Today we’re kicking off a new series here at Mr. Tako Escapes. — Reader Questions. That’s right, I’m starting a series of posts dedicated to answering the most interesting reader questions sent my way!
Got a questions you want answered about investing, dividends, my life, or even food? Shoot me an email using the contact page!
Our first reader question comes from reader ‘Meg’ (not her real name), who’s recently suffered some pretty steep investing losses, and wants some advice. Reader Meg writes…
Dear Mr. Tako,
By accident, I recently stumbled upon your blog. I really enjoy your common sense, no-nonsense approach to living life frugally while still having a good time.
I’m making some big decisions which will affect my upcoming retirement, but I recently lost almost 50% of my money on a silver investment. The investment was recommended to me by an old friend who generally is very savvy with money.
I wanted to ask you — How do you feel about investing in gold, silver, and other precious metals?
Yikes! That’s a rough loss Meg, and I’m sorry to hear that it happened to you so near to retirement.
But, look on the positive side — this was a great opportunity for you to learn. Learning is what investing is all about, and exactly why I picked your question to kick-off my first “reader question” post!
So let’s get down to it!
Precious Metal “Investing”
Since the dawn of time, mankind has been obsessed with shiny precious metals like gold, platinum, and silver. For the longest time man minted these metals into currency, melted it into jewelry, and showed it off as a symbol of wealth and power.
For the longest time, gold and silver ACTUALLY WAS MONEY until the governments of the world decided to move completely to fiat currencies.
Unfortunately, precious metals have too long a history for humans to really think clearly about it. The stuff makes the minds of otherwise intelligent men and women go completely crazy.
Precious metals are now mainly used to make jewelry, bars or coins, high-end electrical connectors, and some dental and chemistry applications.
So, does Mr. Tako think of precious metals as an investment? Well, to first qualify as an “investment”, it has to pass my Asset Test.
Honestly, I could care less about how various dictionaries define the word.
My definition of an asset is a little different — When it comes to the world of money, I see three kinds of pieces on the gameboard of wealth — assets, liabilities, and commodities. Can you tell the difference between them?
I define an asset as: A thing which generates cash flow, outside the buying and the selling of the thing itself.
Liabilities (of course), do the opposite. They consume cash flow outside the buying and selling of the thing.
Metal of any sort (shiny, precious, or otherwise) falls into the commodity category. One piece of metal is perfectly equivalent to another piece of the metal of the same size and quality. That’s a commodity.
Commodities have prices too, just like assets and liabilities. The price of that commodity is mainly governed by supply and demand, but investor speculation can also move the price from time-to-time.
What you WON’T hear me say is that precious metals are assets. They’re not! (at least how I define assets)
So, when people say the words “investing in silver” or “investing in gold”, I just have to facepalm. Investing is the buying of assets, NOT liabilities OR commodities.
Making Money In Commodities
Don’t get me wrong — it’s entirely possible for people to make money trading in precious metals or liabilities. People do it every day. But, 90% of the time it’s PURE SPECULATION that the price will rise or fall.
They either get lucky, and the price goes up! Or, they get unlucky (like our reader Meg), and the price goes down.
Very few individuals have the data and inside information necessary to understand the intricate economics that will affect the price of precious metals over the next 5 years.
Precious metals are simply a store of value… the price of which will be governed by supply and demand whenever you buy or sell that commodity. Think of a store of value as very similar to cash (except cash usually declines in value because of inflation)
Gold or silver does absolutely nothing in your hands. I know people with vaults full of the stuff, and it never does anything but sit there.
One pound of silver will only be one pound of silver in 20 years time. It won’t spit off dividends or interest. That silver bar won’t suddenly reproduce and become two silver bars. It will never compound. That silver bar will always be exactly one pound of silver.
I personally have zero ability to accurately predict the future prices of gold, silver, or any other metal. (Most people fall into this category) For me, putting money into commodities is simply gambling.
Instead, I prefer to invest in assets. Assets that compound.
Stop Gambling And Start Investing
Now, I know all the ‘gold nuts’ of the world are going to disagree with me. I don’t have a problem with that.
They can show me the charts where the buying and selling of precious metals at “select” points in time will have outperformed stock investments (don’t worry, I’ve already seen these charts), but that won’t change my mind.
Why? Speculation returns rely strongly on luck (sometimes called random chance) to produce results. My approach tries to remove the ‘luck’ from investing (as much as possible).
Unfortunately, I’m not a lucky person. Where I’ve speculated in the past, I’ve both won and lost considerable amounts of money. Returns can’t be consistently earned over time — They won’t compound. They won’t feed my family, or fund my early retirement adventure either.
Instead, I need steady and predictable returns produced by assets, and the power of compounding.
I avoid speculation wherever possible. That’s not to say that people can’t make money at it — they do! It’s just not the way I invest.
So, I’m going to end this reader question with an incredibly instructive quote from my favorite investor, Charlie Munger**:
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
** Incidentally, Charlie Munger is the subject of a wonderful book I think every investor should read.