Gold: Yesterday, Today and Tomorrow

Recently, in order to get through a sensitive metal detector, with some pain and effort I removed my wedding band. I hadn't had it off in years. I later had it resized and polished, and was quite surprised how nice it looked. It all reminded me of an old gold mine that I grew up near. Let me explain.

Rings have a long history, often used to signify power and status, and more recently, achievements and love. Not one to care much about marking myself with symbols, I tried to pass on a wedding ring. My wife convinced me otherwise.

Researching rings, I learned that I could have our rings made using gold that had just recently been mined and processed from the Ropes Gold Mine. This is the old mine just a few miles from the house I grew up in in the Upper Peninsula of Michigan. The mine had recently reopened. I ordered two rings. We both have our rings. And each other. And three boys. And four grandchildren.

I recently saw an ad pushing the sale of gold. Yes, it's climbed a lot lately, up nearly 7 times in the past 20 years. Note, though, that in the same period the S&P 500 index is up five times (excluding dividends). In recent years, gold has not been a bad investment but history suggests it's not what it's said to be.

Back to our rings. When I was a kid, we occasionally brought our garbage to an open dump that was on the same gravel road as the old Ropes Gold Mine. There was a small sign recognizing this mine from the 19th century. It had been closed for decades.

The Upper Peninsula is known for its iron ore mining, which has been mined continuously since it was first discovered in 1844. Copper was once a big industry, too. But there were also over a dozen gold mines in the area.

The Ropes Gold Mine was the most notable of these gold mines. It was started by Julius Ropes, a chemist from Vermont who had searched for gold and silver on the west coast and in the south. In 1862, at age 27, he came to the Upper Peninsula working for a local druggist. Mining had already been active in the area for years.

Mr. Ropes married a local girl, settled in my hometown, Ishpeming, Michigan, had four children and eventually opened a drugstore. He was very involved in the city, becoming postmaster and a school board member. They lived in a house just a few blocks from the family home my great-grandfather bought about the same time, a home both my grandfather and dad grew up in.

Mr. Ropes continued his prospecting for gold and silver, and eventually discovered both in what became the Ropes Gold Mine organized by him in 1881. Mining began shortly afterwards.

It continued operations for fifteen years until it was closed due to financial difficulties. It produced $645,792 worth of gold, worth about $90 million today.

Note, though, that had this same amount of money been invested in the S&P 500, it would be worth tens of billions of dollars today. During this time, after accounting for inflation, gold went up about 4 times while the S&P 500 went up over 2000 times. Ok, enough of this. But I will carry this point out later to show just how bad of an investment gold is.

The Ropes Gold Mine remained closed for most of the 20th century. I remember as a kid walking through the mine ruins many times, looking through the history that sat overgrown with trees. Mounds of ore and equipment lay about, the former obscured by brush, the latter more rusted with each passing year.

Gravel roads eroded into trails, now as frequented by deer as man. But gold won't rust or be washed away, and beneath 100 years of shrubbery, it still coursed through the land's veins.

During these years the Ropes Gold Mine changed hands several times. As is usually the case, finances and investing were the drivers.

The big breakthrough came in the 1970s. Gold prices spiked, going up nearly 15 times while the S&P 500 about doubled (including dividends). Callahan Mining Corporation bought the mine and reopened it in 1983. They ran it again for nearly ten years when it again closed primarily due to the rising cost of operating the mine while the price of gold fell. It’s during this second run of the Ropes Gold Mine that I bought our wedding rings.

Our marriage has been very good. But as an investment, the gold in our rings didn’t do so well. When I had my ring resized, I asked for an estimate on what it is worth. They said it was worth about $1100, three or four times what I paid for it nearly forty years ago. How does that compare with the S&P 500? Including dividends, that same money would be worth $18,000 today, more than ten times what the gold is worth.

Gold has a long history going back thousands of years. There's a reason it is considered a timeless item with an inherent value. But gold doesn't do much other than make nice jewelry. Although it's backed by more than crypto currency, it’s not by much. They both are mostly only worth what someone else will give you for it. It's the same with most commodities. But in this case, there's emotion and history, unlike natural gas or wheat.

That's quite different from money invested in companies. Almost all stocks are backed by companies with products and facilities, with many paying dividends. There's not a lot of emotion to Proctor & Gamble or Apple Computers or Ford Motor. Nothing to share at a wedding or to carry on your finger for decades.

But from a cold financial perspective, these companies make and sell things that people want, and as an investment they lap gold again and again.

By how much? According to Stocks for the Long Run by Jeremy Siegel, after accounting for dividends and inflation, the S&P 500 has averaged nearly 7% a year return since 1800, rising over 23 times in this period. During the same time, gold has averaged less than one percent a year, rising only 4 times after inflation.

Yes, gold occasionally goes up fast as it did in the 1970s and as it has again this century. But from 1980 to 2000, it hardly moved while stocks went up by multiples. And even in this century, gold hasn't done much more than keep up with stocks.

They claim gold is a hedge against inflation. Maybe and sometimes. It worked in the 1970s. But, no, it doesn't normally track with inflation any more than bonds or stocks.

Gold is wonderful. I like my ring. I like its history, both through ancient times and into the Ropes Gold Mine. I like what it symbolizes.

But an investment? No. If you own the actual gold, you have to store and secure it. If you buy it electronically, whether directly or through a fund, you're open to all the same issues that come with trusting others' commitments to you.

People rarely do well with gold. But in the long run, buying and holding stocks, whether individually or in low-cost funds, it is hard to lose. At the same time, love, history and sentiment can’t be measured purely in financial terms. I’m still glad that I have my wedding ring.

What Goes Around Comes Around

I have spent my career working with computers. I still enjoy using new gadgets or learning how something like AI (artificial intelligence) works. Yet, not everything in tech is new, even in computers. I recently learned that mainframes, a relic from the 1950s, are alive and well, and in fact, their sales are increasing, presumably because they are quite suited for AI. Mainframes and AI are not words that should coexist! Here’s what has happened.

I learned to program decades ago writing in Fortran. Fortran was one of the first high-level programming languages, written before I was born. It was designed primarily for scientific and engineering calculations.

My programs ran on an IBM mainframe, a powerful computer that easily processes huge amounts of data, known for their speed, security and reliability. The name comes from the large cabinets (main frames) they were once stored in. Mainframes could weigh tons, living in large, temperature and humidity controlled spaces with maintenance personnel always onsite.

I also knew COBOL, another early high-level programming language, designed for business applications. Since then, I've programmed in an endless number of languages and hardware configurations. Both grow like weeds, each addressing some special situation or need. Since their start, new notable programming languages have been developed at the rate of about one a year.

Over time, mainframes dropped off in use as computing moved to servers, personal computers and smart phones, the hardware now generally used in today's internet.

I’ve known for years that COBOL has some residual holdings in business applications such as payroll processing, most notably Walmart. But I was surprised when I heard of someone who had recently used Fortran.

I continued searching, and yes, what goes around may come around. Mainframes, Fortran and COBOL are all alive and well.

Mainframes were the first commercially available computers. Because of their expense, originally they were only available to large organizations, including the government. They are essentially "black boxes,"  an environment that does not interconnect well with the outside world, a sharp contrast to today's tech environment that is essentially an endless interconnected network.

But this closed design that encapsulates processes has some benefits. It is easier to control both the hardware and the software, giving it a high degree of reliability, availability and security. Further, because most of the processing happens in a physically small area, processing can be very, very fast, able to complete computations in a fraction of the time they may take running on multiple servers and workstations, a common configuration today.

So, yes, there are not just a few mainframes hanging around but instead they are a viable industry, nearly all run by IBM. A majority of the companies in the S&P 500 have at least one mainframe, and many industries such as banking, airlines, insurance and government rely heavily on mainframes for their core functioning.

And now they are coming into use for AI, primarily because of their core competencies: fast, reliable and secure. And they can be cheaper to run, too.

I also found that millions of lines of COBOL code runs daily. It's estimated that more than half of all business transactions globally are processed using COBOL. And for similar reasons: It's fast, secure and it works.

Many of these business processes still handled by old languages have changed little. Payroll does about the same as it did fifty years ago: hours, rate, total pay, deductions and net pay. Process once every week or two, or once or twice a month. In payroll, there's really nothing new under the sun.

And what about my Original Language, Fortran? It is still widely used, a top choice for heavy number-crunching in scientific and engineering fields such as meteorology and physics. It has survived for some of the same reasons other old technologies are around: It is fast, has lots of libraries accumulated over decades and there’s just not a compelling reason to move to something else.

To be clear, these ancient tools have changed dramatically over the years. A mainframe today, almost exclusively built by IBM, is millions of times faster than their forebearers, and much smaller. Their architecture has changed little but the individual components are made using the most modern technology.

Although less so, old languages still in use today often have many of the modern constructs so common in newer languages, such as object orientation, parallel processing and recursion.

The world of technology changes at lightening speeds. New ideas and possibilities are endless. But like so much in life, there are functions and needs in technology that were solved decades ago, and there hasn’t been a compelling reason to change.

There might be a life lesson buried somewhere here.

Delayed Gratification

One of my life tenets is delayed gratification, a concept where I’m surely out of sync with much of the developed world. I learned early that instant gratification is expensive and that the ability to hold off on the endless purchases that are heavily pushed will get one ahead of the curve. And once that happens, a whole new world of opportunities opens up.

I recently heard from the opposing side. The Wall Street Journal had an enlightening article on just the opposite - why we shouldn’t delay the “extras” in life that can make us happy. Oh, pity the hundreds of generations that preceded us who didn’t have these options for a good life.

My wife and I are now living the advantages of our delayed gratifications. Both children of Depression-era parents, we share a disdain for debt. I grew up in a new house that still has never had a mortgage and is still in our family. Neither of my parents had college educations; my dad was a miner, my mother a bookkeeper.

But this counter-culture has its challenges. I remember early in my career making a meal for my friend at my townhouse, a new home that I purchased with a mortgage. It was quite nice, with vaulted ceilings and a garage that I had never had access to before.

My friend noticed my manual can-opener. It was an upgrade from the camping one it had replaced. I probably used it once or twice a month. It took me a few seconds more to open a can than the modern electric can-openers that I didn’t want to spend money on, but also didn’t want cluttering up my countertop.

“Why do you suffer with things like this?” she asked me. “Suffer?” Only in the U.S. would I have been seen as someone who lives with hardship. How do I respond to this question? OK, let’s begin by saying that this is probably our last date.

Today, my wife and I live in a beautifully renovated hundred year-old home on a hill near Lake Superior. We have more than we’ve ever needed and most of what we want.

Yes, we’ve often held-off on purchases, delaying gratification. Our first summer place was a three-season lake cabin without indoor plumbing. I’ve driven more than one truck until it was virtually worthless. We’ve never carried credit card debt, never financed a car since we married and paid off our home before turning fifty.

“Suffer?” I loved our cabin. I remember rising before sunrise, starting a fire outside, sitting with my wife in the quiet morning, drinking coffee while the kids slept. I had won the lottery.

We live in a world that pushes us to spend every dollar we have, and then charge the rest up on a credit card. Who can enjoy the outdoors without a new SUV, a toy I first got in my forties. The media never mentions what happens if you lose your job, or the shackles these debts put on your life.

Don’t be deceived. You won’t have more in your life by borrowing money to get it early. Delayed gratification is a key ticket to a secure and comfortable life.

So I can hardly contain myself reading the Wealth Management section in the Wall Street Journal. Jacqueline R Rifkin shares the downside of delayed gratification. She eloquently talks about her experiments where people are asked to imagine buying a bottle of wine. The study examines the impact of opening the wine now or delaying opening the wine.

Ms. Rifkin concludes that “in reality” some go too far, putting off the “sweet things in life” (e.g., a bottle of wine or a nice-smelling candle) until it’s “too late.” She speaks longingly of this bottle of wine, of “drinks with friends, birthday dinners, celebrating a promotion.”

I painfully read through the article just in case there was some wealth management help here, but, no, it grinds on, noting the “high price” and “stress” we pay for putting off such basic needs.

I acknowledge that there is a reasonableness to delaying purchases, that hoarding for some unknown future has its limits. I’m not recommending a miserly and selfish life isolated from your community. But we are mostly unaware of how expensive it is to take on debt for things that are hardly critical to survival. In the long run, spending less than you earn has huge financial benefits for you.

No surprise that Ms. Rifkin is a professor of marketing. She’s in the right place, trying to justify our first instincts. But this is no help for wealth management. Or happiness.

If you’re interested in getting ahead of the debt cycle and building a net worth that gives you vast freedom to enjoy life your way - rather than the ways sold by marketeers like Ms. Rifkin - delayed gratification is one of the keys to getting this done.

And about your “suffering” along the way, consider for a moment that nature and its wonders don’t require an SUV. Relationships don’t require some special bottle of wine. Wonderful gatherings are as close as your kitchen and pantry. Love and art and humanity are available wherever you are.

And it doesn’t require an electric can-opener. Yes, delay your gratifications, because in reality, you need little of them to find contentment, happiness and security.

A Fool and His Money

Recently, Jason Zweig wrote a fascinating article on how Wall Street continues to extract oversized fees from investors. The dollars are astounding, especially when almost any investor can open a free online brokerage account at any of several firms, invest their money in an exchange traded fund (ETF) that tracks the S&P 500, and charges as little as .03% a year.

Let me explain this carefully. This is not 3% which funds may still charge you. It is not .3%, or three-tenths, of a percent. This is 3 hundredths of one percent. If you put $100,000 into this fund, you would pay $30 a year in fees.

For example, today, you can go to Charles Schwab, open a free online brokerage account in about ten minutes, deposit any amount of money you like, buy an indexed ETF for the entire US stock market, pay no transaction fees, keep the money there for a week or a lifetime, and pay pennies a year in fees. You need look no further for a great deal.

But what are people doing instead? According to Mr. Zweig, they chase returns, buying alluring and sexy funds. Think hedge funds. Alternative funds. Funds that claim to return 2-3 times more money than the S&P 500 (the 500 largest stocks traded in the U.S., representing about 80% of the $43 trillion dollar capitalization of the U.S. public companies).

What are these funds? They vary, but they may use any of a variety of non-traditional and often risky strategies and investments, such as commodities or cryptocurrencies, or borrowed money. Of course, risk is rarely mentioned when they are advertized.

According to Mr. Zweig, the intermediaries in these funds "regularly rake off one-sixth of the gains... for themselves." He cites a recent study that over decades, average investors in stocks return sometimes as little as half of what the S&P 500 returned during the same period. He notes that while fees on index funds approach zero, alternative and hedge fund fees have barely dropped, some keeping more than half of all gains.

This isn’t new information. The reason for this huge inequity to investors is that Wall Street knows how to market. Fancy names and strategies, and highly selective marketing of occasional extreme gains is so much more enticing than the average return of the U.S. stock market.

But don't be fooled. These funds are highly selective in the data they share and the arguments they use. This enables them to make outrageous claims that are seemingly true, but don't work in reality.

I've said it many times in this blog and I'll say it again: If you invest in the S&P 500 with close to zero fees, you will far outperform most of the showy investments that people try to sell you. You should never pay a transaction fee to own a U.S. equity, whether a stock or a fund. You should not pay any annual fees for an unmanaged online account.

You should pay close to zero fees on a U.S. fund, indexed or otherwise. And although it's not sexy, you almost certainly will outperform most of these schemes that investors throw away their money on. And it is far less risky.

There are endless reasons that we have a world of big money confiscating the earnings of common investors. Numbers are hard to follow. People struggle to look back at data more than a few years old. Expensive clothes and soothing words give a false sense of security. These firms make used car salespeople look like Mother Teresa.
 
But while few of us have hours each week to spend trying to follow arcane figures and strategies, investment firms work tirelessly to confuse you into believing they are the good guys trying to help you out. But they are not. They are trying to keep you away from the easiest, cheapest way to earn money in equities - near-zero-cost indexed funds.

A close friend of mine understands the value of money and hard work, but does not like working with numbers. Periodically, he has asked me for help with his investments. I have said these same things to him multiple times. But he reluctantly handed his investments over to someone he trusted.

It went well for a couple of years, which was enough to keep him engaged during some trying years that followed. But then things went wrong and when he looked closely at what his advisor had done with his money, he again asked me for help. But this time he was determined to do it himself, which he has done ever since.

One day he again called me with a question on his investments. He told me how once a year, he takes a piece of paper, writes down all his gains or losses for the year for each of his accounts. Otherwise, he does little with his investments, keeping them in low-cost indexed funds, rarely making trades. He told me what his percent gains were, and he wondered if he had something wrong. They seemed too high. No, he had it right.

He hadn't spent the year agonizing over daily or weekly or monthly returns. He didn't move his money into any hot fund. No Bitcoin here. Just simple indexed funds that charge almost nothing. And he did very well, as he continues to do.

Unfortunately, there are many who want a portion of your money for themselves. Don’t listen to them. Keep it simple and keep your fees very low. And then you, too, can enjoy solid gains - and keep almost all of it for yourself.

The Financials of Smartphones and Batteries

I was recently pricing a new smartphone. Standard Samsung or Apple phones start around $800 (plus taxes and fees, a screen shield and a new case). The most common reason for replacing them is a dying battery.

Phones normally last two or maybe three years, depending on who you talk to. I use my phone a lot but after nearly five years, it’s still running well. Some years ago, I did some research on phone batteries and found that with some discipline, you can extend the life of a phone significantly. Here’s what I learned.

The short course on phone life is that batteries are stressed by how you charge them and by the demand you put on them. Heat is also a source of battery trouble. Here’s some further details if you’re interested in potentially saving yourself hundreds of dollars on phone costs.

The information on batteries can vary, partially because smartphone retailers want to present their phones as easy to use, and this often means a shorter life. Further, they have more than a little interest in you buying more phones.

But the independent data on phone batteries is fairly consistent. In spite of today’s battery hype, little has changed in the technology behind the lithium-ion batteries used in phones. And the rules that apply to your phone battery mostly apply to any lithium-ion battery, whether your watch, laptop or electric car.

One of the best ways to extend the life of a lithium-ion battery is in how it is charged. They are most efficient when working at around 50% capacity. Draining a battery below 20% is one of the worst things to do. It’s also best not to charge it much past 80%.

Charging it to 100% and then running it down below 20% is a sure way to shorten your battery’s life. Some phones now come with a system setting that will stop charging before it reaches 100%.

It’s also good to use chargers approved for your phone. Most off-brands work fine but some can overcharge a phone. You are fine charging your phone through your computer or laptop. Finally, slow charging is better than fast charging. There may be options on your phone to only allow slow charging.

There’s one last charging issue, and that is a parasitic load. Do not charge your battery while it is also being drained significantly, such as watching a video or gaming. Charge your battery when it is mostly idle. In fact, the best way to charge a phone is in short, slow periods when the phone is idle, keeping the battery somewhere in the middle of its capacity.

The next battery issue is drain. In general, the less you drain it, the longer your battery will last. Balancing this with your needs can be a challenge.

One of the biggest uses of the battery is the screen. There are some things you can adjust, such as reducing the brightness and having a shorter screen timeout (auto-lock).

Another problem can be Wi-Fi, Bluetooth and GPS. They can be a silent battery killer if you’re in an area with spotty coverage and your phone is working to keep itself connected. If you know you don’t need any or all of them, shut them down.

Another heavy drain on phones can be any of several apps, such as Facebook, Messenger and Instagram. They can be constantly operating in the background even when you aren’t using them. If you don’t need them, turn them off.

Finally, if you’re running low on your battery and can’t get it recharged, then shut down any unneeded apps and turn your phone to a power saving mode. Note that turning it off isn’t necessary. An unused phone without background apps running uses very little power.

The last big problem with batteries is heat. Lithium-ion batteries do not like heat. They are fine with cold (although their short-term power reduces when cold) but heat is all bad. Keep them out of the sun and out of a hot car. Heat is one of the reasons to avoid fast charging.

After this, there are potentially dozens of things you can do to extend a battery’s life a bit more, such as monitoring applications, keeping your software updated, limiting the use of camera flash, turning off vibrations and reducing screen refresh rates. But now you may find yourself more engaged in not using your phone than in trying to help its battery do its job well.

If you prefer, there can be some value in considering having a battery replaced, and possibly even doing it yourself.

But in the end, a battery and your phone will both eventually die. In my case, the manufacturer quit providing security updates, forcing me to replace it. Fortunately, I got over a 50% rebate for an old phone, so all was well.