Source: Wikipedia

Dear Diary,

The Dow posted another record high yesterday.

Gold was flat.

We began buying gold in the late 1990s, when it was still cheap.

To illustrate just how cheap it was, for a brief moment in 1980 you could buy nearly all of the 30 Dow stocks for just 1 ounce. By 1999, the Dow had risen so high that you would have needed 43 ounces to perform the same trick.

At this point, you could scarcely go wrong buying gold and selling stocks. Stocks were expensive; gold was cheap.

We are too lazy to do real stock research. And we are too inattentive for trading or meticulous timing systems. We don’t aim to beat the market. “Live and let live” is one of our market mottos.

Here’s an easy way to do it – a refinement of our Simplified Trading System (STS) described in previous Diary entries.

You are either in stocks. Or you are in real money – gold. You buy stocks when they are cheap. You sell them when they are dear.

And you use roundish numbers to make it easy. When the Dow components are selling for 5 ounces of gold or less, you buy the Dow. When they are worth more than 20 ounces, you sell.

100 Years of Boredom

If you have followed that formula for the last 100 years you would have gone crazy with boredom.

You would have bought the Dow in 1914… suffered through World War I… the 1929 crash… the Great Depression… World War II… the Eisenhower years… and held on until October 1961.

That long stretch of inactivity would have convinced your friends and family that you shouldn’t be trusted with money. But you would have turned each ounce of gold into 4 ounces.

Then you would have stayed out of stocks for 13 years, until April of 1974, when the Dow fell below the 5-ounce mark.

You would have bought back into the Dow at that point. Alas, stocks continued to go down and you would have felt like a dummy again.

Mr. Market’s giant wheels may grind slowly, but they don’t stop. By 1997, it would have been time to get out again, with another 300% gain in gold terms. You’d have 4 ounces for every ounce you invested.

Again, you would have felt like a fool, because the Dow continued to go up to the aforementioned heights – equal to 43 ounces of gold. By this time, your wife surely would have left you.

But time would tell its tale… and the tale it told was a familiar one. Up, down. Down, up. Stocks took a dive in January 2000. They have never crossed the 5-ounces-for-the-Dow level again.

You would have been in gold ever since…

But look at what has happened. Since your first buy signal in 1914, you would have multiplied your gold 16 times. And gold has gone up 58 times (we’re doing this in our head) against the dollar. So, each dollar invested in this way is now worth more than $900.

Today, gold is worth pretty much what it was worth 100 years ago… but now you have 16 times as much!

Buy Cheap, Sell Dear

Is that a good performance?

It depends on how you look at it. We found a calculation showing that each dollar invested in the stock market in 1929 – including dividends and price increases – grew to be worth more than $1,000 by 2010.

We’re suspicious of that. It is probably based on market averages, neglecting all the dollars you would have invested in companies that went broke or were removed from the averages during that time.

Also, this measure is taken with the stock market at an all-time high. It would look much different if stocks were cheap now, rather than so expensive.

One of the nice features of this timing system is that it required only four moves in a century. One every 25 years; we can handle that. And the risk is low. You are, after all, buying cheap and selling dear.

We stopped buying gold when it rose to more than $1,000 an ounce. But we didn’t dump it to buy stocks; even at the bottom in 2009, it still took 7 ounces of gold to buy the Dow. And stocks have gone up since – to 14 ounces.

Today, gold is neither too cheap nor too expensive. It is about where it ought to be: right in the middle of our trading range. Stocks went up until January 2000. By our reckoning, stocks have been trying to go down ever since.

Eventually, they will get to where they are going: to under 5 ounces to the Dow. Then, we will be ready to buy them again.

Regards,

Bill