Margin of Safety
What if I were to tell you the safest investment you could make right now is stock in a specific financial company? You would probably think I’m crazy. How about if I said buying gold right now isn’t safe?
The questions above are relevant because of the situation. Picture a brick on the side of the road. It’s completely harmless. Now picture the same “harmless” brick being dropped over the side of a building. It has now become a potentially lethal projectile. The only difference is the situation.
If you were to buy gold in 1987 where inflation adjusted prices were similar to today, you would have lost over half your investment over the next 14 years. If you adjust for inflation, you would have lost over 75% of your buying power. So if your investment in 1987 would have bought 4 hamburgers, in 1991, it would have only bought about 1. Clearly gold is not resting safely on the ground at current prices.
Now consider General Electric (ticker: GE) and Wells Fargo (ticker: WFC). These two financial institutions (GE’s Consumer and Commercial finance units provide a significant amount of their earnings) are AAA rated by the major credit ratings agencies, have two of the best CEO’s in the world in Jeffrey Immelt and Richard Kovacevich, and currently trade close to the lowest price to retained earnings ratios in the past 20 years. Their dividend yields alone provide a better return than 10 year government bonds. Now this is the kind of investment that I would call “solid gold”.