought you were referring to US stocks. I know nothing about UK stocks.
The timescale of when it all ends depends on when the politicians here fear they will lose elections by creating inflation. So far there is no hint of that. They are so far denying there is any inflation, at the same time saying how wonderful it is to have inflation, and if only we had more, poor us. The Weimar Republic had economists denying the existence of inflation at the very time people were geting paid in wheel barrows of money. So we will have them too, I think.
If indeed the dollar is doing worse than the Euro, which I doubt, and the pound, which I don't know, then coming here is going from the fire into the frying pan at best. Just being foreign does not mean desirable. What you want are countries like Canada and Australia and New Zealand [commodity based economies]; China [net exporter]; Germany [net exporter] if you could extricate her from the Euro and its headaches [having all those PIIG mouths to feed]; Singapore [capitalist country like no other]; maybe even Japan [net exporter with stocks plunged after being nuked, but still has the same economic know how].
I don't think several trillion is something to sneeze at. Plus, the Fed does not have to open its books by law, and refuses to do it voluntarily, so who knows what they are up to? And inflation here is not under control. It is bad now and the worst is yet to come.
Japan is such a powerhouse of production and underconsumption, net exporter with 25% saving rate, that prices should have gone down all the time. Their inflation was prices not dropping. The US is net importer to the tune of $40 billion a month, with 0% saving rate.
Yes, the banks made a lot of money from the bailouts. But they did not give any of it to the stockholders, and will not in the future. Why should they? The stockholders are stupid enough to think that the gamble of the stock price going up for no reason at all [stock price should be related to dividends paid, but people have become such idiots they have been fooled a stock thta never pays dividends is worth something anyway] is return enough for them.
Also, the banks in US are all on brink of bankruptcy, again. They have no one to lend to because everyone is broke, and when interest rates are forced to rise because inflation is finally so high it cannot be lied about, they will be in deep trouble. I'm too buzzed at the moment to remember how this last detail works. Maybe someone else can help.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I think equities will do well over 40 years. I think they will probably also do well over 10 years and almost certainly do well over 20 years. I assume that because people keep turning up and saying I've got $2-10,000 to invest they are probably in their 20s. Also there are lots of threads about university, even high school. So I think most of have many decades of investing ahead of us. I am mid 20s. If you are in your 20s you should be making investments you will not touch for decades. I think it is highly unlikely that gold will outperform equities over the next 40 years. Even for 20 years. In fact once you include re-investment of dividends I'd be surprised if you could find a 20 year period in which gold outperformed equities.
That 12 year old article didn't "basically say "it's better to invest for the long term"" It demonstrated that equities with re-investment of dividends grow from £1 to over £16,000. I think gold was about $20 at the time, so you can see that equities massively outperformed gold. Look it was quoted in The Economist magazine a few weeks ago. I'm not sure how disreputable you think they are, but the equity premium is common knowledge. Also I don't see how your little historicist rhetoric that 112 to 12 years ago does not apply today, should give you any particular authority to pass judgement on my suitability as an economist or an investor. As it happens that article was pointing out that the growth of £1 to more £16,000 was not as good as other measures, but still better than other assets. There was no mention of gold being a good investment because growing from about $20 to $2000 in the same timeframe is a lot worse.
Look, I agree if you are diversifying out of US equities you don't have to get back in. You could invest purely in UK, Japense, other European, Asian, Latin American etc. equities. I've never held a fund specialising in US equities, so probably having very minimal exposure. So I wish you'd stop inferring that I specifically single out the US as a good investment. Peter Schiff has explained that his strategy is to invest in foreign stocks with a smaller proportion in gold. I'm echoing his points IN CONTRAST to lots of people on this board who advocate investing most or all directly in precious metals. That's much riskier than Schiff's strategy.
The reason I used that as an example is that I recalled some information I was sent from Fidelity which showed that a surprisingly large proportion of equity growth from the last few decades came from very short bull markets following bear markets. I am less sure of the details, but I then recalled Peter Schiff being very bearish about US equities long in advance of the peak. And as stocks have rebounded, most goldbug types (not sure if Peter Schiff specifically was one of them, but I'll check) have warned about impending further falls at 7,000-8,000 as the Dow began it's rise to the current level of 12,800. In fairness if you sold at 14,000, even 12,000 and invested in gold you're up on the market. Probably the best strategy would be to sell around 12-14,000 and go into gold and then get back in the Dow at 7,000, but who knew that 7,000 was the bottom! That's the issue.
I have a BSc and MSc in Economics from a Russell Group university (that is the best 20 universities in the UK for research). In addition to formal courses I've studied Austrian economics independently. I'm guessing you're quite clever John as you display the same argumentative style I was subjected to at my interviews at Oxford University. But you'd better be well on your way to having a PhD to be qualified to be so dismissive of me. OK I realise you will probably say that is a fallacious appeal to authority. But really I don't see where I've displayed a lack of understanding of economics.
And on investments, this is the default advice! If you have a pension it will probably go into index funds.
Dave
You are mostly making the same points I am. It is best to be in Asian stocks. But one reason stocks can do well if the economy plummets, is the stocks sometimes rely so much on overseas income. Two thirds of the FTSE income comes from overseas. I wouldn't be surprised if the USA was similarly international and that could explain part of the puzzle of why the market is doing so well when the economy is doing badly.
But it is still doubtful that a basket of global equities would be outperformed by gold.
John I have found another source which quotes the research done by Fidelity to which I was referring:
http://www.investorschronicle.co.uk/Columnists/GuestColumnists/article/20110405/54bbd5a8-5f58-11e0-a1e9-00144f2af8e8/Staying-invested-beats-market-timing.jsp
John, you refer to Murphy who says economics won't make you rich, but may prevent you from going broke. Herbert Gintis makes exactly the same point in his favourable review of Malkiel's Elements of Investing:
"Malkiel's Random Walk Down Wall Street is one of the best finance books ever written. It is still a pleasure to read. This book is more nuts-and-bolts, but the advice is absolutely first rate. Here are their four main points: 1. Save regularly and start early. 2. Use company- and government-sponsored retirement plans to supercharge your savings and minimize your taxes. 3. Diversify broadly over different securities with low-cost "total market" index funds and different asset types. 4. Rebalance annually to the asset mix that's right for you. 5. Stay the course and ignore market fluctuations; they are likely to lead to serious and costly investing mistakes. Focus on the long term. I think point 4 is way overstated, however. I would rebalance every ten years, or maybe even twenty years. Rebalancing is costly. When you buy index mutuals, never pay more than 1/5 of one percent in overhead per year. If you buy international mutuals, you will have to violate this rule, however. Don't buy only index stocks. Also index bond funds. Anyone who tells you he can beat the market without being an expert is a liar or a fool. Even an expert can only beat the market by a tiny bit with "inside information" and an understanding of market dynamics. Malkiel and Ellis tell it all. Give this book to your parents if you want to inherit in your old age, and to your children if you want them not living with you in their middle-fourties"
Successful investing/trading/speculating is a lonely endeavor. Conforming to accepted "wisdom" and seeking a pat on the back from the herd (or anyone else, for that matter) is not a part of it. Getting to this state is not easy. An essential passion about markets drives to a lot of work and study, which lead to the most important parts: confidence in your own judgment alongside a humility to accept being wrong -- but the journey is well worth taking. The maxim: "Those who know, do -- those who don't, teach" is especially relevant in this realm.
So don't ask to be taught, especially not on an online forum.
Sam:Peter Schiff has explained that his strategy is to invest in foreign stocks with a smaller proportion in gold. I'm echoing his points IN CONTRAST to lots of people on this board who advocate investing most or all directly in precious metals. That's much riskier than Schiff's strategy.
Please show me someone who advocated investing most or all directly in precious metals.
Bingo. You're not offering anything of the sort the OP was asking for. You're more or less regurgitating the same thing anyone could get by turning on CNBC. And you obviously don't have a very good understanding. I mean you looked at the numbers in that article and said "that's a better return from owning gold". And you spent a great deal of this "i think equities will do well" post doing essentially the same thing. I spent multiple paragraphs in the very second post on this thread explaining how gold almost never earns a "return" and almost no one buys it for that purpose. You continuously talk as if gold is an investment when I spent the better part of that post explaining how that's by and large exactly not what it is.
Trust me...Based on everything you've said I do not doubt that you got a mainstream economics education as well as a typical investment education. You are, after all, offering nothing more than "the default advice". And exactly how many people lost their life savings in the last 3 years doing that, again?
I have no idea why you felt the need to make that last post of elementary grade generalized investment "advice". I thought it was obvious the OP was looking for a little more than the Dave Ramsey refrain. Again, if he was looking for the default "save early, and get yourself in some good growth stock mutual funds" tune, he could easily turn on the financial news or a radio. (And personally, if someone needs to be told that "hey, it might be a good idea to invest in your company 401k at least as much as they will match"...I would say they're gonna need a lot more than a book if they hope to not end up wearing a "Welcome to Wal-Mart" button on a bright blue vest.
1. Save regularly and start early.
Saving is great but if you're starting from scratch and you don't earn a million-dollar salary, you're never going to build enough capital to start your own business. You would have to get VC support for that. While that won't stop you from nickel-and-dime investing, it's an important point that is often overlooked, IMO.
2. Use company- and government-sponsored retirement plans to supercharge your savings and minimize your taxes.
Yikes. Stay out of 401(k)s and IRAs, those trillions are a fatted calf and the cash hungry Federal government is salivating over them. The tax-deferral is just a lure, IMO. I don't know how much longer they're going to let the program run before they nationalize the assets but nationalization is inevitable.
3. Diversify broadly over different securities with low-cost "total market" index funds and different asset types.
This is only good advice when stocks are in an inflationary phase relative to commodities or other inflation shelters. For the last two years, your money would have been way better off in gold, oil or silver than in the stock market because stock investors have been fleeing inflation and other risks into the safety of commodities.
Index funds are obviously better than managed mutual funds but neither one is very good at all. Both are "blind investment" into "the market" which I think is a serious error. Speculation is only profitable in one of two ways. The first is blind luck. If you buy a stock and it goes stratospheric, you got lucky and wealthy. But that's not what professional speculators are doing. They make money the second way which is when you buy a stock because you have good reason to believe it's going to go up. The lucky blind speculator will eventually go bankrupt if he doesn't stop blindly buying stocks (buying mutual funds, whole-market or even market sectors are all forms of "blind investment" in my book).
The idea of outsourcing your speculation to professional speculators doesn't make much sense to me. Speculation works because people don't put their own money on the line lightly. Professional speculators who manage other people's money are not as careful with the money they manage as they are with their own money, no matter how hard they try to be. It's always going to be worth it to take a risk with someone else's money that you would never take with your own. If you lose a few percent, your clients won't be happy but then nobody else is offering anything better. However, if you make a large gain, you will get publicity and more customers.
4. Rebalance annually to the asset mix that's right for you.
You should be rebalancing constantly. Anywhere you put your money, you have to follow the news daily. If you buy gold, you better read every scrap of information about gold and anything that might affect gold that you can get your hands on. Same goes for oil, ag, any stocks you hold, real estate, you name it. That's the definition of "personal responsibility." You're responsible for keeping track of and taking care of your own stuff. No one else will do it for you, even if they give you a shiny brochure full of promises that they'll "take care of your money for you."
5. Stay the course and ignore market fluctuations; they are likely to lead to serious and costly investing mistakes. Focus on the long term.
Horrible advice. Do not ignore the wider market. When there is a bear market coming, you run. Run as fast as you can! There is no such thing as "paper losses" just missed opportunities. Let's say you hold a staid American corporation in 2007 that is supposed to be a "value investment", let's say Pfizer which was trading around $25 then. The financial crisis begins and, instead of fleeing the market, you "hold for value." Pfizer takes a huge dip down to $12.72 but has now "recovered" to $20 - in 2011 dollars, which are significantly less valuable than 2007 dollars. Let's say in another two years your stocks will 'fully recover' to $30 where they will once again be as valuable in inflation-adjusted terms as your original investment. The first thing to note is that you haven't really made any money, you just haven't lost money to inflation. But the second thing to note is that if you had cashed out half way down, say at $20, and then bought back in at $12.72, you still could have actually made some money and when the stock gets back to $30, you'll actually have something to show for your effort rather than just inflation neutrality. If you know for a fact Pfizer isn't going bankrupt and will weather the financial crisis with its market intact, you might be right to own Pfizer but it doesn't make sense to keep your money invested anywhere in the stock market when the whole thing is going down at once and you can see it about to happen.
The whole thing is that people are lazy and greedy. They want a magic cure. They want an investment that "just pays out without worries" - hell, they'll even settle for a much more modest growth rate so long as they don't have to worry about the details. But the fact is there is no such thing, just a whole lot of snake-oil salesmen promising they are selling it. Your capital is at risk 100% of the time no matter what you have it in (even cash, even gold, even real estate, there are no safe-havens) and that is the sorrow that comes with money. But if you do your homework and learn to buy and sell at a profit, you can escape the workaday life of constantly selling your time and energy to someone else in order to make a living.... that is what capitalism is, that is what the "leisure class" has that others envy. But nothing in life is free. When you have enough capital that you can earn a living through buying and selling (speculation), you also have enough capital that you must constantly tend to it and keep track of it and avoid losing it, which is a lot of work in itself.
Clayton -
"You are, after all, offering nothing more than "the default advice". And exactly how many people lost their life savings in the last 3 years doing that, again?"
Nobody lost their savings in the last 3 years by buying the index. The US and UK indices both lost about half their value, then bounced back to about the same level over the course of 3 years. OK a zero or say at worst small nominal loss in a period of worse than normal inflation is not good, but it's not disastrous, especially for most of the youngsters who want touch their investments for another few decades.
Who lost their savings? If they really did that badly they were in derivatives or they were heavily weighted towards bad firms. This is the peril of not investing in indices, but stock picking. Perhaps you are referring to people who were about to retire, but found that their pension fund (if they had a defined contribution pension) had lost a lot of value. If they were in really bad managed funds, they may still be a lot lower. If the fund managers waited until the markets hit the bottom, then sold, yes you'd could have halved your holdings in 3 years. But no such problems if you had an index fund.
I'll try to explain why it is important to make elementary advice. This advice is well-known but it is important for the advisory and activist investment management industry to obscure this in order to get as many clients as possible to pay for things they do not need. So this is the elementary mainstream advice in the sense that it is what the theory and evidence suggests, but it is not the advice which is most trumpeted in investment adverts. I very much doubt CNBC would have investment analysts or advisors or fund managers saying you can get a cheap passively invested portfolio. They're more likely to say it's very important to have the right balance, and we only charge so much, but it's worth it because we have so much experience and expertise.
I do realise gold is not an investment and I thought you were only arguing with me because you did not. When I realised you did not think gold was an investment I was puzzled that you keep trying to be so rude about me. I'll go and check the forums for people who said gold is an investment.
gold is not an investment
Huh? Anything you can buy low and sell high is an investment.
If you are in your 20s you should be making investments you will not touch for decades.
Your age should make no difference except that you might be in a position to endure more privation before marriage and children, hence, you may have an opportunity to build capital before you "start life." I don't buy into the "time horizon" thing anymore, it just doesn't make sense. It's an implicit denial of uncertainty. What investment recommendations would you have made to the average German citizen in 1913? Would it have mattered whether their time horizon was 10 years, 20 years or 40 years? Would any of your predictions about the "long-run" trend of the market have mattered once war broke out? We have not reached the End of History. I find it laughable that just 50 years since the close of the greatest social cataclysm in human history (the global wars of the 20th century) some moron has declared that we have reached the End of History.
There is no long-term stability and no reason to suppose there will be no global cataclysmic upheaval in the form of drought, famine, war or something else. Renowned investor Jim Rogers is all but predicting famine in the coming decades and his reasoning is inescapable. I wonder how your stock picks will do when formerly middle class people are starving in the streets of what are today First World countries?
As far as I can see John didn't really disagree with me, except that I didn't point out gold was not an investment. Well I didn't do that because I thought so many people on here had already taken for granted that gold was a great investment. And so I thought I'd be more likely dismissed if I pointed that out, and so instead I'd simply point out that if treated like an investment, it was inferior to equities, which are basically best. From there I argued that unless you have close to six figures time spent investing would be better spent working. The fees you incur are higher as a proportion so it is even harder to beat an underlying benchmark. Abstracting from these beating the index is hard (to say that is misleading in that one might infer that chances are better if one tries harder, which probably isn't true - if you end up trading more you have even less chance due to the fees). So I said it is best to invest in funds. Few funds will outperform an index, so you could do a lot worse than to pick an index. Personally I have had a lot of success in a fund which has outperformed it's benchmark consistently. I don't really know what did which others didn't. But once a fund manager has established such a successful record it seems reasonable to believe he may be able to maintain it (obviously this cannot be relied upon, but you expect he is better than the average).
And now we have Clayton saying gold is an investment. Also earlier in the thread In response to the question of whether gold or silver were a good investment, Smiling Dave wrote: "they are good because they retain their value in times of inflation and low interest rates, because people want gold exactly then." Implying that gold is a good investment. sonofliberty75 (http://mises.org/Community/forums/t/23192.aspx) starts a thread calling seeking investment advice: "I do currently own some gold and silver, but I am wanting to get into some other investments as well"