Maybe stocks aren't a great investment

Here's a graph of the S&P 500's closing price for the last 100 years. It goes up and to the right, and since this is a logarithmic graph, the growth is dramatic. This is what long-term index fund investors point to as proof of their investing thesis.

spx_chart

Here's the chart of gold. Gold has also gone up over time, especially after the 1971 removal of the U.S. gold standard when the dollar became a free-floating fiat currency. It has had much longer periods of going sideways than the S&P, which has caused many to consider it a boring store of value rather than an investment.

What's interesting about gold is how stable it has been as a store of value throughout human civilization. An 8-gram Roman aureus from the 1st century BCE was worth a legionary's monthly salary and could buy 100-200 loaves of bread—roughly \(500–\)1,000 in today's dollars, similar to wages today.

gold_chart

Gold being a constant store of value throughout history is dubious, but it may be the best proxy we have besides real estate. If we assume it's roughly consistent, we can divide the S&P 500's price by gold to approximate the real value of stocks.

spx_gold_chart

Viewed this way, the S&P 500 hasn't really gone up and to the right—it has gone mostly sideways. The boom and bust cycles of the U.S. economy become much more visible.

I find this perspective useful because most stock charts show nominal prices. When the news reports "The S&P made a new record high today," it's worth asking: in terms of what?

If we take this assumption seriously—that gold has remained constant while the dollar has devalued—the implications for long-term financial planning are interesting:

  1. Hold gold in proportion to your risk tolerance. If stocks fluctuate around a mean, gold provides stability.

  2. Buy stocks at the cheap end of the cycle. The SPX/gold ratio resembles a sine wave, so buying when it's low (and rising) could make sense.

If instead we assume dollar devaluation is guaranteed but gold isn't necessarily a perfect store of value, the strategy shifts:

  1. Buy a broad basket of assets. If everything rises in nominal terms due to inflation, diversification captures that.

  2. Use long-dated options (LEAPS) to go leveraged-long on inflation that markets may not fully price in.

This is not financial advice—just an interesting way to think about stock valuations.