Tuesday, January 31, 2017

Start Points and End Points

Any investment can be made out to be a good deal, if you carefully select the start points and end points of your graph.

I have received a number of messages from people who have some gold in their portfolio, arguing it is a good way to hedge against inflation (I am not sure what that phrase means or how it works, but it sounds like a good mantra) or to diversify their portfolio.   With regard to the latter, I guess that is a valid argument, if you have maybe 10% invested in inanimate objects.  Myself, I am investing heavily in zinc, as it makes about as much sense.

I am not "against" gold or other metals or commodities, I just fail to see the difference between them.  Gold is not special anymore than aluminum is, and aluminum is a good example of the perils of investing in metals. 

As you know from school - or should know - aluminum was once one of the rarest metals on Earth.  The tip of the Washington Monument is made of 100 ounces of aluminum - then the largest single piece in the world  Before it was installed it was displayed at Tiffany's in New York, so that people could ooh and aah over this very rare piece of metal!   Napoleon dined with aluminum flatware, while his generals made do with lesser metals, like gold, silver, and platinum.   Aluminum was once a very rare and expensive metal!

Think about that the next time you toss an aluminum can in the trash.  If you could travel back in time with a six-pack of beer, you'd be the richest man in town, provided the beer was in cans and not bottles.

All that changed suddenly when cheaper ways were found to extract aluminum from the ore bauxite, which is as common as dirt - literally.   And we see the same thing with other minerals as well.   I was told when I was at GMI that by the year 2000 the world's supply of oil would be exhausted.   Yet new reserves are still being found, and the price of oil has dropped to new low levels never dreamed of back in 1979.   By the way, 1979 was about the time gold last peaked, and then crashed hard and stayed crashed for fifteen years.   Gold can be a gamble.

And yes, part of the problem is goldbuggery.   People hype the price of gold saying weird things like it has an "inherent value" or idiots in the media interview someone whose "logical" argument for gold is that is valuable because it is:
Jim Grant, a "respected Wall Street Publisher" (interesting credential) noted that  the argument for gold begins with its role as the original money.  From NPR:
"People recognize it as such. You don't need a Ph.D. in economics to have it explained to you. Gold is sort of the Muhammad Ali of monetary substances; the world over, you look at it, you know what it is," Grant says. 
Pegging the dollar to gold would limit inflation, he says, and force greater fiscal constraints on governments because they couldn't simply print money to pay their debts or bail out bankers. 
And, he says, it would bring the kind of stability to the monetary system that it had a hundred years ago.
Read that last sentence again, and when after you fall out of your chair from laughing, you may understand why Ron Paul followers are total losers.
And like clockwork, people bought gold and bid up the price to $1800 an ounce.  Now it is down to $1200, which was entirely predictable if you went through this before in life, as I have.  Now some folks are saying, "Well, wait for it, it will go back up!" and it will, over time, like anything else.  But it could be a long wait, as folks who bought at $500 an ounce in 1980 found out.

The problem is, other investments have done better over time than gold.  But it all depends on what time frame you use to compare investments.  If you look at the time frame from 2009 to today, the stock market trounces gold.   If you look at time frames from 2011 to today, stocks went way up, while gold lost 1/3 of its value.   It all depends on your start points and end points.

When someone uses very short time periods to sell an investment, perhaps you should be careful before investing.   Moreover, a chart of a stock price or gold prices really isn't very useful information, and it is one way I got burned when I started investing.   I would look at these charts and try to divine what is going on with the stock price, rather than looking at the company financials and try to figure out what is going on with the company.  Guess which is a better way to invest?

Trends in charts are just that, trends.  And trends can suddenly reverse.  If a stock or commodity price is going up, up, up, guess which direction it is most likely to go next?  Yup, down.   That's why I sold out of the Real Estate market when I did - I saw a correction was coming.  But my decision was based more on the underlying business model - when a house costs more to own than to rent, why bother owning it?   And eventually, people figured this out and stopped buying and the rest is history - which will repeat itself in short order.

The same is true of stocks.  The robust market today makes me happy that I am doing well - but nervous that it could reverse very suddenly.  Something stupid like a tariff war could cause this - although I think the GOP in the Senate and House would not vote for this - let's hope anyway.   So far, most of the dividend-paying stocks and conservative mutual funds I am in are doing well, as the underlying fundamentals of the companies are sound - they still make products, people buy them, and they make a profit.   Of course, that can all change in a hurry, as we well know today.

With gold, you can look at historical trends and see that people have been burned before - as we shall see below.  But looking at the chart, you cannot tell the future price of gold.   However, by reading about the gold industry, and how it is expanding rapidly to keep up with demand, you might start to realize that supply is not finite.  And when the cost of extraction is about $500 an ounce, you might wonder why it is selling for twice that.   But that is real analysis, not just looking at Disco Stu's record sales chart and projecting upward. 

But getting back to start and end points, people like to tout Bitcoin as an "investment" when again, it is little more than a way to launder drug money.  If I decided to leave Trump's America and move to Panama or something, I might use Bitcoin to move my money overseas and avoid a lot of hassle with banks, which get antsy when you try to transfer money overseas.   But as a place to "invest"?   Invest in what?   The perception of others?

Bitcoin buggers like to tout the price of Bitcoin as "evidence" that it is such a great investment.  But frankly, I think these are people who want to hype the price of Bitcoin because they are invested in it, so they set up trollbots to go on Reddit and hype the snot out of it.  But like gold, it has no intrinsic value - well Gold has some value for electronics and jewelry.  Bitcoin is just an idea - as all money is.

By carefully choosing your start and endpoints, you can make any "investment" look swell, to the plebes.  For example, look how great Bitcoin is doing today:

 Wow!  It's really gone up!  Click to enlarge.

Of course, I am being deceitful here, as the chart is for one day only and the y-axis starts at 920 and is in $10 increments.  If we look at a larger picture, you see this "rapid rise" is really background noise, and not an indicator of anything.   If we expand the chart to 2016, we get a better idea of what is going on with the price, but not a complete idea:

 Still a good long-term investment, right?  Click to enlarge.

And this is the sort of chart people selling Bitcoin, gold, or stocks would like to use to sell you on the idea that it is a good investment.   But again, we are using a selected time-base of one year, and the y-axis doesn't start at zero, but 400, with increments of 200.
If you expand the x-axis to all-time and the y-axis to start at zero, well, it doesn't look so great:

 Um, this looks like a volatile currency to me.  Click to enlarge.

As you can see, Bitcoin is anything but the stable "haven" the bit-buggers claim it is.  In fact, if you bought at the peak in 2014, you lost your shirt in 2015, and today you are just making your money back.   That is not a stable currency by any means, compared to the pound, the euro, the dollar, or whatever.   Maybe compared to the Venezualan bolĂ­var or Russian ruble, but that's about it.  This chart is the chart the Bit-buggers would rather you didn't see or think about.

And 2014 wasn't that long ago, folks.   Although as I have noted before, the economic memory of people in the USA seems to be about 18 months tops.  By 2011, most people had forgotten about the crash of 2009, or in their minds dismissed it as an anomaly caused by Barack Obama or Bill Clinton.  They didn't want to think it had anything to do with their own poor financial decisions, such as overpaying for houses, re-financing homes, or trying to live beyond their means.

The point is not that gold is a shitty investment or that the Bitcoin is an unstable currency - yes, they both are.  The point is, you can make a lot of investments look great by picking start and end points that are convenient to your narrative.   Charts don't tell you where prices are going, but they can be instructive in seeing where they've been.   And when you see that something has tanked in the past, that is a pretty good indication it may tank in the future.

Motley Fool, during their heyday of the 1990's, would go on television in their Jester hats and say that stocks were the best investment ever, and would use a stock chart that started in 1929 - an interesting start point if there ever was one.   If they started in 1928, however, their chart might not look as good.  During the go-go 1990's buying any stock was a "good investment" as everything went up, up, up, until it didn't.  Then it turned out that some stocks were better than others.  The dot-coms with their foolish notions went bankrupt.  The companies with sound financial footing survived.

Bear in mind that really long time periods can be just as confusing or deceitful.  If you look at a chart of the price of gold over longer periods of time, it appears to be a swell investment, largely going up:

You have to look at this chart carefully to understand why gold is not a good idea.

Now, a gold-bugger might look at this and say, "See, gold is going up, up, up!" but what they are missing is that scaling effects mask the real tragedy of 1980.   As you can see, gold shot up in the late 1970's when Jimmy Carter was President, there were hostages in Iran, and a gas crises meant that gas was available only on alternate days (no, I am not making that up!).   Gold went from $50 an ounce to over $600 an ounce in a very short period of time.  Gold is a fear metal.  Bear in mind that $600 an ounce is about $1800 in today's dollars and now you see why I say I saw this before in my lifetime.

Now look at the chart from 1982 to 2005 - well over a decade - and you can see that gold is flat.   Bear in mind that due to inflation, flat means "losing money" not "parking it" - and yes, the stock and bond markets did well over that time period.   Someone who "parked" their money in treasuries did better than a gold bug.   The guy who bought at the peak in about 1981 or so had to wait nearly 15 years just to make his non-inflation-adjusted dollars back.   And if we adjust for inflation, if he was smart enough to sell at the recent $1800 peak he just about broke even.  The guy with treasury bills came out way ahead over the same time period.

People don't see the gold bubble of 1981 as being significant, as in a chart from 1975 to today, it looks pretty small.   But again, this is just a scaling effect.  That "small" bubble was huge back then, when the dollar was worth more.   In fact, if you scaled the two bubbles - 1981 and today - to adjust for inflation, you would get the same exact shape.

Yes, if you choose your start and end points, you could have doubled your money in gold.  And as soon as I get those time machine parts from Amazon, I can go back in time and do that.  We'll also buy those winning lottery tickets, too.  And I'll buy more than $750 worth of AVIS stock for 74 cents a share.  Sadly, time-machines don't exist.

Could gold go back up?  Sure, maybe.  Over time, it will trend up, but timing it is tricky.  If Trump keeps screwing up, people will get nervous, as they already are, and gold is a fear metal.  But when gold goes up, it never goes up like other investments.  It never pays a dividend.   And when it goes down, boy-howdy does it go down and stay down.

You might as well buy zinc.