A Little Game of Old Maid, Part IV

By Robert Ringer

(The content of this series of articles has been taken from my 1982 book “Civilization.” So far, you’ve seen the case I made for getting out of paper money – and the reason most of your alternatives for trying to safeguard your capital are like black holes that simply suck it in and make it disappear. In the next section of the book, I examined several alternatives that at least give you a chance – an outside chance – of coming out ahead.)

Stocks

The biggest reasons the Capital Black Hole alternatives are automatic losers are that they are locked into a fixed rate of return and they pay off in paper. Thus, corporate stocks deserve the status of Capital Crapshoots, because they are not automatic losers like Capital Black Holes; they are only wild speculations.

With stocks, you at least have an outside chance ─ a very outside chance ─ of coming out ahead. Even though any dividends paid will not be sufficient to offset taxes and price inflation, what sets stocks apart from Capital Black Holes is the possibility for long term capital gains.

Because there is theoretically an unlimited upside potential, and because capital gains taxes are much lower than taxes on dividends and interest, it is conceivable that an individual could increase his capital in the stock market. I said there is “theoretically” an upside potential, because all the empirical evidence, as well as the current facts, point overwhelmingly in the opposite direction.

A number of studies, including David Dreman’s Contrarian Theory, have shown that a person might very well have equaled, or even bettered, the records of most stock analysts over the years had he simply chosen stocks by donning a blindfold and throwing darts at a stock board. You occasionally hear of a winner here or there, just as you do in a gambling casino, but almost never among the “smart money experts.” I personally have always been of the opinion that an individual has just as good a chance at Caesar’s Palace, and he can have a lot more fun in the process.

However, there is an even worse problem than the problems involved in trying to pick the right stocks at the right time: Even if you make a profit, you will be paid off in paper. I’m trying to be redundant: The objective is to get out of paper! The objective is to convert paper into hard assets (i.e., real assets, meaning assets with a utility value).

This point cannot be repeated often enough, because it is a completely foreign way of thinking to most people. Which is exactly why they are going to get caught holding the Old Maid. They keep thinking in terms of paper profits, forgetting that the increased volume of paper they hold is worth less and less each day.

The so called Dow Jones Industrial Average is the stock market’s leading delusional public relations tool. A 1,000 DJIA, or even a 1,500 DJIA, is pure fiction. The truth is that, adjusted for inflation, the DJIA is at about the same level as it was in 1913, when the infamous Federal Reserve Act (the legislation that made monetary inflation an easy proposition) was passed. As paper money is inflated out of sight, the stock market will go wild. The DJIA won’t have time to catch its breath as it sprints past 2,000, 3,000, 5,000, and higher.

But it’s nothing more than playing with numbers. The reason for its unprecedented upsurge will be the very reason that it’s an illusion: inflation of paper money. The problem is that when an investor wants to cash out, he will be taking back those same pieces of paper that the stock market rise will be telling him are worthless! Unfortunately, hard core stock market addicts will not accept this reality until it’s far too late. Make sure you’re not one of them.

Three Less-Risky Alternatives

There are three alternatives for getting out of paper money that, while far from sure things, are not nearly as risky as Capital Crapshoots, provided you know what you’re doing. For this reason, I refer to them as Capital Question Marks. These include so called collectibles, commodities, and real estate.

Like stocks, Capital Question Marks, which are not usually tied to a fixed rate of return, afford an owner the opportunity for long term capital gains. In addition, however, owners of Capital Question Marks hold real assets, not paper (or at least have the option of doing so). Nonetheless, Capital Question Marks are far from foolproof.

Collectibles

Collectibles encompass such hard assets as diamonds, gemstones, art objects, rare coins, and antiques. All of these derive their values from their limited supply and continuing, though fluctuating, demand.

What is good about collectibles, as a group, is that they fluctuate somewhat in line with increases and decreases in the value of paper money. They will, therefore, almost certainly at least keep pace with price inflation, and should there be an interim price deflation, the decrease in their dollar prices will probably be no greater than the temporary increase in the value of the dollar. An additional plus for the smaller collectibles, including diamonds and other gemstones, is that they are easy to hide.

What is bad about collectibles is that only a relatively small number of experts really know much about them, and you cannot become an expert in this area just by reading a few books. It’s a full time job, which means you can rarely feel certain about what you’re buying. Further, when you buy and sell in this market, you are usually dealing with that same relatively small number of experts, and thus you tend to end up buying retail and selling wholesale.

Another disadvantage of collectibles is that their markets are fraught with counterfeiting, which means that, unless you’re extremely careful, you could end up losing all of your capital. Finally, while the smaller collectibles are easier to conceal than other hard assets, they are also less practical in an emergency.

It’s pretty hard to buy a loaf of bread with a diamond that’s worth $25,000. For this reason alone, I believe that collectibles are primarily for the well heeled, and then only if they have access to the expert advice of someone whom they can totally trust.

Commodities

Commodities (and I am using the term loosely here to include not only the commodities traded on commodities exchanges, but also strategic metals) also tend to fluctuate, long term, in line with the value of paper money. The main problem with most commodities, however, is the impracticality of actually taking delivery on them. Where are you going to store 10,000 bushels of wheat? Or a carload of pork bellies?

And, if you insist on thinking short term, commodity trading is really an area for experts. The odds against even a well qualified investor making money in short term commodity trading are staggering – like putting money on one number at the roulette wheel. Occasionally, the payoff may be substantial, but the likelihood is that you’ll get wiped out long before it happens.

In Part V, we’ll take a look at a whole different kind of “Capital Question Mark” – real estate – an investment that has played a key role in bringing the invisible depression out into the open.

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Today’s Reflections:

Probably the most important point I made in this section of the book was that the Dow Jones would sprint “past 2,000, 3,000, 5,000, and higher” – but that whatever the number might be, it would be an inflationary aberration.

Now that the Obamacrats are totally drunk with power, it’s impossible to know what the stock market will do near, mid, or long term. As the economy continues to collapse under the weight of government spending programs, I can imagine the Dow dropping to 2,000 – or lower.

But as trillions of new dollars are printed in a frantic effort to pay for the wild spending programs that are coming down the road, who knows what might happen? Just keep in mind that even if the Dow were to go to 20,000 or beyond, the number would be even more fictional than it has been over the past twenty-seven years.

Either way – whether the Dow sinks to 2,000 or “rises” to 20,000 – having any money in the stock market, at least the U.S. stock market, in the future would be even more foolhardy than it was in the past.