Making good investment decisions is both a science and an art.
You can, for example, track the performance of investment sectors, fund managers and even investment advisors with precision. You can see their successes and failures. But past performance, as we all know, is no indication of what will take place in the future.
You can also calculate with reasonable precision global money flow, governmental and personal debt, unemployment, GDP, and so on.
But these data combined won’t tell you with any certainty what and when some macroeconomic event might happen.
The problem is twofold. The global economy is so big and complicated, and humanity’s response to economic shifts is equally complex. And this is to say nothing of “black swans” – unexpected and random events that cause major turmoil.
Which is to say that, for practical purposes, anticipating the future is impossible.
Still, as lowly investors, we must try. We must make regular buy, sell and hold decisions about investments we own. And we must make general judgments about the market in order to assess our holdings.
I’ve been in the financial publishing business for more than 35 years. In that time, I’ve worked with many of the best investment writers and followed their advice. I’ve even been able to see unpublished analytics that track their performance.
I’ve concluded that most haven’t a clue about the future. But there are some who are actually very good at making specific investment recommendations over periods of time ranging from five to 15 years.
There are also some who are very good at big-picture economic analysis. By very good, I mean they are able to write arguments that convince me, a skeptic.
Of those few that are good, about half are perennial optimists. The other half, of course, are perennial pessimists.
What I do is this…
I read the best big-picture writers I know – not to “know” what the future holds, but to get a sense of what might happen. Then, I look to the specialists for specific advice that would apply.
Around 2004, my favorite big-picture pessimists were predicting a collapse of the real estate market, the dollar and the stock market. They predicted a serious economic recession as a result of the insanely overvalued real estate market and the government’s love affair with paper money.
The optimists were saying not to worry.
I found the pessimists – especially my colleague and business partner Bill Bonner – more convincing.
So what did I do?
I did not sell all my stocks. But I did sell off any stocks I felt might not recover from a major economic collapse.
I did not sell all my real estate. But I sold most of the real estate that wasn’t generating a rental income that would give me more than 5% returns even if rental prices dropped 25% or 30%.
And, for the first time, I started buying gold.
To keep things simple, I bought gold bullion coins. Over the course of two or three years, I bought gold every month until I had a tidy sum stashed away.
By tidy sum, I mean it was enough to support my family in the event of a sustained depression. But I did not bet the farm on gold prices rising because I had no certain knowledge of whether gold prices would go up or down.
My guess is that gold coins at that time came to represent about 5% of my net investable wealth.
As it turned out, the pessimists were right. The economy went south, the stock market followed it, and the price of gold soared.
My stock portfolio went down but not terribly because I had nothing but what I call “legacy” stocks. I owned companies like Coca-Cola and Nestlé that I was pretty sure would do well even during a serious recession.
I didn’t sell those stocks because I had a long-term perspective. Now, of course, I’m glad I didn’t sell. Until the recent pullback in the stock market, they were trading at near-record highs.
And although the theoretical value of my real estate holdings went down, I kept making good income from the properties I kept.
Making the adjustments I made – reducing my exposure to risky assets, focusing on income and buying gold as insurance against disaster – was about hoping for the best but preparing for the worst.
The collapse of the real estate bubble made millions of middle-class Americans poorer and thousands of bankers, brokers and other members of the financial industrial complex richer.
It amounted to a multitrillion-dollar transfer of wealth from Main Street to Wall Street.
In a genuinely free market, a financial recession has a positive effect. It kills off unhealthy businesses and financial practices and replaces them with better ones.
But the U.S. economy is not a genuinely free market. It is a highly manipulated marketplace where large industries and businesses persuade local, regional and national government officials to pass laws that benefit them.
On top of that, you have a political environment that practically forces politicians (Democrats and Republicans) to continue to spend money we don’t have. Right now, the U.S. national debt is sitting at $21.7 trillion – and it’s expected to increase another $10 trillion over the next 10 years.
All of which is to say that, despite what you sometimes hear from the financial media and bullish investors, the U.S. economy is still very much in danger of another major financial collapse, possibly one much larger than the “Great Recession” we’ve been living through since 2008.
In next Wednesday’s column, I’ll tell you what you can do to protect yourself and your wealth.