Never Buy Gold

goldA significant portion of the Financial Infotainment Industrial Complex dedicates itself to selling you gold, as an investment.

Resist.

I have already written about the three other horsemen of your personal financial apocalypse: variable annuities, times shares, and bitcoins.

The commonality of these four horseman is that they are sold to credible people as “investments” when they are really the opposite of investments. All four act as a drain on your net worth.

Gold fails the fundamental test of what constitutes an actual investment.

What do I mean by the “fundamental test” of what makes an investment? I mean that unlike true investments, gold produces no cash flow. the birds-and-the-bees of compound interest is like this. Money begets money. True investments make you money because over time they reproduce little baby monies, which over time, reinvested, grow up to be big monies. That’s what positive cash flow means.

what_if_I_told_youThe way to value real investments is to measure future positive cash flow.

If you don’t want to get more technical than the birds and the bees, skip this next paragraph.

To get a bit technical for a moment, the fundamental value of every investment is the sum of all of its future cash flows, discounted to the present day. This is how to value private businesses, as well as publicly owned stocks, based on future re-invested profits and future dividends. This is how to value bonds, based on future interest and principal payments. We similarly calculate the value of commercial real estate, based on the expectation for future rents.

Gold, by contrast, produces nothing. No cash flow. No baby monies. It just sits there, a non-fecund lump. In fact, gold in physical form – like all other commodities – has negative cash flow, because of storage costs. You should reasonably expect a negative return over time on your long-term gold holdings, all else being equal.

But now you might be thinking that you’ve heard people, or at least seen people on television, talking about making money investing in gold. Gold certainly fluctuates in value, which can create the illusion of an investing opportunity. But it’s a speculator’s illusion, a gambler’s trick. It’s based on expecting other people to become fearful about the state of the world, which for a short time can make the price of gold go up. The little silver ball of a roulette wheel, similarly, consistently lands on either black or red, and you can observe people making Never_buy_goldmoney over a short period of time by correctly guessing the future color.

The key is not to look at how gold (or stocks, or bonds, or real estate) performed over the last few weeks or last few years. Rather, the key is to look at gold’s long-term results, in order to overcome any distraction we may suffer from short-term fluctuations.

Professor Jeremy Siegel – author of the finance classic Stocks for the Long Run offers the definitive take down of gold as a long-term effective asset class, especially when compared to real investments like stocks or bonds or real estate.

According to Siegel’s time series, one dollar invested in stocks in 1802 would be worth $706,199 by the end of 2012. One dollar in long-term bonds would be worth $282. Meanwhile, one dollar in gold would be worth just $4.50.

But what if you think of gold not so much to grow your money, like an investment, but rather simply to hedge against inflation? That’s also important to consider, for two reasons. First, because Siegel also notes that one dollar hid under a mattress in 1802 would be worth just 5 cents by 2012, its value eroded by inflation. Second, many gold-purchasers view their shiny metal not as a way to earn a positive return, but to guard against inflation.

But again, this lacks the historical view.

To hedge against inflation, you need the value of the thing you’re buying to increase in value at least as much as inflation erodes your money. But if a dollar only buys one twentieth of what it bought 200 years ago, then earning gold’s real return of 4.5 times isn’t enough.

If you really want to keep pace with inflation, buy real estate and stocks. Unlike gold, these actually do increase in value as fast as inflation. A company that sells a successful product can increase prices to keep pace with inflation, and can even earn a profit in the face of inflation. Own the company through its stock, and you too can outpace inflation handily with your investments.

Owning your own house, interestingly, is an effective inflation hedge. The price of homes, in aggregate, generally increases in line with inflation.

Some people buy TIPS – inflation-adjusted bonds from the US Treasury. I wouldn’t, but that’s at least a rational decision, with a positive cash flow, under inflationary conditions.

What if you had a $100 million investment portfolio? Should you buy some gold then? Ok, maybe. I don’t endorse it, but sure, you can afford to buy a wide variety of experimental assets without cash flow for diversification – including art – and maybe a diversified basket of commodities. Go ahead and buy collectible beanie babies while you’re at it. You can afford the loss. It won’t do you any good, but who am I to argue? You’re the one with the $100 million.

But what about the fact that during times of extreme financial crisis – like we last experienced in 2008 – gold prices soar. Didn’t gold prove its hedging value then? Yes, I can’t deny that gold prices temporarily responded to financial panic, mostly because other people and institutions buy into the fiction that gold is a “safe haven” appropriate for the financial, or zombie, apocalypse. You had a couple of weeks for feeling smug, but I know you’ve lost money on your gold investment since then. The medium and long-terms prospects for gold are always terrible, because gold is primarily a psychological trick played upon the scared and financially naïve. Don’t participate. Its fundamental value is as fictional as the Walking Dead. Nobody wants your lumps of shiny metal when the undead approach. You would be better off with backup power generators, baseball bats, and canned goods as an investment.

The only apocalypses are the ones happening in your head, and to your net worth.

 

A version of this post appeared in the San Antonio Express News and Houston Chronicle.

 

Please see related posts:

Never Buy A Time Share

Never Buy Variable Annuities

Never Buy Bitcoin

 

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Never Buy A Time Share

timeshare_bullshitOh time share, time share!

How do I hate thee? Let me count the ways.

I hate the way you are sold. I hate they way timeshares give the appearance of an ‘investment,’ when they are in fact the opposite of an investment. I hate the way financially distressed people buy you.

I’ve previously urged readers to never buy a variable annuity. Last fall I broke my self-imposed rule to never even mention the word bitcoin. Some day soon I’ll write about never buying gold. Taken together, time shares, variable annuities, bitcoin and gold are the Four Horsemen of your Personal Financial Apocalypse.

All four share the common characteristic of being packaged and sold as sound investments, when really they’re expensive, money-soaking, tricks.

For your benefit, I signed up for a timeshare pitch last week. I sacrificed an otherwise pleasant afternoon to multiple aggressive and manipulative sales techniques packed into 90 minutes. You’re welcome. I deserve a medal for bravery.

Roberto, my personally assigned salesman at Wyndham Resorts, asked me for fifteen minutes what kind of vacations I usually take, what place I like to go, and what people I go with. As I warmed up to describing past skiing and camping trips with my daughters, he asked me to share what kind of “feelings” I experienced with my daughters while on vacation. Oh, Roberto, thank you for asking.

always_be_closingPlunging deep into the hazy mist of emotions and family, I learned that timeshares are a legacy to pass on to my daughters. They promise “ownership” in perpetuity, yet every month charge “maintenance fees” which never go away. My editor at the newspaper is an heiress who “inherited” a Hilton Disney World timeshare from Dad. Hey, thanks Dad! It costs her $1,500 a year to maintain. With a handsome legacy like this, she may never be able to retire.

Once made dizzy by this emotional journey, Roberto began to bludgeon me with the fuzzy logic of timeshares. Since I already spend a certain amount of vacation money per year on my family – as he scribbled some numbers on a page – wouldn’t I like to “own” rights to vacation spots rather than “rent” as I have been doing up to now through traditional hotels? What if I could do that at less cost? More number scribbling followed, plus I would gain “Deed and Title” to vacation ownership. Roberto wrote “D & T” on the page and underlined it twice, so I’d really grasp the solidity of this type of ownership.

“Deed and Title?” That is such garbage. Ask anyone who has ever had tried to book timeshare vacations with points and you will quickly enter a world of “exchange fees,” added fees for “guest certificates,” fees for membership in the points exchange company, and heavy restrictions on usage. Can’t book your vacation with one and half years’ lead time? Sorry, all the places you want to go, at the listed “points” price, are blocked.

Have you ever noticed that carnivals and video game centers always work on a tokens or tickets system, rather than money? Timeshare venders use points for the same reason.

But back to my afternoon with Roberto:

wyndham_resorts_fraudHe repeatedly used the classic “anchoring” sales technique of saying the full price of their vacation point package would be $100,000, only to eventually offer a very similar package for around $27,000. Wow, I should have been thinking, what a huge discount. All just for me?

Actually, he made two offers, a bigger price and a smaller price. Given those two, he asked, which one seemed more attractive to me? This is the sales technique of making me feel like I’m cleverly in charge and actively choosing a smart, low-cost, option.

Were the offers made affordable? Well of course they were, because I can make a low down payment and borrow the rest. Wyndham offered to “finance” part of my purchase of the “Deed and Title” to their vacation points, at 13.99% interest. So that was really nice of them, assuming I don’t mind paying sub-prime mortgage interest rates.

When he heard I was in finance, my salesman focused on the clever “inflation hedge” aspect of these timeshares. Since the cost of hotels would be increasing by 10-14% in coming years (an #AlternateFact, but whatever) I should know that my points would always be worth the same amount forever, so I’d be better off buying today rather than waiting for another day.

Speaking of today, in a classic red-flag sales technique, Roberto would not allow me to take any of their marketing materials or specific offers home to “think about it.” The offer, of course, was “this day only,” with assurances that on any subsequent day I came back the offer would likely be worse.

four_horsemen_personal_financial_apocalypse
The Four Horsemen of your personal financial apocalypse: Time Share, Variable Annuity, Bitcoin, Gold

After I had declined to purchase the package, I was sent to an exit interview with a new person. Following a few cursory “how was your experience today” questions, she hit me up once again with an offer to purchase a smaller package, at an even lower price. Today only, of course.

In an earlier professional life, I networked with bankruptcy trustees, the people who sell off valuable assets of the estate of a person who goes bankrupt. You’re not going to believe this but trustees always, always, always had timeshares to offer.

The simple problem for bankruptcy trustees is that timeshares are worth nothing. No, that’s not quite right. Timeshares are worth less than nothing. They have negative value, because they cost money every year to maintain.

This is why Ebay is full of offers for timeshare vacation weeks, and hundreds of thousands of “points,” for $20, or $1. Or even $0.01. Check it out.

Caveat Emptor, or buyer beware, on any particular offering on eBay, obviously, but a scan of timeshare message board confirms that paying full price for a timeshare is a complete mug’s game.

timeshare_bankruptcyAll bankruptcy trustees become inadvertent experts in timeshares, and not just because they can never seem to sell these so-called “assets.” There’s clearly a positive correlation between people who go bankrupt and people who are tricked into believing timeshares are a good investment. Bankruptcy trustees tell a quiet joke amongst themselves that, by law in the United States, nobody is allowed to go bankrupt unless they have first purchased a timeshare.

The slogan of the entire industry should be: “Timeshares: All the costs of renting, none of the benefits of owning.” Catchy, no?

See, that’s why I don’t work in marketing.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle.

 

Please see related posts:

Never Buy a Boat

Variable Annuities: Shit Sandwich

Bitcoins and Bullocks

Vacation camping with my daughter

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Bitcoin Blockchain and Bullocks

BitcoinOne of my rules of writing is to ignore journalistic fads. I’ve considered Bitcoin since 2013 to be a complete red herring, a finance-journalism fad that has no bearing on real things, real life, and real people.

Technology people – FWIW I am not one of these – have long been excited about Bitcoin, and a couple of TedTalks from this past summer claimed that Bitcoin is “The Future of Money” and “Changing Money and Business.”

While I think that’s bananas, I try my best to be open to new ideas. I’m going to break my previously self-imposed ban on writing about Bitcoin and consider the idea that there’s something real there worth paying attention to.

Invented in 2008 by an anonymous programmer (or programmers) known by the pseudonym Satoshi Nakamoto, Bitcoin hit the mainstream financial and technology press in 2013. Bitcoins are a sort of nation-less currency created and “earned,” or “mined,” through a computer process of solving a series of increasingly complex cryptographic puzzles. As a store of value as well as a medium of exchange, Bitcoins could theoretically replace or compete with dollars, or gold, or any other widely accepted currency.

Technologists point to the advantage of the technology underlying Bitcoin – known as blockchain – which allows decentralized computers to recognize and verify transactions without having to go through a traditional bank.

Bitcoins – and other cryptocurrencies, of which there are many less well-known variants – appeal to people who like the idea of currencies free from government control, and free from the intermediation of financial institutions.

For example, whenever I pay for gas with my credit card, or withdraw money from an ATM, or automatically invest in index mutual funds, I leave an electronic record of the transactions with my financial institution, which both collects fees from my activity and collects data on my financial life. I live with those fees and that data collection because it’s super-convenient to me, and because I’m not personally paranoid about those institutions tracking my activity.

But if you hate the idea of government control of things or your activity, then Bitcoins – or related crypto-currencies – become potentially more attractive.

Early Adopters

Some of the earliest adopters of Bitcoin were people who needed to purchase things online without using trackable currency, like consumers of child pornography, assassination-services, or drugs. I wasn’t an early adopter.

silk_road
A convenient Bitcoin exchange for assassinations, drugs, and child pornography

Since 2015 until now, Bitcoin exchanges have reported up to 80% of activity driven by Chinese nationals, presumably as a way to escape currency and capital controls in their country. The Wall Street Journal recently reported that three Chinese exchanges account for 98% of Bitcoin transactions in the past month. That makes sense for people trying to squirrel their money away from the eyes of Chinese authorities, but again, is not my scene.

Bret Piatt, the CEO of San Antonio-based Jungle Disk, which offers small-business data security, notes that many people’s first encounter with Bitcoin these days happens when hackers – often based in another country – remotely seize a company’s data and hold it ransom until paid in Bitcoin. Piatt says his company can’t advise clients with how to deal with ransomware hackers, but he does point out that purchasing Bitcoin to pay the ransom is just a few Google clicks away.

The beauty of Bitcoin for these hackers, again, is its unlinking from governments and banks.

All of these adaptive uses for this cool new “future of money” tend to leave me feeling confirmed that Bitcoin is worthy of ignoring, as I have up until now.

Reasons to care

So what’s the positive case for paying attention?

From what I can tell, Bitcoin offers three main advantages:

  1. A reminder of what money is, and isn’t
  2. A vehicle for blockchain-technology adoption in transactions
  3. A tool for creative people to control and benefit from their creation

So remind me – What is money again? Bitcoin and other crypto-currencies – by their nature newly invented virtual, digital creations – show us that “money” is a completely illusory, socially-constructed idea.

There’s nothing inherently valuable about coins (or historically, stones or shells or gold) or the digital stores of value we depend on every day – they only have value because we all engage in a collective fiction that they have value.

Bitcoin – a clever creation of computer code – is just as theoretically legitimate as a US dollar. Today I find Bitcoin inconvenient and dollars convenient, but that doesn’t always have to be true in the future? As a side note and (maybe?) interesting fact, I personally pay for most stuff in $1 coins and $2 bills, which nobody else finds convenient, but that’s probably just because I like the attention it brings at the coffee shop.

dollar_coinsWhat do I mean by the adoption of blockchain technology? I hardly know myself, but I’ll take a stab at it. Decentralized computers that can simultaneously recognize and confirm identities and payment might make financial intermediation simpler, or even unnecessary.

One prosaic example could be the elimination of notaries. Notaries are meant to verify, via signature and identification check, that I am who I say I am, for the comfort of someone on the other side of a transaction, so the other side won’t be defrauded. More ambitiously, Don Tapscott claims in his TedTalk that blockchain could be used to create a more trustworthy global land title system, especially useful for the estimated 70 percent of the world with uncertain systems for proving who owns what properties. Tapscott also sees blockchain disrupting the $600 billion per year cross-border payments industry, which takes high fees and multiple days to do something that blockchain can do for nearly free, immediately. Neha Narula, in her TedTalk on the future of money, says the blockchain will allow each of us to control our own personal, financial, or health data, which we could then sell to the highest bidder.

Sigh. That makes me regret I’ve been giving all that personal data away for free, to Facebook, since 2007.

dilbert_blockchainFinally, Tapscott claims that the decentralized nature of blockchain technology will mean that creative people like artists and musicians can own and sell their work without giving up control to financial intermediaries. The computers that form the blockchain can allow a creator complete control of her work in exchange for direct payment. Silly me, I thought that’s kind of what PayPal was for, but you can see how stuck in 2002 I really am.

Will somebody please show me how to put this post on the blockchain to make it rain Bitcoins? I’m so excited.

 

A version of this post ran in the San Antonio Express News.

 

 

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