How Ron Paul is beating the market

The libertarian-leaning congressman and GOP presidential hopeful has an investment portfolio dominated by companies that explore for and develop gold and silver. His buy-and-hold strategy is working just fine.

By MSN Money Partner Aug 29, 2011 1:31PM

By Zvi Bar, Seeking Alpha

 

Ron Paul is a medical doctor, a Republican congressman from Texas and a candidate  to be the GOP’s standard-bearer in the 2012 election. He is also an investor, and apparently a very good one.

 

While Paul’s portfolio may lack diversification, he  has had a focused buy-and-hold strategy over the past decade. The strategy has worked well for him, largely because gold has been the focus of his investments.

 

Congressman Paul has consistently warned that high inflation is coming on the back of the Federal Reserve’s loose monetary policy. Paul has asserted that this inflation could hurt the lower classes worst of all, because they will have few options to protect themselves from rising prices other than to put some of their savings in gold and silver.

 

 

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For more than 15 years, Paul has held shares of gold and silver miners. He rarely sold shares over the last decade, and raised his stakes of many miners as the United States expanded its diplomacy into Iraq in 2003.

 

Below are the year-to-date, five-year and 10-year returns for some of the gold and silver miners that are among Paul’s top holdings. These holdings have largely outperformed the Standard & Poor’s 500 Index, most by a significant level.

 

The Paul portfolio

Company

Year to date

5-year return

10-year return

Goldcorp (GG)

13.3%

73%

875%

Barrick Gold (ABX)

-4.6%

53%

201%

Newmont Mining (NEM)

1.6%

19%

187%

AgniCo Eagle Mines (AEM)

-9.9%

89%

620%

AngloGold Ashanti (AU)

-9.1%

-5%

150%

IAMGold (IAG)

16.6%

94%

441%

Pan American Silver (PAAS)

-21.1%

51%

791%

Silver Wheaton (SLW)

0.6%

288%

1,129%

Standard & Poor’s 500 ($INX)

-4.5%

-7%

1%

 

Last week, Barron's characterized Paul's investment portfolio as a "big bet against the U.S. economy." Barron’s noted that the congressman recently voted against raising the debt ceiling, and that a failure to raise the limit would have benefited Paul's portfolio. This argument ignores Paul's history of voting against government spending and his argument that this very type of action is what will cause that feared inflation.

 

Beyond shortsightedness regarding Paul's lengthy history of voting against inflationary legislation, Barron's showed bias against the portfolio by choosing to provide readers with 1-year and 3-year return numbers for Paul's portfolio holdings, and the claim that "Paul's 'stopped clock' portfolio looks like it's finally paying off."

 

In particular, one may wonder what a 3-year return has to do with Paul's holdings, especially within an article that explains Ron Paul acquired most of those holdings between eight and 15 years ago. Taking a look at the chart for the Gold Miners ETF (GDX), it appears the industry lost a significant amount of value about 2.9 years ago, though, and that Barron's used that time-frame in order to show the portfolio from a poor and biased perspective. The reluctance to actually consider Paul's historic performance appears to be intentional blindness to the facts.

 

An investment in the worst performer among these tocks over the last10 years would have returned 150%, with the average miner's return being nearly 550%. Compare that to the S&P 500, which is up just 1% over the last decade. The five-year average return for these miners was over 81%, compared to a loss of 7% for the S&P. These returns also indicate that Paul's portfolio is not finally paying off, but that it had been paying off for quite a while. Not bad for a stopped clock.

 

Over the last decade, Paul's portfolio has beaten the market as well as the vast majority of hedge funds, yet Barron's labeled Paul's investment strategy a "financial planner's nightmare." Okay, so what? After all, should an investor's priority be how soundly their financial planner sleeps or the identification of suitable and timely investments that present a value proposition? Perhaps Barron's feels Paul was too focused on winners, and needed to diversify into some losers.

 

While it may be true that a financial planner may sleep easier knowing clients are broadly invested in fee-based instruments and market-linked baskets, such a move would have cost Paul essentially all of his substantial profit over the last decade. Do keep in mind that a financial planner's daydreams cost about 1-2% in annual fees that are not included in the S&P 500's performance, and that about half underperform the S&P 500 before fees anyway.

 

 At the time of publication, Bar had no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours. Bar is a contributor to Seeking Alpha and an attorney who provides advisory services for trusts and beneficiaries, as well as expert consulting in fiduciary and related financial litigation.

 

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