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Two Competing Investment Strategies based on Two Opposing Premises

06 May

Savings [courtesy Google Images]

Savings
[courtesy Google Images]

A recent article in Mish Shedlock’s Global Economic Analysis declared in part,

 

“With central bankers globally suppressing interest rates, the [creditors’] search for yield elsewhere is on. One of the places investors have turned is speculative junk bond offerings.”

 

Here’s where I differ from such investors.  Those willing to invest in junk bonds believe it’s possible to reliably invest their wealth (fiat dollars) into some form of paper debt instruments (stocks, bonds, junks bonds, etc.) and recover an acceptable “yield” on their wealth.  Because the world’s central banks have reduced interest rates on what would ordinarily provide a positive yield (in bonds, for example), some investors seek “junk bonds” because they pay higher rates of interest.

From such investors’ perspective, they need only search though the various paper investments options until they find one that pays a positive rate of return.   If the option that pays the highest reasonable rate of returns is junk bonds, then they’ll invest in junk bonds.  If the option that pays the highest rate of return is stocks, they’ll invest in stocks.

The fundamental premise behind their investment strategy is that the paper monetary and paper debt-based instrument “system” will survive, no matter what.  Yes, they know they could lose some or all of their wealth if they invest/bet on a particular junk bond that turns out to be worthless.  But they don’t imagine or believe that the entire paper monetary system—including US dollars, stocks, bonds, bank accounts, pension plans and junk bonds—could suffer a systemic collapse where all paper financial instruments suffer sudden, substantial (or even complete) losses of value.

I, on the other hand, base my investment strategy on an opposite but fundamental premise:  I believe that the entire paper monetary system is fundamentally flawed and therefore destined to suffer a slow (or possibly sudden) systemic collapse which will destroy 80% to 90% of all paper wealth.  I don’t know when this collapse will take place, but when it happens, virtually everyone who chased “yields” in the paper markets will lose their assets.

Therefore, my investment strategy is not based on chasing “yields”.  My investment strategy is based on preserving the assets I’ve already earned.

Those who invest in junk bonds pursue yields.  These investors are looking for a net gain of, say, 5% per year.

I’m not looking for a 5% annual gain.  I hope to make a gain (and far more than 5% per year), but I don’t covet more wealth.  I’d like to increase my wealth, but my primary objective is to preserve whatever wealth I’ve already earned by investing in precious metals that can’t be destroyed if the paper monetary system collapses.

Thus, we see two entirely different investment strategies based on two entirely different presumptions concerning our economic future.  Those who invest in junk bonds believe the “system” is solid and sure to survive.  They therefore seek to increase their wealth.  Those (like me) who believe the monetary system is in peril and certain to decline (slowly or suddenly), therefore seek to preserve our existing wealth.

If wealth preservation is your primary objective, gold should be your primary preservation vehicle.

 
8 Comments

Posted by on May 6, 2014 in Gold & Silver Coin, Investment, Values

 

Tags: , , , ,

8 responses to “Two Competing Investment Strategies based on Two Opposing Premises

  1. Mike

    May 6, 2014 at 6:57 PM

    I’m in agreement Alfred…right on target regarding preservation of wealth and the dangers of saving in currency, bonds or anything else where value is based upon currency units. The best function of gold is as a store of value and it can best do that if it does not have the value set by government via a gold standard. That which is used for the preservation of wealth does not need to be, and IMHO should not be, used as currency.

    Anything designated as currency by government will be abused by that government if possible…when the people use currency for their savings it is a forgone conclusion that the government will become an abuser. Our only protection is to save in something what does not depend upon someone/something else for its value.

     
    • moon

      May 6, 2014 at 10:47 PM

      Hi Mike. How are your watermelons coming along?

       
      • Mike

        May 7, 2014 at 7:31 AM

        Great…I might have enough soon to trade one for a warehouse full of those beanie babies. I can’t use watermelons for kindling, but beanie babies, maybe.

         
      • moon

        May 7, 2014 at 7:50 AM

        Aw, man, don’t disrespect my Beanie Babies before you hear my pitch.

         
  2. Toland

    May 6, 2014 at 7:36 PM

    Is a simultaneous collapse of the entire “paper monetary system” all around the world a likely occurrence? Or is it more probable that some paper currencies will gain in value despite, or even because of, the downfall of others?

     
  3. moon

    May 6, 2014 at 11:06 PM

    “Investing” in paper reminds me of the redneck embezzler who skipped town with all the accounts receivable.

     
    • Mike

      May 7, 2014 at 7:35 AM

      Much like those who buy GLD or other paper gold. Hey Moon, this may mean I’m not a redneck…are your trying to ruin my day?

       
      • moon

        May 7, 2014 at 7:52 AM

        Sounds as if you may have redneck tendencies as I do. I hope your day is great!

         

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