Precious Metals: Time for Fear, Not Greed

Benz: I also want to touch on metals, which has been another big mania for investors. Gold in particular recently has come back down a little bit. But I'd like your take on precious metals as a component of investors' portfolios. Are you a believer or a naysayer?

Bernstein: I believe that in the long term precious metals should be part of most everyone's allocation. But once again, Buffett's maxim applies here, which is you want to fearful when others are greedy and greedy when others are fearful. If you are buying gold right now, you are probably buying it from someone who paid $300 an ounce for it in 1984, and so you are probably the patsy at the table if you're doing that.

Benz: The greater fool theory in operation right now. How about alternative type products, other alternatives? There has been a fascination in some quarters for all kinds of products, whether managed futures or funds that use hedging strategies. Do you think they make sense as a component of investor portfolios, or do you they are just sort of overpriced and not really going to add a lot that they couldn't get through a plain-vanilla stock bond.

Bernstein: I think that they are a wonderful way of transferring wealth from investors to traders. They have been a disaster the past five years. Think about it: Most of these funds have had fairly flat returns over the past five years, during a period, when almost any commodity you could shake a stick at has doubled or tripled in value. Why is that. Well, it's because everybody is investing in these things, everybody is going long, and so that increases the futures price relative to the spot price--you get a condition that's called contango, and so you are losing 3% to 5% per year sometimes even more versus the spot price. It's a chump's game.

Benz: So that's commodities. How about other alternative products?

Bernstein: Once again you look at the performance of alternative mutual funds over the past couple of years; they have been terrible. When people pile into any one asset class, they raise the price of the underlying assets and that decreases its future returns. The time you want to avoid any asset class is when everyone else is talking about them.