CHISWICK, WEST LONDON – One way to invest is to buy-and-hold low-cost equity index funds.
The argument for this strategy goes like this…
One, that over the long run (when you subtract transaction and management fees), stocks have a constant return of about 7% after inflation.
And two, that as long as you use a holding period of at least 20 years, it doesn’t really matter when you buy them or what valuation you pay. You’ll compound your investment at about 7% after inflation.
I hate this strategy.
And there are three reasons why…
Three Reasons Why I Hate
This Popular Strategy
For one thing, it cherry-picks from the last century of U.S. stock market returns to make its 7%-after-inflation return assumptions.
The last century of U.S. stock market prices has basically been one giant bull market, with a few interruptions for wars and inflations, as the U.S. rose to become the world’s only superpower.
Can we expect the next century to repeat the results of the last century in terms of U.S. stock market performance? I don’t think so…
Second, I think Wall Street created – or at least hijacked – the buy-and-hold narrative with the ulterior motive of selling passive investment strategies and exchange-traded funds (ETFs).
Finally, it’s possible to beat the returns of buy-and-hold investing by using a very simple market timing strategy… the one I write about all the time in these Postcards. Except today, I’ll show you a twist on this strategy.
Let me explain…
A Better Way to Invest Our Money
Like I mentioned, my investing strategy is simple. Regular readers will know what I’m talking about…
When stocks are cheap, you buy high-quality stocks and hold them until they get expensive. Then when stocks are expensive, you go to the sidelines in gold and wait for stocks to get cheap again.
Going back 120 years, this results in a “Big Trade” every decade or two. The rest of the time, you stay put. (I intend to use this simple market timing strategy for the remainder of my life.)
I’ve often presented this strategy by showing the Dow-to-Gold ratio going back 120 years… And pointing at the very clear chart pattern that forms as the ratio cycles between expensive stocks and cheap.
Take a look…
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But today, I present this strategy with a twist: By looking at the ratio of Berkshire Hathaway’s A-share price versus gold.
A Twist on Our Simple
Market-Timing Strategy
Berkshire Hathaway is Warren Buffett’s company. Warren Buffett is the most successful buy-and-hold investor in history.
Remember that, as I wrote on Monday, there’s a very specific type of business I’ll be buying the next time stocks get cheap again.
If there is a simple proxy for that type of business, it’s Berkshire Hathaway’s A-share.
Berkshire’s A-share has never paid a dividend or done a stock split. So its stock price is a pure representation of the growth of Warren Buffet’s buy-and-hold investment strategy.
Here’s the Berkshire-to-Gold ratio going back 25 years…
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As you can see, the Berkshire-to-Gold ratio moves in big, clear trends… much like the Dow-to-Gold ratio we follow in these Postcards.
When the ratio is high, it means Berkshire Hathaway’s A-shares are expensive relative to gold. When the ratio is low, it means Berkshire is cheap relative to gold.
Notice how the ratio peaked at the turn of the century, bottomed a decade ago, and then peaked again in the fall of 2018.
Today, despite a recent reversal over the past few months, I believe the Berkshire-to-Gold ratio is in a primary downtrend.
I don’t know how far the ratio could fall… But I wouldn’t pay any more than 60 ounces of gold for a Berkshire Hathaway A-share.
(Right now, one Berkshire Hathaway A-share sets you back almost 230 ounces of gold, as you can see in the chart above.)
We’ll see.
– Tom Dyson
P.S. As I mentioned above, I intend to use this simple market timing strategy for the rest of my life. In fact, I’ve gone nearly “all in” – and bet more than $1 million of my own money – on a trade built around this strategy. I share the details in this video.
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
Readers share their thoughts on family homes… possessions… and finding happiness…
Reader comment: Having had the opportunity to travel a bit while working, we have visited a number of the places you and family have. Always memorable experiences and nice people. We’ve also visited your mum’s home area… such a lovely destination you now have to settle into!
Reader comment: Possessions are funny things. On the one hand, they may be a burden and seem to weigh you down. On the other hand, money in and of itself cannot buy you happiness. It can always give you more options – but not happiness.
Take a moment and listen to Johnny Cash, A Satisfied Mind. He so eloquently puts it in its proper place as do many country Western songs. Everyone needs money to a certain extent to cover basic needs, but once those are met, it becomes also a burden. You spend your life trying to accumulate it and once you do, you worry the rest of the time about losing it. So the worry part never goes away… it just changes.
The answer to life’s riddle is different for each of us and finding out what that means to you will be one’s key to ultimate success.
Reader comment: I appreciate the pull of living in your longtime home. I grew up living in my grandparents’ and parents’ home. But getting married young, we moved constantly. Even after 20 years in the last house, I realized when it was time to move. A house and possessions can be a great anchor in your life. You want to own and appreciate them, but don’t let them own you. Blessings.
Reader comment: Smart decision to keep your mother’s home and furniture and raise the children there. Become a professor and keep writing for a living. Best wishes.
Tom’s note: As always, thank you for your messages! Please keep writing us at [email protected], and I’ll do my best to answer your questions in a future Friday mailbag edition.