A Fool’s bet


I subscribe to Fool.com‘s commentary on specific stocks.  One feature I especially enjoy is "Dueling Bulls," where two Fool commentators virtually duke it out over a particular stock.  One chooses a bullish outlook, and the other chooses to be bearish on a particular stock.  Recently the "Dueling Bulls" focused on whether to buy a share of Google or an ounce of gold.  On November 30, Rick Aristotle Munarriz argued that a Fool should invest in a share of Google.  The next day, Robert Aronan countered that it is better to buy an ounce of gold.  On December 5, I argue you should buy neither, because you can earn a better return on your investment and diversify your portfolio by buying several shares of stock with the same amount of money you would spend to buy a share of Google or an ounce of gold.  I enjoy Fool.com’s commentaries and have no doubt they are a smart group of investors, but sometimes I find their recommendations way off the mark.  Their recommendations on Google and gold are exhibits A and B.
 
On Friday, Google (GOOG) closed at $417.70 per share.  Gold recently closed at over $500 per troy ounce.  With so many analysts rating Google a buy or strong buy, it’s likely that Google will be on its way to $500 per share, putting it at near parity to an ounce of gold.  Is a piece of Google worth its weight in gold?  I doubt it.  That contention is debatable.  However, what is becoming increasingly clear is that the upside for both gold and Google is shrinking.  There is no guarantee that either will continue to rise or retain such high valuations, and the more expensive they become, the more likely they are to lose value.  Gold has not flirted with such high valuations since 1987, when the stock markets crashed (remember Black October?).  Just 16 months ago, Google went public at $85, and many analysts, including Rick Aristotle Munarriz and my idol, Bambi Francisco, believed it was overvalued at the time.  In fact, I sold my shares of Google at $200 per share, believing that they could not rise much higher than $235 per share.  At the time, my bearish sentiment was reinforced by many of the same analysts who now say that Google shares are on their way to $500.  I now believe a target price of $300 for Google is sustainable, but $500 per share?  I wish I had kept my shares and enjoyed the ride to $417, but I still would have sold a long time ago.
 
The value of a dollar is more than it was in 1987, so gold may very well be on its way to $600, and Google’s share price will probably continue to rise over the short term.  However, the risk associated with a return of 20%-25%, which many bullish analysts are predicting for Google and gold in the next year, is very high.  I would much rather take $500 and put it into several equities.  If I wanted to buy some Google, I might buy shares of Bill Miller’s Legg Mason Value Fund, which owns shares and is on the verge of beating the Standard & Poor’s 500 for the fifteenth year in a row.  If I wanted to buy gold, I might choose to purchase a couple shares of StreetTracks Gold, an exchange traded fund (ETF).  The ETF also saves you the trouble of buying and physically holding gold under your mattress. 
 
I would be more apt to invest my $500 in other equities and funds diversified by industry, market size, and region.  I prefer to invest my money in promising companies and sectors not pumped up by speculation, as is now happening with both Google and gold.  Gold may be alluring, but buying a diverse range of metals and materials is a much better bet.  A hypothetical $1 million metals portfolio I developed on Marketocracy two years ago has returned over 50% since inception.  The fictional portfolio includes a variety of mining companies and an assortment of materials manufacturers.  As for Google, it may eventually swallow up all of techdom and bring the mainstream media (MSM) to heel, but for now I think it’s wiser to spend investing dollars on Yahoo, Ebay, Dell, Oracle, Microsoft, Amazon, and any number of top tech companies with far lower stock prices.  For example, you could buy 125 shares of Sun Microsystems for about $500, and it would need to increase by just 85 cents per share to earn a 25% return.  In October alone, Sun increased 65 cents per share.  While I don’t recommend buying shares of Sun Microsystems, I believe it’s a safer bet than buying Google now.  Buying Google or gold now is a Fool’s bet.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s