You have probably read it in the news that the price of gold has reached a new high in the past 6 months. If you had invested in gold when it bottomed out in August 2018, you would surely be a very happy investor today. But what’s the big idea here? Is it a sign that we should clean up our stock portfolio and pour it all into gold for 2019? Is this a wise move? To understand that, we need to study a little deeper.
What is GOLD?
In the market today, it is not only stocks that investors invest in. They also invest in precious metals such as silver, platinum, and palladium. But out of all the precious metals, gold is considered the most popular. Culturally in the investment community, gold is considered as a hedging tool or a safe haven for investors. Meaning that when the market is in chaos and investors are spooked, they would flee to gold in order to protect their money.
If you compared prices of gold (in blue) and the S&P500 (in red) during periods of crisis such as that in the 2008/2009 sub-prime mortgage crisis, we can see that when the stock market bottomed out, price of gold steadily spiked up. Even until today, we can see similar patterns.
So Why Are Investors Flocking To Gold?
In order to know this, we need to reflect on the various events in 2018 a little deeper. First of all, many investors are feeling a little wary to how long the current bull market will last. It has been more than 10 years since the last economic bubble burst and many expect the next one soon.
In fact, headlines are filled with news and doomsday theories which has been spooking investors. With more and more investors believing that the crash should be coming, many are taking precautionary steps by putting up more of their funds in gold.
On top of that, investors have also been through a roller coaster ride in 2018 with many corrections and disappointing results or guidance which is happening globally. Let’s take one of the darling stocks in the USA, Nvidia (NVDA). NVDA is considered as an investor’s favourite stock previously because of its solid position in the graphics card and semiconductor industry. The company even reaped massive rewards during the bitcoin craze earlier in 2018.
However, recently in an earnings update, the company announced their guidance and it didn’t meet expectations of analysts and many investors started dumping the shares out of disappointment.
What about in China? China is currently known as the upcoming largest consumer economy, just next to the USA. The spending power of the Chinese is expected to eclipse that of the US in the years to come and are their technological advancement is way beyond expectations. Let’s take a look at how mighty companies like Alibaba and JD.com are revolutionising the E-Commerce and data industry in China, at the same time enriching millions of Chinese. However, the Chinese stock market despite such bright prospects took a heavy beating thanks to various trade wars threats made by none other than US President, Donald Trump.
Today, stocks of these giant Chinese companies are trading at extremely low prices that it even looks attractive to some investors.
Not only trade wars, but various events that happened in the US from government shut down to scandals to irresponsible social media tweets caused investors a lot of money this year. The incident at the Facebook’s Cambridge Analytica Scandal. It has caused Facebook’s shareholders a whole lot of money.
In our local front, many manufacturing companies which stock market darlings and investor favourites reported disappointing earnings especially after the change in government. These dragged down the Malaysia stock market as well.
Due to the many stocks that faced significant losses this year, it is no wonder investors have very poor confidence and started looking to pour their money into safe havens such as gold.
To make matters worse, the year ended with a US government shutdown resulting in a gloomy Christmas and New Year’s celebration.
But Is A ‘Goldish’ New Year’s Resolution Sensible?
During the annual shareholder’s meeting of Berkshire Hathaway in March 2018, legendary investor, Warren Buffett made a comparison of investing $10,000 in gold vs S&P500 index (a portfolio of 500 stocks) since 1942 until today. The results showed that a $10,000 invested in gold will be worth approximately $400,000 today. However, a $10,000 investment in stocks will be worth a staggering $51 million. He further mentioned that all you needed to do to make that $51 million is not rocket science or complicated mathematics but to simply figure out that America will do well over time.
That is an important concept to understand before deciding on this new year’s resolution. If you had invested in gold, the only way for you to make money is to hope that share price goes up in order to sell for a higher price. That’s like investing based on hope. However, stocks are part ownership of businesses. Over the years, since 1942, American businesses have prospered, became better, more efficient and more profitable. With increased profitability, they pay out more dividends to shareholders for every share they own. Imagine a share of Visa Inc you owned many years ago pays out $0.30 in dividends. Today it pays out $1.20 in dividends. Will people pay more for those shares? Definitely! There is a concrete and justifiable reason for other investors to pay a higher price for your shares. That way, your investment is more grounded.
Secondly is in terms of risk. Risk is simply defined as the amount of capital you are bound to lose when you invest in an asset. If you had invested $10,000, your risk is $10,000. Therefore, when everyone flocks to gold and you flock to gold as well, your risk actually increases because you are paying a higher price for them. But stocks on the other hand, saw their prices come down drastically. Provided that the fundamentals of the business do not change, stocks are a less risky option!
So How Do We Invest For 2019?
Here are 2 tips to invest safely and profitably in 2019.
1. Focus on the obvious companies
Many a times, investors like to look for hidden gems that are trading for maybe $0.20 and will potentially go up to $2.00 in the future. While possible, it is also a lot harder. Obvious companies with strong competitive advantage like Facebook, Amazon, Nestle, and Hartalega continued to perform well and have strongly entrenched in their industry, beating many competitors. These companies continue to perform over the years. When Amazon (AMZN) was trading at $800 last year, many lamented it was too expensive to invest. But today, it is worth more than $1400. Same goes to Nestle. Last year it was trading at RM 70 a share. Today it is more than RM120 a share. Collect these companies into a watchlist and wait for them to drop to invest.
2. Keep Cash on Standby
Cash is king in the investment world. Having cash not only allows you to diversify your risks meaningfully, but it also allows you to grab investment opportunities anytime. These opportunities come without warning and the most successful investors are the ones which are most prepared. This is why soldiers train and practice everyday. They do not start practising only when a war is nearby.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.