The word prudence means the quality of being prudent or cautious. It’s synonymous with good judgment, wisdom, common sense and shrewdness. It means to show care and thought for the future. Prudence especially applies to investments and the things you do with your money. One measure of prudence would be paying attention to historical financial norms like price-to-earnings ratios. Throughout most of the last century it was thought that a stock was a good buy when it sold at under ten times its earnings. If a company made $1.00 a share and you could buy it for $8.00 a share that was a buy. However, if it sold at $20 a share or 20 times earnings that was a stock that should be sold because it was overvalued. This was the prudent advice of the famous value investor, Ben Graham and other stock market savants.
Today, however, that advice goes unheralded. Stocks like Amazon sell at 300 times earnings. Netflix sells at 250 times earnings. Most of the averages (DOW, S&P, NASDAQ) are around 25 times earnings. This means that many stocks are at historical highs. History provides evidence that is not prudent to buy stocks at all-time highs. Nor is it prudent to buy into investments you don’t fully understand like Bitcoin. Nevertheless, investors are piling into cryptocurrencies. One reason must surely be the need for immediate gratification. Many investors have no patience and want immediate action. Bitcoin certainly eliminates the need for patience.
A more prudent course would be to purchase assets selling at their lows and holding them for the long term. Perhaps the best of these is silver, which has yet to experience a price run-up, but has so many bullish attributes. In fact, silver may be the most prudent investment one could make these days.