Back Four investment pitfalls and jackpots to match
D. Murali
| "The overall market will offer poor returns," and, dangerously, "some segments will suffer devastating losses." |
Stephen Leeb's recent book The Coming Economic Collapse was featured in the E-Dimension column last week (`Oily skid is just dangerously around the corner,' Business Line, April 8).
You may fret that exploration for newer oil sources, costly wars and fuel taxes aren't areas where lesser mortals have much say. Yet, you can pay attention to making money even if oil were to soar beyond $200 per barrel, with Leeb's help. For, as chapter 13 declares, `Your personal choice: Insane wealth or pitiful poverty.'
As individuals we can take steps to safeguard our financial situation during hard times, assures the author. "Certain types of investments will benefit tremendously from inflation and produce phenomenal returns. The small percentage of investors who adjust their portfolio now to favour these investments — while reducing exposure to the most vulnerable sectors — are likely to become insanely wealthy."
The next 10 years will be very much similar to the 1970s, predicts Leeb. Those were the days when making money was difficult, in the face of runaway prices and failing investments. The first pitfall is cash, because inflation will erode the value of money. Including what you hold in savings bank, where interest rate is lower than inflation rate.
Next pitfall is bond, because as inflation rises, bond price falls. "The trick to remember about bonds is that price and yield are like two ends of teeter-totter." Thus, when you want to sell your bond, "the purchaser will want compensation for the increase in inflation." A tip from the author is TIPS (Treasury Inflation-Protected Securities), as the one bond worth holding. Is there something similar closer home?
Biggest trap!
Third pitfall is stocks, `the biggest and most dangerous trap.' How? "Because of the tremendous gain stocks made during the 1990s, most people have come to regard the stock market as the best, or possibly the only, investment vehicle. Most investors today put too much faith and money into a diversified portfolio of stocks." Resist such groupthink, exhorts the author. Pray, why? When inflation rages on, "Only certain segments of the stock market will do well." On the contrary, "the overall market will offer poor returns." And dangerously, "some segments will suffer devastating losses."
The author's first recommendation for the near future, therefore, is to forget about diversifying among all sectors. "Stay away from index funds, large-cap funds, and any other vehicle that mirrors the broad market. They will only bring you closer to the poorhouse."
Vulnerable US stocks today, according to the author are Avon (cosmetics), Kellogg (food), and Wal-Mart (retail). More vulnerable are airlines and chemical producers "whose revenues and profits are inversely related to energy prices."
Pitfall # 4 is small-cap.. Leeb reasons that small companies can't grow their earnings rapidly unless they access the world's fastest-growing consumer markets of Chindia (that is, China and India). Looks like Indian companies may end up fighting only with the multinational giants, because the smaller-cap companies of the developed countries may continue to depend on their own mature and slower-growing economies.
Gold, oil and real-estate
There are four investment jackpots that the book mentions, to help you make money in the coming collapse. These are: Gold and gold shares; oil and oil shares; real-estate; and Chindia. "Gold is the quintessential inflation hedge," explains the author. `Golden opportunity' is the promise of acceleration in the yellow metal's bull phase. "Increasingly, financial advisers will recommend that their clients put 5 per cent to 10 per cent of their savings into inflation hedges, such as gold and other precious metals. That buying pressure will force the price of gold higher rapidly."
Since at the peak of gold prices, in 1980, "all the gold in the world both above and below ground (approximately 200,000 tonnes) was worth about $5.5 trillion, equivalent to around five times the value of S&P 500 at that time," Leeb calculates that today's value of gold should be $2,800 "to be on par with its value to stocks in 1980." Far below the 25-year high of $604 an ounce that gold touched on Tuesday!
The final chapter in the book is on `the next hot investment sector'. Hey, what's that?
Catch up with Leeb!
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