(Podcast) The $700 Million Man Who Lost His Fortune

What’s hot and what’s not?

The chart below shows that U.S stocks (NYSEARCA:SPY) are still outperforming other asset categories like bonds (NYSEARCA:BND), global real estate (NYSEARCA:RWO), and gold (NYSEARCA:GLD) this year.  Stock market fear is contained and the VIX – a popular barometer of sentiment –  has declined around 30% year-to-date.

In terms of S&P 500 industry sectors, healthcare stocks (NYSEARCA:XLV) have jumped 10.62% while consumer discretionary stocks (NYSERCA:XLY) are up 9.25%.

In my latest Index Investing Show podcast, I tell an incredible story about how one technology entrepreneur lost his $700 fortune because of poor risk management. What went wrong? His financial negligence will blow you away and is a lesson on what not to do.

Also, I chatted with Andy Martin at 7Twelve Advisors about his new book Dollar Logic: A 6-Day Plan to Achieving Higher Returns by Conquering Risk.  I read the book’s galley version and it’s jam-packed with financial gems, including a complete debunking of the popular myth that higher risk leads to higher returns.

Gold Underperforms in 2015

As the chart above shows, the underperformance of gold this year is especially noteworthy because it’s occurred on the back of another European bailout crisis with Greece, collapsing oil prices and a crash in China’s A-shares market (NYSEARCA:ASHR).

Although gold is often promoted as a safe-haven that will hold up during turbulent markets, it’s actually lost value and hasn’t been an effective hedge during 2015’s upheaval. It’s another reason why I’ve been telling you that using gold for your portfolio’s margin of safety is a huge mistake. Remember: Assets that can lose market value should never be used in your portfolio’s margin of safety bucket.

Finally, even though fanatical types claim that GLD isn’t physical gold, it still doesn’t change the fact that GLD is a close proxy for physical gold prices. Each share of GLD approximately reflects 1/10 the ounce price of gold bullion and the LBMA Gold Price PM is the benchmark used.

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2 comments on “(Podcast) The $700 Million Man Who Lost His Fortune
  1. Richard says:

    “Finally, even though fanatical types claim that GLD isn’t physical gold”

    Not sure why you’d have to be ‘fanatical’ to make a claim like that. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day. Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole. I’ve also verified the following to be true and welcome everyone else to do so:

    “The GLD prospectus fails to specify around how much of GLD’s gold is insured but it does give you this clause “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” As I wanted clarification on this subject, I called GLD’s info line. The GLD representative acted as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent doesn’t know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors. These representatives behind GLD sure doesn’t seem to be the most honest types. Anyone share a similar experience? Thoughts?

    I also recall there was a well documented visit by CNBC’s Bob Pisani to GLD’s vault. This visit was organized by the management behind GLD to prove the existence of GLD’s physical. However, the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not show up on the bar list dated at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.”

    • Ronald Delegge says:

      Hi Richard,

      I don’t want readers to lose sight of an important point that GLD – regardless of how much physical gold enthusiasts hate it – is still a proxy of physical gold prices. Sure it may be off a few basis points from spot prices, but it’s close enough.

      I understand your concern about physical bullion vs. paper bullion. It’s a legitimate concern that can be alleviated by simply owning physical bullion, if that’s what makes you sleep better.

      Remember: Storing physical bullion requires space and insurance and both of these costs will decrease your expected returns. Also, the cost/spreads for acquiring physical bullion from bullion dealers is another significant cost factor along with the fact that long-term capital gains tax (if you’re lucky enough to have them) are higher vs. long-term cap gains rates for other assets like equities and real estate. Oh, and then there’s the issue of liquidity. Love it or hate it, a gold ETF gives the investor the convenience of intraday liquidity – whereas the physical gold investor has to haul their stash to the local pawn shop for liquidity. All of these factual expenses/hurdles are things that gold investors face.

      One more thing: How do owners of physical bullion hedge their holdings? In most cases, they don’t because a) they’ve been brainwashed to believe it’s not necessary, or b) they don’t know how. The beauty of GLD is that it can be hedged with put options for downside protection. Then again, a dogmatic view of the gold marketplace would never allow such heretic behavior, would it?

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