Financial theory, much like political or military theory, evolves over time. The past is usually quite clear, but the future is exceedingly difficult to hypothesize about, let alone predict. All of us are so involved in the current investment strategies that few are able to step away for long enough to see how the economy is changing.
For example, in England for decades before 1850, among the best investments were forms of interest-bearing bonds. In a non-inflationary economy, 5 percent per annum interest was not a bad return. And the English tax rate of that period was so low that the 5 percent netted the investor only a little less than that. For the individual investor, probably the greatest opportunity for a large-yielding investment return since the advent of insurance trading companies to ensure trade with the East was the invention of the steam engine. Huge economies could result because coal and wood would now do the work of men and horses. But the machines had to be built and fuel had to be dug, and this presented tremendous opportunities for capital. Perhaps the greatest fortunes ever made were done so in both England and America financing and producing the Industrial Revolution of 1800-75.
At any moment in time, there are wonderful opportunities on the stock market. But, on the whole, over the last twenty years the shares of most companies have been comatose, and there is little certainty that future movement will be upward. The high-technology stocks have been in vogue, but they are short-term strategies and are good only until some higher technology stock comes along. The oil stocks have grown tremendously in the last ten years, more as a result of inventory profit and higher volume due to higher prices than because of any intrinsic managerial excellence. And with few exceptions, the oil companies are even having trouble investing in other areas of the energy production field, so that profits will remain strong long after petroleum ceases to provide the overwhelming percentage of our total energy. The oil companies seem to act like the landed gentry of old, sitting pretty on top of their estate, built years ago, raking up profits that they have had little to do with earning.
Even if you are a smart investor, the tax rate in the United States and in most of the world, when combined with the inflation rate, makes it extremely difficult for a person with capital to stay even, let alone get ahead. This is why companies have shifted income disbursement patterns from dividends to income retention (and expansion) so as to produce greater net worth. The higher net worth of the company hopefully results in a higher share value, which allows investors to take their profits at capital gains rates when the stock is sold, rather than as prejudicially taxed dividends. This is unfortunate, as companies that are expert in some area of business and technology are often quite inept at others, and only expand into other areas because of the pressures produced by the tax code.
Gold is an extremely popular investment today, and because of the uncertainty in the world, will probably continue to be so. But it must be remembered that in the 100 years between 1860 and 1960 gold proved itself to be a very poor investment, the price only a little more than doubling in a century-- an uncompounded rate of 1 percent per year, which could easily have been quadrupled at any bank. Gold buyers continue to hope that hard money will someday be the choice of world government; but short of monetary collapse, it's hard to imagine any government voluntarily advancing this position. After all, money is a commodity, and government is its producer. The ability to print money gives governments great power, which they will probably always retain.