There are many investors who swear by the shiny stuff and they propose you stash a portion of your portfolio in a vehicle that tracks the price of gold. Many consider such a move to add to the diversification of asset classes you own if you also hold things such as shares, bonds, property, and cash.
In fairness, the price of gold has done well over the first 20 years of this millennium and is up by just over 450%, as I write. And it tends to rise in times of economic uncertainty, which is something we’ve seen loads of over the period.
Gold is a poor substitute for shares
However, betting on the price of gold is a poor substitute for holding the shares of companies backed by good-quality, growing businesses. Companies can generate value while you hold their stock. They can increase their cash inflow, assets, and shareholder dividends, all of which could lead to a rising share price.
Gold, on the other hand, can’t do any of that. It just sits there and looks at you, to paraphrase super-investor Warren Buffett. Those tracking the price of gold have enjoyed a good run over the past couple of decades but there’s no telling where gold will be 20 years from now – it could even go down in price!
Rather than following the gold price directly, I’d rather invest in gold mining companies if I believe that the price of gold will rise. Mining companies can add value through their operations and, in many cases, pay me a handsome dividend along the way, which will gradually compensate me for taking the risk of holding the shares in the first place.
Likewise, with other commodities such as silver, platinum, copper, and coal. Instead of betting on commodity prices I’d look for shares backed by an underlying company dealing in the stuff.
But commodity mining companies represent just one sector of the market and a highly cyclical one at that. So, with £20k to invest in 2020, I’d aim to invest in the most compelling opportunities represented by company shares that I can find, regardless of their sector.
A triangle of factors to search for in stocks
My search would start by looking for strong quality indicators such as high profit margins and returns on capital. A good trading record of revenue, earnings, cash flow, and shareholder dividends, all rising a bit each year would indicate decent operational momentum.
Then, after establishing the quality of the enterprise, I’d aim to buy the shares as cheaply as possible and check out the strength of the balance sheet, so the focus would be on valuation. Finally, I’d look for a catalyst or a good reason to believe that the business will improve in the months and years ahead.
Indeed, searching for quality, operational momentum, and good value strikes me as a powerful triangle of factors to turbocharge my investments through 2020 and beyond.
