Thursday, January 20, 2011

In which I opine on the superiority of stocks...

First off, let me state that my philosophy of saving is quite abnormal. I don't believe in amassing a large fortune. If fortunes are given, one must carefully consider what the Scriptures and the Fathers say about wealth: how difficult it is for the wealthy to enter the kingdom of heaven (the Master); that one's excess belongs to the poor (Chrysostom); and that riches are fleeting (James). That said, one must manage one's wealth carefully, as it is a gift of God. My first responsibility is to my family, and in order to provide for them, saving is a necessity... living paycheck-to-paycheck won't pay for a roof replacement, and going into debt (aka slavery) for the same should be my last option. In addition, in my case, I must manage my children's money for them while they are still young. Therefore, it behooves me to carefully consider what constitutes a good investment versus a bad investment.

There are a number of things one can do with one's money. Here is my opinion of each.

Savings Account
You hand your money to a banker, who then uses it however he sees fit, and pays you a true pittance for it. Savings interest rates are so far behind inflation that you are actually losing money by the time you withdraw it. If that doesn't make sense to you, you most likely don't understand that the value of the dollar is not static; the purchasing power is the only thing that matters. The reason prices for everything have gone up is simply that the value of the dollar has gone down--your dollar cannot purchase as much as it used to. According to the BLS, inflation for December 2010 was 1.5%. However, the BLS has been monkeying with the CPI for so long that it no longer reflects reality. If we applied the same inflation calculation that was in place before the Reagan and Clinton administrations monkeyed with it, we are actually seeing inflation of almost 9%:
Therefore, unless your savings account has a 10% interest rate (good luck finding that), your money is losing value every day it sits in that account. Most banks pay you less than 1% to use your money, which means they are quite literally stealing your money from you.

Certificate of Deposit
This is the second worst thing you can do with your money. It pays a little better interest rate than a savings account, but you don't have ready access to your money. The bank is still screwing you over, since the interest rate is usually in the low single digits.

Precious Metals
This is the ultimate hedge against inflation, but it is what is called a sterile investment. In other words, it produces no return. That said, gold and silver are the perfect long-term savings vehicle. Their value will never go to zero until the Heat Death of the Universe. It has been oft-stated that, for the last several hundred years, an ounce of gold will purchase a decent men's suit, regardless of the "price" of gold in the local currency. This is because gold is, for all intents and purposes, immune to inflation. As the purchasing power of a fiat currency drops, the price of gold in that currency will always rise to compensate. In the Wiemar Republic, a classic example of inflation and hyperinflation, gold was at 170 marks per ounce in January of 1919. By November 30, 1923, gold was at 87,000,000,000,000 marks per ounce. Yes, that's 87 trillion marks. As the value of the mark dropped, the price of gold responded in the opposite direction.

Bear in mind, however, if you put money into gold and silver, don't follow the gold and silver price and don't ever panic-sell (or if you do, call me and I'll buy it from you). The price bounces around all the time on the open market. The daily price is subject to manipulation by large central banks, as well as the regular dynamics of supply and demand. You have to trust that God's money (gold) will retain its value over time; buy it, put it in the safe, and forget about it until you need it.

While gold is the perfect money, silver is possibly a hot investment. Unlike gold, silver has a huge and growing demand in all sorts of industries. In other words, while every ounce of gold ever mined is still in circulation (or at the bottom of the sea), silver is constantly being consumed. The consumption far outstrips the supply, and bringing a new mine online takes years. This very well could lead to astronomical prices for silver in the next few years. It's already gone up nearly 10-fold since I started buying at around $4 an ounce.

Finally, the other precious metal: steel. By which I mean: firearms. These are a multi-purpose investment. Unlike gold and silver, you can actually use them to put food on the table, defend your family, or just have a good time plinking, all while the value slowly appreciates. This assumes that you take decent care of the firearm, of course. The firearm collection is a great investment vehicle, especially if you're willing to put your name on the list of full-auto firearms owners. A dozen years ago, you could pick up an M-16 for $8000. A year or two ago, you couldn't touch one for under $25,000. Now, you can pick one up with an M-203 grenade launcher for $22,400. The dramatic rise in price is due to both the dropping value of the dollar and the law of supply and demand. No full-auto firearms have been manufactured for domestic sale since the early 1980s, so the supply is finite, and as time goes on, it is dwindling. Demand has gone up, however, as more people are becoming the gun enthusiasts our Founding Fathers intended us to be. Contrary to popular opinion, you do not need a "Class 3 license" and you do not need to be an FFL to own a machine gun. You do have to get approval from the head of local law enforcement (State Troopers for us Alaskans), pass a background check, and pay a $200 tax for the "privilege" of transferring ownership of a registered machine gun. That's it.
It is a common misconception that an individual must have a "Class 3 License" in order to own NFA firearms. Legal possession of an NFA firearm by an individual requires transfer of registration within the NFA registry. An individual owner does not need to be an NFA dealer to buy Title II firearms. The sale and purchase of NFA firearms is, however, taxed and regulated...  National Firearms Act - Wikipedia
Government Bonds
This is the only investment vehicle which I believe is morally repugnant. This is particularly the case for government bonds. Government bonds are the modern form of slavery, pure and simple. When I purchase a bond from, for instance, the Municipality of Anchorage, I am holding a certificate which guarantees me, on a quarterly basis, the fruit of the labor of all Anchorage property owners. I don't have to do anything to earn that income other than hold that piece of paper. As an owner of that bond, I am the master and the Anchorage resident is the slave. I literally own that resident's time. Can this be called anything other than slavery? The worst part is that it's entirely involuntary servitude. If someone wants to indenture himself to me, that's one thing (see Corporate Bonds below), but if 51% of Anchorage votes yes on a bond proposition, the 49% who voted no are forced into debt slavery.
Frank Chodorov: Don't Buy Government Bonds

Corporate Bonds
Corporate bonds are another issue entirely; I don't necessarily find them morally reprehensible. I don't have any experience with corporate bonds, because I'm a small player. Trading in bonds is not for the small player; generally speaking, each bond costs $1000, and you often have to buy them in blocks of 5 or more. As with government bonds, you are still the master and the piece of paper proclaims the corporation your slave. So, it's still indentured servitude, but it is voluntary servitude, which is not morally reprehensible. In fact the Mosaic Law has provisions for this form of slavery, so obviously God doesn't find it immoral. Caveat: Clark Howard warns that Bonds may not be the safe harbor investors think they are.

Money Market
I'm kind of a fan of this beast, but only for short-term savings. It generally pays dividends on par with a CD, but has the liquidity (and often the convenience) of a checking account. With Vanguard, you can get checks to write against your money market balance. I have payroll deposit a certain amount each paycheck into my money market account, and when it's time to pay property tax and insurance, the money is there. In the mean time, it earns a small amount of interest each month, on par with a CD at my local credit union. Again, however, it's losing purchasing power, as it's not producing enough of a return to keep up with true inflation. A money market is generally a basket of very-short-term bonds and other lending instruments.

Mutual Funds
A mutual fund is a) a way to diversify your risk and b) the lazy person's way out of doing any investigation. You buy whole or fractional shares of a mutual fund, and the fund manager then uses that money to buy cars, planes, a house in Vail, and he'll also buy some stocks in your behalf. If he's a good fund manager, he'll actually research the stocks before he buys them, but more often than not, he'll just buy whatever looks good at the moment, and will usually wait until way too late in the game to sell. If you're going to buy mutual funds, do it with the lowest-cost companies. I said companies, but what I mean is: use Vanguard. They have the lowest fees, and the lowest costs. Period. If you're not willing to do any investigation of stocks at all, stick with an index fund, like VFINX (tracks the S&P 500) or VQNPX (focuses on growth and income stocks).

I saved the best for last. Buying a stock is buying ownership in a company. Here is where you need to do a little homework. At first, it can be a little intimidating, but you don't have to focus on all the fancy numbers, as useful as they may be to high-volume traders. If you're investing for the medium to long term, you want to find a solid company that has good growth potential and hopefully a decent dividend. When I am looking for a new stock, I tend to favor decidedly unsexy things like natural resources, electric utilities, and mid-stream service providers (like the guys that maintain oil and gas pipelines).

Some of the stocks I've purchased were for income, like the natural resource company I picked up a year and a half ago. For the price of a share, the quarterly dividend was pretty decent, and the company had a pretty stable balance sheet. That income can then be used to purchase more shares. What also happened was that the stock's price went way up. It doubled, actually. If I'd bought a year earlier, it would have quadrupled by now. And during the time I've owned it (five quarters), those shares have returned 12% of my initial investment in the form of dividends.

Others were more speculative; for instance, about a year ago, I picked up a small copper & silver mining company for a little over $1.67 per share (price adjusted for a stock split); it's been trading between $4 and $5 for the last two months. Once it doubled in price, I sold half of the shares, so I got a complete return of my initial investment, but I still hold a couple hundred shares. I regularly follow the press releases and SEC filings, and my kids want to go visit the mine. It's just plain exciting to own part of a silver mine.

Owning a company is a great part of the American Dream; owning stock is the simplest way to do that with limited capital. The best part is, if you're saving up for that deck you want to build, or for the car you'll need when you have that next baby, open a Scottrade account (tell them I referred you and we'll both get free trades out of the deal), and buy some shares of a stable company like John Deere or FirstEnergy, and let them pay you quarterly dividends between now and then. When you need the money, sell enough shares of the stock to cover your needs and transfer the cash back out to your bank account. It'll take a few days for it all to settle, so you don't have the convenience of a money market. But, as I mentioned earlier, a money market's not going to give you the kind of returns you'll get from a decent stock.

Think about it. If I'd instead stuck $1000 into a savings account a year and a half ago, today it would have accrued roughly $6 in interest, a whopping $1006. In a CD or money market, it would have accrued perhaps $30, so it would be $1030 today. That same $1000 investment in NRP would have doubled in price and produced 12% in dividends, so it would be worth $2120. When you figure in 9% inflation:
  • Savings: $1000 becomes $1006 but only has the purchasing power of $916.50 of the original money
  • CD: $1000 becomes $1030 but only has the purchasing power of $941.75 of the original money
  • Gold: $1000 would have bought one ounce of gold, which today could be sold for about $1400 with the purchasing power of $1221.43 of the original money
  • Silver: $1000 would have bought about 70 ounces of silver, which today could be sold for $1960 with the purchasing power of $1443.88 of the original money
  • NRP: $1000 becomes $2120 but only has the purchasing power of $1485.85 of the original money
You tell me what's the best place to preserve and grow your wealth.

In the interests of full disclosure: I own FirstEnergy, John Deere, Natural Resource Partners, and Revett Minerals, all of which produce quarterly dividends, and all of which have appreciated by at least 10% since I purchased. I have no intention of selling any of these any time soon. I do not own any Vanguard funds, except their prime money market fund, VMMXX. And seriously, if you do decide to open a Scottrade account, let me know and I'll get you a referral code which will get you (and me) three free trades.

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