One of the most important lessons anyone can learn in life is that being “right” is only the first step. The next step is to know how to use it. And this is something that troubles plenty of people — especially free-market investors.
Over the last century, pro-gold and pro-freedom investors have made incredibly huge predictions on the basis of their economics, and some were right, and some were horrendously wrong. Let’s figure out what the most common are, and how we can prevent ourselves from making similar mistakes.
I Support the Free Market, but…
Before I begin, let me first say I’m a radical when it comes to economic liberty. I believe that nobody has the right to restrict my commercial activity unless it’s violating the rights of others.
No government has the right to ban gold, peer into my bank account, or anything else.
I’ve launched a website dedicated to capitalism and have even written for a radical free-market website at Mises Institute in Canada (I don’t live in Canada, but I love those guys).
But unfortunately, some people who love liberty jump to conclusions and end up making horrible investing mistakes because of it. Here are a few of the mistakes:
Mistake #1: Oversimplifying How Investing Strategy Should Work.
If you believe that inflation is good and will help the economy, you’ll obviously invest differently than if you believe that inflation is horrible for the economy.
The same for if you believe regulations are helpful, if you believe Congress is competent, and if you believe that free trade works. You’ll just invest differently.
Unfortunately, some people believe that if you support a gold standard, then you should automatically conclude that gold will just skyrocket no matter what. This is patently absurd.
Of course, over time, gold holds its value, but it’s not magic metal or anything close. It’s an asset and its price is based on supply and demand just like every other asset — period. Nothing is beyond the laws of supply and demand.
I love gold. I’ve made a lot from it over the years. I’ve sold profits and have bought cheap dividend-paying stocks with those profits. I really do love the metal. But I can’t allow my emotional attachment to be how I determine my investing strategy. Liking something doesn’t mean it’s going to be in a bull market soon.
Just because an asset is a good asset doesn’t mean it’s a good investment right now.
Here’s an example: it’s 1970, and John has just finished reading a book about Austrian economics. Inflation is the enemy, and gold is the friend — this is obvious to him and many of his friends. So for the next decade, John puts every dime into gold.
Unfortunately, in 1980, the metal dropped something like 60%, and then didn’t perform well for another two decades. If John was 40 when he bought the gold, then he would have been 70 before seeing any real returns.
What did he do wrong? He simply assumed that “inflation bad” meant “buy gold now”. That’s a silly oversimplification, and if it was that easy to invest, we’d all be billionaires. Of course, he also made another mistake, just like hundreds of other investors…
Mistake #2: Oversimplifying What is Going to Happen Next.
I love Doug Casey. I think he’s one of the most brilliant men when it comes to investing, economics, and politics. He also made a horrible, horrible mistake.
In 1980, Doug Casey wrote a book called “Crisis Investing”. In the book, he talked about an eminent “coming” Great Depression. He was, of course, wrong. He sold a lot of books and became famous, but the “coming Great Depression” never came. Instead, we went into a 25-year super-bubble.
Plenty of people read the book, freaked out, dumped some assets and bought other assets — only to see the bubble show up and party without them.
What’s the lesson here? Simple: even if you’re an economics genius, there’s no way in heck you can know what’s coming just around the corner. Economic geniuses often miss even the most important events — they often overreact. We’re all human.
The reason the world works this way is simple. Economics isn’t like physics or chemistry — it involves people. And people make choices. And because people make choices, there’s no way to predict exactly how the economy will respond — or how long some responses will take.
Sure, we’re overdue for a great depression — that’s obvious. We might even finally be in the depression he was talking about. But he was 30-years-too soon — and if you bet the farm on his prediction coming true quickly, you would have lost the farm.
That brings us to the next mistake people often make when investing…
Mistake #3: Assuming “Good Assets” Are Always “Good Right Now”.
I’m about to do something I never thought I would do… quote John Maynard Keynes in a positive way. I actually agree with something he once said. He’s essentially “the” economist that most politicians base their reasoning on, at least in part, and he’s essentially the one who made “print money for the good of the ecnomy” mainstream.
Either way, he once said something everyone should keep in mind while investing:
“Markets can remain irrational longer than you can remain solvent.”
A good example of someone who didn’t understand this was a man who, early this year, put all of his money into leveraged silver investments. He was going into debt to buy silver. He said that anyone who doesn’t buy silver through leverage is “stupid” and “doesn’t understand” how money works.
Of course, silver prices temporarily dropped — but his losses were permanent. The market was irrational longer than he was solvent.
This is critical to understand. Even if the dollar is going to collapse someday, it doesn’t mean it’ll be instant — or even soon. People have been predicting the collapse of the dollar for decades, yet if they had always put their money in non-dollar assets, they would have made pennies on the dollars that they could have made.
The same goes for gold. I believe gold is going to go straight up when the world’s currencies finally completely collapse. But I don’t pretend that’s next month. And I don’t pretend that’s next year. The answer is: I don’t exactly know when it’s going to happen — so I prepare by owning other assets as well.
Thanks for reading. I’ll be referencing this article quite a few times from now on, obviously, because these are the three biggest mistakes most small-time gold investors make, at least from what I’ve seen. If you haven’t already signed up, please join our newsletter by entering your email on any of the two forms on this page.
Join Over 8,000 Investors:
In less than 15 minutes a week, you'll learn everything you need to know about gold prices, the collapsing dollar, and the real inflation rate.
Thousands of investors have already signed up for the newsletter and are getting the info for free: