The following is by Tony Chou, who runs an investment blog where he shares his thoughts on the financial markets.
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It all started in early 2011. As regular readers might know, I had an SLV position back then. I was bullish about silver, and heavily long. I was also interested in seeing how buying physical silver (in the form of bullion bars) would work. So I went to the nearest coin dealer, and bought 10 ounces of .999 silver, just to see what it was like investing in real silver that you can feel.
So I bought it at – I think silver was at $30 an ounce back then. Here’s what happened.
1 – Silver was at $30 an ounce in Febuary 2011, but they charged me $35 an ounce. That’s a 17% markup. So right away, I just lost 17% on my investment.
2 – Silver starts getting really hot. This was early April 2011, and everyday, silver was setting a new high. This was when silver crossed the $40 an ounce barrier.
3 – I considered selling my 10 ounces. I was already almost 100% out of my SLV position. I went to the dealer, and asked them, on the spot, how much they would pay me for my 10 ounces. “Oh, just 10% below the spot price.” Just great. Not only did they charge me 17% when I bought it, now they’re also charging me an additional 10%. Percentage wise, this investment is starting to get expensive.
4 – As April drew to a close, it seemed like there would be no end to the silver bubble. While my real portfolio was sitting on the sidelines, just looking at the markets, my 10 ounces of physical silver was still gaining in value. A tiny bit of comfort at least.
5 – I got somewhat caught into the silver bubble. I was thinking “hell, how far can silver fall?”
6 – And we all know what happened after that. Silver fell from $49 an ounce to the mid-30s. So from $35 to $49, I made almost $150 on those 10 ounces. And now that silver has drifted to almost $30 an ounce, I lost $200 from my peak.
So what has this taught (or rather, re-taught) me?
- Never, ever get caught up in a bubble. Every time, it will seem like there’s no end to the bubble. Every time, you will have the “how far can my investment, if it does fall, fall?” A great line from a famous investor is “The more markets move in one extreme, the faster and harder they will move in the other extreme.” The greater the bubble, the scarier and faster it’s bursting will be.
- Never buy physical gold or silver as an investment! Absolutely the worst idea ever. Ever. For one thing, you can’t go short. For another, the bullion dealers charge a huge markup.
This was a guest post by Tony Chou, who runs an investment blog where he shares his thoughts on the financial markets.
This happens in many areas. For example, buying individual odd lot corporate bonds (anything less than $1 million) – markups/commissions on both sides will kill you! A good thing, I guess, is that most people don’t know they are paying dearly to pay retail type markups. They think “….just 10%…” and figure, I guess, it isn’t that much.
There are a couple lessons to be learned for sure.
1. When purchasing physical silver, shop around. A small dealer preys on the uniformed. Do your homework and contact several by phone or purchase online. I did so with APMEX and have been pleased.
2. Physical is for long term wealth preservation. Purchasing those 10 ounces is not necessarily a mistake. I have five ounces from 1989 purchased at $5.20 per ounce. I wish I had more. I also have other ounces around $7 and $11. The difference is that it was a thought out purchase to protect from inflation, not an emotional decision.
3. Never say never. Physical silver and gold have been a good investment if purchased right. Real estate can lose value.
You’re right. It’s definitely meant for long term. The liquidity is terrible, and the “broker” fees (I guess you can call them that) are exorbitant.
The entry and exit costs can apply to many investments, thought I don’t know of any mutual funds with both a 17% load and 10% unload fee. I have done some research on precious metals ETFs and never found one exactly like what I wanted. A diverse basket would be best because it can protect you from the silver bubble a bit by giving gold, copper, and platinum exposure as well.
Tony, you learned a good lesson here. I’ve had many lessons myself, the important thing is to not repeat, especially when the money involved gets bigger
You can make money in the metals, you just need to keep a few things in mind. Transaction costs go down the more money involved. If you have invested 10K, the transaction cost you could have gotten would have been a couple of percent. Also, watch what it is that you are buying, larger bullion (1/2 ounce or more) will trade closer to its scrap value.
If you only want to invest a few hundred dollars, some metal etf’s are a good way to go.
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We’ve never sold any of our physical gold or silver. They’re not considered an “investment” any more than cash or other collectibles are considered an investment. Just part of the family assets.
This is personally the way I see it, too. It’s been a while since I read some FOFOA, but I’ve always appreciated his perspectives on this. Short-term trading/chasing just isn’t for me, and I’ve gotten mildly burned by letting my emotions interfere and trying to play that game.
It’s really hard not to get caught up in the bubble and what the media/ public is saying about something. It’s all hype!
I learned my lesson with silver too! I bought a little bit and I’m down $150 (though I don’t intend to sell for a loss, just going to let it sit for a while).
Sometimes we learn our lesson and then we repeat the same mistake again (I am guilty of this!).
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[...] it Wisely has a great guest post on how he relearns a valuable lesson to not fall for the hype when it comes to the stock market (and we relearn and relearn again- or at least I [...]
Thanks for sharing your lessons. Many investors ignore bad trades and the lessons that come with it. It is almost like losing twice because you are most likely to repeat the mistake which will lead to more losses!
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[...] Others may make large purchases, and then have a bit of buyer’s remorse — such as Tony Chou in this guest post on Invest It Wisely: “How I Made $150, lost $200, and Re-learned A Valuable Lesson” [...]
I considered doing the same thing with Gold over a year ago after reading the book “Aftershock”. But once I shopped around, I was immediately turned off by the high mark-up of the dealers and the low return rates they wanted to buy it back. You can’t cry over spilled milk; all you can do is try to learn something from it. Thanks for sharing your story and I’m glad to see you took a few lessons away from the experience.
@MyMoneyDesign I personally buy for the long term as those markups are insane. I wonder if one could do better in the private market, but I guess others would need to watch out for fraud.
@MyMoneyDesign I personally buy for the long term as those markups are insane. I wonder if one could do better in the private market, but I guess others would need to watch out for fraud.