The Most Dangerous Word I Know
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- Published on Wednesday, 19 September 2012 11:51
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
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Ben Bernanke continues to toy with the economy. Gold bugs love it, but when it comes to beating inflation, one asset class outshines them all.
Thanks our good pal Big Bad Ben Bernanke, there's a four-letter word that should be ready to jump off our tongue.
It's not what you think... although many of "those" words are acceptable, too. Just don't say them in front of children. They'll hear enough of them in time.
The word I'm thinking of, in fact, is something you should tell your children. You should probably even whisper it in your mom's ear and maybe even your pastor's ear, as well.
They won't slap you. And they may even thank you.
The word... is "risk." It's the most troubling word in our lexicon these days, yet so many people take it for granted.
Just last week, Bernanke and his pals at the monetary roundtable plopped an infinite risk on the investing world. We're buying from now until we stop, he told us.
There's no timeline. No stop-loss for the bankster -- no set figure when Bernanke admits defeat. There's not even any oversight.
It is terrible news for investors. It is an infinite risk.
Oh, sure... from now until the election, the market's reaction will be grand. Short term, it's every drunk investor's version of heaven.
Long term, though, things get risky.
What happens when Big Ben decides enough is enough?
Or what happens when we turn on the TV and Ben tells us we're too addicted to his easy money to stop? That will be the ultimate outcome.
You know it. I know it.
Open a history book... the proof is right there. This isn't the first time a central bank went all in.
And it won't be the first time inflation grabs an economy by the neck and works to strangle it to death.
If you ask the gold bugs about the situation and the risk it creates, they'll smile and tell you they were ready for it the whole time.
But I say we can do them one better. I say we buy something that's better than gold.
Yup... I know it's sacrilegious to many of you, but here's the chart that proves there is an even higher power.
The green line represents the oh-so-popular SPDR Gold Shares ETF (GLD:NYSE). The blue line represents the better inflation hedge... the unconventional way to outsmart and outpace the Fed's moves.
I shaded the symbol behind the blue line because the stock is an active play in my Unconventional Wealth newsletter (thousands of folks will read the ideas behind the stock). But I will tell you that the company is a leader in the timber industry.
If you are a subscriber, you know I believe timber is a far more lucrative inflation hedge than gold. Don't get me wrong; the shiny metal has its place (in the form of a nugget or two in your bedroom safe), but when it comes to outpacing the ever-decreasing value of an American greenback, timber's the best of the breed.
Here's what I told subscribers about timber earlier this year:
Since the final years of the Reagan administration, this oft-overlooked asset has returned an average of 13.5% each year. At this pace, $100,000 would grow to $1 million in just 18.5 years -- twice as fast as your average stock.
There are only two asset classes that can beat that figure... private equity and venture capital. But here is where timber shines. It is a far less risky asset. If you have ever been part of a private equity or venture capital deal, you know for every investor who makes a buck, there is somebody else who lost two. It is a high-risk-high-reward game.
That is not the case with timber. The Sharpe ratio is not something you will see discussed in most financial newsletters (a nod to our fourth core tenet -- the art of valuation is dead). It's a little-understood measure of an asset's historic return versus its variability. It is a complicated formula... but it doesn't lie.
Essentially, the higher the ratio, the more return we get for each "unit" of risk. During the period we studied, the S&P 500's Sharpe ratio was 0.45. Gold's risk/reward equation was not much better. It averaged about 0.75. But timber... its Sharpe ratio measured 1.06. In other words, it's far less volatile than stocks and gold, and its returns are typically much higher.
We nailed it. Our play has shown very little volatility, yet now that the Fed has relit the inflationary fires, our timber stock is outpacing the price of gold by a nearly 2-to-1 ratio.
Right now, you can't open a financial rag and not read about the surging value of gold. Again, it has its rightful place in our portfolio. But gold is not the only, or even the best, inflation fighter.
Timber has been the best... and will remain the best.
The harder Bernanke beats on the chest of our dying economy, the better our play on trees will perform.
So I say, go ahead, Ben. Give us the best you've got. We'll turn that four-letter word, "risk," upside down. We'll use it to our moneymaking advantage.
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