Don’t Get Shaken Out (Up or Down)

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In early 2009, I bought Apple (AAPL) shares during the crash. The price was around $4.60 (split-adjusted).

By early 2010 the price had more than doubled and I decided to take profits. The fear of a “double-dip” recession seemed very real at the time.

I missed out on a roughly 50x gain. Everybody’s got stories like this one, but it’s one of the moments which convinced me to always hold quality investments for the long-term.

Put simply, if you own a great asset, it’s usually a bad idea to sell it after it doubles. They say “let your winners run” for a reason. Another strategy is to take some profits, but let the rest ride.

Bull markets always go on longer, and run higher, than we expect. The current tech bubble is the perfect example.

But the big tech bull market has been going on for more than 15 years, with a few brief corrections. It’s certainly in the later innings.

Gold and Silver: Today’s #1 Long-Term Opportunity

We should all constantly be on the lookout for the next great long-term investment.

As you all know, gold and silver (and miners) are among my current favorites.

My goal is to hold onto precious metals, and mining stocks, for at least another 5 years. I expect the bull market to last until then and probably longer.

Previous precious metal runs have lasted at least a decade. See 1970-1980, and 2000-2011. Both periods were incredibly profitable for both bullion and miners.

A good anecdote is that it’ll be time to sell precious metals once governments start to balance their budgets.

When you put it that way, it sure seems like a long way off.

Hold Strong

As this bull market progresses, there will be times when it seems like a great idea to sell. Either because your investment rises quickly, or drops sharply.

During the 1970-1980 bull market, we saw both clearly. Gold started the decade off trading at the gold standard price of $35/oz. By 1975 it had reached $195/oz.

Gold had a major correction in 1976. The price fell from $195 to $105. The worst of inflation seemed to be over, and investors assumed that central banks had gotten control of the situation.

Investors who sold during that correction surely regretted it. After dropping 46% to $105/oz, the price of gold then soared to $850/oz by 1980.

To be clear, I don’t expect a 50% correction in the price of gold or silver anytime soon. But we could see a significant dip at some point. That might be a tempting time to take profits.

But the smart move is to hold strong, or better yet, buy the dip if you have the means to do so.

Tax Efficiency

Timing markets is difficult, to say the least. But another great reason to put the majority of your portfolio in long-term positions is the way capital gains taxes work.

Warren Buffett illustrated this point beautifully in his 1989 Berkshire Hathaway annual letter.

Here’s an excerpt:

Imagine that Berkshire had only $1, which we put in a security that doubled by year end and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time.

At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250.

Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.

The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we—taking in taxes of $356,500 vs. $13,000—though, admittedly, it would have to wait for its money.

A 27x greater return, simply by holding for the long-term! The example Warren uses is an extreme one, but it shows that tax efficiency matters greatly for long-term portfolio performance. If you’re constantly buying and selling, and hopefully making money, a lot of those profits are going to the government.

Of course, there is a place for trading in most people’s portfolios. Sometimes short-term opportunities cannot be ignored. But when you find a great company or sector, and it’s trading at an attractive price, consider the “set it and forget it” method.

Besides gold, silver, and miners, I’m also buying and holding select emerging markets such as Brazil and the UAE.

We’re always on the lookout for more great potential long-term investments, and will let you know when we find them.

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