Investment strategies for an irrational world

January 16, 2008

Everyone should invest their money, the last thing you want to do in an inflationary cycle is depend on cash as a store of value. But if you’re not prepared to work hard than you should leave decisions up to someone else. I would recommend periodically seeking advice from an educated friend or family member to keep you on track – but verify with a few sources, relying on people who have little knowledge but sound authoritative can get you in trouble. Stock brokers are generally useless, their only function is to deliberately complicate the entire process and intimidate you into feeling as though you need them.

My philosophy is simple, understand long term trends then wait for the herd of morons to react by selling every piece of negative news while you happily scoop up the bargains. This of course assumes two things: (1) you get the long term trends correct, and (2) you have a job and new money is available to expand your portfolio.

Precisely where you invest your money can vary greatly. Within the industry you choose, you should be biased towards strong dividend paying stocks and you shouldn’t focus on one company. When you invest in equity you are susceptible to mismanagement that could have no relation to the underlying trends you have identified, so you need to spread the risk.

Furthermore, there is no longer a need to bet on any management team. Invest in an index. You can also invest directly in commodities. Instead of only buying a gold mining company, also but a gold ETF. Instead of only buying a crop producer, also buy an agriculture ETF that invests in wheat and corn futures. You get the idea.

However, the most important thing to take into consideration is currency. Never be fooled by rising nominal asset prices if inflation is eating away at your cost of living. When the value of each dollar is reduced it doesn’t always matter if you have more of them. If the dollar is declining, seek income from foreign companies and invest in commodities with limited supply.

Always remember that all money starts at a bank and ends at a bank. Every dollar created anywhere in the world will eventually be invested somewhere. Unless central banks are abolished and people start hoarding gold in their personal vaults, the markets will always tend to the upside.