Gold bugs are celebrating, though they haven’t thrown the victory party just yet. Many bullish investors believe the price is going to $2,000. Some predict $5,000 as a realistic target. It very well may be. But more than a century of data suggests that investing in shares is a better way to go.

Over the past 110 years, gold’s risen by an average of 3.95% per year. On the other hand, global markets have average 4.89% a year, not including dividends. Add in a dividend yield even at the historical low average of 3.2%, and the return rises above 8%. Double the return of gold.

And despite the ALSI having run a fabulous 7.8% in the past three weeks, investors are climbing a wall of worry. And admittedly, there’s much to worry about. Radiation is spewing uncontrollably from a melted Japanese nuclear reactor, the US military is now engaged on three fronts, government spending – the world over – is out of control and food prices are going through the roof.

Despite all of these problems, the market keeps charging higher… Today, South African Investor Pillar One Advisor, Marc Lichtenfeld, tells you why shares remain your best bet! 

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Shares still promise you more than gold...
By Marc Lichtenfeld

I learned a long time ago that the market is a forward-looking indicator. Generally speaking, it tells you what’s going to happen about six months from now. When the market bottomed in early 2009, it was a signal that the economy would stop crumbling and start turning around later in the year. And that’s exactly what happened.

According to the Bureau of Economic Analysis, corporate profits jumped 36.8% in 2010, the largest increase in 60 years. Over in America, now that CEOs are seeing earnings return, they’re getting increasingly comfortable with hiring again. Last month, we saw some real progress on the job front as 216,000 jobs were added and the unemployment rate fell to 8.8%.

Yet despite these signs of global economic recovery, many investors are piling money into gold without thinking about the future potential of the stock market.

I know the argument for gold. It’s a hedge against currency devaluation, which everyone is certain will soon sink the US dollar. Gold is seeing increasing demand as an industrial metal and as a store of wealth. I know. I know. You don’t have to leave comments below telling me why gold is great - despite the fact that it underperforms shares over the long haul.
I know. I know…

This time it’s different, right?

It’s important to keep in mind that people always assume the problems their society is facing are among the worst in history.

My grandmother was sure the world was going to hell when my mom started playing Doo-Wop records and insisted on wearing blue jeans. In each decade since, my mother was leading the world to oblivion by listening to Duke of Earl, serious issues have faced the world and its markets.

We’ve had five decades worth of social and political crises such as terrorist attacks, foreign wars, threats of nuclear war, race riots and assassinations. And yet despite how upsetting and perhaps life-altering these events were, life did return to normal for most people.

We also had natural and man-made disasters such as devastating hurricanes, earthquakes and tsunamis. Chernobyl, Three Mile Island, the Bhopal/Union Carbide disaster, oil spills and the Proteas choking at yet another ICC Cricket World Cup. And still, people soldiered on.

And, of course, we’ve had decades of financial crises. No doubt, this latest one was a doozy. But past financial calamities were no picnic, either. The savings and loan crisis of the 1980s and 1990s, where 23% of the savings and loan associations failed, cost taxpayers $88 billion ($124.5 billion in today’s dollars) and was partially responsible for the large federal budget deficits of the early 1990s.

At the tail end of that situation, global markets went into one of their strongest periods of prosperity, balanced budgets and huge stock market gains.

The dot-com collapse in 2000 to 2001 caused many investors to swear off shares forever (not surprising, since more than $5 trillion worth of wealth was destroyed). It was their loss, or rather, lack of gain. Investors sitting on the sidelines after the bubble burst missed out on huge profit opportunities starting in 2003.

And after the market was cut in half by the most recent crisis, investors have made back about 85% of their money - and that’s if they bought at the very top.

Despite decades of financial, political and social problems, people still went to work, opened businesses, raised their families, celebrated milestones, weathered tough times, laughed, cried and lived their lives. And smart investors still made money.

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So when you turn on the news (that is designed to do nothing but scare you) or you hear people talking about the end of the world, remember that we’ve been there, done that and own the worn, tattered T-shirt.

The problems we face today are serious. But so were the ones in decades past.

Don’t let fear stop you! Ignore the “outside” noise and you’re sure to profit!

Don’t be scared so badly that you miss out on the gains that the market will deliver over the coming years. Asset protection is an important investor strategy. However, you should also stick to time-tested strategies like The South African Investor’s Gone Fishin’ Portfolio or investing in dividend aristocrats. Instead of investing solely in shiny gold rocks and ETFs like NewGold (JSE:GLD) now is the time to seek shares in potential high-growth industries emerging from the crisis, or quality dividend-yielding companies.

Although Grandma and Grandpa were certain that the Levi’s hanging in Mom’s closet signified the end of days, they continued to invest in the markets, real estate and the family business. It would have been easy to get sidetracked by any of the issues listed above over the past five decades. But ignoring all of the outside noise was the best decision they ever made as they achieved their financial goals and lived comfortably into their mid-nineties.

But THIS time it’s different, right? I’m sure you could have made that argument during two world wars and at any other period since 1900. And each time was different but, it’s tough to argue that history shows us that stocks outperform gold over the long haul.

Don’t forget: Long-term, shares trump gold hands down….

And for those of you with a shorter time horizon, shares should still prove to be the better investment. No doubt, gold has beaten shares over the past ten years, but that’s simply repeating a pattern where gold outperforms for about ten years and shares outperform for the next 20.

Source: Stocks-For-Beginners.com

Will history repeat itself or is this time really different?

I think you know the answer…

Until next week… Here’s to your financial freedom,

Karin Iten and Marc Lichtenfeld

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Your broker says…

Introducing a high-flying dividend share trading at a massive discount...

Insurance companies are typically valued by discounting their future profits to a current value and adding the market value of their tangible assets to this figure. The result is called the “embedded value” – an actuarial construct that allows you to accurately value insurance companies. Future profits are calculated by deducting future claims from future premiums of existing policies. It’s important to note that embedded value is a conservative figure doesn’t assume that the insurer will sell additional policies in the future, it also ignores goodwill.

It’s not easy to imagine then that an insurer’s share price could differ significantly from its embedded value. That is if the company is well managed and is expected to grow its client base in the future. But it does happen. In fact, currently a handful of insurers display these characteristics and the sector as a whole is showing great value.

I’ve identified two insurers that hold the most value in the sector.

Liberty Holdings: Back on track and ready to make you money!

Liberty (JSE:LBH) has interests in life and health insurance, asset management and property development. The group’s principal operating business LibertyLife is the third largest life insurer in South Africa, while 100% subsidiary STANLIB is the second largest investment manager in South Africa and SA’s largest unit trust company.

Liberty’s currently trading at a 28% discount to its embedded value of R91, historically the discount has averaged between 5-10%. Liberty grew earnings more than 6,000% in 2010 as a result of its restructuring and the absence of impairments and provisions. Although the share recovered from a low base in 2009, this is still a good result – coming in well above analyst expectations. The company’s getting back on track with investments growing rapidly and impairments in check.

Liberty offers a forward dividend yield of 7% a forward P/E of 7.6. The share could easily get to R85 in the next 12 months for an attractive 28% return. (Buy)

Old Mutual’s discount set to narrow! Snap it up while it’s still cheap

Old Mutual (JSE:OML) is currently trading at a 47.7% discount to its embedded value of R22 per share. I believe the embedded value will increase further once the disposal of US Life is finalised. If you are looking for one reason for the huge decline in Old Mutual’s share price, its US life business is it. The US Life assurance business required repeated capital injections and reached unrealised losses of $2.3bn December 2008. Conclusion of the sale is great news even at a R8bn accounting loss. The sale will actually increase Old Mutual’s future profits and therefore increase its embedded value. And now that a year of stable income streams and stronger earnings (up 185%) has passed, confidence in the share should recover and reduce the discount to embedded value.

The consensus earnings forecast from I-Net of R1.87 for 2011 – an increase of 63.7% – seems well within reach, resulting in a forward P/E of 8. I think the share will trade beyond R20 over the next 12 months, which combined with a 3% dividend yield, will result in a 37% return in 12 months! (Buy)

If you want to get involved in the stock market and don’t know where to start give me a call at (011) 550-6251, alternatively visit our website at www.imara.co.za

Good investing,

Marcelle Van Der Merwe

Imara SP Reid’s research is focussed on mid-tier companies. Their analysts are very well regarded in the industry and research is based on very conservative estimates.