Nearly one-hundred years ago one of the best (and worst) barters occurred in New York City. I read the entertaining story recently and found it fascinating. While it is a great tale of American history, the message is wholly relevant to investors today:
Described by The New York Times as "one of the finest" residences in the area, the Plants' New York City residence was on the corner of 52nd Street and Fifth Avenue. It was built in an Italian Renaissance style of limestone with marble accents.
When Maisie Plant fell in love with the natural, oriental pearl necklace, Pierre Cartier sensed an opportunity. Pierre, the savvy businessman, proposed the deal of a lifetime: He offered to trade the double-strand necklace of the rare pearls — and $100 — for the Plants' New York City home. The necklace was valued at $1 million, while the building was valued at $925,000, according to The New York Times.
The pearls were worth more than the Mansion at the time. Why were the pearls so costly? Cultured pearls had not fully entered the marketplace yet, which meant that each natural pearl had to be found by divers. It had therefore taken Cartier years to assemble the 128 graduated, perfectly matched pearls of Plant's necklace. Additionally, diamonds were becoming less valuable because of recent discoveries in Africa. Because of their rarity, natural pearls had become the symbol of the well-to-do socialite.
Maybe it's the way my brain works, but I wanted to find out who really made out in this deal, and to what extent. Below are the values of what the trades would be worth today. In doing some further digging and research, I found the following info:
- In 2004, a similar natural, double-strand pearl necklace sold at Christie’s for $3.1 million. This is a 1.1% annual return over time (much worse than inflation)
- The 5th Avenue mansion is listed in NYC tax assessments at $52 million (probably much less than what it is actually worth). This is represents a 4.2% return over this time period.
Sadly, Ms. Plant's heirs sold her necklace after her death at auction for a mere $170,000 in 1957 (a loss of 86% from her purchase price). So, Cartier was the winner in this trade. What is not even mentioned, is that for the past 97 years, the 5th Avenue building also was producing income (via rent) which makes its true value hard to even quantify over time. This is just another example of why we tend to shy away from commodity type investments like precious metals. They cannot grow, cannot produce income and your returns come from the hope that someone else will be willing to pay more than you did.
Just in case you were wondering, over the same time period, stocks would have turned the same investment into $271 million (without accounting for dividends)! Just another example of the power of investing in businesses and not just hard assets.
We are a quarter of the way through 2014, making it a good time to review what is working and what is not in the investment markets. The Capital Spectator released this chart of asset class performance through 3/31:
The clear winners for 2014 are REITs and Commodities. Unfortunately, those asset classes don’t typically account for a huge weighting in an average investor’s portfolio. Last year people were upset because their portfolios were trailing the US stock market. But when you are properly diversified you are always going to trail the best performing part of your portfolio (which last year was US stocks). It’s funny because this year I haven’t had anyone mention that they are upset they are trailing the REIT index. It all comes back to many of our inherent biases. We all are exposed to the performance of the US stock market on CNBC every day, making us want to compare ourselves to it. We are familiar with it. It is important that investors gain exposure to asset classes like REITs because of the value of diversification. This has been especially evident in the first quarter of 2014.
Before we begin 2014, we thought it would be appropriate for us to stop and take a look back at 2013. It was a very interesting year for investors and one that not many predicted (I guess that could probably be said for most years). For those investors who just watched CNBC, they saw the US stock market soar last year, gaining over 30% in value. For those, more in tuned with global themes, there was quite a bit more happening. While the US market had its best year in over a decade, international stocks, bonds, real estate and commodities all lagged, in some cases significantly. Here is a chart from the Capital Spectator Blog:
8 out of 15 of the asset classes reviewed on this chart lost value in 2013. For investors with a balanced approach, the lesson could seen as the failure of diversification. We see it a little differently. There will be a time in the near future, where those with a diversified portfolio of global asset classes will be delighted in their choice of not putting all their eggs in the US stock “basket”. We don’t know when that will happen, but diversification is one of those principles that we believe in strongly. There is a reason is has been called the “only free lunch when investing”.
What is the best vehicle for accumulating long-term wealth? This is a question worth thinking about as an investor and a recent Gallup poll shows that only 37% of those surveyed believed that stocks were a good method for accumulating wealth. This isn’t surprising. Over the past 13 years we’ve lived through two stock market crashes of 50%+ with very little overall growth over that period. But let’s take a longer term view of this. From the Investors Friend blog, we see this chart comparing the returns of stocks, bonds, gold and the dollar. It is pretty clear who the winner is of these options:
So, are stocks the only game in town? No, other investments to consider would be real estate and private businesses. Active ownership of a private business is probably one of the riskiest and most effective methods for accumulating wealth. If you go through the list of the richest people on the planet, most acquired their wealth through this method. Realize that most private businesses fail, so for every successful entrepreneur out there, there are probably 20 or more that have either seen their business fail or have not generated significant wealth through this endeavor. Stocks are one of the better choices for most investors since they allow you to take a passive stake in a company versus some of the other options that require more active participation.
This chart is another example why every investor should have some portion of their portfolio allocated to stocks. They allow you to participate in the profits of some of the best and well managed companies in the world. In addition, the long-term results speak for themselves.
From an insider’s perspective the last few weeks seemed to be the perfect time to be a gold investor. We had the government shutdown causing a slowdown in economic activity and even more importantly, it looked like we were heading for a potential breach of the US borrowing capacity which had the potential to cause a default. In times of great uncertainty (which is probably an understatement from the past few weeks), gold is often thought to be the investment of choice. This was such common wisdom that Goldman Sachs came out with a research report that gold was a “slam dunk sell” once the crisis was over since that was when the uncertainty would be removed.
There is an old saying that markets tend to do what makes the most people uncomfortable. Gold is no exception. Here is the chart:
So, gold fell through the lead up to the shutdown and until it looked like a deal was going to be reached. So during the period of maximum uncertainty, gold fell. Once resolution to the crisis was in sight, gold has been climbing. This tells us two things that we already knew. First, gold is not the great diversifier that everyone thinks it is. We saw this over the past few weeks and we saw it during 2008 as well. Second, no one can predict how the market will respond to events. The more certain you are, the higher the probability that you will be wrong.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.