Buy and Hold? Debunked!

Please click on the following link, and scroll down to the third chart on the page (the chart of the Dow Jones average plotted on a logarithmic scale)

http://www.lowrisk.com/djia100year.htm

Today the "buy and hold" strategy is common wisdom among the investing public.
However, there have been several periods in recent history where stocks showed
a zero-percent return over time spans as long as 25 years! In other words, over
the last 100 years, Buy and Hold has worked for about 50 years and failed
spectacularly over about 50 years. That is only a 50% success rate, great if
you get your timing right, terrible if you don't!

Note that if you bought the Dow in 1927, you did not see a positive return
until almost 1950! And god forbid if you HAD to sell (due to some unexpected
personal expense occuring requiring an immediate cash outlay) at some point in
between those time periods, you could have lost as much as 75% of your original
capital!

The periods between approx. 1967 and 1982 and 1905 and 1920 also showed a
long-term zero return. Note that a savings account paying 3% (the lowliest form
of investment and currently spectacularly out of fashion), compounded over 15
years, would have left you dramatically better off than if you had stayed in
stocks!

The point is, every so often, we enter a period of flat stock market returns
that lasts between 10 and 25 years. Exactly how long that period of zero
returns is is different for each individual investor, and depends on the exact
timing of when you got in and when you got out. Or to restate, during those
periods, everyone did badly, but exactly HOW badly you did depended on your
exact market timing. But no matter how you slice it, a long stretch of
consecutive years with zero returns is devastating both in terms of losses to
inflation, and the opportunity cost of not being in a more profitable alternate
investment. One thing is for sure: those who got OUT of the stock market at
the beginning of--or even well into the middle of!-- a big downtrend and
invested their money in alternate investment vehicles did SIGNFICANTLY better
than those who weathered the long stretch of zero return.

There is every reason to believe that the Dow and S&P are just now following in
the footsteps of the Nasdaq decline between 2000 and 2001. I expect we may see
a fairly similar drop in the Dow and S&P over the next year. The Dow and S&P
are less volatile than the nasdaq, so figure maybe a Dow of 5000 (give or take)
and an S&P of 500 (give or take) So, most of the S&P and Dow losses could well
be in front of us, not behind us. In other words, even if you've lost some
"paper profits", the probability is, if you don't sell now, you'll lose WAY
more by staying in the market and watching the Dow and S&P plunge in a similar
fashion.

The lesson here: SELL any money you have in stocks or mutual funds that you
think you might need anytime in the next 20 years. This may be your last chance
for a LONG TIME to preserve your HARD-EARNED capital. You should also consider
redeploying at least SOME part of those funds you won't need for over 20 years
in order to avoid the opportunity cost of missing out on alternate (i.e.
possibly SUPERIOR) forms of investment, like money market funds, bonds, and
commodities like precious metals.

EYKIW!

Ruminations on investments: what is to be done?

Recently my old friend Blotto (well that's his nickname, not his real name) asked me about how to buy silver and gold via his IRA. Little did he know the response he would get back. Here it is for the world. (Stick with it: it gets more interesting the further down you go. I promise.)

I have been doing lots of research on how to play the precious metals from within the restrictive confines of an IRA. I have acted on all of the following except purchasing physical silver... however I have finally located a dealer with great prices and will hie myself hence tomorrow to start establishing a physical stockpile...the only thing that has held me back so far is the fact that it has been difficult to find a local dealer. It is so tough to find bullion dealers, I'd have called the FBI and CIA to help, but I wanted results before christmas...(badump bump!). You can buy bullion on the internet, but the shipping and insurance fees are prohibitive and the markups are high too. So ya gotta do some shlepping around.

The high risk/high reward play is to invest in the mining companies. You'll want any of the big silver companies (SSRI, PAAS, CDE) or an *unhedged* gold producer (TGLDX is an unhedged gold fund, GG is one of the biggest and most stable unhedged golds), and there are plenty of other "junior golds" that could go up 100x or more if the price of gold takes off. Wow. (However: DON'T TOUCH HEDGED GOLD MINERS WITH A 10 FOOT POLE. Not enough time to explain what that is here, just believe it.) If, however, the big money center banks can continue to successfully suppress the prices of gold and silver (and there is anecdotal and statistical evidence that they have been working overtime since 1995 to keep a cap on gold and silver in order to keep the dollar artificially strong--but that's another scary story) then you could be in for some rough sledding. At least until the market manipulators fail, and if history is our guide, they eventually will fail.

Another way is to invest in a publicly traded company called the Central Fund of Canada (CEF). CEF is basically a closed-end mutual fund whose only assets are physical gold and silver locked up in a big vault in Toronto. Because it is a closed-end fund, the share price tends to be slightly more volatile than the price of gold, but basically, it tracks the price of gold and silver very closely.

There are actually some complicated ways to "hold" physical gold and silver in your IRA. However for some reason you are legally forbidden to actually touch or take possession of any physical metals in your IRA portfolio. I guess the IRA custodian holds the metals in a vault somewhere but you are not allowed to take it, hold it, love it... But you're saying, "so what if I don't hold the silver, I still get the price appreciation, right?" Maybe. But as they say, "possession is nine tenths of the law...."

...so the "ultimate paranoid play" is to cash in all or part of your IRA, pay the penalties, and buy physical gold and silver and stick it under a loose floorboard. Why? Because the US dollar has been so thoroughly debased (look at the Fed statistics--they have been printing money like madmen for 7 years), and the gold and silver markets have been so thoroughly manipulated, there is a small but significant risk that the US gov't could confiscate gold and silver. Can't happen here? Well, it already did once, in the 1930s. FDR decided that the country needed gold because the dollar was in such bad shape. It was declared illegal to hold gold. Uncle Sam bought your gold at the statutorily-fixed price of $20.67 per oz. (this was back when we were on a gold standard). When good ol' uncle sam had taken possession, he changed the official price to $35/oz--yes that's called devaluing the currency. Whoops! so you just sold your gold to the Uncle, and the dollars you got back were now worth almost 50% less in future purchasing power. Like it or lump it. Something like this could happen again in a nightmare scenario, and considering how scarce silver is today, the uncle would probably try to take that too. But this time around you'd be crazy to sell your gold to the uncle because fooled me once, shame on me, fooled me twice.... Your options-- smuggle it to Canada (the canadian anthem starts like this: "Oh Canada, glorious and free..." you might like it, you know), or participate in the domestic gold-currency black market. It will be kinda like the old Soviet Union, where they used rubles to buy crap, and dollars to buy anything of real value--except this time it'll be the dollar that's worth crap, and some old apparatchik will be all smug in his dacha chuckling at the delightful irony.

Incidentally, did you know that Warren Buffett owns 130 million ounces of silver? That is something like 10% of all silver extant. It's sitting in a warehouse in some corner of Nebraska, presumably. He bought it 4 or 5 years ago when nobody was looking. He fessed up, upon which the price of silver went up a few dollars/oz for a while but then settled back as everyone hunkered down to play the NASDAQ for next 3 years. When was the last time Warren made a bad investment? Bill Gates and George Soros allegedly also have large positions in the white metal.

Buying a thousand dollars worth of silver pieces is a smart move and relatively risk free. But before you get involved with gold and silver in a really big way--like with your IRA/life savings--you must understand the single biggest risk: that the US government and the biggest banks in the world have been manipulating the gold and silver markets for years, and recently, have probably been fooling around with the stock markets as well. (The charter of the Federal Reserve Bank explicitly gives them permission to buy and sell securities in any US market, with no limitations). JP Morgan is so deeply involved in gold and silver derivatives that if they lose control of the price of gold the entire bank could fail--probably taking many other banks with it. Understand that the US govt will do anything to prevent this from happpening. It isn't clear what ultimately the gov't could do to suppress the price of gold in the long run, but they could really complicate things for a while, and there is always the threat of confiscation, which could include government takeover of mines, assumption of any valuable paper assets associated with gold, and "mandatory" buyouts of personal hoards at some laughably low price. Which is why having some silver or gold in your physical possession will be so important if the shit really hits the fan (i.e. stock market collapse, followed by bank failures, followed by currency collapse, followed by economic breakdown, etc.). Make no mistake: by getting involved in gold and silver, you are betting squarely against the Financial Establishment and their awesome aresenal of weapons. But judging by the job they've been doing over the last five years, that is looking like a better bet than ever. For me, it is as simple as following my convictions. I think our corporate and financial culture is totally corrupt, and our federal government has been dangerously compromised, and I'm putting my money where my mouth is.

But what if your beliefs are less extreme than mine? Well, you'll want to stay at least one step ahead of the cascading collapse. If you are convinced the stock markets are grossly overvalued then you want to be in real estate or bonds. But now real estate and bonds are aproaching all-time highs. So you want to be in cash. But if the dollar is going down (which it has been steadily over the past few months)--then you want to be in other currencies. Yen? no way. Euro? they have their own problems. Pound? Swiss Francs? Forget it. If currencies aren't the answer, then you have to be in commodities. Cocoa prices are going nuts right now--check it out. There is some talk--in reputable publications like The Economist-- that sinister forces are in the process of cornering the cocoa market. Palladium took off like a rocket earlier this year, followed by platinum which took a nice leg up. Gold and silver are up, but sluggishly due to market manipulation. So: Oil, commodities, mining stocks, and physical gold and silver look like the place to be right now. Maybe discount retailers and Proctor&Gamble-type companies as well if you are committed to keeping some money in the stock market. There is a lot of insider buying in the tech sector right now, which is normally a bullish sign, but the idiots running those companies have zero credibility. There is no way I would try to pick tech stocks right now, or try to pick a tech bottom.

Remember, confucious say: he who tries to pick bottom gets smelly finger.

EYKIW!!