On Worrying and Losing Sleep

I had not intended to write another letter this soon, but circumstances convince me of a need for one. (Wow! I just noticed the date. It is a coincidence, but maybe appropriate). A few people have recently asked me, “Are you nervous?” “Are you worried?” Have you lost sleep lately?” My consistent answer has been, “No, I have experienced no anxiety and not lost a wink of sleep.” But honesty compels me to confess that it has taken me fifty years to reach this condition. On several occasions like this in the past I died a thousand deaths emotionally. This letter explains what has made the difference. I pray it will be helpful to some of you.

First, and most importantly, is the spiritual component. About fifteen years ago I came to understand this truth given in Scripture: God is in control and He has my best interest at heart. One of the things He decides is my standard of living on this earth, the amount of material wealth He will entrust to me to manage for Him. Interestingly, He allows me to decide my standard of living in eternity. It is based on the contribution I make to His kingdom with the assets he entrusts to me. I have complete control over that. (See chapters 1 and 7 of the Biblical Economics book on the web site if you want to pursue this subject).

Second, there is the economic (portfolio management) component. It is based on what I have learned from the few experts I believe God has led me to, as explained in Letter 3. They have taught me how to allocate my portfolio to weather any economic scenario (except the end of the world). What you will read below is based on what they are doing and saying. 

My portfolio has taken a sizable hit the last two months. Accurate details will be forthcoming in the end-of-the-month updates. There is a good possibility 2008 will be a down year for me. When I view that in the context of the eight straight up-years preceding 2008, averaging a very good return, I am not concerned. I am emotionally prepared for a down year, which sooner or later, most of us will experience. I would suggest you re-read Letters 16, 18 and especially 19, written early in the year, and which prepared me for what is happening now.

Before discussing some of the details of the current investment environment, I want to give you a brief summary of why I am at peace and not losing sleep over my recent portfolio decline.

1. I have no debt.
2. I am 35% in cash, and only 17% in common stocks. If my stocks went to zero, it wouldn’t be the end of the world.
3. I am 45% in tangible (non-paper) assets which are in my possession and are no one else’s liability.
4. I am not forced to sell anything.
5. We are in a long term commodity bull market which is not more than half over despite its current intermediate correction. New highs lie ahead.
6. If 1 thru 5 are true, there is no reason to worry, and inaction is the best option for the foreseeable future.

Now let’s talk about some details.

Investment psychology you must understand
(How the experts consistently win and why the average investor loses)

We are in a powerful secular commodity bull market which is probably not more than half over, and likely capable of multiplying capital many times over its full duration. Yet, not only will most investors not get anywhere near the full gain, most will actually lose money because their decisions will be dictated by their emotions (fear and greed). Wealth will flow from the average investor to the few Rogers, Buffets and Mayburys of the world.

The great investors spend most of their time doing nothing, waiting for prices of investments with intrinsic value to fall to super bargain levels (“hated assets”); then they buy and hold through the entire bull market…until the crowd is buying feverishly, with commodities on the covers of leading magazines, etc.

I listened to a Rogers interview a month or so ago in which he was asked about his investment in oil. Oil had topped at 147 and dropped to 120 or so at the time. The interviewer asked him if he were buying oil. His answer: “No, I don’t buy things at or near all time highs.” Then he was asked whether he had sold near the high, and his answer was: “No, I won’t sell my oil until 2017, when it will be higher than anyone would imagine today. The big surprise will be how high it eventually goes and how long it stays high.” Then he added the most important information in the interview, “If it falls far enough in this correction, I will buy more. In the nine years of this oil bull market, there have been three corrections between 40% and 50%, and we will undoubtedly have more of them.”

As this is written, oil is 102, down 31% from its all time high. It could easily fall to 80 or lower, but we don’t know if that will happen in this correction. What we do know is that 80 is a great value for oil. If we get that opportunity, the blue chip oil and gas companies would be real bargains.

Rogers has said the same thing about gold and silver. He owns both, doesn’t plan to sell them until many years from now, but said he would buy more if they fell far enough. As this is written, gold is down 28% from its high, but silver is down 50%. Although I have not heard him say, I would bet that he is buying silver now.

Why not trade these major swings you might ask. I know of no way to consistently profit from short term trading, and my experts tell me they don’t either. They don’t sell corrections (weakness), and don’t buy upward break-outs (strength). They don’t use stops. That is another form of selling weakness. They wait patiently for the long term bull to end. It always does. Human nature will assure it. Here’s one way to put it in a simple rule format: Buy weakness (but only extreme weakness which creates bargain values); Sell strength (but only the final strength which comes at the end of a bull market).

What's causing this commodity correction?
No one has all the answers, but the opinions I am getting from my experts suggest that the crisis in the financial stocks is exacerbating the fall in commodity prices. Speculators and traders are being forced to liquidate. Many hedge funds are being forced to liquidate because their investors want to cash out. Everything is being sold to cover margin calls and hedge fund liquidations. The sell-off has begun to feed on itself. The more selling, the lower prices go, which triggers more margin calls or more panic selling.

Gold has typically done well as a safe haven during severe bear markets, and I expect it will do so again as this bear market’s fury unfolds. The current sell off in gold and silver will continue until the demand for it exceeds the dumping by speculators. The good news is that physical demand has exploded at these lower prices. As has been widely reported, the US Mint ran out of eagle coins. Kruggerrands have become scarce worldwide and premiums for them have shot up. It’s been reported that physical demand coming out of India, the Middle East and Asia is unprecedented. Last week, Trade Arabia reported that demand for bullion in Dubai is soaring. The bad news is, we don’t know how much more gold the speculators have to liquidate.

Whatever the causes may be, the correction is not unusual. As I mentioned in Letter 30, the 1970-80 gold bull had two corrections in the 25% range, one of 35% and one 50%, all within a ten year bull which took the price of gold up 24 times. We don’t know how long it will last or how far it will fall. Things nearly always take longer than the average investor expects. The 50% correction in gold in the 1970s required three years to run its course. But what if the commodity bull were to reverse quickly and start up strongly? Follow Rogers’ advice. Ignore it and hold on. And here’s something we must never forget: For every seller, there is a buyer. Every time one of our investments falls to a lower price, someone buys it. And if in fact those investments have intrinsic value (such as our gold, silver and better mining company stocks), then the buyers are in the main the strong hands, and the sellers are the weak hands. After the correction is over, a larger portion of our investments are in strong hands who recognized the value and took advantage of the bargain prices, and who intend to hold them until the market recognizes their value and bids up the price.

What's going on with silver?
If you’ve been reading my letters, it’s no secret that silver is my favorite investment and receives a target allocation of 20% in my portfolio. I suggest you re-read Letter 8 which explains my reasons for this allocation. Silver has always fluctuated more (percentage wise) than gold, for several reasons, including its lower price, its much lower above ground supply, and its dual role as a “store-of-value” asset and an industrial commodity. See the very interesting article at http://www.silverinstitute.org/news/3q08.pdf . It is amazing how many new uses for silver have been discovered in the last five years. Yet silvers’ supply is finite and is being used up.

Having said that, the sudden drop of 50% from its recent high, at the very time when demand for physical silver is soaring, looks suspicious. In recent months several experts have alleged illegal manipulation of the price of silver on the Comex commodity exchange. I do not know whether this is true or not. I suggest you read the following article where this is discussed: http://news.silverseek.com/TedButler/1220986679.php  Ted Butler has done extensive research on this issue, and writes articles on silver every few days. They are well worth reading and may be found on www.silverseek.com.

It seems clear to me that two separate markets for silver have evolved: a “paper” market on the Comex, and a “physical” or “cash” market off the Comex (coin shops, silver refiners, silver miners, etc.) Beyond any question the physical market price of silver is at least $3 to $5 per ounce above the paper market price. Just check Ebay and you can easily verify that. So the first thing we should do is relax and realize that today our physical silver is worth $14 to $16 at a minimum.

Even if the alleged illegal manipulation is verified, my enthusiasm for the future of my investment in silver remains undaunted. Sooner of later the free market will solve the problem and the paper and cash markets will again trade within a few cents per ounce of each other as they have for years. Unfortunately, some investors participating in the paper market (silver futures) could sustain significant losses if, in the process of correcting the disparity, the Comex exchange becomes insolvent. I hope it doesn’t happen, but the possibility underscores the importance of holding physical silver in your possession.

A word about the US dollar
Have you noticed that for the past few weeks, everything has been going down against the dollar, precious metals, oil, other commodities, real estate…almost everything? This is an episode of deflation, very likely only temporary. Even as all these asset classes are falling in dollar terms, more and more dollars are being created by our non-elected officials (Bernanke and Paulson), as they take over and bail out one failing bank after another, on top of the already huge and growing budget deficit. How do you think this is going to end? Do you really think the dollar can continue going up in value? I don’t know the future, but my vote would be against the dollar and for real assets which are approaching bargain price levels.

What if my allocation were wrong now?
This is truly the $64,000 question, and a question I have no good answer to. As you can see from the Major Allocations section of the Jay’s Portfolio Market Values page, I made a major re-allocation in March, 2008. It turned out to be a very strategic move, for which I am grateful to God. That move is in part why I am not worried or losing sleep today. But if I had not made that move, what would I do today? Here’s the best general answer I can give: If I were under 30% cash and/or over 20% in common stocks (of any kind), I would begin making “measured” steps at periodic intervals toward the objective of reaching 30% cash and under 20% stocks, then following the strategy of the experts summarized above. That’s the best I can do. 

I know that some of you are worried and losing sleep. I know exactly how you feel. If I can be of help, I’d be glad to hear from you by email, then if necessary by phone. But realize that I have no perfect answer and I don’t know the future. I will be praying for all of you.

The final word
Since items 1 thru 6 listed above are true to the best of my knowledge, there is no reason to worry or lose sleep. Based on the advice of the experts I have confidence in, the investments I hold are becoming better values almost every day and are moving into stronger hands every day. It’s a great time to do nothing (investment wise), to stop watching the market every day and listening to all the confusion on TV and the internet, and concentrate on more important things, such as the ministry to which God has called me. Some day this correction will end, and my portfolio will begin recovering value. That’s not a guarantee, nothing in life is. But that is my expectation. If it doesn’t happen, the alternative will be even better. I have God’s promise on that. (Romans 8:28, Proverbs 3:5-6).