It Is Not Paper

A lot of people I knew lost quite a bit of money during the dot com bust. But there were quite a few who didn’t lose any money; primarily because they never invested in stocks.

There were two main reasons for that:

  1. They were too conservative to put their money in stocks.
  2. They were living in remote areas and didn’t have easy access to brokers.

If you look at real estate; it differs exactly in these two respects:

  1. A house is considered one of the safest bets you can make.
  2. It is found everywhere.

When land prices started to go through the roof; people derived confidence from the fact that they were so different from stocks. Somewhere along the line people started telling each other that houses are different from stocks. Stocks are just paper, but houses are real. Besides, whoever heard of declining home prices?

These things were of course true; houses are different from stocks, they are generally not as volatile as stocks — you can live in a house but not in a stock and owning a house saves your rent too. All these differences didn’t stop the speculative bubble in housing pop.

Gold is the New Real Estate?

There are a lot of pundits who are promoting gold these days. And they present the same type of arguments that were presented in favor of real estate.

Most importantly: it is not paper.

It is hard to argue that gold is not paper, but, then wasn’t that the case for houses too?

If something rises much faster than its historical growth rate, then there is surely some amount of speculative build up in that asset. We saw that with houses and also with oil in the recent past. Gold may look safe when the stock markets are falling, but, what happens when markets eventually rebound; wouldn’t lot investors who bought gold for safety, then move to stocks — taking gold prices down with them? That would also trigger a reaction where speculators exit gold and it sees the same kind of crash that we saw in oil prices.

No investment is conservative just because of the nature of the asset, the price at which you bought something decides whether it was conservative or not. So, don’t invest in gold, just because it’s not paper.

One thought on “It Is Not Paper”

  1. Wise words. Gold is great in the form that it is not something that can be produced (compared to currency) but I personally prefer something that will bring me a cash flow. Stock are nice if they pay a yearly dividend but speculating on the prices is not my game. It is the same with real estate. If it will bring me a monthly cash flow I like it no matter what the current market prices are doing.

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