John Bogle: I for one--I hope it's all right for me to say this--have no conviction that commodities belong in anybody's portfolio, at any time, under any circumstances. Did I make that clear?
Don Phillips: [laughs] You're still hedging. I don't know.
Bogle: I say that for a very particular reason. I don't think it came up in the commodities session today; I wasn't able to hear all of it. But stocks and bonds are investments. What does that mean? That means they generate an internal rate of return.
In bonds, it happens to be the current coupon on the bonds. And in stocks, it's the discounted cash flow on the investments. Let's look at the stock market in total. Or put in a more easily familiar way, the dividend yield at the time you buy, I guess a little bit to the earning's yield when you buy in, to the interest rate yield when you buy in. And the subsequent earnings growth. That's the internal rate of return on an investment.
Now the speculative return, whether people are paying 40 times earnings or 10 times earnings can change that, but that's the internal return.
What is the internal return on a commodity? It is zero. A commodity is therefore a total speculation. That doesn't mean that if you want to speculate in it you can't make money, but somebody else is going to lose the money. In the long run, just look at gold over a couple of hundred years. With no internal rate of return, there is no way it could possibly match even a Treasury bill, and it doesn't.
So if you think you can spot highs and lows, if you think the demand from the underdeveloped countries is going to push the price of wheat and those kinds of things, or copper or whatever it might be--each of which has had their own crisis--speculate in the commodity. I wouldn't tell you not to do that. I wouldn't do it myself, and I wouldn't consider it an investment. It's a gamble.