A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

EXERCISE 8: TIPTOE THROUGH
THE FIELDS OF GOLD,
COLLECTIBLES, AND OTHER
INVESTMENTS
In previous editions of this book I took different positions on
whether gold belongs in a well diversified portfolio. At the
start of the 1980s, as gold had risen in price past $800 an
ounce, I took a quite negative view of gold. Twenty years
later, at the start of the new millennium, with gold selling in
the $200s, I became more positive. Today, with gold selling
at nearly $1,400 an ounce, an all-time high, I find it hard to be
enthusiastic. But there could be a modest role for gold in your
portfolio. Returns from gold tend to be very little correlated
with the returns from paper assets. Hence, even modest
holdings (say, 5 percent of the portfolio) can be of help to an
investor in reducing the variability of the total portfolio. And
if inflation were to reemerge, gold would likely produce
acceptable returns. Small gold holdings can easily be obtained

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now by purchasing shares in one of the mutual funds or ETFs
concentrating on gold.
The volatile movements in gold prices remind me of the
story of the Chinese merchant who made an excellent living
trading in sardines. His business was so successful that he
hired a bright young college graduate to assist him in his
endeavors. One day, when the young man was entertaining
his in-laws for dinner, he decided to bring home a couple of
cans of sardines to have as an appetizer. On opening the first
can, he found, to his great chagrin, that the can was filled with
sand. He then opened the second can and found that it, too,
was filled with sand. When he informed the Chinese merchant
of his experience the next day, the wily trader simply smiled
and said, “Oh, those cans are for trading, not for eating.”
In a sense, this story is very similar to the situation that
occurs in gold trading. Practically all gold trading is for the
purpose of hoarding or speculating so that the bullion can be
sold later at a higher price. Almost none of the gold is actually
used. In this kind of market, no one can tell where prices will
go. Prudence suggests—at best—a limited role for gold as a
vehicle for obtaining broader diversification.
What about other collectibles? Diamonds, for example, are

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often described as everybody’s best friend. But there are
enormous risks and disadvantages for individual investors.
One must remember that buying diamonds involves large
commission costs. It’s also extraordinarily hard for an
individual to judge quality, and I can assure you that the
number of telephone calls you get from folks wishing to sell
diamonds will greatly exceed the calls from those who want
to buy them.
Another popular current strategy is investment in
collectibles. Thousands of salesmen are touting everything
from Renoir to rugs, Tiffany lamps to rare stamps, Art Deco
to airsick bags. And eBay has made buying and selling
collectibles much more efficient. I think there’s nothing wrong
in buying things you can love—and God knows people do
have strange tastes—but my advice is to buy those things
because you love them, not because you expect them to
appreciate in value. Don’t forget that fakes and forgeries are
common. A portfolio of collectibles also often requires hefty
insurance premiums and endless maintenance charges—so
you are making payments instead of receiving dividends or
interest. To earn money collecting, you need great originality
and taste. In my view, most people who think they are

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collecting profit are really collecting trouble.

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