What does a conservative investor do?

First let me say that this is not meant to be specific advice for anyone – your situation is unique and you should consult with your financial advisor.

I have been an active, successful investor (or maybe trader) for many years – and at first when the market turned, I wasn’t sure what to do. Mostly I decided some serious education was in order. So I went to a class put on by SRI, a coaching company run by Steve Linder, who is a very, very successful individual.

The class was DMAS, and teaches trading based on market psychology rather than fundamentals. It doesn’t really use Dow theory, but is a technical trading methodology. Of course, I was primarily a value investor – it was really easy to make money, being a value person, for a long time. Doesn’t work so well now! So this class was my first look into technicals. Since then, I have learned more about Dow theory, Elliott Wave (really interesting stuff!) but the most interesting part of my education was reading The Fourth Turning by Strauss and Howe.

This book describes how generations of people move through economies and how they affect the economy. If you think about the baby boomers, they correlate pretty well with the US economy and the seasons – when the boomers were working really hard, young, super entrepreneurial, having their ‘summer’, we had the dot com boom and the internet explosion; as they moved on, aged, came into the ‘fall’ of their lives, we had the housing bubble. What’s next? If you buy into this theory, as the boomers age and come into the ‘winter’ of their lives, they are going to need health care, assisted living, etc. So there might be a bubble in this area.

The book was written more than 10 years ago, and it is a pretty accurate prediction of today: “… neither they nor their nation will have saved enough [money]. From this sudden realization could issue the end game of Boomer life-cycle consumption and savings habits: the Great Devaluation.”

Prophetic words indeed. The entire book is worth a read, though it can be a bit heavy at times. The interesting part to me, is that the predictions made are in alignment with Elliott Wave theory, at least my meager understanding of it.

So knowing this, and knowing what we do about the dollar, and the credit crisis, and the [divine] intervention of the new administration, what things should we think about? First, about energy. Oil is going to be around for some time, in spite of solar, wind, and other alternatives. Until someone invents a Zero Point Module, that is. And, I think we are on the declining side of the supply curve. So oil and gas prices are ultimately destined to rise; I think they are artificially low now, just as they were artificially high.

Second, about currency, credit, and gold. The price of treasuries is very low. This is because they are viewed as the ultimate liquid safe harbor; if and when people’s faith in the ability of the government to make payments on the debt comes into question, or when other investments once again provide a better risk/reward, but really when people are no longer as frightened as they are now, then the demand for treasuries will fall and the rates will rise. This will be the start of a huge rise in interest rates for everything. Right now, home loans are at an all time low rate. They will probably go lower, but ultimately they will rise, and I think they will rise dramatically. We are presently in a deflationary period – lower demand for things lowers prices. Housing is a large part of it. It is evidenced by a strong dollar. When this deflationary period bottoms, I think we will have pretty strong inflation, and the dollar will plummet as faith in the currency falls. Inflation will mean that our purchasing power, as measured against the value of goods on the world market, will fall. So we must hedge against this. Buying gold is likely a good idea, but I would wait until the current deflationary trend finishes. [I never try to call bottoms, being close is good enough].

Third, biotech, assisted living, and health care in general. The huge population of aging boomers will demand it. And Lastly, education:

Earlier this week I gave a talk to my investment club about something called Spiral Dynamics. It is a framework that can be used to understand where people are in their lives, where businesses are in their lifecycles, and in general where social groups are in their evolution. To move from an earlier, less expansive stage to a later, more expansive stage, change must occur. This change is often required because the strategies that have been employed in the past, are no longer adequate for the current (new) situations. So, the person, business, or society must evolve; new strategies must be found for coping with the new situations. These changes can come through revolutionary change, wherein the pain of the current situation becomes so severe as to force change to occur; and with this, the required growth is painful. Or, change can be evolutionary, wherein we see that things are not working and look for new strategies ourselves, through business consultants, coaching, or other methods.

Clearly we are living in different times than we were just a year or two ago. The smartest of us probably saw it coming, but most of us had no idea it would be like this. So we have to find new ways to live; we must adapt, companies must adapt or go the way of the passenger pigeon; our society must adapt or it could fail as well. The fear of this is so powerful and pervasive that people are strongly seeking to improve themselves and find new ways to cope; so educational companies are an interesting investment option.

In a nutshell: I like biotech and healthcare; I like educational and coaching companies; and when the deflation pressures ease, I like gold and energy, in particular Canadian oil and gas trusts.

I also think that it is very important to measure your capital against world purchasing power rather than against itself (ie. What does my worth look like in Euros or Singapore dollars as compared to how many dollars do I have today?)

A friend of mine who is a money manager established something called the Stable Currency Index, which is a ‘basket of currencies’ which attempts to provide a benchmark against which you can measure your wealth.

Contact me if you would like more information about the investment club!

-PLH