Category: Investment

A Tough Year For Gold, But Positives Ahead

FuturesIt has been a disappointing year for gold investors in 2015 so far with gold gradually declining since the beginning of the year. Investors may be getting sick of the yellow stuff after the 2014 performance of gold going nowhere, and then the drop in 2013. However, it is during such times that it is important to review the reasons for owning gold and keep its performance in perspective. In this article, we will review the performance of gold, look ahead at the financial landscape, and review whether holding gold still makes sense.

Gold Continues to Outshine, Despite Short-Term Performance

Gold is currently down around 10% year-to-date, bringing its one-year performance down to about the same at -11%. The current price of $1,070 hasn’t been seen since November of 2009. The five-year performance of gold is now down around 21%. This comes after 2014, where gold was essentially flat for the year, and 2013 where gold was down around 28% after correcting from its big run-up to $1,900 an ounce.

Periods of poor performance are certainly painful, and years of poor performance can seem excruciating in the short-term. However, gold as an asset must always be viewed in longer time frames and should always be compared to the other options. From 2001 through 2012, gold had positive gains, with eight of those years showing double-digit gains.

The ten-year performance of gold is up 116% and the fifteen-year performance is a positive 303%, compared to the S&P 500 which is up only 65% and 55% respectively! Gold is clearly holding its own, considering it should be an underperformer because it doesn’t represent a business or return a cash flow.

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Finally – Legal Investment in Small Businesses

SECYou no longer have to be super wealthy to invest in a new startup company or small business. On October 30th, the Securities and Exchange Commission (SEC) announced new rules that will make equity crowdfunding legal, something investors and small companies looking to raise money have been waiting a long time for. While not perfect, the rules are a step in the right direction to allow capital to flow freely and efficiently to new business ideas and products, which could unleash exciting opportunities.

What is Equity Crowdfunding?

Many people are familiar with the idea of crowdfunding in general — raising money from a large group of people. The two biggest crowdfunding platforms are Indiegogo and Kickstarter. But have you ever noticed that both platforms only allow you to receive products in exchange for your contribution? In other words, you may get a t-shirt or the first product that rolls off the assembly line, but you can’t have an ownership stake in the company: that would have been illegal.

This problem became glaringly obvious to people when Oculus Rift, a virtual reality headset in development, was purchased by Facebook for $2 billion. The project was initially launched on Kickstarter, and those who helped get the company off the ground were given an early prototype of the product in return. But when Facebook made the acquisition, these backers received nothing because they didn’t actually have any shares in the company.

Previously, only accredited investors, or those who were already wealthy, were able to participate in these investments. Now there is the potential for anyone to invest in companies looking to raise capital. This is important for a number of reasons.

The Auto is “On Auto”

google-driverless_3147440bOver the better part of the last seventy-plus years, passing the driver’s license exam was a rite of passage. Teens longed for the day when they could get behind the wheel of Dad’s old Mustang and leave behind a cloud of dust as they raced towards the horizon. Sitting in the driver’s seat with a parent alongside yelling “Hands 10 and 2… eyes on the road… use your turn signal!” became quite the typical family outing. Eventually, that driver’s license brought you freedom and responsibility – road signs for an ‘Adult Life Ahead’. 

Tech Trifecta

Investing_moneyThe first question one must ask when looking to invest some money is, where to put it? This is true whether you are hoping to make a lot of money, to do something valuable with the money you have in savings while you’re not using it, or looking to support a business you believe in. It turns out that there may be a way to fulfill each of those three desires simultaneously: a tech trifecta, if you like. Investing in the tech industry might be just the thing for you. There are certainly lots of great technological ideas worth getting behind purely to support, but it’s also common knowledge that there is a lot of money to be made in the industry as well.

Last year, Facebook bought Oculus Rift for $2 billion. Oculus Rift famously raised over $2 million in crowdfunding through a Kickstarter campaign. The tech startup was not a publicly traded company so when they were bought by Facebook,

Patience Tames the Beast

 stock market crash illustration with graph going down and bear As a child, I often recall adults saying “Patience is a virtue,” or “Good things come to those who wait.” Living in a society whose zeitgeist revolves around the individual and instant gratification, patience tends to fall by the wayside. While there is inherent importance in risk-taking in order to achieve greatness, sometimes simply biding your time is the best thing to do. One of the caveats of playing the stock market is its incredibly volatile nature; you mess with the bull, you get the horns. To become a wise investor, you need an equal measure of risk-taking and knowing when to be patient. 

What Causes Volatility?

In terms of a volatile market, we have to look at both the short and long-term fluctuations of market value. The simplest way to address short and long-term volatility comes with an understanding of supply and demand. Prices are driven up when demand is higher than the amount being sold; inversely, prices drop when more people want to sell than buy. The effects of supply and demand on the market can be seen daily in the market’s closing numbers.

Many believe that a company’s valuation largely determines the stock price, but many are wrong! A company’s value (price multiplied by outstanding shares) does not determine the stock price; rather, it is the opposite. Another important key concept is a company’s earnings. In theory, earnings should be the limiting factor for why a stock rises or falls. Au contraire, mon frère. The earnings determine the ability for the company to turn a profit, while the stock price is determined by the interest placed in the stock by investors.

Long-term stock fluctuation (positive or negative) relies on supply and demand principles, as does short-term stock fluctuation. However, there can be factors outstanding as to why a market would go through a period of intense highs or lows. During times of war, low economic prosperity due to unemployment, or periods where foreign trade decreases, the market (usually) tends to take a decline due to investors not putting money back into the market. On the flip side, periods of intense prosperity seem to drive market values higher, due to investors having more money to spend.

How Do We Counteract Volatility?

Short-term volatility really has no way of being stopped or counteracted. The market will always undergo some type of decrease, increase and leveling out, stemming from fickle investors just like ourselves. We all try to increase our profit margins in the long term through wise investing, but short-term money can be made through incremental buying. If you don’t have a broker and rely solely on your own wisdom and whatever you can glean from your TV financial news channel, incremental buying should be the ace up your sleeve. As the market ebbs and flows from hour to hour, buying one-hundred shares per hour (more or less, depending on the current price) allows you to increase your chance of making larger gains. Buying stocks hourly allows you to decrease the overall money spent per stock when price decreases and increase overall profit per stock when price increases.

Incremental buying works nicely for the long-term effects of a volatile market as well. However, the best tool you can use to curb the effects of long-term volatility is patience. When experiencing a difficult market similar to the one we have now, sometimes the best thing to do is just wait. I would personally advise taking the incremental route, primarily as a mid-risk/high-reward option. There’s always the chance of catching the stock at a low point, right before the soar. But patience is one of the greatests tools in a good investor’s arsenal. I stress the importance of patience for two reasons. First, history shows that markets trend toward stability. Second, rash decision-making backed by poor market understanding makes you no money. Riding the wave to shore works better than fighting the current.

When Will It Stop?

BlackRock Inc. has called for a halt on the market if volatility increases. A halt on the market would cause a temporary cessation of trading in order for investors and companies to get things figured out and back on a stable track. This would include a ‘limit-up/limit-down’ clause where the market would be halted if securities drop or rise above a certain threshold. Experts are saying that the market should calm down once the Federal Reserve raises interest rates. An increase in interest rates would benefit those so-called thoroughbred stocks due to the sense of surety that investors attribute to them. The market beast may be wild right now, but it won’t stay that way forever. Starting this fourth quarter and looking towards the end of the year, keep an eye open for the market to be tamed.  

Land of the Free, Home of the Idiot

testscoresForgive the suggestion, but it seems we may have reached an era in history where finding the village idiot may not be so difficult. Bloomberg reported that this year’s SAT scores were lower than they’ve been in some years. The SAT is a globally recognized collegiate admissions exam that tests a student’s critical reading, mathematics and writing abilities. This year’s students earned an average score of 1,490 out of the possible 2,400 points that the exam has to offer (800 per section). 

The two traditional sections, critical reading and mathematics, averaged 495 and 511 respectively. The writing section was an addition to the test in 2005 in an effort to assess a student’s ability to read and respond to a prompt in an analytical fashion. This section received the lowest average score since its conception: 484. The ACT, which is another (more popular) collegiate admissions exam, had average scores that remained relatively stable when compared to previous years. While the ACT exam tests what a student has learned in high school, or their ability to recall information, the SAT is more of a test of reasoning, logic and verbal skills. 

These statistics reveal much about the current nature of education in the United States. Regardless of beliefs regarding traditional education versus common core, American students are not learning. They are not learning to think critically, logically or rationally, and it doesn’t take any explanation to understand how this is becoming a dangerous phenomenon. A student, in order to learn, must be open to the learning process. It may not be a matter of which educational tactic is best, but rather teaching a student who is attentive and willing to put in the necessary hours to truly learn. As a biology student with aspirations of attending medical school, I know that for every hour spent in class, I require two hours studying outside of class. It’s not always enjoyable and it is certainly detrimental to an exciting social life, but it is what’s necessary for greatness. There seems to be a problem with high school students where academic mediocrity is not only acceptable but even encouraged among one’s peers.