> In this chapter, I have studied the returns to investments in durable assets since the start of the twentieth century. These assets are generally characterized by relatively low capital gains and substantial price fluctuations. The rate of value appreciation has been more pronounced for collectibles, but transaction costs are very high in such markets as well. It should also be pointed out, however, that a rental income yield can add substantially to the returns on housing and land, and likewise owners of collectibles may receive a significant emotional dividend. Because of the lack of such an income or utility stream, gold, silver, and diamonds appear to have been particularly bad long-term investments (at least if not held in the form of jewelry). Finally, durable assets are unlikely to be good inflation hedges, but they may still help diversifying a portfolio because of the imperfect correlations with financial assets.
The headline thesis seems reasonable, but they lost me as soon as they started comparing USD to gold. Gold is just such a weird special-case thing in economics that it seems very hard to draw interesting conclusions about anything else when you're opening up the discussion with using gold as a benchmark.
Gold can be a crazy irrational form of money, but how is that different from USD or other (crypto)currencies? Everything is on the table in this moment of geopolitical uncertainty.
How's that invaluable? Even if someone's a quack or a little crazy, he may still be mostly right.
Don't get me wrong, there were days when the paranoid fever dreams of borderline schizophrenics clearly belonged to the realms of unreality. But those days are gone. I miss them, but pretending they are still with us won't help.
Take the pizza-parlor related conspiracy theories from a few years back. Thanks to the revelations concerning the late great J. Epstein, we know they were for the most part wrong. Except, for the part where a significant portion of the ruling class regularly engages in sex with underage girls.
The quacks were wrong about everything except the most essential part of the story.
I can give you other examples, if you wish, but few are as prominent and as unarguable as this one.
Silver has such an interesting history as a unit of exchange. I remember reading that China started demanding payment in silver around the 1500 for goods leading to the boom in Spanish silver mining in the Americas to pay for imports.
The lack of silver also lead the British to start the opium trades to get around the Chinese state.
Is that still true in modern times with more people, but also better technologies? They make gold notes now that are 1/1000th an oz. Two of those would get you lunch. Also...if it was the main source of currency, wouldn't the value go up to where you would need very little (example - $15,000 an oz)?
I'd even guess you could keep it in a form of bank and then have a debit card you could use where most items were tiny tiny fractions of an oz. Is it still too little gold at that point?
I'm not suggesting a gold standard btw...just curious. I'd also point out that it might be crazy, but our current system seems incredibly risky and many nations have had their currency collapse through over supply. I don't think a perfect solution exists here.
> Gold is just such a weird special-case thing in economics that it seems very hard to draw interesting conclusions about anything else when you're opening up the discussion with using gold as a benchmark.
Especially since the gold standard did nothing to help in stabilizing currencies:
even over the long-term, per Roy Jastram's The Golden Constant: The English and American Experience 1560 to 1976:
> Andre Sharon, head of the international research department at Drexel Burnham, Inc., notes, “the value of gold essentially derives from its capacity to preserve real capital and purchasing power.”† I select this particular quotation because of the prestige of the organization and the position of the spokesman, but statements in this vein can be found in great numbers. They can be traced back for generations and in many countries. How can this proposition so contrary to statistical fact become so widely believed and quoted? Possibly because gold has preserved capital in cataclysmic cases it is easy to infer that it can be trusted to do the same in less severe circumstances. To extrapolate from gold’s protection in singular catastrophes to its use as a strategy against cyclical infation is an example of faulty inductive reasoning.
The author starts with 8 paragraphs on gold, and the word gold is mentioned 33 times throughout the article, spread about evenly throughout. By no means did the author "move on" from talking about gold, let alone "quickly".
Wouldn't the appropriate comparison be real estate (as a class) with precious metals or maybe even commodities (as a class)?
Otherwise I can easily state that, parts of NY and SF and London etc may have appreciated differently relative to each other, but a London home has appreciated very well across most time periods.
And if AMZN was one of ten you would have 20X'd. It's just an extreme example illustrating the principle. Most people don't have 99x as many losers as winners, most winners aren't AMZN, and most losers don't go all the way to zero.
Yeah, few people realize what it means to sit on a paper loss for 14 years. Not many have the mental fortitude to do that. But it's really hard to convince the millennials and younger who experienced nothing other than a roaring bull market throughout their investing lifetimes.
> the millennials and younger who experienced nothing other than a roaring bull market throughout their investing lifetimes
Poking at certain generations tends to be counter productive, but this jab is also disconnected from reality.
Millennials entered adulthood in the shadow of the mortgage crisis, which by all measures was a depression event until the definition of a depression was reworked.
There were only two significant crashes between 1929 and 2008. 1987 (black monday) and the tech bubble (2000).
More recently, covid was a ~40% decline in the S&P (bigger than black monday), and another ~30% started at the beginning of 2022.
It shouldn't be worn as a badge of honor, but millennials and younger have experienced more volatility in a much shorter amount of time than older generations.
> few people realize what it means to sit on a paper loss for 14 years. Not many have the mental fortitude to do that.
Partly why real estate is such a big part of most people's net worths (and covered by the OP): it's not marked to market frequently, so it's much easier to hold for decades at a time. If everyone had a ticker they looked at every day where the value of their house was updated real-time, there would be a lot more panic selling.
Doubling your money over 25 years is roughly ~2% returns a year, so it would have been a terrible investment. For comparison, if you parked your money in the S&P 500, you would have made over 5% a year.
A terrible investment, for sure, but not as terrible as you would expect if you were told there were 99 times as many losers as winners in the portfolio.
What defines normal interest rates? Without defining that we cannot in turn defined high or low, much less ultra-high or ultra-low (or whatever name you want to give). That means we can't even have a discussion, yet I have yet to see anyone try to define what normal should be.
Of course when defining normal you also have to define what variance is normal, and what to do when things get too far out of normal. (though everyone seems to agree we shouldn't go below zero)
Well I'm no prophet, but the case would be:
1) globalization added downward pressure on prices, so deglobalization (or even just partial backing off) will remove that downward pressure
2) people really don't like inflation, even rich people, and expect the central banks to do something about it (raising rates)
Yeah the cats out of the bag, the on-shoring is for certain strategic needs only (e.g. computer chips and goods related to defense) but globalization is here to stay, the next big effort is to offshore knowledge work.
The trick is knowing that, getting in early enough, so you can get out before others realise and move out. Investment is all a game beyond a certain level, with the numbers just a means to keep score, there connection to money as we know it (the numbers we exchange for goods & services to survive day to day) being rather tentative.
The trick is knowing that you've missed the boat. Give up. If only you knew Amazon, Google, Apple, gold, bitcoin, etc would appreciate this much in value 30 years ago.
"Get in early and get out before others realise" is not rational or a feasible strategy because it assumes knowledge that others don't have. This idea that you can know things before the "normies" do is behind the financial advice companies like Bloomberg, and behind the rapid fire boom and bust of the thousands of shitcoins. Everyone involved in those knows exactly what's going on, they're just in denial because they believe they know what's going on and can benefit from it.
Yes the trick is knowing that you aren't actually investing, but speculating and gambling. Your money is not actually moving the needle in any significant way like a true investment (e.g. giving start up capital to your brother's small business), you are just a speck of dust riding a global corporation's variable cash flow and you are trying to siphon out what you can when you need to.
Yes, to understand bitcoin well enough to confidently ride the volatility at this early stage in its growth, not only does it help to be technically minded, but you also need an understanding of what money really is and how fiat money really works.
People with that combination are few and far between. But there's plenty of people on HN who confidently think they know.
Cynicism because "we" like to believe we understand technology and stocks better than the average person. But plenty of HN people both made and lost a lot of money in crypto.
Insightful, but by no means complete (missing, among other things: matching of liabilities with assets; risk or diversification or the basics of modern portfolio theory; the notion of real vs nominal returns (only alluded to); etc.)
Man she really wants me to put my savings into gold and bitcoin. I have no idea why gold and bitcoin will be worth more when I retire than a % of public corporations, which are machines that turn capital, labor, and money into more money. Basically money printing machines, with some of the world's greatest brain power working their hardest to figure out to make these machines robust and more and more efficient, instead of rocks and a % of a digital currency.
Why should I do this? Why are these rocks and entries into a global digital ledger going to be worth more when I need this money in retirement?
Her thesis is that increasing interest rates creates a headwind against the most successful strategy (leverage) corporations have been using to make money. It's true that often people reach conclusions and then back fill justification for those conclusions, but she has certainly laid out an argument detailed enough for a blog post.
> [...] than a % of public corporations, which are machines that turn capital, labor, and money into more money.
But only in theory does this translate into an appreciating stock market value and dividends; I'm no expert but I've long noticed that the value of a stock does not represent the worth of a company, e.g. Tesla.
What kind of strawman are you building? She did not mention bitcoin once in the article. And what she's saying is something that serious investment analysts have known for years. Most investments don't pan out, at best a passive investor can count on preserving their capital against inflation. Stocks in the USA overperformed but that is a clear survivorship bias as most other stock markets around the world failed to even preserve the capital for the stock owners.
This isn't the first article of hers I've read, the advice for investment in hard money, or at least putting a significant % of your savings is essentially gold and btc based on previous articles of hers.
I understand what she's saying, and I agree with that part of the article, but she's big on the "hard money" portfolio (lately? I think?). The advice to buy index funds is basically "you own a % of all of industry" which is these money printing machines I talk about, and i'm more confident people are going to need industry in 20-40 years than "hard money."
I haven't followed her at all nor read any other articles. I agree with you that stocks should be owned and I own them. But I also don't shy away from gold, commodities or bonds. I believe that diversification is the best route to capital preservation that we have. I make an exception for bitcoin though which I consider utter idiocy.
I'm too young to worry deeply about capital preservation, but maybe I'll get there. I didn't even get into the fact that our government enacts monetary policies built around ensuring assets (namely stocks and bonds) do not lose value and keep inflating up and the right. I just simply don't see a case for commodities at least at the horizon i'm investing at.
> at best a passive investor can count on preserving their capital against inflation.
That's not true. A) most active funds fair worse than passive funds (as has been shown many times), and similarly, most active traders fair worse than buy-and-hold traders, but more importantly, B) you can hold the full market (more or less) as a passive investor easily, and thus benefit from the few companies that pull the entire index up.
Most stocks underperform the bond market, but the stock market as a whole outperforms the bond market.
> Most stocks underperform the bond market, but the stock market as a whole outperforms the bond market.
Most people don't realize how much most stocks suck:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.
Yes, passive investing will of course outperform active investing because math. But that's not to say that there is any level of return that is guaranteed for stocks. As I said in my earlier comment, any long term analysis limited to US only stocks is a case of survivorship bias.
"If you had simply put $100 into gold, you would have turned $100 into $10,042. The number of dollars in the U.S. broad money supply increased by more than 400x from 1928 through 2023."
This article gets the economics quite wrong in an overconfident way. Money supply growth is not the relevant quantity here. Central banks set interest rates not money supply growth rate. And they look at inflation.
I don't think she asserts that central banks set the money supply growth rate, only that the money supply does, in fact, go up faster than for example the gold supply growth rate.
Apparently she still hasn't figured out that it's possible to invest in the entire market of stocks and bonds. Therefore it doesn't matter that most of them perform badly (by some arbitrary standard), as long as they perform well as a whole.
Hmmm...she mentioned broad investments numerous times, and talked also about how entire classes of investments worked (a few providing most of the benefits).
I was referring to her analysis of historical stock returns, where she spends 6 paragraphs out of 7 making the point that the majority of stocks historically have performed poorly (according to her analysis).
The fact is, retail cannot compete risk-wise with institutions. Thanks to Quantitative Easing and low interest rates, money, by itself, has very little value. To make lending money "valuable", you have to leverage it at ratio that the average retail investor can't afford risk-wise. Only edge fund that can afford to risk it all can do that. More so, 2008 proven that the government was willing to bail out institutions, something not available to retail.
Most aren't trying to. The manager in an investment fund probably has all the money he needs to enjoy life. He doesn't care about the performance of his fund, so long as clients stay on board.
And the funny thing is, that makes his fund far more driven by the whims of the public than retail investors. So many stories about funds staying away from the dot-com bubble end with "the fund had to close, because of clients pulling out their money".
Half the reason Warren Buffett is hailed as genius is because his shareholders can't pull out their money easily.
As someone said, they don't need to outperform. They only need to perform enough to survive and pull management fees, which are risk free for the managers.
I think the downvotes come from people who don't like to believe this is true. But it is true, at least the part about retail investors being unable to compete. Sure there are occasional ones who win the lottery, but in general large institutions can afford to devote their attention full time to finding out what to invest in, get lower rates for leverage, and probably also use inside info more often than is discovered.
> In this chapter, I have studied the returns to investments in durable assets since the start of the twentieth century. These assets are generally characterized by relatively low capital gains and substantial price fluctuations. The rate of value appreciation has been more pronounced for collectibles, but transaction costs are very high in such markets as well. It should also be pointed out, however, that a rental income yield can add substantially to the returns on housing and land, and likewise owners of collectibles may receive a significant emotional dividend. Because of the lack of such an income or utility stream, gold, silver, and diamonds appear to have been particularly bad long-term investments (at least if not held in the form of jewelry). Finally, durable assets are unlikely to be good inflation hedges, but they may still help diversifying a portfolio because of the imperfect correlations with financial assets.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2746356