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The Worst Asset To Own
Jul. 14, 2016 10:17 AM ET
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25 comments
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About: iShares 7-10 Year Treasury Bond ETF (IEF), GLD
Bram de Haas Premium Research »
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Summary
Warren Buffett is notorious for his dislike of commodities and gold in particular.
His friend and business partner Charlie Munger tells us to invert, always invert.
Let's explore what is the worst asset to own through a simple thought experiment.
Commodities are dead money. If you hold them you are not paid interest or dividends and you are not expected to earn any return over the inflation rate. While you hold them they just lay there in storage sucking purchasing power away from you in the form of storage fees, insurance fees and maybe even management fees if you own them through a fund or ETF. You buy these commodities like gold playing the greater fool's game. Maybe some day, someone will pay a higher price for your gold. Chances are the day will never come and you are stuck holding the bag.
Buffett is notoriously dismissive of the particular commodity gold.
Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn't produce anything.
Buffett's partner Charlie Munger is famous for saying: "Invert, always invert", as a problem solving strategy. An idea he likely borrowed from 19th century German mathematician Carl Jacobi.
Source: Charlie Munger doesn't like gold too much either by the way
It's not actually inverting but let's try a very similar thought experiment and replace commodities and gold with bonds in the above arguments. That will yield the following statements that ring awfully true:
Bonds are dead moneyIf you hold bonds you are not expected to earn any return over the inflation rate.If you own bonds through an ETF or fund you pay management fees to own them.You buy these bonds to play the greater fool's game. Maybe some day, someone will pay a higher price for your bonds. For that to happen someone has to be willing to hold bonds at an even deeper negative real return they are yielding now. How likely is that?Bonds are a way of going long on fear.If people become less afraid you lose money.If you look at it this way, you will have to admit bonds are at this time awfully similar to a commodity.
Let's compare the prospects of two major ETF's that hold the assets I want to compare. The SPDR Gold Trust (NYSEARCA: GLD) with the iShares 7-10 year Treasury Bond ETF (NYSEARCA: IEF) in a graphical way:
Gold and Bond ETF/ Returns in USD
| Real return under 2% inflation scenario
| Real return under hyperinflationary scenario
| Real return under deflationary scenario
| Return when fear is going up
| Return when fear is going down
| When will someone buy them off you at a substantially higher price
| SPDR Gold Trust
| Neutral
| Positive
| Up for debate
| Positive to extremely positive
| Negative
| There are various scenario's: helicopter money, raging inflation, gold rush, panic in the markets, etc
| iShares 7-10 year Treasury Bond ETF
| Negative
| Negative
| Positive
| Positive
| Negative
| Never because they would have to accept enormous negative real returns
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I believe it is the dynamic I describe above that makes treasuries a very poor investment at this particular point in time. There are no circumstances where you come out with a big win. Few circumstances where you'll preserve your purchasing power perfectly and various scenarios where bonds are going to return significant negative real returns.
It has not always been so but deliberate policy has brought us to a point in time where it has become extremely hard to defend purchasing power. I don't know whether that's right or wrong but that's how I view things today.
My approach is to hold stocks but also short a number of European treasury ETF's mainly because I'm located in Europe. I would feel almost equally good about shorting the IEF. In addition I'm long various miners and gold royalty companies but would feel good about holding physical gold ETF's like the SPDR Gold Shares as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. |
