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About a week ago it occurred to me that I could probably double my net worth without increasing my risk. But I wasn't willing to pull the trigger because even though I could identify no risk, maybe I was missing something. It turns out that my plan would have worked, but I waited too long and probably missed window.

The investment idea was this: Sell most of my municipal bonds and buy stock in Wells Fargo bank. This was before the recent run-up in the stock market. The reason this seemed like a risk-free investment is that there were only two real possibilities for the future. Either the banks would become healthy, through government action or market forces, in which cases their stock would zoom, or the entire world would plunge into darkness and no investment would be worth anything.

Generally when you make an investment choice there is an opportunity cost. You always have to wonder if the investment you didn't make would have been better than the one you made. But in the case of banks last week, either they would go up in value, probably by a lot, or the entire economy would collapse and no investment would have value. So while there was a huge risk to investments in general, there was no risk in moving money into Wells Fargo stock. It was all upside potential with no additional risk.

I wonder if there has ever been a time when such a clear investment choice existed.
 
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Mar 26, 2009
It seems to me U.S. Bancorp would be a much better choice for Scott's strategy, and it's also not too late.
 
 
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Mar 26, 2009
I suppose your hedge could be spending what time and money you have left !$%*!$% up to farmers so that one of them is likely to take pity on you (no contract required) before the rest of the mob... perhaps survival training wouldn't hurt either...

I was also thinking that since we have all become completely relient on the internet to manage our day to day lives... I think it might be smart to start printing out all the webpages so that when the electricity goes out we can still function.
 
 
Mar 26, 2009
Boozle: if the financial and social order has completely collapsed, and you've made a deal with a farmer to share his oasis of real value . . . who will enforce your contract with him? Don't you think he'll already have plenty of help to pick from, between his extended family and his neighbors? Do you really think he would let a stranger into his refuge, when most strangers are trying to loot his farm? With no lawyers and no policemen, who will uphold your claim?

There is no "hedge" against the end of the civilized world. If you want to be prepared for the end of the world, you have to go all the way. Buy a farm in a remote location, learn how to subsist without electricity or modern medicine, and be prepared to defend it against all comers. Better yet, convince someone in your immediately family to go do that, while you stay put, invest while the market is at low ebb, and cash in when things get better. That's what Dogbert would do . . .
 
 
Mar 25, 2009
Webgrunt et. Al, I invite you to look up Chris Martenson's crash course. How the government makes money is exactly that.
 
 
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Mar 25, 2009
Some people are about to get very rich, or more likely increase already substantial wealth. Whichever private investment company figures out asset pricing best is going to win the toxic asset lottery. These assets have a lot of value and with the government subsidizing the risk some hedge fund is going to make a mint. I don't know how to judge the quality of private investment firms beyond some standard performance criteria, but pick the right one and lots of money will be made.
 
 
Mar 25, 2009
Scott:

You might yet get your chance to try this investment. According to my Ouija board, we are currently merely experiencing a "sucker's rally". The Dow will go back to tanking in a few weeks, and continue (with more minor rallies) into next year.

So says the mighty Ouija board.

 
 
+1 Rank Up Rank Down
Mar 25, 2009
For situations like yours my boss often says 'there is no point betting on the end of the world.'

A concept that is strangely quite difficult to put into practice.
 
 
Mar 24, 2009
@webgrunt "Please tell me you're not one of those people who thinks the government generates new money to spend just by printing it... "

I think that you'll find that this is effectively what they meant by "quantitative easing" in the 300 billion bond buy back announcement.

It might be unusual, but these are unusual times. I read that the UK are doing it too. Printing more money is all the rage these days.
 
 
Mar 24, 2009
Scott, have you worked for walmart or something, because your strips are like wal-mart to a "T". One time our store manager thad a great idea of taking paper towels from the bathroom to save money. Too bad you couldn't do a comic strip about having parking meters in the associate parking only, or pay toliet paper dispensers (not pay toliets that way when you sit down they got you right where they want you). ten cents for 1 ply, 25 cents for 2-ply and you only get 5 squares.
 
 
Mar 24, 2009
My shot for an almost no-lose investment is to sell the current 5-year interest rate which is somewhere around 1.8%. How much lower can it go? Conversely, with the dollar losing more of its value each day, as soon as the ecomony picks up, so will inflation.
 
 
Mar 24, 2009
I just got out of a foolproof trade a couple weeks ago, it seemed so obvious.

I double shorted the Yen vs. the dollar back when the cross was about 90 yen/dollar. The trade had to be successful because due to investor flight to the yen, the yen had gained value over every other currency. This was killing Japanese companies that mainly export, due to smaller or negative margins for their products. Flight of money to Yen due to risk was pretty much at its peak and couldn't really get worse. If global economies recovered, the Yen would devalue. If the Japanese government decided to help their companies and increase their money supply, the Yen would devalue. If the Japanese companies couldn't make money and went bankrupt or made steep cutbacks, the Yen would devalue. And like clockwork, the trade made about 20% even while the stock market here was declining day after day.
 
 
Mar 24, 2009
A pretty easy investment right now would be to convert your US Dollars into Canadian ones. The Canadian dollar basically hinges on the price of oil, and that goes up every summer. It is at $0.81 US right now (1usd will get you 1.24 loonies) so buy in and sell when it tops out at par this summer. 24% in the next 5 months.
Alternatively there is a way to buy futures in currency, you can get more bang for your buck that way.

Whats the risk? As long as the printing press doesn't break there is no slowing down Obama, so the USD isn't going up. Also the odds of the Canadian dollar staying where it is are the same of oil staying where it is.
 
 
Mar 24, 2009
Boozle: you rock. Till I hit your post, I felt that people were listening to each other less and less here, and completely missing Scott's point (Phantom II being the most out-there).

Scott's observation is interesting, especially because it implies a solution to this jam: if you stand to lose everything anyway, you might as well invest in something. Desperate investment won't lead to prosperity, but it will make gears move that will otherwise stop.
 
 
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Mar 24, 2009
I read your blog every day and even though the economy is awful right now, somehow you make a joke of it and it makes me feel better. :) In one of your next blog posts could you please comment on this idea of legalizing all drugs: http://www.cnn.com/2009/POLITICS/03/24/miron.legalization.drugs/index.html
 
 
+2 Rank Up Rank Down
Mar 24, 2009
Scott - Please publicly acknowledge Phantom ii's supreme intelligence so that maybe he will stop with the boorish soapbox lectures. Ignoring him doesn't seem to work...I think he just wants or needs the attention...on second thought, recognizing him would only fuel him further to type more crap. As Gilda Radner would say, "Never mind!"

Just a thought, but buying SH and selling calls against it on big days up is nearly a fool-proof strategy unless you actually believe the market is going up...
 
 
Mar 24, 2009

That's precisely what I've being doing through this crisis, investing in a soundly managed and efficient bank with low multiples. For me it was a clear buy signal as people are running scared from every bank without further thinking.

Anyway, if you don't feel confident with stocks, not buying was probably the smart thing to do. Also you may want to notice that a positive development for wells fargo doesn't necessarily indicate that it would have been a good investment in the first place, you have to think of probabilities, a particular outcome tells you little if you're understanding of the sitution is limited.
 
 
+1 Rank Up Rank Down
Mar 24, 2009
Phamtom: I don't think you understood the point of the post... perhaps you didn't study enough economics in school... Let me give you some simple information that you missed.

When deciding on an action you should compare it to the best alternative not simply to the status quo (the opportunity cost of the action). Scott was saying that it was an unambiguously good investment since if the banks failed chances are that everything else failed too; but if we turn this thing around the banks will be the largest winners. Hence comparing the expected return on the banks to the expected return on other investment posibilities should have been favourable. He perhaps failed to appreciate the risk of nationalization which would wipe out the shareholders of banks and has already been mentioned in several other comments.

I find your last paragraph particularily misplaced since Scott's historic philosophy on investing has been anything but embracing speculation (buying the index and making the most of tax incentives as I recall).
 
 
Mar 24, 2009
Tell me again, Scott. Your major was economics, right? I guess that shows the difference between economics and investing. Let me give you some simple information that you missed in school.

First, any purchase of anything for an anticipated short-term gain is not investing, it is speculating. You should only speculate with money that you can afford to lose. That is because, over time, you will probably lose more than you gain. This is because of the emotional component inherent in speculation: you make decisions based on emotion, particularly following a speculation where you have guessed wrong.

You'll notice you're only talking about the money you would have made, after the fact. This is because you well could have been wrong. Companies don't have to go out of business, nor the economy collapse, for a stock to decrease in value, even counter to the trend for other businesses in its industry.

Financial "gurus" make big bucks this way. They tell people after the fact why "investment X," which they said they told you to buy, was in fact a great move, if you just would have listened to them. Of course, they don't mention "investments Q-W" that they also recommended that tanked. And people, responding emotionally, only think of how much money they would have made with X, and mimimize the money they would have lost with Q-W.

The clash of academia with reality is always interesting. This is why you should run screaming from any politician who tells you how smart they are, but have no real-world successes to back that up. Same with financial advisors. Same with cartoonists with an economic degree. I rest my case.
 
 
Mar 24, 2009
When the British government rescued banks, it gave them money in exchange for shares in the bank. So where the government takes a 50% share, the other shareholders now own all own half the percentage of the bank they owned before.

With Northern Rock, the government took over the whole thing, and the shareholders were left with virtually nothing.
 
 
+2 Rank Up Rank Down
Mar 24, 2009
If I understand your logic you are saying that investing in the bank had no real downside since if it failed chances are the economy has totally collapsed and your municipal bonds will also be worthless. Basically you are saying that you can't hedge against complete economic collapse.

You can in fact hedge against economic ruin... and it isn't by buying gold as everyone keeps saying. If you seriously want to hedge against the worst case scenario you should buy a farm so that you can be self sufficient when your paper money (and gold bullion) stops working. Hmmm... makes me wonder if farmers could sell some sort of insurance contract against a total meltdown (i.e. you get to come help till the land in exchange for food if we end up returning to a barter system and no one wants to trade food for comic strips).

 
 
 
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