Investing Without a Net

Larry LaBorde
Jan 26, 2009

It seems that many "investment professionals" would have you believe that there are only two investment classes, namely stocks and bonds. They talk endlessly about the mix of the two. That you should be heavier into stocks when you are young and heavier into bonds as you get older. Lately some are advising on moving more of your money out of "risky" stocks into the "safety" of bonds.

Niall Ferguson tells of the Cotton Bonds of the CSA in his new book, "The Ascent of Money" He speculates that the financial fall of New Orleans was a greater disaster than both Gettysburg and Vicksburg. During the War for Southern Independence the South tried to finance the war with bonds. It did not take long before all the capital in the South was exhausted. The South then faced the grim prospect of selling bonds while in the middle of an invasion. They convinced the small French firm of Emile Erlanger & Company to sell Cotton Bonds. These bonds paid a 7% coupon and a 20 year maturity. At that maturity they could be converted to cotton at pre war prices. After Union Admiral Farragut seized control of New Orleans in the spring of 1862 the South became even more desperate. During the war cotton prices soared four times higher than pre war prices.

The amount of cotton that entered English ports from the South dribbled to a mere 3% of the pre war amount. It was known as the cotton famine in the mill towns of England. In spite of the risk of running the Union blockade the price of the cotton backed bonds doubled in Europe. The CSA government also sought to withhold cotton in order to pressure England to enter the war in support of the South. Of course if the bond holders could not get paid for their coupons and the underpinning cotton was beyond their reach then the bonds simply become worthless. By 1863 the English mills had found new sources of cotton in India, China and Egypt. The cotton bonds became worthless and the South had to resort to printing money without backing. If only the South had been able to hold onto New Orleans for a few more months until after the 1862 harvest had been sent to Europe perhaps the financing would have been quite different. Who knows how it may have ended with the additional financing? At any rate, hyperinflation set in and the end finally came.

Many investment professionals are trying to steer investors into bonds but the investor must consider the ability of the entity that issues the bonds to repay the loan. Many States and municipalities are getting hit with both barrels right now. Income is down from sales taxes and property taxes while the demand for services such as unemployment and uninsured medical costs are rising. Expect many States and municipalities to default without massive federal revenue sharing interventions (which will only further strain the federal government's credit). Even the mighty Treasury bond may come under fire if foreign investors lose faith and not only quit purchasing them but start to sell them. So remember that "safe bonds" are only safe if the issuer can repay them with something of equal value at maturity (if it can repay them at all).

I am reminded of Ecclesiastes 11:2 "Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth." (KJV) While some give credit to King Solomon for Ecclesiastes others are not so sure. At any rate it is wise council. There are at least seven different investment classes: stocks, bonds, cash, real estate, commodities, precious metals and collectables.

With stocks it is more important to be invested in the correct sector than in an individual investment within that sector. Pick the right sector & diversify within that sector and you can weather any storm with confidence. Even though the market in general is doing poorly some sectors are doing much better than others.

Bonds are a promise to pay into the future. BEWARE long bonds in an inflationary market. If you think that inflation is set to rise beware of bonds denominated in dollars. Always consider a borrowers ability to repay a loan.

It is always prudent to keep some cash around. At least 6 months of living expenses in an emergency fund is a good idea. A bit outside the banking system is also prudent right now.

Many people are finding out the hard way that residential real estate is not an investment but a lifestyle expense. If most people are honest with themselves, over the long run their house just keeps up with inflation. By "real estate" I am speaking of income producing property.

Commodities have seen spectacular gains and drops in the past year. Copper, lead, coffee, corn, beans, sugar, wheat and crude oil are just a few examples. Ask any farmer and he will tell you that he speculates in commodities. Any time you plant in the spring and have no idea what the price will be in the fall you are keeping your eye on the commodities market the entire growing season. ETFs are now available for most commodities and make it easier than ever to invest in this market. If you have never invested here GO SLOW at first. Do not ignore this sector even though it can be dangerous. Just do your homework and wait for an opportunity for a small investment.

Collectables are as numerous an investment choice as the stock market. Almost anything goes in this class. If you choose to invest in a collectable make sure it is something you are passionate about and enjoy. Become an expert and spend time researching the item and the market for the item. Also ENJOY your collection.

Finally precious metals are the last investment class. My absolute favorite saying is, "Put 10% of your entire net worth into precious metals and pray that they go to zero." Does anyone ever purchase fire insurance and then get upset if their house does not burn down? Precious metals are financial insurance. If your precious metals lose value it normally means that the other six classes (or the other 90% of your wealth) are smoking hot and doing quite well. HOWEVER, when the other 90% of your investments are in the toilet it is that little 10% invested in precious metals that will save you and allow you to start over. Do not skimp and buy a cheap lifeboat with a storm on the horizon. If you feel the risk of financial strife is great right now move up to a 15 or 20% allocation in precious metals until the storm passes. Investing without a portion of your wealth in precious metals is simply INVESTING WITHOUT A NET.

Remember to invest a portion in all seven classes to one degree or another. King Solomon was indeed both wealthy and wise.

Larry LaBorde
Silver Trading Company
318-470-7291
website: www.silvertrading.net
email: llabord@aol.com

Larry lives in the occupied South [Shreveport, LA] with his wife Puddy and sells precious metals at the Silver Trading Company.

Larry can be contacted at llabord@aol.com. You can view his web site at www.silvertrading.net.

To order advance copies of Larry's new book, "Investing Without a Net" please click here.

321gold Ltd