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 as the shiny yellow stuff. Unfortunately, they're wrong.

Of bars and buildings
You might think gold is safe because it's a tangible item that exists in limited quantities, and because piles of gold bars in a vault somewhere won't lose their worth anytime soon. But stocks are similarly tied to tangible assets: actual brick-and-mortar companies.

Pfizer stock is tied to Pfizer buildings, and Pfizer employees, and lots of research and formulations of medications and patents. ExxonMobil stock is tied to oil exploration equipment and data, to oil fields, pumps, and refineries, and to more buildings and employees -- among other things. These assets almost certainly won't suddenly become worthless, nor will the demand for affordable goods, medications, or oil will suddenly shrivel up.

Both companies have averaged roughly 13% annual gains over the past 20 years (vs. 6.5% for the S&P 500). That kind of appreciation is tied to tangible, growing value. Great companies tend to hold, and often increase, their value.

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


Real Return, in 204 Years











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). With gold, your money wouldn't even have doubled.

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


Total Gain or Loss

1900 and 2000


1900 and 1950


1970 and 1980


1980 and 1990


1990 and 2000


2000 and 2010


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 100 years. 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 from here than to keep rising. That's why it's good to seek out investments that seem cheap. Consider parking much of your money where it's most likely to grow -- including stocks.

You could follow the advice of Warren Buffett and us Fools, and just opt for one or more simple index funds to track the overall stock markets. The Vanguard S&P 500 (VFINX) fund, for example, encompasses 500 of America's biggest companies, such as Intel, Bank of America, and Altria.

But if you want to aim even higher, consider screening for a handful of carefully selected stocks to supplement your holdings.

Here, for example, are potentially undervalued companies I found by screening for market caps of $500 million or more, price-to-earnings (P/E) ratios of 20 or less, and return on equity (ROE) of 15% or more:


Market Cap




$170 billion



Johnson & Johnson (NYSE: JNJ)

$180 billion



WellPoint (NYSE: WLP)

$26 billion



McDonald's (NYSE: MCD)

$75 billion



Colgate-Palmolive (NYSE: CL)

$42 billion



Amgen (Nasdaq: AMGN)

$59 billion



Abbott Labs (NYSE: ABT)

$81 billion



Source: Motley Fool CAPS, Yahoo! Finance.

Of course, you'll still need to research any such candidates further. With high ROEs, for example, you'll want to make sure the company doesn't have unmanageable debt, as steep debt can inflate ROE numbers.

If you'd like other suggestions, our Motley Fool Inside Value investing service seeks out undervalued and temporarily unloved companies. To read every issue and see every one of the recommendations that have been topping the market handily for more than five years now, just click here to test-drive the service free for 30 days.

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

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson, McDonald's, and Amgen. Intel, Pfizer, and WellPoint are Motley Fool Inside Value recommendations. Johnson & Johnson is an Income Investor recommendations. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel and Johnson & Johnson. The Motley Fool is Fools writing for Fools.