When others are greedy, it's time to be fearful. When others are fearful, it's time to be greedy. -Warren Buffett
The above quote while stated so eloquently by Warren Buffett, speaks of an investment philosophy which has been around as long as the capital markets themselves. It is nothing more than the contrarian approach, stated so as to make it sound like some well thought out philosophy. There have been other great Value Managers, Warren Spitz, David Dreeman, David Williams, to name a few. All of them have told us for years that emotion is the enemy the successful investor.
Look at what the current national sentiment is, then do the opposite thing, is more often than not better advice than jumping on the latest bandwagon and listening to all of the well thought out reasons why this time is different than every other moment in our world's history. As our nation's most famous and least useful stock index flirts with setting new record highs, bear in mind that we've all seen this movie before. This time is a little different than most however. The magic rocket flight experienced in our nation's capital markets is due in large part to the single largest currency manipulation in world history. Those debt monetizing activities so euphemistically labeled Quantitative Easing I, II, and III, have created an environment where two simultaneous bad conditions have led to an entire nation dawning rose colored glasses. (I about fell off my chair when, during the latest Presidential version of a beauty contest, Mitt Romney stated that China was guilty of manipulating their currency. I forgave him during the campaign for this disingenuous moronic position, but now that things are over, China's manipulation of her currency is only their amateurish reaction to what we've been up to. Seeing as how they stand as our largest single creditor, and we their largest single credit customer, what choice did China have?)
Those two conditions are as follows. One, our dollar has become devalued, and while inflation of about 3.1% per year is considered a normal condition, our devaluation of currency has been far greater than that in recent years, and it has been spurred on purposefully. By robbing us of the value of the property already in our hands, our government has been able to fund their ill conceived adventures, for instance teaching Chinese Hookers how to hold their liquor. to lend a little perspective, it takes one dollar to purchase the commodities that 56 cents could buy only four years ago. While it is true that products not directly connected to commodities have not yet caught up to that sad state of affairs, they will at some point in the future, follow suit. Presidents you see, do not have the authority to repeal the laws of simple economics. Those wonderful stock prices are not so much an increase in the value of America's businesses, so much as they are the devaluation of the currency being traded for those shares.
The second condition, which is the most dangerous and the least advertised is this. Quantitative Easing does not refer solely to the printing of currency, which is bad enough, but also how that currency is integrated into our national economy. What makes this so pernicious is how that integration is accomplished. It is done in a way so as to fool us all into believing that there's nothing to be angry with. Let's not forget that during the days of the Confederacy, (this refers to a time before our Constitution and not to the attempted secession of our Southern States,) three states used tobacco as their official currency. Since anyone with half a brain began growing tobacco, the currency did not take long to devalue. People began soon enough burning their neighbors fields, and it became a capitol offense to harm somebody else's tobacco crop. That's right, killing tobacco was dealt with by hanging those who got caught. (My, how times have changed.) Not wanting to face the inevitable pitch forks, and wishing for that eventuality to be held off until they are long out of office, our current group of geniuses have devised a plan where bye they sneak their ill created shares of our wealth into the economy by purchasing items offered in our capital markets.
Since this is a little sneaky, and a little complicated, it will require some explanation. When the government prints out a new bill that was not created for the limited purpose of replacing an old one, they are not simply spending it as was once the practice. The lessons of the 70's told them that much. They are taking that currency and using it to purchase the bonds that they issue, buying up or paying the interest on their own debt. Then, they are taking those instruments, and selling them at the weekly bond auctions. This has the effect of driving up the prices of bonds, since now the people who are prone to buy those instruments have competition for the bonds that they did not used to have, ie the very same government who created them in the first place.
Investors, not being idiots, are far less likely to pay good money for crap instruments, like worthless government bonds which have severely inflated prices, so they must find other places to invest. Every rung on the ladder will eventually be inflated by this process, until even the Dow Jones 30 gets its share of the bubble. the problem of course is that bubbles burst, and when they do, we'll see the same talking heads on our televisions stating that the world is once again ending and this time is different, unprecedented, and there will be no way out from the wilderness.
That leaves us with a where do we go now scenario. Equities, even with the huge bubble being created once again thanks to government malfeasance, remain the single best hedge against the looming inflationary symptom that will one day soon be felt, which is rampant increases in the prices for goods and services. Commodities funds within your 401k's and annuity sub accounts are also a good play for small portions of your holdings. The same can be said for real estate funds, REITS and other Direct Participation Programs. Don't fall for the allure the gold and silver only crowd offers, but recognize this for what it is, which is making a commodity play where only one commodity is used, rather than diversifying. That one commodity by the way, unlike every other commodity traded in the Chicago Mercantile Exchange, has zero other uses beyond being a pretty, shiny, metal.
Don't panic, but our neighbors will be reaching for pitch forks and torches soon. when they do, bear in mind that we've done this before in our country, and we've come through it O.K. I've never been a fan of gold only investing. While I'll admit that taking up to 5% or even 10% of a portfolio with a commodities play may be beneficial in light of what's about to happen next, shotguns, ammunition, and canned goods will at least be useful. Gold will just be too damned heavy to lug around.
Comment
Comment by John Wiseman on March 7, 2013 at 8:35pm Herb, I agree with your last statement, should the apocalypse ever happen, that plan will be as good as any other.
Comment by Herb Irish on March 7, 2013 at 8:09pm 
Comment by Steve Merkel on March 7, 2013 at 4:36pm Given a financial meltdown and lawlessness, what will be of most value to us? Gold? Guns and ammo? Freeze-dried food? Farmland? Our personal hoard of stuff? The lone wolf. the survivalist, the prepper doing it on his own -- he will be the most vulnerable. Community will become important. A church community, for example can work together and accomplish much more than isolated individuals. A church community has the advantage of being dependent -- not on government or gold or stashes of stuff or guns, but on God. Think of the community that wrote the Declaration of Independence, ending with "a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor." This community put their trust in God as first priority. Everything else was second. A pretty good example for us.
Comment by John Wiseman on March 7, 2013 at 3:59pm So was I, only in a different form. Buying Real Estate, ie your own property takes a lot of capital. That right there suggests that unless you are very well off, you'll be out of wack as far as your asset allocation is concerned. I'll give an example.
If your suggested model calls for an 8% allocation into the non correlated asset class and you have $1 Million to invest, that would mean that you had $80,000 prior to leverage that your model would suggest. As an industry professional, I would probably be giving the advice to take advantage of real estate avenues designed for smaller investors. Minimum REIT purchases are usually $2000, but will require individual state qualifications to make certain the the investment is appropriate for you. (Income and Net Worth hurdles will need to be met.) Mutual fund purchases are ideal for the smaller investor.
Comment by Richard Curtis on March 7, 2013 at 3:50pm I was talking about buying real estate itself as an investment, provided the other bases are covered.
Comment by John Wiseman on March 7, 2013 at 3:48pm I put real estate in the second to last paragraph as a decent hedge against inflation. What's intriguing about real estate right now is that it has never really had the recovery usually associated with the trough that it's been through. This is probably a good time to pick a good REIT, and I would choose one that's not using leverage as its main funding vehicle. Talk to your professional about the proper due diligence that you're looking for. For the smaller investor, there are mutual funds that buy and trade REITs as well, Fidelity, RiverSource, Franklin Templeton, T.Rowe Price, etc. all have at least one real estate fund.
Comment by Richard Curtis on March 7, 2013 at 3:38pm John, It has been said that They will quit printing money when the Unemployment Rate gets down go 6.5%. When they stop, the market is said to stop. Is that a date one should prepare for? What about owning Real Estate as a hedge, provided one has the other bases covered, -- Food, Fire, Toilet Paper, Water and Ammo.
Comment by John Wiseman on March 7, 2013 at 3:31pm Which is precisely the opposite of truth. Gold has no intrinsic value. The only value gold has, is that which is assigned to it. It has no real use. It is so heavy in fact, that even when gold was used as the currency standard, people switched to paper certificates which promised gold to the bearer. Gold is a commodity, traded like any other commodity. It's value as an investment travels the cycle of ups and downs along with other members of that asset class. More importantly however, if our society ever reaches that level of lawlessness and mayhem that you seem to be rooting for, gold is the last thing any sane person would want. you'll be tied to it like a prison sentence. You'll be unable to hunt for food, terrified to ever leave your gold unguarded. It'll be far too heavy to take with you, and you won't be able to plant or eat it.
If the Apocalypse happens, you'll want canned food and shotgun shells, (I'm guessing you already have the weapon.) As for gold becoming the standard of barter, that statement is self defeating. By definition, barter is one good or service traded for another, and has nothing to do with a centralized currency, such as you are proposing gold to be. If life has devolved to that point, why on Earth would someone trade you their labors for something that they'll have zero use for?
Herb, I feel like I have you at a disadvantage. I have a background in actual economics, and you are giving me the Goldline Corporation's talking points as a counter argument.
Comment by Herb Irish on March 7, 2013 at 3:07pm Comment by John Wiseman on March 7, 2013 at 2:56pm Herb, can you give any reasonable arguments as to why you believe gold will be the only thing to have any value? If you follow my link, there are a few arguments you will see that explain my position to the contrary. What I am looking for is honest debate, based on real ideas that are based on something more than emotion.
I would be happy to have that debate, but when ever it gets started, all I get from the other side is fingers stuck in ears and endless chatter about others not being able to hear.
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