Stuck In Stowe

Kevin asked me what I thought of his newsletter and I promptly ignored this request for two weeks.  I feel justified in doing so for a number of reasons.

1.  I was actually busy for a significant portion of that time

2.  I didn’t really want to do it.  I like Kevin but I don’t like investment newsletters, replying honestly meant disagreeing with Kevin strenuously and replying dishonestly meant not getting to disagree with Kevin.  You can see my dilemma.

So I will start with this- If I ran a newsletter it would be EXTREMELY boring.  My first argument against newsletters is that they are hawking all kinds of advice.  Diversification you might call it.  Ok, I’ll call it diversification.  Now everybody knows that divirsification is good in investing- right?  How many sit down and think about why its good though?  Generally its good because you probably aren’t as smart as you think you are/you might have missed some important information/been lead astray by a crooked (j/k) newsletter.  You don’t want all your eggs in one basket in a manner of speaking.  This is half of it.  The other half is that the market generally generates generous returns.  Somewhere between 5-8% per annum over long stretches of time.  Diversification brings your returns more inline with market returns- so while your one brilliant idea may have returned 20% per annum and your diversification brings it down to 10% at least you are still making money- ie doing better than the alternative of doing nothing and holding cash.  On the other side your one brilliant idea returned -5% per annum your broader portfolio could bring this up to 3-4%  pretty easily and again it was better than doing nothing (though worse than most government bonds most of the time).

Here is the thing though Kevin believes (or wants us to believe that he believes) we are either in a recession or on the verge of a double dip recession.  Now there are many ways to define a recession and differences between recessions but one important aspect of a recession is that the expected return on your average investment is negative.  Its simple logic- if recessions involve the decline in real ingcome/gdp/net worth then what you are expecting when you expect a recession is a general decline in some combination of the quality/quantity of production relative to cost (this is essentially the definition of real GDP).  If this is true then profit margins must decline meaning lowered expectations of future income (in some cases the profit margin of companies can increase but only because their competitors go out of business and since you have diversified you also need to expect to own some portion of the collapsed companies) which means lower stock prices and or dividends.

Ok- once you buy that load I’ve got a second truck here to sell you.  If you predict that we are on the verge of a recession then your advice should simply be “don’t invest”, and this advice fits in with other platitudes such as “in a recession cash is king”.  Doesn’t Kevin hate cash though?  Doesn’t he believe that the dollar will perpetually lose value?  We have an out for Kevin though becasue he advises holding gold instead of Uncle Benny’s Magical Inflatobux so we just say gold is better at being cash than dollars are adn advise you to hold cash in the form of shiny metal.

What if Kevin is wrong about recession?  Shouldn’t we diversify in case Kevin’s macroeconomic predictions turn out to be wrong?  The answer to this is yes but you have to consider how you are diversified.  If you are 30 years old and have a job then the lack of double dip recession means that you are highly likely to still have that job when it becomes apparant that Kevin is just another Chicken Little, in this case you can pretty safely put near 100% of your investments in gold and still consider yourself diversified as long as you think of your portfolio as the average of your expected future earnings and not “money I put in my 401k becasue I got a tax break/match from my employer”.  If you are retired and living off your pension then you do want to diversify but in the same way retired people always want to diversify and that is with as little risk as possible.  Blue Chips, divident bearing instruments, safe bonds and a good chunk of gold to balance those things out.

My investment newsletter would be very boring, the first issue would say “if you are under 50buy lots and lots of gold (and a little bit of silver) and if you are over 50 take 2% of you nest egg for every year over 50 that you are out of gold and put it in your taditional blue chip/government bond/divident bearing instrument” and the second issue wouldn’t come out until I thought the recession was over.

This entry was posted on Wednesday, May 12th, 2010 at 8:21 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.