Tag Archives: Financials


The 5 rules of educated speculation

Rule #1: Contrarianism takes courage.

Everyone knows the essential investment formula: “Buy low, sell high,” but it is so much easier said than done, it might as well be a secret formula. The way to really make it work is to invest in an asset or commodity that people want and need but that for reasons of market cyclicality or other temporary factors, no one else is buying. When the vast majority thinks something necessary is a bad investment, you want to be a buyer—that’s what it means to be a contrarian. Obviously, if this were easy, everyone would do it, and there would be no such thing as a contrarian opportunity. But it is very hard for most people to think independently enough to risk hard-won cash in ways others think is mistaken or too dangerous. Hence, fortune favors the bold.

Rule #2: Success takes discipline.

It’s not just a matter of courage, of course; you can bravely follow a path right off a cliff if you’re not careful. So you have to have a game plan for risk mitigation. You have to expect market volatility and turn it to your advantage. And you’ll need an exit strategy. The ways a successful speculator needs discipline are endless, but the most critical of all is to employ smart buying and selling tactics, so you don’t get goaded into paying too much or spooked into selling for too little.

Rule #3: Analysis over emotion.

This may seem like an obvious corollary to the above, but it’s a point well worth stressing on its own. To be a successful speculator does not require being an emotionless robot, but it does require abiding by reason at times when either fear or euphoria tempt us to veer from our game plans. When a substantial investment in a speculative pick tanks—for no company-specific reason—the sense of gut-wrenching fear is very real. Panic often causes investors to sell at the very time they should be backing up the truck for more. Similarly, when a stock is on a tear and friends are congratulating you on what a genius you are, the temptation to remain fully exposed—or even take on more risk in a play that is no longer undervalued—can be irresistible. But to ignore the numbers because of how you feel is extremely risky and leads to realizing unnecessary losses and letting terrific gains slip through your fingers.


Rule #4: The trend is your friend.

No one can predict the future, but anyone who applies him- or herself diligently enough can identify trends in the world that will have predictable consequences and outcomes. If you identify a trend that is real—or that at least has an overwhelming amount of evidence in its favor—it can serve as both compass and chart, keeping you on course regardless of market chaos, irrational investors.

Knowing that you are betting on a trend that makes great sense and is backed by hard data also helps maintain your courage. Remember; prices may fluctuate, but price and value are not the same thing. If you are right about the trend, it will be your friend. Also, remember that it’s easier to be right about the direction of a trend than its timing.

Rule #5: Only speculate with money you can afford to lose.

This is a logical corollary to the above. If you bet the farm or gamble away your children’s college tuition on risky speculations—and only relatively risky investments have the potential to generate the extraordinary returns that justify speculating in the first place—it will be almost impossible to maintain your cool and discipline when you need it.





Keep your Investment Expectations Reasonable

What Is a Good Return on Your Investments?

New investors often don’t know what a “good” rate of return is on a well-constructed long-term portfolio. The answer depends on how the portfolio is constructed and varies by asset class.

To provide a start illustration, $10,000 invested at 10% for 100 years turns into $137.8 million. The same $10,000 invested at twice the rate of return, 20%, does not merely double the outcome, it turns it into $828.2 billion. It seems counter-intuitive that the difference between a 10% return and a 20% return is 6,010x as much money, but it’s the nature of geometric growth.

So What’s a Good Growth Rate?

When it comes to answering what a “good” rate of return on your investments is, I find myself frequently reiterating the truism that past performance is no guarantee of future results, and that even the best-structured portfolio or investment plan can result in permanent capital losses. I think about risk a lot. It’s in my nature. In fact, I believe people don’t think about risk enough. Things like the total decimation of the Austrian stock market upon the annexation of Austria by Nazi Germany have happened, can happen, and will happen again at some point in the future.

There are no guarantees of any kind in life.

With that said, I think the only reasonable, academic position a person can take if they assume that civilization will remain relatively stable is to answer that determining a “good” rate of return on your investments is probably easiest if we examine the nearly 200 years of data from Ibbotson & Associates, a data research firm that tracks financial market history.

It’s not perfect for the reasons we just discussed, as well as several others, but it’s the best we have.

To accomplish this, the first thing we need to do is strip out inflation. The reality is, investors are interested in increasing their purchasing power. That is, they don’t care about “dollars” or “yen” per se, they care about how many cheeseburgers, cars, pianos, computers, or pairs of shoes they can purchase.

When we do that and look through the data, we see rate of return vary by asset types:

  • Gold: Typically gold hasn’t appreciated in real terms over long periods of time. Instead, it is merely a store of value that maintains its purchasing power. Decade-by-decade, though, gold can be highly volatile, going from huge highs to depressing lows in a matter of years, making it far from a safe place to store money you may need in the next few years. Use Gold as an insurance over time.
  • Cash: Fiat currencies are designed to depreciate in value over time. In fact, $100 in 1800 is worth only $8 today, representing a loss of 92% of value. Burying cash in coffee cans in your yard is a terrible long-term investing plan. If it manages to survive the elements, it will still be worthless given enough time.
  • Bonds: Historically, good, quality bonds tend to return 2% to 4% after inflation in normal circumstances. The riskier the bond, the higher the return investors demand.
  • Business Ownership, Including Stocks: Looking at what people expect from their business ownership, it is amazing how consistent human nature can be. The highest quality, safest, most stable dividend-paying stocks have tended to return 7% in real, inflation-adjusted returns to owners for centuries. That seems to be the figure that makes people willing to part with their money for the hope of more money tomorrow. Thus, if you live in a world of 3% inflation, you would expect a 10% rate of return (7% real return + 3% inflation = 10% nominal return). The riskier the business, the higher the return demanded. This explains why someone might demand a shot at double- or triple-digit returns on a start-up due to the fact the risk of failure and even total wipe-out are much higher.  To learn more about this topic, read Components of an Investor’s Required Rate of Return.
  • Real Estate: Without using any debt, real estate return demands from investors mirror those of business ownership and stocks. The real rate of return for good, non-leveraged properties has been roughly 7% after inflation. Since we have gone through decades of 3% inflation, over the past 20 years, that figure seems to have stabilized at 10%. Riskier projects require higher rates of return. Plus, real estate investors are known for using mortgages, which are a form of leverage, to increase the return on their investment. The present low-interest rate environment has resulted in some significant deviations in recent years, with investors accepting cap rates that are substantially below what many long-term investors might consider reasonable.

Keep Your Expectations Reasonable

There are some takeaway lessons from this. If you’re a new investor and you expect to earn, say, 15% or 20% compounded on your blue chip stock investments over decades, you are delusional. It’s not going to happen.

That might sound harsh, but it’s important that you understand: Anyone who promises returns like that is taking advantage of your greed and lack of experience. Basing your financial foundation on bad assumptions means you will either do something stupid by overreaching in risky assets, or arrive at your retirement with far less money than you anticipated. Neither is a good outcome, so keep your return assumptions conservative and you should have a much less stressful investing experience.

What makes talking about a “good” rate of return even more confusing for inexperienced investors is that these historical rates of return — which, again, are not guaranteed to repeat themselves! — were not smooth, upward trajectories. If you were an equity investor over this period, you suffered sometimes jaw-dropping, heart-pounding losses in quoted market valuation, many of which lasted for years. It’s the nature of dynamic free market capitalism. But over the long-term, these are the rates of return that investors have historically seen.


The Gold Invisible Hand: Wealth Protection

Between 1999, when gold bottomed at $250, and the 2011 peak at $1,920 there was only one major correction lasting 8 months in 2008. The ensuing correction from the 2011 top at $1,920 of almost $900 seemed to take an eternity until it finally finished in December 2015. During those four years it was always clear to me that the uptrend in the precious metals was still intact although I must admit that I did not expect a correction of that duration.

But after a long life in markets, patience becomes a virtue that is absolutely essential. If your investment decisions are based on sound principles at the outset, there is no reason to change your opinion because the market takes longer to accomplish what it must do.

And as we know, the financial system almost went under in 2007-9. With $25 trillion of printed money, credit and guarantees the system was given a temporary stay of execution. But these $25 trillion was just the initial package. Since 2006 global debt has increased by $90 trillion plus unfunded liabilities and derivatives of several hundred trillion dollars. This explosion of debt has confirmed the risks that we saw already back in 2002.


Now entering 2017,  the financial system seems that cannot survive intact. Global debt has gone from $20 trillion to $230 trillion, a more than 10 times increase in the last 25 years and none of this debt can be repaid with real money. Governments and central banks have totally run out of ammunition. In their desperate attempts to save the financial system, they have manipulated every single market and financial instrument. They print money, they set false interest rates (now negative), they buy their own debt, they support stock markets and they also sell gold in the paper market.

All of this action or deceitful manipulation is just creating bigger bubbles that will eventually lead to a total implosion of the financial system and all the bubble assets such as stocks, bonds and property.

In addition, bank stocks in Europe are now showing all the signs of going to zero. Most major banks are down 70-90% since 2006 and many have fallen 25% in the last few days. The European banking system is on the way to bankruptcy. And many U.S. banks like Bank of America and Citigroup are showing the same signs. The coming months will be extremely volatile and disruptive in world financial markets.

The problem is that no one is prepared for the coming shock. The world believes that the Shangri-La state that central bankers, led by the Fed, have created in the last 100 years will last forever. A privileged few have accumulated unreal wealth. Most normal people in the West believe that they are better off, not realizing that their higher standard of living is based on government debt and deficit spending as well as a massive increase in personal debt.

But before the financial system implodes, there will be the most massive money printing program that the world has ever seen. They will need to print money in a final and futile attempt to save the bankrupt banks. With $1.5 quadrillion in derivatives outstanding, the printing presses (or the computers) will run hot. With Deutsche Bank’s derivatives at $75 trillion and JP Morgan at almost $100 trillion, only those two banks need support at 2.5 times global GDP.

It is of course not just the financial system that will need support. Governments will run out of any significant tax revenue and will need to print money for all their expenditure. Remember that Japan, for example, already today prints 50% of its annual expenditure.

All of this printing will result in global hyperinflation of at least similar proportions to the Weimar republic or Zimbabwe with the dollar, euro, yen and pound all reaching their intrinsic value of zero.



Throughout history, gold (and sometimes silver) has been the only money that has survived. Every paper or fiat currency has always been destroyed by governments through deficit spending and money printing. In the last 100 years all major currencies have declined 97-99% against gold. It is virtually guaranteed that they will go down the final 1-3% to zero. But it must be remembered that this decline means a 100% fall from here.

This final decline of the currencies will be reflected in the gold and silver prices. I am still convinced that we will see gold at $10,000 and silver at $500 and possibly in the next 5 years and that those levels will be reached even with normal inflation. But if we get hyperinflation, we could add quite a few zeros to the price.

So from a wealth protection or insurance point of view, it is absolutely essential to own gold and some silver. And although I said that precious metals are primarily for a privileged few, this is actually not the case. In India, virtually everyone owns gold and many of the Chinese save in gold. Any ordinary person can buy, say, one gram gold or more a month. One gram is $40, which many people could afford to save monthly.

Gold at $1,330 and silver at $19 is a bargain. But the metals will not stay at these low levels for very long. With the correction finished and the next uptrend in place, we could soon see the metals accelerate very fast.

The problem is that there is very little physical gold available in the world and we have reached peak gold from a production point of view. With the massive outstanding paper gold position in the system, we will soon see the paper shorts running for cover. Once demand increases, it can only be satisfied by much higher prices.