Monday, February 13, 2012
Starting Points Matter
"Starting and endpoints matter," Steve Galbraith, partner of Maverick Capital observed in pointing to a graph of S&P returns over the past 75 year, "and we started from a ridiculously blown-up level. But the reality is, even with the rally we've just had in the markets, this has been the second-worst decade ever for stocks. And I'd much rather be investing now than 10 years ago."
After I published my post on Friday comparing the returns of stocks, gold and cash over the span of my 30-year career, one of my colleagues challenged my methodology.
"Look, you 'gamed' the results", he said with a smile. "The 1980's and 1990's were some of the best years for stock market returns in U.S. history. What if you changed the starting date? Would stock returns have been as attractive in a different period?"
Fair enough. As the quote from Steve Galbraith says, starting and end points matter a great deal. If you choose your time period correctly, you can "prove" the superiority of any asset class.
So let's concede my friend's point, and look at the returns from two other periods. But I can't help but make a few observations first.
True, the 1980's and 1990's were terrific times to be investing in stocks - or bonds, for that matter. But it is also true that the last 12 years have been particularly poor ones for equity returns.
Cash returns have also been remarkably low during the last few years, reflecting both Fed policy as well as the deflationary trends sweeping our economy. The total return from Treasury bills, for example, has been less than 0.5% in total for the last three years. This is as bad as the rates that savers earned in the 1930's.
The trend in gold prices was either flat to down for most of the last 30 years. For example, the average gold price was $376 an ounce in 1982, and $310 in 2002. Most of the rapid rise in gold prices has occurred since 2006, when the full fury of the financial crisis hit the world's markets.
So with these caveats in mind - poor returns from cash and stocks over the last decade, and a meteoric rise in gold prices for the last 5 years - let's take a look at some other periods of time.
If you invested $100 in all of the asset classes 20 years ago, here's where you would have stood at the end of 2011:
Here again, stocks are the winner, although the advantage is considerably less. What is clear, however, is that "playing it safe" was the clear loser.
What the gold bugs will point to is the past 10 years, when gold clearly was the winner:
So if you had been smart enough to buy gold 10 years ago, what would you do today?