Strategies Part 2

On March 25th (Strategies Part 1) we reviewed a few ideas to protect ourselves against the slaughter in the stock market. We also noted that Exxon has built up $31 billion (a 40 week supply of cash) to fund their capital projects for most of the coming year. We also noted my personal goal of saving enough cash to cover 6 months of payments and expenses.
  • Today we will examine further strategies to insulate ourselves from the worst damage.
In my view, one of the major sources of security in uncertain times, is something that has been well esteemed for millenia, gold. Whether the economy faces deflation as some suggest, or severe inflation as others assert, gold is an anchor of wealth. It can't be multiplied by printing more of it and it can't be inflated away to worthlessness. For 5000 years it has been the recognized store of value worldwide.
  • My goal is to place a minimum of 10% of my net worth in gold coins and bullion. Although I have not yet met my final goal in this regard, so far the physical gold purchased has produced a return of close to 30%. In the meanwhile the stock market has fallen further since August 2008 and then only recovered meagerly. Had I left my funds in the market as my advisor suggested, I would still be down over 15% rather than up 30% with gold.

My portfolio exposed to the stock market currently is restricted to 2% of my net worth.

Interestingly, this is a similar strategy employed by Irwin Yamamoto, my new favorite contrarian investor.

A few excerpts:

Throwing money at a problem this big has never worked before, says Mr. Irwin T. Yamamoto. He has the historical examples to back up his argument in the latest version of The Yamamoto Forecast.

10 per cent rests in the Rydex Ursa Fund (RYURX), which inversely correlates (i.e., shorts) the S&P 500 Index. The other 90 per cent of the portfolio — cash in bank money-market accounts — “has totally escaped the damages of the market’s bloodbath.”

The fact is, he states flatly, the bailout plan is inherently bad. “In the annals of economics, whenever a country has devalued its currency, as the U.S. is doing now, it has never worked. Never.”
Yes, this may have averted a short-term collapse of the economic system, he concedes, but the key word is “may.” We really don’t know the outcome of this experiment. And somewhere down the road, there will be a mammoth price to be paid.
The result will not simply be inflation, but hyperinflation. “For every misstep, there is a consequence.”