Investing

(revised 10/2/2007)

Saving (Investing) is one of the twin pillars of any self-responsible existence (the other is exercise).


Consider the following four ideas while pondering investment decisions (also ponder the thought that we live in such an insane society that I must cover my ass by warning you that you consider my ideas at your own risk):

  • 1. We can never fully predict the future. Reality is always larger than any reference frame we overlay it with. Pondering this principle can lead one to diversify his investment vehicles. Stocks, bonds, gold, foreign currencies, real estate, and commodities are all major categories of investment. Steady growth, mild inflation, hyperinflation, deflationary collapse, and stagflation are among the cyclic phases that economies and markets go through (see Diversification note).

  • 2. In general, assume that human beings, and especially governments, do not learn from history (see History note). Thus, the future will often replay the past. Investors will tend to ignore long term market cycles. Governments will attempt to restrain numerous forms of free exchange, and will periodically go totally insane (like the U.S. government's current proclivity to embrace restrictive religions, wage needless warfare, and limit personal freedoms). Reflection on the near inevitability of humanity repeating its past can sometimes lead to interesting investment ideas.

  • 3. If it is not obvious to you that mankind is on the verge of mindlessly reproducing itself into ecological or sociological disaster, you came to this web site by some horrible accident, and you might as well leave now, you'll discover nothing here. This bizarre and unending over-reproduction of humanity, and even the widespread proliferation of sociological, political, and religious justifications for it, indicate one of the surest trends one can bet his money on. Research the phrase "Peak Oil" on the internet. Feel free to share any thoughts you have about the implications of "Peak Oil" on investing with me.

  • 4. Poker is an honorable game of skill that has much to teach investors, such as the fact that you can't win every hand, but that you can, on average, win if you have enough skill. Poker has nothing in common with lotteries, which are just a great way (volitional) for governments to take money from fools. One should consider ALL investments to be gambles on possible futures.

    I am by nature a long term investor (but I'm certain that some people are good at shorter term investing), and I believe in REAL DIVERSIFICATION (way beyond just stocks and bonds). By this I mean I try to be somewhat prepared for numerous long term world event possibilities, including US Dollar depreciation, deflation, and severe inflation. My principle aim is to have a portfolio which would likely do well even if I were to become comatose for 20 years.

    As of this revision of this web page, some of my more conservative investment ideas include:

  • gold (the ultimate conservative store of wealth, immune from the inflation generating policies of paper money loving governments)
  • Euro and Canadian dollar government bonds (with gold, an excellent way to bet against some of the current fiscal insanities of the U.S. government, you can buy these through some US brokerage firms)
  • Oil stocks (a gamble on the seeming inevitability of humanity reproducing itself into a futire with no more oil) like British Petroleum(BP), Exxon(XOM), Surgutneftegas(SGTZY.PK), PetroChina(PTR), Petroleo Brasileiro(PBR), and Talisman Energy(TLM).
  • Drug/medical stocks (a gamble on demographics) like Abbot(ABT), Wyeth(WYE), Merck(MRK), GlaxoSmithKline(GSK), MedcoHealth Solutions Inc.(MHS), and Zimmer Holdings(ZMH).
  • Natural Resource stocks (reasons are related to oil) like Companhia Vale do Rio Doce(RIO).
  • China/East Asia plays (reason is Asian growth) like iShares MSCI Singapore Index(EWS).

    • Regarding stocks, I do not try to be a master stock picker. I do care about growth rates, low PE (when I buy), management, and other things, but with oil and drugs, I believe in owning baskets of solid companies to spread my risk. I consider oil and drug/medical equities to be good long term bets. I also think that if it ever comes to pass that certain publicly owned companies own significant supplies of fresh water, that these companies might be good long term investments.

    I always tend to avoid buying companies in industry groups with few entry barriers, such as food, clothes, consumer goods, etc. These companies seem to come and go, whereas drug/medical companies have long term proprietary rights to expensively developed products, and oil companies own most oil.

    Some of my less conservative equity choices include:

  • Celgene(CELG), thanks to Dan Luksetich.

    • I am a bit concerned that just about everybody is still (in October 2007) interested in stocks. Just 30 years ago, this was not the case. Financial markets seem to follow long term cyclic patterns, probably based on mass psychology. After the last great rise and fall, ending in 1929, two generations elapsed before the masses again became enthused with stocks.

    Finally, since our beliefs influence reality, I think that "Random Walk" theorists get the returns they deserve.

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    Below, some specific topics are addressed:


    Diversification Note:

    Harry Browne taught that one should keep a large portion, if not all, of ones liquid assets in what he called a "permanent portfolio". This concept is described in "Fail-Safe Investing Life-Long Financial Safety in 60 Minutes" by Harry Browne, and some of his other books. This diversified portfolio was to be configured in a way similar to the below (note that this is MY interpretation of his concept, from memory):

  • 25% cash equivalents
  • 25% stocks
  • 25% serious inflation hedges (gold, Swiss Franc bonds, etc.)
  • 25% very long term US Treasury bonds
    • Thus, stocks were for steady growth, the serious inflation hedges for serious inflation, the long term bonds for serious deflation (or stagnation with lowering interest rates). The categories were to be periodically readjusted to the pre-chosen percentages (perhaps just once a year). This readjustment naturally constituted "buying low, and selling high".

    One of the reasons behind Harry Browne's idea was that one could never be certain that he could correctly predict the future. An investor should play his short term hunches with a separate part of his portfolio, say the "temporary portfolio". The more confident someone is in his ability to pick short term winning investments, the more he'd allocate to his temporary portfolio. Thus, someone might keep 75% of his assets in the permanent portfolio, and 25% in a temporary (play money) portfolio, etc. These concepts are obviously enhanceable and modifiable in numerous ways.

    I personally have always avoided buying bonds that I could not be sure of holding to maturity. I thus avoided the part of Harry's portfolio which advised buying 30 year U.S. Treasury bonds (the longest term available several years ago). However, had I bought these, I'd have profitted immensely, as interest rates came down in recent years.


    History Note:

    I'd advise any investor to read a few books about panics, crashes, and market cycles through history. Such reading puts our current time into perspective, and teaches the immutability of mass psychology. I also consider it a good idea to read about "libertarian" philosophy, which is the current label for "classical liberalism", a very sane philosophy of minimalistic government which many of the founding fathers of the United States adhered to. Understanding the libertarian principles (as well as their economic theorists, such as Ludwig von Mises) gives one a realistic view of governments' impact on investments, banking, money, and inflation.

    "Panics and Crashes" by Harry Schultz
    "Manias, Panics, and Crashes" by Charles Kindelberger
    "At the Crest of the Tidal Wave" by Robert Prechter


    Investment book suggestions:

    "Market Wizards : Interviews with Top Traders" by Jack D. Schwager
    Any book by Harry Browne
    "Tomorrow's Gold: Asia's Age of Discovery" by Marc Faber
    "24 Essential Lessons for Investment Success: Learn the Most Important Investment Techniques from the Founder of Investors Business Daily" by William J. ONeil
    Any books you connect with concerning "trend following", "turtle trading", technical analysis, and fundamental analysis. There are great things about both fundamental and technical analysis.



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