Investment Opportunities

The Greatest Wealth Creation Idea of All Time

In the past, I’ve explained why hard-money types have been wrong about the economy, inflation, the dollar, the stock market and gold.

Judging by the many responses readers posted, this is a hot-button issue, one that some folks have a tough time thinking clearly about.

One respondent called me “a liberal” who is “a solid conservative.” Others claimed I was applauding the Fed, cheerleading deficit spending and manipulating the data by only going back to 1980.

I never knew these things about myself.

So let me clarify a bit… and explain why the gloom-and-doom, hard-money mindset is not conducive to building a fortune, conserving wealth or protecting against inflation.

I’ll also reveal what is.

Let’s start with a chart that goes way back beyond 1980… to 1802. Below you will see the real – i.e. after-inflation – annual return of stocks, bonds, cash and gold.

As the chart makes clear, if you are seeking to achieve or preserve financial independence, there is no better vehicle than a diversified equity portfolio.

A single dollar invested in a basket of common stocks in 1802 – with dividends reinvested – turned into $930,550 by the end of last year. Bonds – with coupons reinvested – were a distant second at $1,505. A dollar invested in Treasury bills compounded into $278. And a dollar invested in gold was worth $3.21.

Of course, $3.21 is a lot better than $0.05. That is what a greenback turned into over the same period.

So, yes, inflation has ravaged the dollar. And gold has been a hedge against that.

But it hasn’t been the best one.

This is why we concentrate on identifying undervalued companies rather than spinning tales of gloom and recommending a dominant position in precious metals.

Yes, past performance is no guarantee of future results. But as Mark Twain famously said, “History doesn’t repeat itself, but it does rhyme.”

How to Get Rich

In our capitalist system – the greatest anti-poverty program ever devised – the best way to become rich is to own a profitable business. However, most of us don’t have the time, the expertise or the access to capital to start and run our own company. And even if we do, we face a daunting headwind. Most new businesses fail in the first few years.

It is far easier – and safer – to own a fractional interest (which is what share ownership is) in a number of businesses. This is the rationale for a diversified equity portfolio.

However, unless something really exciting happens in the science of human longevity, what different asset classes do over a couple hundred years may not seem relevant.

But the chart is not misrepresentative. Select almost any period measured in decades and the results are similar.

Don’t be taken in by distorters who point to a stock index that was unchanged for 20 years or more. In the past, dividend yields sometimes exceeded 10%. A stagnant market is not necessarily an indicator of low annual returns, especially when those dividends are reinvested.

What About Tomorrow?

At this point, gold bugs will generally claim that the future will be unlike the past, that the federal deficit will cause a cataclysmic economic collapse that will cause gold to soar and stocks to crash.

The deficit is indeed a threat, and an inexcusable one at that. But does it make an economic collapse inevitable… or even probable?

There’s really no way to handicap this one. But unbiased readers should ask a few skeptical questions:

  1. How do we know we’ll see a financial collapse? (Some economists claim it will take only a 0.2% increase in annual GDP growth to bring the deficit under control. Technological advances and lower energy prices may well generate more than that.)
  1. If we do have a financial collapse, how can we be sure gold will rise?
  1. Have the “analysts” who are predicting this been saying much the same thing for decades?
  1. How long does a forecast have to be inaccurate before it is “wrong” rather than just “early”?
  1. Why do we never see the world’s greatest investors – Peter Lynch, Warren Buffett, Bill Gross, etc. – wringing their hands about the coming financial collapse? Who is more likely to be wrong here?

And consider this counterintuitive notion: Is it possible that stocks may be the best thing to own even in a collapse?

Gold bugs will sputter at the notion. But history suggests otherwise.

Consider this passage from Dr. Jeremy Siegel’s book Stocks for the Long Run:

In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K. Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change.

The same thing happened in Japan. By the end of 1945, Japanese stock prices stood at one-third of their levels just prior to the war. Yet over the next 40 years, the Tokyo market returned more than 20 times as much as its American counterpart.

(And that same market’s dismal returns over the past 25 years are the best argument for spreading your risk beyond your own borders, no matter where you live.)

Over the long haul, a globally diversified portfolio of stocks has consistently delivered superior long-term returns, throughout expansion, recession, inflation, deflation and war.

However, I am also a strong advocate of gold. (As I mentioned in my last column, I own it.) And gold stocks are an important part of any investor’s asset allocation.

There’s an excellent long-term case to be made for gold and – best of all – it doesn’t require economic or political calamity.

Good investing,


Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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