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To measure ones wealth, the
“price” of ones assets is not very important but the
“purchasing power” or “relative value” is very
important. Understanding this difference may be one of the most
important concepts an investor can learn.
To become an “instant
billionaire” simply measure the “price” of your investment
portfolio in Zimbabwean Dollar’s instead of your local currency.
If you were to measure your
portfolio in Zimbabwean dollars, there is a good chance that you are a
billionaire and yet your relative wealth, or standard of living, is
unchanged. This extreme example helps illustrate that when we measure
any asset in any currency we are actually measuring the value of the asset as
well as the currency itself.
As you can see in the above
illustration the “Price” of the Dow Jones Industrial Average is
actually a ratio between the value of the US dollar and the value of the Dow
Jones Index. In other words the measuring stick, “dollars”,
is a moving unit of measure which can drastically skew our investment results
and perception of our actual wealth.
To illustrate our point please
note the “price” of the Dow Jones over the past nine years in the
chart below.
 
Now notice how the Dow Jones has
performed over the same time period “relative” to another asset
such as gold.
In the year 2008 the Dow Jones
crashed in value relative to the US dollar but when compared directly to gold
the Dow Jones had been crashing since the year 2000. In the year 2000
it took roughly 42 ounces of gold to buy one share of the Dow Jones
Industrial Average and in the year 2009 it takes roughly 7 ounces of gold to
buy one share of the Dow Jones Index. Relative to gold the Dow Jones
has lost about 82% of its value since the year 2000.
The above realization of
relative value and “real” losses could make an investor depressed
but through this new enlightenment opportunity arises. If the Dow Jones
has lost 82% of its value relative to gold, expressed another way, relative
to the Dow Jones, gold has increased in value 450% since the year 2000.
Back in the year 2000 significant opportunity was available for the investor
who understood the relative value of gold to the Dow Jones Industrial
Average.
Had an investor transferred
their capital from the Dow Jones and placed that money into gold in the year
2000, relative to the Dow Jones, they would now be about 4.5 times
richer. In this example the individual’s actual purchasing power
and wealth has increased significantly.
As investors we want to know
what the “value” of our portfolio is so that we may spot more
opportunities such as the one noted above. This is why we have been
invested in Silver and Gold for many years and we plan to monitor the
“value” of our portfolio to help us decide when to exit our
positions. There is no magic formula for guaranteed results when
investing, but in order to assist us in our investment decisions we have
created a variety of custom built timing charts that help us bypass the
distortion of the fluctuating US dollar measuring stick. To sign up for
our free newsletter and to learn more about our investment strategy please
visit us at www.investmentscore.com.
Michael Kilbach
Editor
Investmentscore.com
Michel Kilbach is the President
and Editor or www.investmentscore.com,
an online publication designed to show investors how to make profitable entry
and exit trading decisions in high growth potential investments.
Investmentscore uses a unique scoring system as a visual guide to assist
investors in making lower risk / higher reward trades.
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© 2006-2007 Michael Kilbach
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