One Man’s Approach to Investing in Dangerous Times

This is a comment from a knowledable reader (P. W. Dunn at http://righteousinvestor.wordpress.com) to a recent post, Speculators Only. It provides insight into how he is trying to navigate these treacherous markets and what he perceives to be future events.

His crystal ball is no better than others, yet he has a clearly defined strategy. It may be useful in helping to develop your own.

Neither I nor Mr. Dunn suggest you act based on his opinion. It is merely an example of how one investor thinks. It is in no way a recommendation.

I would like others who feel comfortable doing so to send in their approach to dealing with current and future markets. You may do so anonymously if you prefer by emailing me directly. Perhaps a cross-section of ideas will be helpful to others in developing a strategy.

There is the saying, “Those who remain calm while others panic, don’t know what the hell is going on.”  It is a troubled time and I genuinely feel bad for what central banks are doing to people’s savings.  But as you say, speculators will make and lose a lot of money.  The biggest winners today are those upon whom Bernanke’s shines his favor, such as the big banks that borrow money from the Fed and lend it back to the government, which is perhaps the biggest Sopranos-type racket going:  but it’s not some kind of under the table pay-offs, but it’s being done right in front of all of us and with impunity.

The 2008 market crash has been particularly devastating on people’s savings.  They were forced by inflation to buy so-called “risky” instruments, esp. stocks. Then that bubble burst twice in less than a decade.  Stung by that, they are still too scared to bet on the market again, and so Bernanke, and the other sovereign banks around the world, have robbed them blind through their loose monetary policies.  In Canada for example, there has been something like a 20% increase in the cost of houses since the summer of 2008, due to the Bank of Canada keeping the interest rates at ridiculously low rates.  So you can’t sit on cash–because the riskiest investment in an inflationary environment is cash in a savings account that pays 1%.  Here in Canada since the nadir of the stock market crash, such cash has lost about 19% against real estate and much more against stocks and gold.

The stock portfolio I manage is now almost all commodities (oil & gas, gold mining), 100% Canadian-based (as I live in Canada), and I am shorting the US dollar to buy these companies.  I am selling cash or margin covered puts (on oil & gas, gold-mining companies, etc.) for income (which gives from 5-10% downside protection) and, because I can’t trust my margin to stay high in market downturn, I am accumulating unused lines of credit as my hedge against deflation,with the view of seizing the day if there is a market crash.  I believe the investor must be aggressive and engaged–you can’t have a “lazy” portfolio today (John Mauldin said the same in his most recent interview with Steve Forbes).  The goal must be to beat inflation, and the higher that goes, the more aggresivity is necessary.  Or if I had to sit out as you suggest, then I would put most of my funds into silver, gold, non-perishable foods, or other commodities–things with durative and intrinsic value (gold and silver are liquid and so are excellent choices, but you have to have a safe place to put it).  Most people’s best hedge against inflation is still their mortgage, as Bernanke’s devaluation of the dollar will also reduce everyone’s debts.  It’s the Year of Jubilee, when everyone’s debts will be canceled, especially the Federal government’s.  Or as Dickens says, “It was the best of times, it was the worst of times … “

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