Is it Time to 'Invest Like Your Grandmother Would'

The ad for a new Fund by Canara Robeco encourages investors to invest like one's grandmother would. The hoardings are plastered all over our cities and show a grandmotherly lady wearing gold necklaces.

This advertisement set me thinking. If one were to invest like one's grandmother, what would one buy? I would have to say, gold would be on top of my own grandmothers' (both maternal and paternal) shopping list, as far as investments are concerned.

Is my grandmother's style of investing wise? Here's a graph which shows that it might just be so.

Image Courtesy: Equitymaster.com

The graph above shows the returns enjoyed by investors in Gold over the past 40 years. The yellow metal has given CAGR returns of 14% p.a.

As a value investor, would it be smart to invest in gold today? Let us evaluate it according to our 4 rules of value investing, which I had earlier listed here.

Competitive Advantage:
Gold does have a competitive advantage in terms of the loyalty which its customers have demonstrated over the past many centuries. The hold that it has on minds has not been diluted, despite what the diamond and platinum jewelery companies might try to tell us through their advertising campaigns.

Circle of Competence:
Gold is a commodity which is within the circle of competence of most investors. And if it isn't, then all we have to do is to ring up our mothers, sisters of partners, and we are sure to be flooded with information on the many splendours of it, and why we should be purchasing more and more of it for them. So, in that sense, Gold has an insatiable market.

Management:
The production of Gold is in safe hands under the management of Mother Nature, and such managements are not made anymore.

Margin of Safety:
Value investors who have read so far into this post, would be quite pleased with Gold's performance on the first 3 criteria above. The problem comes in the last, but most important criterion. Does buying Gold today provide an adequate margin of safety? My personal belief is that it does not. Gold is regularly making record highs these days. Also, many investors are turning to Gold to escape the turmoil being seen in stocks and fixed income. Gold is usually seen as a safe haven in such circumstances. As the economic turnaround gathers steam, and money starts flowing back into risky assets, what will happen to Gold? Will it continue to rise? Only time will tell!

In conclusion, I believe that due to concerns over the Margin of Safety, I would avoid investing in Gold at this time.