I like the lessons in children’s stories (ranging from “The Little Engine that Could” to “The 3 Little Pigs”). This article is about another one, “The Emperor’s New Clothes” as it relates to 5 popular but terrible investments, and I suspect it will tick a lot of people off. However, opposing viewpoints can be valuable, so keep that in mind as I run through these 5 investments which I believe have virtually no place in practically everyone’s investment portfolio.

The Emperor’s New Clothes

Before getting into the investments, let’s briefly review the story of “The Emperor’s New Clothes.” It’s basically a fairy tale (by Hans Christian Andersen) about an emperor who is tricked into believing he's wearing invisible clothes. He parades around naked, but no one says anything. Finally a little kid points out the truth, exposing the emperor's ridiculousness. The moral of the story is basically to trust your own judgment and speak the truth, even when everyone else insists on a false narrative (out of fear or vanity). It also warns against blindly following the crowd. It’s almost as if Mr. Andersen was warning about the dangers of fear, greed and following the herd as an investor.

So with that backdrop in mind, let’s get into the five popular investments that I believe are terrible, particularly right now.

1. Gold

The conventional wisdom is that gold is a good inflation hedge over the long-term, but it can be extremely volatile in the short term. And in particular, over the short-term, people tend to flock to gold when they are concerned about inflation or particularly frustrated with central bank monetary policies (like right now).

For perspective, the long-term inflation rate in the US is generally considered to be around 3% (even though the fed’s target is around 2%). However, the price of gold is now up around 78% since the start of 2023, and it is dramatically outpacing inflation, as measured by CPI, as you can see in the following chart (going back to the 1970’s).

Predicting short-term moves in gold prices is a bit of a fool’s errand (even though there are tons of intelligent-sounding people who insist they can). And without being dismissive of the current macroeconomic situation (including unprecedented, inflation-causing, post-pandemic fiscal and monetary stimulus and current global trade concerns such as trade wars and tariffs), gold seems a bit ahead of itself here (versus inflation).

Over the long-term, gold price will probably revert back to the mean of inflation’s ~3% annual gain. And if people want to hold a little (for diversification and safety reasons) that may be okay. But if you have a significant portion of your wealth invested in gold—I think that is a terrible idea, especially right now.

2. Hedge Funds

I spent over a decade working in institutional investment management, rubbing elbows with all kinds of hedge funds, and here is what I observed:

“Hedge funds are often put on a pedestal as some superior asset class only available to the wealthy. And while they come in a lot of different shapes and sizes (ranging from “market neutral” to “high-leverage,” to name a couple) the one thing they almost all have in common is high fees (that come directly out of your pocket) and inferior long-term returns.”

Hedge funds, such as market neutral funds, can look good in the short-term (often because when the market is down, they are up—like right now), but over the long-term they basically all underperform the S&P 500, and investors would be better off buying stocks (or lower-risk bonds if they have a shorter-term horizon), and simply avoid the high fees.

Other hedge funds apply high-leverage (or borrowed money) to magnify returns. This strategy works great when the market is going up. But when the market goes down, it often spells disaster as it magnifies losses. Almost every time you hear about a hedge fund blowing up (such a Long-Term Capital Management or Amaranth) it’s because they were overconfident and had too much leverage.

So even if you’ve finally built up enough wealth to qualify as an accredited hedge fund investor—stay away. Almost everyone (except the hedge fund managers collecting fees) are far better off avoiding hedge funds altogether.

3. Bitcoin

Rarely will you see a crowd of people defend an absurdity more resolutely than Bitcoin “investors” (except perhaps the people defending the emperor’s new clothes). So rather than me pointing out that Bitcoin generates no earnings, pays no dividends and has zero physical value, here are quotes on Bitcoin and cryptocurrency from a couple of very highly-regarded investment legends:

Warren Buffett on Bitcoin: It’s “probably rat poison squared.”
Charlie Munger on Bitcoin: “It's ridiculous anybody would buy this 'massively stupid' stuff.”

And to the proponents who like to point out that Berkshire Hathaway has now invested (indirectly) in cryptocurrency through its position in Brazilian digital banking company, Nu Holdings (NU), I’ll just let readers decide for themselves what they think while they look at the the price chart of this insanely popular “collectible asset” (akin to coins, stamps and tulips, in my opinion) as compared to Nvidia (a company that actually makes something useful) and the S&P 500.

4. Excessive International Diversification

The Vanguard Target-Retirement-Date-Fund people have been defaulting US investors to have large amounts of non-US investments for many years, even though Vanguard founder, Jack Bogle (and Warren Buffett for that matter), argued in favor of a US home country bias:

“Investment legends Jack Bogle and Warren Buffet have a few things in common: They embrace low fees and index investing, and millions of people look to them for investing wisdom. One other thing: When it comes to investing, both are homebodies.
Bogle dismisses international diversification. Buffett, meanwhile, says an index fund portfolio of 90 percent S&P 500 and 10 percent Treasurys is probably good enough for most investors — that’s how he is recommending his wife invest. But the anti-international stance is the rare piece of investment advice over which many people dare to disagree with Bogle and Buffett.”

Here is how terribly those international investments have worked out up through the end of 2024 (i.e. Bogle and Buffett were right).

Interestingly, so far this year, the tables have turned with non-US stocks (as measured by VXUS) gaining 10% year-to-date while the S&P 500 is down 3.3%. Some investors might argue this is the beginning of some grand reversal that will continue for many years. But as a contrarian, I believe that’s mostly fear (related to uncertainty about US tariffs), and now is a great time to invest in the US.

5. Palantir (PLTR)

Palantir is a GREAT business. The company makes big-data and AI-driven software for governments (which is very hard business to get, but extremely lucrative if you can get it) and now commercial enterprises. Software is a great business in the first place (because it is sticky and very high margin). And Palantir’s attractiveness is magnified by it being in the right place at the right time (i.e. the artificial intelligence megatrend).

And the CEO of this company, Alex Karp, is absolutely amazing. I cannot think of another CEO that is as gifted as he is at saying the right things for his investor base. I have an extremely high-degree of confidence Palantir will be a dramatically bigger and better business every year for the next decade.

However, the problem with Palantir is the market is valuing the stock as if the next decade has already happened.

For example, here is a look at the company’s price to sales ratio and price to earnings ratio versus a couple other dominant high-growth AI megatrend beneficiaries, Nvidia and Meta (META).

As you can see in the chart above, Palantir is VERY expensive (even as compared to Meta and Nvidia—which are a bit expensive in their own right to begin with).

I have owned Palantir in the past, and I will absolutely buy it again if its valuation metrics come back down into the earth’s atmosphere. But for the time being, as great of a business as Palantir is (and it is a great business), it is just too richly valued for me at the moment.

No offense to anyone that own Palantir, but I hope the price comes crashing down (even more so than it did last month, before subsequently soaring higher) so I can invest again.

Conclusion:

I want to encourage investors to achieve success (just like The Little Engine that Could), and I want them to build smart investment portfolios (just like the 3 little pigs learned to build strong houses). And for those reasons, I believe the five investments described above are all terrible ideas right now, and virtually all investors should stay away from making those specific mistakes a significant part of their investment strategy.

At the end of the day, you need to do what is right for you. Disciplined, goal-focused, long-term investing continues to be a winning strategy.

5 Terrible Investments “Everyone” Is Buying