CAFAYATE, ARGENTINA – We drove down from the ranch yesterday to the tourism and wine town of Cafayate.
With our own 4×4 truck, we could have easily made it through the pass where we got stuck two weeks ago. But the track was so rocky, we decided to avoid the wear and tear by taking the long way around.
Even so, the road was still so rough (unpaved all the way) that it jolted a taillight loose.
By the time we got to Cafayate three and a half hours later, the truck – missing a rear light – was so covered with dust, and so beaten up, that a group of French tourists paused to laugh at it.
But today, we turn to practical matters…
Recently, we made some money – a little dividend from a woodworking shop in Nicaragua.
The shop was set up with a modest investment and modest ambitions. But as the number of people building houses on the coast has increased, so has business.
Now we find ourselves making money.
The question on the table: What to do with it?
Stocks? Bonds? Cash? Gold? Real estate?
Bringing the end of the story right up to the beginning, we decided to buy a little bit of timberland in Virginia.
But let’s back up and work through the choices…
We hold about one-third of our liquid wealth in stocks. Part of that is in the long-term, conservative recommendations Chris Mayer makes in his Bonner Private Portfolio advisory.
It’s early days still. But Chris’ portfolio is up about 9% since he launched his service last April.
We have another little portfolio of country-specific stock market ETFs (exchange-traded funds).
The idea is simple. Individual companies go broke. Countries rarely do. So when an entire stock market is beaten down and hated, there’s good reason to think it will go back up.
The idea came from the “Dogs of the World” strategy popularized by fund manager Michael B. O’Higgins.
We buy the cheapest markets in the world… and wait.
No stock analysis. No guesswork. No investment fees. No reading the newspapers or wondering what will happen next. The current list of dogs: Turkey, Malaysia, Mexico, Denmark, and Britain.
This approach is not for everyone.
Because not everyone can wait for the long run to come. And over the short run, anything could happen. Awful markets – such as Greece – can get awfuller.
And the big picture for stocks, worldwide, is bad.
They are priced for a world of near-zero interest rates – a world that can’t last much longer.
So, given our druthers, we’d rather not put more money into stocks.
Forget it. By our estimate, the 37-year bull market in bonds peaked last July.
High-quality bonds could go back up in the next crisis. Then they will eventually get murdered by inflation and higher interest rates.
It will take nerves of steel to play that move.
Low-quality bonds will sell off fast as soon as the next credit crisis begins.
It is impossible to say when or how, but the risk is high for us.
We already have about one-third of our money in cash, half in U.S. dollars and half in Swiss francs.
Holding Swiss francs is painful. The banks charge us a negative interest rate. We aim to get the money into something else; we just haven’t gotten around to it.
The problem there is that consumer price inflation is probably twice the official tally… and it looks like it could get worse.
Recent tallies by MIT – which collects 15 million online prices daily – reveals prices rising as much as 3.6% a year. That’s nearly twice the official, fake-news rate.
It’s hard to say, but we could be losing 2% or 3% a year on our dollar holdings.
But we don’t mind holding some dollars. They are a form of insurance. If we’re right about the coming crisis, these dollars will be the best “investment” we have.
But the longer the crisis takes to arrive, the more the insurance costs. And as Voltaire reminds us, paper money always returns to its intrinsic value – zero – eventually.
Another form of insurance is gold.
That makes up about another third of our liquid investments.
Our children think gold is for fuddy-duddies. They believe cryptocurrencies, such as bitcoin, will make gold obsolete. Maybe they’re right. But we’ll wait for proof.
Besides, when the crisis comes, it’s likely to be accompanied by a broad failure of the electronic money processing system. Even the power grid and the internet could be affected.
You may have millions in bitcoin but be unable to access it.
A Krugerrand, comfortably carried in your pocket, needs no cord, no power, and no internet connection.
But gold is not cheap. Our estimate shows it is more or less fully priced. So the insurance value costs you nothing extra. But – apart from the insurance – there’s no obvious upside.
So what then?
The problem with stocks, bonds, cash, and gold is that you get no pleasure from them. At least we don’t.
Real estate, on the other hand, can be fun.
Yes, it can also be a pain in the derriere. Yes, you can lose a lot of money, too, if you’re not careful. But it can also be a good way to tuck money away for the future.
Warren Buffett once explained that one of the best investments he ever made was a farm in Illinois.
He didn’t intend it as an investment. He didn’t watch farm prices. He just forgot about it. And it rose in value.
It doesn’t always happen that way. We invested in a piece of property down here – close to San Martín de los Andes – about 20 years ago. Today, it is still worth what we paid for it (in nominal dollar prices). Not a penny more.
Timberland, though, is usually a good buy-and-forget-about-it investment.
You buy. You pay the taxes. You get a timberman to look after it. And then, many years later, you… or your children… harvest the trees.
From a 2010 report from Charlie Curnow at Advisor Perspectives:
Between 1987 and 2009, the most common measure of the performance of timber as an asset class – the National Council of Real Estate Investment Fiduciaries Timberland Index, which tracks a large pool of individual timber properties acquired in the private market for investment purposes only – earned a compounded annual return of more than 14%. The S&P 500, by comparison, has returned about 9.4% in the same period.
Plus, if you buy in the right place, you may decide to convert your timber property for another use.
In our case, we paid more than we should have for pure timberland. But location was key. The land we just bought is within a half hour of Charlottesville… a charming college town.
It is within a half hour from a sister and next door to a brother.
As we look ahead to how we might live in the last part of our lives, we think… maybe… we will build a little bungalow near the rest of the family.
I’ll do the gardening and dig up the weeds… while Elizabeth knits a sweater by the fireside.
Bouncing grandchildren on our knees…
…singing night and day…
…and collecting our Social Security checks.
P.S. Recently, we introduced you to our newest colleague, Jeff Clark. Unlike your editor – an old fuddy-duddy when it comes to investing — Jeff is a trader. And very different from our Diary’s “big-picture” view, Jeff believes you can spot short-term trading opportunities by studying the numbers alone.
It’s not our usual fare here at the Diary. But it’s a good counterbalance to the public spectacle we discussed above.
BY JEFF CLARK, EDITOR, DELTA REPORT
It took Martin just a few months to blow up his entire account.
In mid-2001, Martin bought 1,000 shares of Polaroid at $10 apiece. The company had fallen on tough times. The stock had already plunged more than 50% on the year. But Martin was convinced it would turn around.
“Blue-chip stocks don’t just all of a sudden go out of business,” he said.
The stock dropped to $8. And Martin bought 1,000 more shares.
“It’s a steal at this price,” he said.
Polaroid then fell to $5 per share.
“I’m not worried about it,” Martin claimed. “I’ve done the math. All I need to do is buy 2,000 shares here at $5. Then when it pops back up to $7, I can sell everything and break even.”
You can probably guess what happened…
The stock didn’t pop up to $7. Instead, it fell to $2. And that’s when Martin got aggressive. He bought 20,000 more shares.
“My average price is now less than $3 per share. I’ll make a killing when this thing bounces.”
The problem was… Polaroid never bounced. A few days later, it traded for $1.
Martin was desperate. He had “averaged down” on a bad trade.
This one stock now made up most of his account. And it was sinking… fast.
Martin started scribbling out another order ticket. Most of the traders around Martin thought he would finally bail out of the trade. He’d sell Polaroid for whatever he could get, lick his wounds, and then move on to getting his account back up.
But that’s not what Martin did. Instead, he filled out an order to buy another 30,000 shares of Polaroid at $1.
“What else can I do?” Martin asked as he handed his order to the trading desk.
Under his breath, another trader whispered, “You could pray the stock drops to $0.10. Then you can buy a ton and really bring down your average cost.”
Less than one week later, Polaroid stopped trading at $0.28 per share. The company declared bankruptcy. The stock never opened for trading again.
Martin had blown up his entire account. $98,000 of his money had disappeared in a matter of months.
“Averaging down” on a losing position is almost never a good idea.
The only time it makes sense is when you make it a part of your strategy from the beginning… like if you take a smaller-than-normal position, expecting to be early on the trade. That would give you some flexibility to slowly build the position to a normal size.
That’s the only time I average down.
Every other time leads to traders taking on too big of a position. They get overleveraged. They get committed. Then they get emotional – which creates another set of problems.
When there’s too much money at stake, traders tend to make bad decisions. They don’t sleep. They eat poorly. They go to the bar after work.
None of that leads to good trading.
Also, traders should never average down when buying options. As time passes, the price of an option falls. Time works against you.
In my early years of trading, I flushed so much money down the toilet trying to turn a profit by averaging down on options trades. It would work, maybe, 10% of the time… But 90% of the time, I would quickly regret that decision.
Leveraged funds fall into the same category.
Most leveraged funds use futures and/or options contracts to double or triple the returns on their respective benchmarks. Like with options, time works against them.
Some traders will argue that averaging down on individual stocks is different.
Remember what Martin said: “Blue-chip stocks don’t just all of a sudden go out of business.”
By averaging down, these traders say, you can bring down your cost basis and make it easier to turn a profit on the trade.
But if you average down and buy more shares of a losing trade, you run the risk of exponentially increasing your losses. Even worse, you run the chance of getting emotional on the trade and hanging on “no matter what.”
That usually doesn’t work out well.
Just ask Martin.
– Jeff Clark
P.S. Every morning the market is open, my Market Minute newsletter tells readers where the action is headed for the day… including which sectors to watch and which to avoid.
If you’re an active trader, it’s a valuable tool for preparing your day. If you’re not an active trader, you’ll learn tips that’ll make you a vastly better investor. To automatically receive the Market Minute for free right to your inbox, click here.
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Today, readers quibble with Bill’s version of history in yesterday’s Diary, “America’s ‘Forever War’ in the Middle East.”
I once applauded the “American Way”, not now. I am appalled at the wanton destruction of the American war machine, its complete lack of humanity, mercy and dignity. It is a wretched display of murder and deceit.
– D. S.
Regarding the Forever War. I beg to differ Bill, the US has been at war in the Middle East far longer than 14 years. It started with the Barbary Wars of 1801 for which the US Navy was first created and the Marine Corp created. So, the real number is more like 216 years.
But of course, your point still stands. This war will go on forever. Keep up the good work. I have been following your thoughts for a couple of decades now and still appreciate them.
– S. Waslewsky
The story of Iraq and Middle East goes back to World War I and Ottomans… then Wilson and Lloyd George and Clemenceau. Read history. Pay attention to details.
Bush 43 went in to protect Kuwait and Saudis and defend his father’s honor who was two minutes from assassination by Saddam. Then because of 9-11 he decided to take on Muslims over there instead of here. The WMD [Weapons of Mass Destruction] threat was real. The WMDS ended up in Syria But go back to 1919 for the real story.
– P. Vale
Meanwhile, readers react to the negative feedback to Bill’s ranch stories originally published in last Thursday’s essay, “Yipping and Yelling.”
I grew up in Los Angeles. We raised chickens, goats, rabbits and the occasional turkey for the table. People are so squeamish about their table meat if it doesn’t come wrapped in plastic.
As far as the gauchos behavior I have been on late summer cattle drives in Montana and the process is no different. Branding, shots, castration and weaning all the same everywhere even among the Maasai in Kenya. Get a clue people.
– G. Williams
After reading responses about the “mistreatment” of livestock (which I have done on roundup too) I hope they all are vegans. If not, then they are hypocrites of the first order. (But we already know that, don’t we?)
– D. Paul
The difference between being able to do surgery to help a broken-legged creature and simply dispatching it, has a lot to do with prosperity and resources or lack thereof. Likewise, most “saving the planet” concerns, about air and water quality, go out the door when you’re cold and thirsty and have no plumbing.
People burn wood to stay warm, and sometimes eat their pets. It is folly to expect one can push people into caring about the others, the planet, animals, or the future, by regulations and taxes, if they are struggling to survive.
– S. Kallander
Your highlights of Gualfin make me wish I was there. I enjoy everything about Gualfin and understand why you and your family want to be there. I salute you and your wonderful wife for helping those that you are so loyal to and for your support of their and your lifestyles of living the good life and helping others. Keep it up.
– W. Mel
Our friend Teeka Tiwari – editor of Palm Beach Confidential and self-described “bitcoin bull” – just released this free training video.
In it, he shows investors how they can enter the booming market of cryptocurrencies and see triple-digit gains in as little as a few months.
Watch the free training video for yourself right here.