Stocks That Are Better Than Gold

It's tough to beat gold. There's no better medal to win in the Olympics. For many people, there's no better component of jewelry. And when it comes to investing, quite a few folks think that other investments just aren't as safe or lucrative.

They're wrong.

You might think gold is safer because it's a tangible item that exists in limited quantities, and because piles of gold bars in a vault somewhere won't be worth nothing anytime soon. Think again.

After all, stocks are similarly tied to actual bricks-and-mortar companies. Alcoa (NYSE:AA) stock represents plants, employees, and technology that churn out aluminum and other products and services. Dell (NASDAQ:DELL) stock is tied to people, buildings, technology, and equipment to custom-assemble computers, among other things. It's not likely that those kinds of assets will suddenly become worthless, or that the demand for energy or medication will shrivel up. Great companies tend to hold their value.

Gold's mixed results
Sure, gold can be a great investment. And it has been -- now and then. But over long periods, it doesn't have the best track record. Check out what just $1 invested in various ways between 1802 and 2006 would have grown to:

Data: Jeremy Siegel, Stocks for the Long Run.

A mere $100 investment would have netted you more than $75 million in stocks (adjusted for inflation). In gold, your money wouldn't even have doubled in value.

I know, I know -- few of us will be investing for 204 years. And gold has done well lately, recently topping $1,000 per ounce. That's more than twice where it was five years ago. But check out these returns:

Data: National Mining Association.

Clearly, you can do rather poorly with gold over various long periods. The 1970-1980 period is legitimately exciting, with an annualized 33% gain. But even the overall 1,372% gain isn't so hot, since it takes place over the course of a century. Annualized, that comes out to just 2.7%.

You can do better
Go ahead and invest some of your money in gold if you really believe in it. Just know that with prices near all-time highs, it might be more likely to fall in value than to keep rising. That's why it's good to seek out investments that seem cheap instead. Consider parking much of your money in places where it's most likely to grow well for you, such as stocks.

You could follow the advice of Warren Buffett and us at The Motley Fool, and just opt for one or more simple index funds, which will track the overall stock markets for you. The Vanguard S&P 500 (VFINX) fund, for example, tracks 500 of America's biggest companies, including Oracle, Boeing (NYSE:BA), and Wal-Mart (NYSE:WMT).

If you want to aim even higher than that, you might add a handful of carefully selected stocks to your mix, perhaps by screening for companies with certain criteria that appeal to you.

Here, for example, are some potentially undervalued companies I found when I screened for market caps of $500 million or more, price-to-earnings (P/E) ratios of 20 or less, three-year revenue growth rates of 10% or more, and four or five stars (out of five) in our CAPS community of investors:

Data: Motley Fool CAPS.

Of course, don't let a screen be the beginning and end of your investing process. You'll still need to research any such candidates further before you even consider buying.

If even a screen seems like too much time and effort, why not let trusted resources point you to compelling contenders for your portfolio? Our Motley Fool Inside Value newsletter recommends bargain-priced stocks each month, including a list of "Best Buys Now," as our team seeks out undervalued and temporarily unloved companies. I invite you to test-drive the service for free for a whole month. You'll be able to access every issue, and every one of the recommendations that have been topping the market handily for more than five years now.

This article was originally published Oct. 7, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart. Wal-Mart is a Motley Fool Inside Value selection. The Fool owns shares of and has written puts on Oracle. The Fool owns shares of XTO Energy. The Motley Fool is Fools writing for Fools.