Barry Ritholtz has been receiving a lot of praise for his 2,500-word Bloomberg listicle “10 Reasons the Gold Bugs Lost Their Shirts”. Which is weird, because it’s deeply flawed. Here, then, are the top ten places he goes wrong:
1. The title. Ritholtz frames his entire piece as a “post-mortem” examining a “debacle” which resulted in certain investors losing their shirts. But he never identifies a single such investor. The rest of the article is effectively moot if people haven’t lost a lot of money on gold. And so it’s telling that no sooner is the concept raised than it is dropped. Yes, the gold price has fallen from its highs. But without knowing where people bought, and whether they have sold, it’s a case of overstretch to thereby deduce that many gold investors have lost most of their money, as Ritholtz’s headline implies.
2. Any idiot can make money in the past. Every year, the FT’s John Authers extolls the astonishing returns posted by Hindsight Capital LLC, two of whose spectacular 2013 trades involved shorting gold. Hindsight Capital, of course, is a joke: its positions are revealed only at the end of the year, when we know exactly what happened. But Ritholtz seems to be absolutely serious here:
As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade — such as the 2010s.
The only thing that Ritholtz is saying, here, is that the price of gold went up, and then it went down. His self-identification as “a gold agnostic” basically amounts to saying that it’s a good idea to own gold when it’s going up, and a bad idea to own gold when it’s going down. On that basis, it seems, it was a good thing to own gold in the 2000s, and a bad thing to own gold in the 2010s. To put it mildly, this is not helpful.
3. He relies on tautology. Ritholtz goes into a lot of detail about the exact movements of the gold price, telling us that it peaked above $1,900 per ounce. “Unless something radically changes in the near future,” he intones, “that may very well be the peak for this secular cycle.” Well, yes. Gold is currently trading somewhere in the $1,250 range: if it shoots back up above $1,900, then I’m pretty sure that would count as something radically changing. But is it reasonable to worry about a sudden radical change, and to therefore hold on to a long gold position? Ritholtz never says. All he tells us is that “some gold fans may argue that the cycle is not over yet, and they may be correct.” Thanks.
4. He criticizes a phantom. Ritholtz says that he has found, in gold, “a teachable moment of what not to do in a trade”. One would think that before you criticize a trade, it is reasonably important to know what that trade is. But that doesn’t stop Barry! Specifically, the standard goldbug trade, it seems to me, consists of putting lots of money into gold, and keeping it there. If you’ve been doing that for decades, you’re still feeling pretty smug right now, and can quite easily ride out the current market downturn. The trade that Ritholtz is criticizing, on the other hand, seems to comprise buying gold at $1,900 and then selling it at $1,200. Although he never quite comes out and identifies it that specifically. Without identifying exactly what (or whose) bad behavior you’re learning from, it’s pretty hard to draw useful lessons.
5. He blames Wall Street for the run-up in gold prices. “On Wall Street, storytelling is a big part of the sales process, and gold was no different,” says Ritholtz in his second lesson. He follows up in the third: “Salesmen always need something to sell. In GLD, they found the found a perfect vehicle to pull in the masses.” The story here — the narrative that Ritholtz is selling, if you will — is that a group of latter-day Jordan Belforts were hitting the phones, telling their schmuck clients to load up on gold ETFs, and making millions in the process. The problem with this story is simple: it isn’t true. The big gold salesmen weren’t Wall Street brokers extolling the efficiency of newfangled ETFs; rather, they were the likes of Glenn Beck and Ron Paul. The Cash4Gold people might have made money from a rising gold price; Merrill Lynch and Morgan Stanley, not so much. Indeed, the main reason for the popularity of the GLD ETF was precisely that it didn’t involve paying substantial commissions to middlemen, be they on Wall Street or elsewhere.
6. He confuses an investment with a trade. Ritholtz quite rightly points to the many periods in the past where gold has gone up and then has gone down. “Everything,” he says, “eventually goes to hell”. But that is not the same thing: the price of gold is still higher than it was during many of the previous peaks. The real lesson here is that in order to be a gold investor, you need a stomach strong enough to withstand these big cycles. Ritholtz’s lesson, by contrast, is the exact opposite: “Everything Eventually Becomes a Trade”. Or, to put it another way, if anything you hold ever goes down in value, then you’re not a long-term investor, you’re just a failed short-term trader. Ritholtz is a trader by profession, so it’s natural for him to think that way. But it’s not how gold investors think.
7. He turns a virtue into a vice. “What would make you reverse your biggest present holding?” asks Ritholtz. “If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.” This is pretty much the worst advice that any investor can receive. To be sure, if you’re putting on a trade, and you expect and hope to take profits by exiting your position in the foreseeable future, then it’s a very good idea to have an exit strategy at the same time that you enter the position. But if, on the other hand, you’re doing something sensible like putting all your retirement savings into a Vanguard target-date fund, then the lack of an exit strategy is a very good thing. You don’t want to panic and sell when the market goes down; indeed, the entire structure of the fund makes sense only if you hold it all the way through your retirement. Ritholtz, like all money managers, complains about fickle clients who withdraw their money at the first sign of underperformance. But if he keeps on writing like this, you can hardly blame them.
8. He encourages market timing. “Every position,” writes Ritholtz, “no matter how compelling the underlying story, should have an exit strategy.” The idea that you should just buy and hold, he says, is “an especially money-losing attitude when holding a commodity” — even though he himself admits that “gold has no fundamentals” and that commodities “lack an objective measure of cheap or dear”. In other words, he’s advocating a market-timing strategy — buying low, selling high — in the absence of any useful information about the best time to buy or the best time to sell. Attempts to time the market are the main reason for the existence of the “behavior gap”: the difference between investment returns, on the one hand, and investor returns, on the other. Here’s a chart from Betterment showing just how big that gap has been estimated to be:
In other words, if you follow Ritholtz’s advice, you’re likely to underperform the asset classes you’re invested in by 1.5% or more. Probably much more, frankly, if you’re the kind of person who likes to play in classes like commodities. I don’t think much of gold as a buy-and-hold investment, but I’m quite sure that attempting to trade in and out of gold is going to be a much worse idea.
9. He shows no conception of hedges, or optimal portfolio allocation strategies. Ritholtz enjoys taking a hammer to what he calls “End-of-World Tales, Conspiracy Theories and Other Such Nonsense”. But while he’s shooting fish in a barrel, he misses the one genuinely good reason for including gold in a portfolio — which is that it’s a reasonably good hedge against various tail-risk events. And indeed, when the entire world imploded in 2008-9, the price of gold helped anybody who owned it as a part of their portfolio to handily outperform the market. Hedges are like insurance: they’re there to help protect you in the unlikely event that a low-probability unexpected event suddenly knocks you sideways. Judging the gold price on its own, as Ritholtz does, is silly — especially in the context of a world where the stock market has been resurgent and portfolios in general have done extremely well. That’s exactly the time when you aren’t reliant on your hedge. And that’s why I’m skeptical that investors in gold have really lost their shirts. Sure, if you’re invested in nothing but gold, then your portfolio will have gone down in 2013, while everybody else’s went up. But for someone with say a 5% allocation to gold, just in case everything goes wrong, then last year was probably a very good one, overall.
10. If all else fails, resort to nonsense:
The concept of situational awareness comes from military theory, particularly aviation, representing the idea that a pilot needs to be fully cognizant of all the elements occurring in three-dimensional space, as well as those about to occur in the near future. For the investor, situational awareness means not getting too caught up in the moment, and understanding the continuum of time. Instead of thinking of any event as a single instance in time like a photograph, consider instead a series of instances more akin to a video.
I have a vision of Ritholtz at his advisory shop, putting an arm around some young protégé’s shoulders, and telling him, “my son, you show promise. But what you lack is an understanding of the continuum of time“. To this, the only reasonable response is a slap in the face.