High-risk real assets vs. boring-old MSFT
May 31st, 2006 | by mbhunter |That’s a comparison alluded to at the in the June 2006 issue of Money Magazine (eBay) in an article entitled
Risk is Back by Pat Regnier
At the bottom of the article there is a link to the latter part of the article:
Precious metals investing garnered a “sky-high” risk level, beating out Small Companies, Emerging Markets, and Natural Resources for risk. Natural Resources got a “near-sky-high” rating, which was riskier than Small Companies categorized as value stocks.
The portion about precious metals is excerpted below:
Just like oil, gold has been on a frantic tear lately. It recently topped $700 an ounce, up from $250 in 1999. And, again like oil, investors can expect huge swings of fortune.
If you bought an ounce of gold in the early ’80s, you’re down about $200 before inflation.
As an investment, gold is an oddity. It’s not terribly useful: Most of it goes into making jewelry, about half of which itself may be purchased as an investment. Gold tends to do best when people lose faith in other assets, including paper money.
There’s a lot of that angst going around.
Joe Sterling, comanager of American Century Global Gold fund, says scary world politics, big U.S. deficits and rising inflation fears are in the metal’s favor. But even if you think you can handle gold’s volatility, think twice about buying a gold fund if you also own other natural-resources stocks.
Rising energy prices have not only stoked inflation fears. They’ve also pumped a lot of cash into oil-producing countries, and it’s possible that some of that money is being parked in gold for now, says Mark Johnson of the USAA Precious Metals & Minerals fund.
Gold also seems to be a favorite of the same investors who have fallen in love with other commodities. When this bull market in real assets dies – whether it’s in a few months or a few years – you may well be glad you hung on to those boring old Microsoft shares.
Here are my comments on this:
- I don’t agree with the description that gold is “not terribly useful.” It’s durable, ductile, divisible, and difficult to come by, and that’s why it’s been used for money for millenia. Many electronic components depend on gold connections for trouble-free operation.
- I do agree that gold flourishes as an investment when people lose faith in other assets “like paper money.” That’s why, in the long run, it’s a good store of value — and why it’s on a tear today. Look at what you could buy for a $20 gold piece in the 1920s versus what you could buy with that same $20 gold piece today. About the same thing! You can’t buy anywhere near the same thing with a $20 bill today.
- I don’t agree with the relative transience of this bull market in real assets, mainly because I don’t see inflation stopping anytime soon, nor do I see substantial amounts of gold or silver being mined anytime soon.
- It may well be that MSFT outperforms precious metals over the next few years. I don’t have a crystal ball. In its favor, MSFT does have a lot of cash and still a pretty good grip on its core competencies to keep the money flowing as long as people still upgrade their computers and want more and more capability embodied in gee-whiz operating systems and office applications. Would you make that same bet 10 years out? 20 years out? 30 years out? Warren Buffet’s favorite time frame for holding a company may be “forever,” but he has been known to sell on occasion, because companies aren’t forever. Only one of the original members of the Dow-Jones Indistrial Average is still part of it today. Lots of things could turn Microsoft’s fortune — or any otherjuggernaut company — permanently south. Gold, on the other hand, was around well before the Dow, it’s still around today, and it will be until the Earth is destroyed. But this near permanence of gold by its nature lends itself to be a long-term investment, as in collecting them and passing them on to your heirs — much the same as passing land to your heirs. So perhaps there’s nothing really wrong with favoring MSFT’s growth potential over gold’s for the next few years, but it dismisses the fact that gold will be around a lot longer than even the mighty Microsoft. Maybe not in 2010 or even 2020, but probably beyond that.
Do you consider real assets higher-risk than stocks? Why or why not?
3 Responses to “High-risk real assets vs. boring-old MSFT”
By Financial Freedumb on May 31, 2006 | Reply
I would have to say metals are the safest investments anywhere…problem is theft…but other than that, it’ll always hold value…stocks on the other hand, might grow quickly, but may drop even quicker…