Walmart Vs Gold - How Will investors be rewarded?

Recap of the capital market

Investors experienced positive returns in virtually every asset class during the first quarter of 2011. Small U.S. stocks led the way with returns of 8%. The world's emerging markets were in negative territory most of the quarter, but finished with black. shares of large companies around the world has rid itself of the impact of natural disasters in Japan and the nuclear crisis, political unrest in the Middle East, and a lot of other bad news, to provide returns in excess of long-term expectations.

Trailing returns time now incorporate two years of recovery, because the market to bottom in the spring of 2009. The major indexes like the S & P 500 are still well below the maximum values ​​reached in the autumn of 2007 (1320 versus 1560, so now), but well diversified portfolios have recovered their value, thanks to the strength of the stocks of small business and receipt of dividends. The major indexes now show positive returns when we look back at three, five and 10 years, with the exception of international stocks (EAFE) during the period of three years.

The bond market continues to labor under the weight of the low current yield and the threat of higher inflation, which could push interest rates up and bond prices down. However, the returns of bonds were little better than break even for the quarter, as the asset class continues to play its part to add stability to a diversified portfolio.

Walmart vs Gold - How is that investors are rewarded?

In a recent issue of Grant's Interest Rate Observer I saw a discussion on the attributes of inflation hedging of gold, compared with the shares of Wal-Mart Stores, Inc., and some interesting comparisons of how the two investments were made over the past three decades.

In the summer of 1999, gold, valued at $ 250 per ounce. It now trades for more than $ 1,400 per ounce. Walmart stock, on the other hand, has traded in a range around $ 50/share since 1999. Thus, it is easy to see that it was better to own over the last ten or eleven.

Why do investors Walmart seen such poor returns? The company has been doing it wrong? The answer - the company has done very well. In fact, sales have grown at a compound annual rate of 8% in the period, while earnings grew at a rate of 11% and dividends at a rate of 17%. Book value per share has grown at a rate of 13% but the market value has not changed! The difference - the investors were willing to pay 50 times earnings in 1999 but only 12 times earnings today. So the company has grown and been profitable, and should continue its profitable growth, and yet investors were not rewarded. The market seems to have concluded that now will be difficult for the world's largest retailer to continue growing at the explosive pace that set in the 1990s, which explains the multiple great for its price relative to earnings.

The collapse of the price / earnings ratio implies a change in the underlying assumptions about the growth prospects of Wal-Mart, while the price of gold tells us something about the market fear of inflation. But what conclusions can we draw on returns over the next ten years?

If markets are rational, we would expect similar risk-adjusted returns of gold and photography Walmart - why they were so different over the last eleven years? Well, the events of the last 11 years have been difficult to predict in 1999. Walmart has been growing like a weed, the path to becoming the largest retailer in the world ruled by the great increase in consumer demand. Gold, on the other hand, had been $ 850 an ounce in 1980, when U.S. inflation reached double digit levels and the value of the dollar was in danger. From this point of gold lost 70% of its value.

If someone had said in 1999 that the price of Walmart would stagnate, while gold prices rose to five times its value, you would not have believed! Nobody could have predicted the series of events about to occur. The collapse of the tech bubble was followed by the U.S. war on terror, a real estate bubble, and then to the credit crisis that led to the deepest recession since the Great Depression. Will the next ten years will be as unpredictable ... probably.

Remarks:

1. There is no way to predict which company or asset class will blow through market premises to provide returns surprisingly good or bad. The future is unknown and will continue to be surprised.

2. Succumb to emotion, or place value on what happened very recently, will certainly have negative effects on investment results.

3. Assets not earning as commodities and precious metals will remain difficult to assess precisely because they are non-earning. The value of any asset can be defined by the money that should produce in the future, but gold only cash can produce is the price of any future buyer is willing to pay.

4. Ten years is not simply a long period of time when we look at history to develop expectations for the future. It is very unlikely that the next ten years will look nothing like the last ten.