How Stupid Are Smart People When It Comes to Evaluating Investment Information?
I normally don’t pay attention to investments pitched on Facebook, for obvious reasons. But a few days ago, a very smart friend, who is also a serious investor, liked and reposted a piece entitled “Is Gold A Good Store Of Value?” Based on the credibility and wealth-building focus of my friend, I felt compelled to read the piece, just in case I was missing something.
Before I ask l you to read the short piece that was pitched, I am asking you to regard this as a quiz for you to identify potential flaws in this well-made case for gold.
In fact, I was going to name this article: “Gold vs House Value: A Highly Flawed Metric for Making Investment Decisions,” but I decided to let you be the judge.
Please put on your critical thinking cap and read the pitch (shown in the box).
Is Gold A Good Store Of Value?
In1970, a home cost $26,600 or the equivalent of 760 ounces of Gold.
Average home today in California cost $487,400 or the equivalent of 380 ounces of Gold.
The $26,600 saved in paper money in 1970 won't even get you a down payment on that same house today.
The 760 ounces of Gold saved in 1970 would purchase you the average price of a home in 1980, 1990, 2000, 2010 and 2017.
Gold Is Money on Steroids. Now go tell the world.
[Promoter’s website deleted from this article]
Before reading further, which statements seemed correct? Which statements didn’t pass the smell test?
A very common sales technique is to mix several undeniable truths (“facts”) with questionable statements then leverage the association of the “truths” with the questionable statements to compellingly drive home the point and close the deal with a call to action (“now go tell the world”)
The “undeniable truth” technique was used here to take you from the verifiable price of gold in 1970 with the verifiable house price in 1970 in “Fact #1” to the absolutely absurd statement in “Fact #5” that Gold Is Money on Steroids”!
So, where do you think the logic flaws are hidden? Read the pitch again before you read further.
Let’s take the points one at a time.
Is Fact #1 true? Yes, it is. You can look it up.
Is Fact #2 true. Yes, it sounds about right and when you divide $487,400 by 380, you get $1,282 per oz of gold which in March 2017 is pretty close. Credibility of the author is going up as you go from Fact #1 to Fact #2.
If you’re a skeptic, you are probably suspicious that the author chose the highest priced state in the nation for housing (California), but most people just go on to read Fact #3.
Is Fact #3 true? Yup, you can barely buy a house in a war zone in the US in 2017 for $26k. The author’s credibility is moving upward even higher.
Is Fact #4 true? Sure. Even if you use round numbers such as 750 ounces of gold at only $1,000 per oz, you already get three quarters of a million dollars and that will buy you an average priced home in every US state. After four rock solid facts, you’re hooked on the pitchman’s credibility.
Is Fact #5 true? Holy crap, where did that come from?! Gold is money on steroids? Most people who say “yes” to the first four facts, will slide right into #5 being a fact. Gold must be money on steroids (or other types of rrhoids!). Now go tell everyone you know and have them click on the link (that I deleted).
Why isn’t gold money on steroids? Or maybe it is and we have just been missing the boat?
Have you guessed the flaws yet? Did you start looking up data …like I did immediately upon reading Fact #1?
I have been following the price of both gold and silver religiously since February 2008 when I heard a great presentation by Kiyosaki about the industrial uses of silver, including for the growing cell phone market, at which time I went out and bought $30K in silver at $19.5 per ounce. Gold was at $950 per ounce and I bought $30K of that as well “to be safe.” A year later silver was at $9.5 per ounce and half my investment disappeared, though I didn’t sell.
The point is that I already knew that precious metals were volatile when I saw this pitch for gold a few days ago.
So, here is the key flaw in the pitchman’s argument. The author-pitchman of this piece chose to use the 50-year low for gold, which was in 1970 (big surprise!). Gold was about $35/oz and fluctuated between $35-$39/oz the entire year of 1970.
So, I decided to choose another arbitrary date, say 1980. Gold was about $630/oz. The median house price in 1980 in the US was $63,000 or THE EQUIVALENT OF 100 OUNCES OF GOLD!
Any metric of value, such as comparing the value to the tangible asset of a house, that can fluctuate-drop from 760 to 100 in a decade is so radically unstable, that not only is it a poor metric of value, it is a dangerous metric upon which to make investment decisions!!!
Always be vigilant when considering the potential manipulation of data. Gold is money on steroids? Are you kidding me?
By the way 100 ounces of gold today wouldn't be enough to buy the median house today.
The equally real data of house price vs gold in 1980 that I just presented is also manipulation because I chose the other extreme!
If one wanted to make a VALID ANALYTICAL point, one would show the historical graph of the number of ounces of gold it took to buy a house since 1970. So, let’s do that.
Figure 1: House Value in Dollars and in Ounces of Gold in July 1970, 1980, 1990, 2000 and 2010
Figure 1 graphically shows that the dollar value of the median house price in the US increased every decade from 1970 to 2010. That is no surprise to anyone. The gold pitchman wants you to believe that since the median house price in dollars increased from $23,000 to over $200,000, that means that the dollar has devalued over 40 years to be nearly worthless. In this case, the gold pitchman is right but takes it a step further by saying that since the dollar erodes so badly, then you obviously need a more stable alternative. If you need a stable alternative to paper dollars, then surely rock solid gold, stored under guard at Fort Knox, must be that stability you so desperately seek.
That reminds me of a mental game I play with 6-year olds who need entertainment. I say to the 6-year old, “I can prove that you are not here!” The 6-year old then responds with a puzzled look and emphatically declares “no you can’t!”
“Oh yes, I can. I’ll prove it to you,” I say.
“Are you in New York?” No”
“Are you in San Francisco? No.”
“Are you in St Louis? No.”
“Well, if you’re not in New York and not in San Francisco and not in St. Louis, then you must be somewhere else, right? Yes.”
“Well, if you are somewhere else, then you’re not here!!!”
The 6-year always says “wait a minute!” and we start from the beginning.
Now consider again Fact #1, Fact #2, Fact #3 and Fact #4 before repeating the mantra “Gold is money on steroids.”
As you can see in Figure 1, gold has a MUCH higher volatility than cash.
That is the exact opposite conclusion about the reliability of gold as a metric for preserving buying power than the gold pitchman was pitching and for which my smart friend fell hook, line and sinker.
I could have easily made the case that instead of gold, I could choose another “mystery metric” that would have a similar reliability for preserving wealth. I am showing the mystery metric in Figure 2.
Figure 2: Comparison of Median House Value in Ounces of Gold vs Marc’s “Mystery Metric”
In Figure 2, the blue line again shows the median value of a house in the US in July 1970, 1980, 1990. 2000 and 2010 in terms of ounces of gold, as shown in Figure 1. But this time, I chose a mystery metric to be represented by the red line.
Can you guess what it is?
Still can’t guess?
Before, I tell you what the mystery metric is, please examine the graph and try to figure out which metric is better predictor of value stability, gold (blue line) or the mystery metric (red line)?
It’s hard, isn’t it?
You know why?
Because house value measured in ounces of gold is not more and not less stable or predictable than house value expressed in terms of my mystery metric.
Ready to hear my mystery metric? You better, because it took me a while to come up with it and then look up the historical data to construct this graph!
OK, here it is… my mystery metric is the median house price divided by the car number of the driver that won the NASCAR cup in 1970, 1980, 1990, 2000 and 2010.
If you say “that’s absurd, there can be no cause-and-effect relationship between median house price and the number painted on the side of the winning NASCAR race car champion”, then you have understood my point about the absurdity of the statement that GOLD IS MONEY ON STEROIDS.
Flawed analysis is routinely used by most people for investing, choosing a spouse, choosing a profession, choosing political affiliation and most aspects of life. That’s why we have a 50% divorce rate, 50% of all workers hate their jobs, 50% of adults have no shot at financial freedom and of course, 50% of us vote Democrat and 50% of us vote Republican.
It’s no wonder that there are so few people who achieved their dreams for happiness, financial freedom, etc. (and that Congress has a single digit approval rating).
I am the happiest person I know and I have achieved financial freedom starting from nothing (net worth of $3,300 at age 30).
I have made excellent strategic decisions in life including being conservative with investments.
I use gold as a hedge and at a low single digit % of my net worth.
Income producing hard assets are the most reliable way to build wealth, as long as you conservatively avoid over-leverage at all stages to weather downturns. Gold definitely is not a reliable way to build wealth. It is barely adequate to preserve a portion of wealth accumulated by other investment vehicles.
That is what valid analysis shows over the long term.
Do you have a written strategic plan? If yes, then congratulations!
If not, you may want to seriously consider engaging a licensed financial advisor, but one who understands real estate investing.
You may also want to consider working with a business coach, like me, to prepare for your meeting with licensed professionals who will help you refine your strategic financial plan and make sure you are on track.
Time is irreversible, Life is irreversible. Every day you live your life without an effective strategic life plan, is a day you won’t get back without achieving your goals for happiness and financial freedom.
Make a commitment to yourself, right now, not later, to take action and get your written strategic plan in order so you can hit your milestones, and eventually reach your overarching life goals, like I have, and be happy.
Biography: Marc Halpern is a successful part-time investor who has achieved financial freedom in terms of passive income and net worth mostly through rentals and flips using “regular” money and self-directed 401(k) funds.
E-mail Marc Halpern directly if you want to improve your profits through coaching by a local expert in South Jersey/Philadelphia with track record.
Do not take any action or make any decisions based in whole or in part on the content of this article. ALWAYS consult with licensed professionals in YOUR state before making any investment.
Now watch the streaming video lectures of Marc Halpern’s Smarter Real Estate Investing Series:
Top 10 Essentials for Successful Flipping
How to Choose Houses for Rentals
Fund a Rental with A Flip: Analysis of an Impressive 2-Deal Case History
Landlording: How to Establish Acceptable Standards of Behavior with Tenants, Tenant-Buyers, Other People’s Children and Other Humanoid Life Forms
How to Effectively Choose Renovations for Flips and Rentals
Should I Flip? Rent? Wholesale? Lease-Option?
Advantages of Self-Directed 401k’s vs Self-Directed IRA’s
Leverage of OPM: The Good, The Bad and The Ugly in Real Estate Investing
Wholesaling from the Buyer’s Perspective
Decision Making, Happiness and Daily Lifestyle Aspects of Real Estate Investing
How to Recover from Bad Real Estate Deals
Overcome Barriers to Buying Your First or Next Investment Property