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Once
again I find myself traveling with the lovely Miss Puddy. On this trip
we are zigzagging across the country. A funeral of a cousin out West,
our daughter’s graduation from college and then more treatments in
Dallas.
All
of this travel gives me time for reflection. Even though perhaps as
many as 20% of the working age people in the US are unemployed, 80% are still
working. Young people fall in love, babies are born and the inevitable
funeral awaits us all at the end of our earthly journey. But what a joy
life can be if you simply make the right choices and chose to enjoy
them. One of my favorite sayings is happiness is not about getting what
you want but simply wanting what you get.
Many
people are uncertain in just exactly how to invest in these troubled economic
times. Private capital seems to be fleeing the stock market as it not
only seems to have gone nowhere this last decade but has even lost ground
when considering the steady erosion effects of inflation as it devalues our
dollars. Even though we may hold the same about of dollars in our
accounts at the end of the decade as when we crossed over into the year 2000
those dollars have shrunk quite a bit when considering their purchasing
power. Many of those dollars that have left the stock market have
rushed into the supposed safety of bonds. With the falling revenues and
increasing expenditures of municipalities and state governments (especially
in lavish defined benefit pension funds) default cannot be far off. US
bonds are not much better but will last a bit longer before the inevitable
default occurs; either through outright default or the slow painful
type that pays off in future dollars that buy less and less than the past
dollars that purchased those same bonds. Bonds may realize a gain if
the interest rates drop further but how much lower can they go? If the
interest rates go up (more likely than going lower) the value of the bond can
even drop. Bonds just do not look as good going forward as they have in
the past.
Most
investment advisors will tell you that you should only invest in stocks and
bonds. Invest heavy in stocks when young and change the mix to a
heavier allocation into bonds as you get older. This is looking less
and less promising as we go forward into this economic storm. There are
7 classes of investments out there; stocks, bonds, cash, precious metals,
commodities, collectibles and income producing real estate. Real estate
still seems like it has lower to go (especially commercial real
estate). Cash is not bad but there is a cost to hold it as inflation
exceeds ordinary interest right now. Commodities are becoming more and
more popular. People had made fortunes in agricultural commodities as
of late due to the Russian drought, a growing population and third world
prosperity that is hungry for a better diet. Precious metals are in a
bull market (when priced in fiat currency) for the last decade and will
probably continue to be a good investment going into the next decade as they
are recognized as the premier form of cash.
Economic
storms are not about smooth sailing or even about passing other boats in the
race. They are about survival. Storm sails and sea anchors are
not about speed. They are about surviving through the storm, then
taking stock of the horizon afterwards and then adjusting our sails and
continuing onward. Preserving our capital in this economic storm should
be our number one priority. Making money should be secondary. The
time for great profits will come a bit later after the storm. However,
if your boat capsized and sank then you are out of the race and when the
storm clouds clear and the sun does reappear you cannot take advantage of
fair winds and favorable seas.
So
how exactly do we rig for storm? Only invest in what you
understand. If you do not understand the business plan of a company you
are invested in then read up on it. If it does not make sense to you
then get out. If the prospectus looks like an old Sears and Roebuck
mail order catalogue then simply pass on that one. Charlie Munger said
that at Berkshire they had 3 buckets; good investments, bad investments
and just too hard to understand investments. Even the best of
investments should be shied away from if they are too hard to
understand. Stocks are not altogether poor investments if you are a
good picker and are willing to do your homework but by and large most are
overpriced right now. When P/E ratios get back around 5 to 7 and good
dividends are being paid out then it will be time to re-enter the market with
our capital that we have saved while going through this storm. Lazy
stock investors will have a hard time surviving this storm. Municipal
bonds should only be invested where you have knowledge of the individual
municipality and feel comfortable with their fiscal position. (I know
of few to none right now.) US government bonds are simply a bet that
Washington DC has the right answers and will guide us through this mess with
responsible policies (It is hard to type and laugh at the same time.)
If you feel that you must invest in bonds then try only short-term bonds or
long term bonds that mature in 1 year or less. Just remember to
be out of them at least one day before they default.
There
are simply no shortcuts in this process. You simply have to grow up and
do your homework on your investments. My father used to lament that it
is hard to make money but it is even harder to invest it wisely to hang onto
it. I now know exactly what he was talking about. I have always
recommended a 10% investment in precious metals (metals that you own outright
and hold in your hands) as portfolio insurance. In these uncertain
times a 20 to 25% allocation is not too much. Don’t look to
others to take care of you. Social security will probably not be around
for those of you under 45 right now. Social Security has just gone into
deficit spending 6 years ahead of schedule. It will be means tested,
real payments will be reduced through inflation and the retirement age will
slowly creep up to where it seems many people will never get there at all
(sort of like the carrot on a stick). Defined benefit plans will
go bankrupt after payments are reduced through inflation. VERY few
plans are fully funded these days and most will only get worse going into
this storm. Cash, while expensive to hold, is still not bad and probably
deserves a 20 to 25% allocation right now. Just make sure your cash is
held in the right place. Most money market funds are paying close to
zero and some even broke the buck back in 2008. Many more may head
below $1/share as interest payments drop and fees are subtracted. Stay
away from the large New York banks as they are all the walking dead.
While it is true that DC may bail them out forever it is just possible that
things may not work out so well for them into the future. I also
consider it morally reprehensible to deal with them at all. Look at
local banks that have a strong bank rating. Also consider credit
unions. Just do not keep over $100,000 in any one institution.
Spread it around a bit and hedge your bets. There will be bargains in
the future when the storm passes and you must have wealth to be able to
play. The stock market will be a bourse with more sellers than buyers
as the largest generational demographic enters retirement age and starts
cashing in on their investments to live during their old age. Most
stocks in the US are overpriced as their P/E ratios are too high and the
dividends are non-existent. Capital appreciation is the only way to
profit with most stocks nowadays and that is a long shot with most of them in
today’s storm. Stock markets in the third world or in the
emerging markets will show great promise after the storm, however, they could
prove a bit risky just now. Start a list of possible investments for
later. Research them and follow their progress through the storm.
It is a bit early to invest but it is never too early to start your watch
list with target purchase prices. (This is why you need the
cash.) Good agricultural real estate and solid commercial real estate
will be great buys at the bottom so start looking around at targets to
purchase in the future.
Finally consider opening a
family bank or your own venture capital investment company. Instead of
investing in Dow Jones stock consider investing in your nephew, your grandson
or another bright young relative. Unemployment is extremely high among
the younger generation. Encourage them to learn a trade such as a
plumber, electrician, machinist, painter, landscaper or commercial
driver. Anything that interests them will work. If they cannot
find a job then encourage them to create their own and start a
business. Make a small loan and then mentor them in their business
venture. Help with insurance selection, cash flow, employee
relations; all the things that you have learned for the last 30 years
in business. Help make them a success. See what the bank would
charge for a small business loan and then make that same loan for a couple of
points less. The return on your capital will be much greater than the
bank is paying. You can control the risk by mentoring them. Many
people complain that the banks are not lending. They are also
complaining that the banks are not paying interest on savings. Well
just cut them out and make those loans directly through your family
bank. It will take honest talk between both parties as well as a little
legal work to have everything perfectly understood up front. The
results can be amazing for both parties.
Housing will be another area
where there will be much more pain to come. Home mortgages will be harder to
get and harder to service. While I think we will see inflation in
things we need and import such as food and energy, I think we will see
deflation in assets such as houses and luxury items that we can do
without. I believe we will see intergenerational homes more and more in
the coming years. There is a great opportunity for building contractors to
convert the sprawling 5 bedroom ranch house into a modern intergenerational
home for the coming decade. A remodel that offers 3 master bedroom
suites each with private bath, bedroom and sitting room along with common
rooms such as common kitchen, den, dinning and laundry rooms will create a
powerful economic family unit that will still allow for a certain amount of
privacy. Grandparents with their own mini apartment or suite can
provide childcare as well as transmit family values to the next
generation. Older adults still working can provide economic stability
and allow younger adult children to take risks and open a new
business. The key to this new family arrangement is converting
the 5 bedroom ranch into a family home with 3 master suites or apartments
allowing for private spaces for each generation. Kitchen, laundry and
dining rooms are public spaces whereas the master suites are private
spaces. This will allow for families to live together in harmony.
The younger generation has been hardest hit in this storm. For those
that do not have the luxury of a conventional job the new economy will work
best if they seek several streams of income through contract work at several
different part time jobs. All three generations working together will
allow for flexibility and many different income streams to support the home
in case one or more are lost.
Debt will be a killer in the
future. If you can pay off your home, credit cards and car then do
so. Try to operate with cash as much as possible or at least pay off
your credit card every month. Live below your means and save all
you can every month. Make sure you have 6 months of living expenses in
savings (preferably in a credit union). Also try to have an emergency
fund of a few thousand dollars at home or close by.
In these economic times
family and neighbors will be more important than ever before. As
government assistance and services disappear in this storm it will be family
and neighbors that pull each other through.
If
you are ready to invest in precious metals just give us a call.
Don’t wait any longer, take a position while you still can. If
you have storage questions then we are here to help as well.
Larry Laborde
Silver
Trading Company
www.silvertrading.net
Larry lives in the occupied South with his wife Puddy
and sells precious metals at the Silver Trading Company. Larry can be
contacted at llabord@aol.com.
You can view his web site at www.silvertrading.net.
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