Learning from 1970s Investment Advice

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Brian Richards, who heads up part of the Motley Fool's international operations, was cleaning out a family member's attic recently and came across a pile of old magazines and newspapers dating back to the 1940s, all in pristine condition. 

Brian knows I like to read old news -- it provides a more honest view of reality -- and gave me a pile of TIME and New York magazines from 1974 through 1976.

Remember, this was a period when the economy was fighting rising interest rates, ravaging inflation, and serious gloom for the first time since the Great Depression four decades prior. The magazines are filled with outrageous, fear-mongering predictions, like this: 

A June, 1974 edition of New York magazine has a cover-story interview with an investor named James Dines. Dines was a gold bug -- one of the originals -- and was as bearish on the U.S. economy as they come. Here are some excerpts: 

"We are going to have a full-scale economic collapse within six months. A year or two at the outside. It has already begun. Inflation is accelerating and there is no stopping it short of collapse. Wall Street will collapse, corporate and personal bankruptcies will abound. There may be violence in the streets."

"Sell all your stocks and bonds, he advises -- yes, even at these seemingly depressed levels."

"Get some money out of the country and into a Swiss bank (or gold coins) ... an amount not less than five years' overseas travel expenses, he recommends -- in case you yourself decide to get out at some point."

"Put as much of the rest as possible, as quickly as possible, into gold and silver stocks -- yes, even at these seemingly heady prices."

"And then, if you are not 100 percent committed to gold and silver (or, by buying on margin, more than 100 percent committed), consider using what you have left to sell stocks short. Almost any stock will do (except, of course, the precious metals stocks)."

"Forget real estate. Real estate values will plummet in the depression. No buyers."

"The blindness, not to mention the immorality, of men in government staggers Dines's rather fertile imagination. What would he do if he were secretary of the treasury? 'Resign,' he answers immediately. The country isn't ready for what I'm saying. They're going to have to bleed first. And there's nobody who could put through the kind of polices that could save us at this point."

"Almost everyone agrees, including Dines, that since the late sixties we have been going through a sort of slow-motion market crash, with all but a few stocks declining 40, 60, 80 percent or more, particularly when allowance is made for inflation. And if the economy holds together, most people, including Dines, would agree that stocks are anything but overpriced. The question is whether the economy can hold together. Most people think that it will; Dines is sure that it won't. He says things like, 'Don't underestimate the human stampede,' and he quotes people like Nathaniel Hawthorne saying, 'The calmer thought is not always the right thought.'"

Now, here's what I find interesting. 

A lot of what Dines said came true. Gold and silver boomed over the following years. The economy did poorly. Interest rates jumped and bonds fell. In real terms, most stocks tanked. 

But unless you got the timing exactly right, most of this advice would have turned out disastrous. 

Gold increased from $150 in 1974 to $350 in 1984, or 133%. But the S&P 500 increased  286% during that span, and even Treasury bonds kept up with the rate of inflation. From 1974 to 1990, gold returned 146%, stocks rallied 1,000%, and bonds returned 300% as interest rates fell. Then came the roaring 1990s. 

If you're into investing in short-term trends, being right isn't what's important; it's being right at the right time that counts. Very few can do that, so the history of people betting against an economy where progress and growth is the default outcome is littered with people who get the story right and the outcome wrong. 

More on the big picture
My new report, "Everything You Need to Know About the National Debt," walks you through step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it. 

The article Learning from 1970s Investment Advice originally appeared on Fool.com.

Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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