Happy Thanksgiving!

Happy Thanksgiving! Here’s an interesting cartoon on the topic.

[Thanksgiving In Washington]

[source: NaturalNews.com]

There’s certainly one group of people who have a lot to be thankful for this Thanksgiving: The white-collar criminals in Washington who are looting the U.S. Treasury and stealing trillions of dollars from taxpayers.

That’s what this financial bailout really is, of course: A grand, desperate swindle that seeks to wring every last cent out of the U.S. dollar before the coming currency collapse. A collapse of the value of the U.S. dollar is coming soon. Just do the math: The end result is obvious. It will either be runaway inflation that leaves dollars virtually worthless or the abandonment of the dollar by the U.S. government and the adoption of a new currency (the Amero?) at confiscatory exchange rates that will wipe out the savings of most Americans.

You are witnessing the downfall of the American empire, and the Federal Reserve — a private bank that was stupidly handed the power over our nation’s money supply — is heaping new debt onto old debt, sending the U.S. into a tailspin of bad money from which it will never emerge. Consider this: It took the United States over 230 years to accumulate $5 trillion in debt. That national debt has now roughly tripled in the last 60 days. Officially, the national debt is now about $10 trillion, but with the Fed just announcing another $7 trillion in bailout money, we’re talking about a $17 trillion national debt that nobody even has a clue how to pay back.

The very idea that we can pay off bad debt with more bad debt is so utterly stupid in the first place, it could have only been dreamed up by politicians. It makes as much sense as paying off one credit card by taking out a cash advance on another credit card. That’s not a financial bailout; it’s more like a financial tar pit. But it’s exactly what the United States of America has decided to do.

Read the rest of the article here.

CitiGroup: Gold To Hit $2,000 – Wars To Follow

Now that the Federal Reserve has bailed out Citigroup, it’s back to business as usual. Having personally helped destabilize the world financial markets, they’re now predicting a rise in gold prices to $2,000/oz in 2009.

According to an article in the UK Telegraph:

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

Wait, did he say wars? Caused by a depression? I’m no history buff, but when did either inflation or depression cause wars? I thought most wars were caused by megalomaniacs or over some natural resource like water, land, oil or maybe even gold. But I don’t think lack of jobs caused people to invade another country. Maybe we should redefine the large number of Mexican workers in the US as angry hordes of invading marauders 😉

Anyway, they try to justify their stance:

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.

“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Who is this people who are throwing around kitchen sinks?

But more importantly, did the author insinuate that Pakistan might start throwing around nuclear weapons if their economy falls?

According to the World Factbook:

Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes, low levels of foreign investment, and a costly, ongoing confrontation with neighboring India.

Sounds like their back is already against the wall. So I guess the question is whether the default bonds from AAA-rated countries will push them over the edge! 😀

Sounds like Fitzpatrick’s original message got a little lost in translation.

Finally though, there’s something that makes sense. But that probably because it’s based on fact and not someone’s misquoted opinion.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. “People have started to question the value of government debt,” he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

Well, I think gold might hit $2,000 or more over the next few years. But hopefully there won’t be any more wars.

Perth Mint Suspends Orders For Gold Bullion

As a follow-up to my previous 2 posts on gold, here’s a news article about the Australian Perth Mint suspending orders for gold bullion until January. Apparently having it’s workers slog 7 days a week isn’t enough to meet demand!

FEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying — making up 80 per cent of its sales. One European client purchased 30,000 ounces for $33 million.

“We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients,” Mr Currie said.

Robert Jaggard, manager of bullion and rare coins dealer Jaggards, said business had picked up strongly and he expected it to increase further.

“All around the world there has been a heavy run on physical gold and there is a shortage of supply,” he said.

Mr Jaggard, who has been dealing in gold for 40 years and is an agent for the Perth Mint, said some clients were buying up to $1million worth of gold, paying a premium above the spot price.

Late yesterday afternoon, spot gold in Sydney was trading at $US747.30 an ounce, up $US8.15 on Thursday’s local close.

“Professional business people who have previously bought small amounts now want more gold because they are suffering in other markets,” Mr Jaggard said.

At a conference this week in Munich, delegates were lined up 30-deep to purchase physical gold. And reports out of the Middle East suggested that there had been unprecedented gold buying in Saudi Arabia during the first half of November, with an estimated $US3.5 billion purchased in recent weeks.

The World Gold Council, releasing its global demand trends yesterday, said identifiable investment demand, which incorporates demand for gold through exchange-traded funds and bars and coins, was the biggest contributor to overall demand during the quarter. It was up to $US10.7 billion, double last year’s levels.

The figures showed retail investment demand rose 121 per cent to 232 tonnes in the third quarter, with strong bar and coin buying reported in Swiss, German and US markets.

The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven. Overall, quarter three saw Europe reach an all-time record 51 tonnes of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.

World Gold Council chief executive James Burton said gold’s universal role as a store of value had shone through during the quarter, helping attract investors and consumers to all forms of gold ownership.

“The rise in demand for gold bars and coins has been impressive,” he said.

Demand in India, the largest market for gold, recovered during the third quarter, encouraged by lower gold prices, a good monsoon and the onset of the festive season. At 250 tonnes, total consumer demand was 31 per cent higher than the same period last year. In value terms, demand hit the record quarterly sum of $US5 billion.

Here’s the link.

So there’s a surge in demand, but no spike in prices that’s usually associated with shortages!

Buying Cheap Gold Coins

Gold and silver are global commodities with spot prices being the same all over the world (assuming you live in an open society). The only differences are the premiums that dealers charge buyers. One of the surprising things has been the large increase in premiums on gold and silver coins. Even though the prices for both metals have dropped from their highs, the cost of buying gold or silver coins hasn’t dropped proportionately. In fact, there’s been reported shortages of these coins by the US Mint and the Australian Perth Mint, not to mention individual retailers. This seems to defy common wisdom; prices drop when demand decreases. Even though spot prices have increased, the demand seems to have increased and thus gold and silver coins aren’t as cheap as they should be.

Right now the premium on silver coins is a whopping 60%+. For gold it’s a lot lower but still higher than it’s historic 2.5-3%. I just got an email today from a newsletter service that I subscribe to that’s pretty interesting.

If You Want Cheap Gold Coins, Canada Has Them
By Tom Dyson

I don’t trust my bank. And I don’t trust the dollar.

As far as my savings are concerned, I’d rather keep them in gold. And I don’t mean gold futures or gold certificates or gold mining shares. I’m talking about physical gold bullion in a safety deposit box.

My family thinks I’m taking a big risk. But as I see it, they’re the ones taking the risk. I’m the one storing my money in the world’s safest asset… the asset that’s been used as money for 5,000 years… and the only money that’s no one else’s liability.

Besides, what have I got to lose? My bank pays less than 3% on its savings accounts.

I’d advise you to own at least a couple of ounces of gold, too… if nothing else, for insurance purposes.

Coins are the best way for individuals to buy gold. They come in small denominations, they’re portable, and you can exchange them for cash anywhere in the world at gold’s international spot price.

Here’s the thing: Right now, gold coins are hard to find. Even if you can find them, they’re more expensive than usual.

In normal markets, you can buy silver coins below the spot price and gold at a 1% or 2% premium to the spot price. I’ve spoken to at least six gold coin dealers in the last week. Three of them were out of stock. Of the dealers still in stock, the cheapest gold coins I found were selling for a 5% premium to the gold price.

In other words, with gold at $800, you’d have to spend at least $840 on a one-ounce coin. The scarcity of silver coins is even worse. One dealer told me he was paying $16 for one-ounce silver coins, purchased in bulk. Right now, the spot price of silver is $9 an ounce. So the premium’s almost 80%.

The financial crisis is the reason for this mispricing. Demand for coins, one-ounce bars, and other “retail” denominations of gold has outpaced the ability of fabricators to make them.

There is no shortage of physical gold. If you wanted to buy a kilo or a 100-ounce bar, you’d have no problem.

The shortage is just a short-term supply problem at the retail level. Gold producers will take advantage of the premium and ramp up production. So in a few months, the big mark-ups will disappear.

That said, if you want to buy small quantities of gold right now, go to Canada.

The Bank of Nova Scotia is one of the world’s largest precious-metals dealers. If you go to the Hollis Street branch in Halifax, Nova Scotia, or the King Street West branch in Toronto, they’ll sell you Canadian Maple Leaf coins at a 3.7% premium to spot and one-ounce wafers at a 2.6% premium to spot.

Good investing,

Tom

P.S. Gold doesn’t show up in airport security metal detectors. I’ve tested this with gold coins before. But if you’re traveling across the border with more than $10,000 worth of gold or currency, you must declare it at the border. They’ll run your name and make sure you’re not a money launderer. That’s it.

Of course, if you don’t feel like going all the way to Canada just to buy a few gold and silver coins you can always buy them cheaply here:
American & Canadian Silver Coins

American, Canadian French, & Swiss  Gold Coins

Gold Jumps: Has It Become Correlated To The Stock Market?

I’ve been an avid collector of gold and silver coins and have been following the prices for a years.

Gold is supposed to have a negative correlation with the stock market. This year has proved otherwise. Of course, as we’ve seen repeatedly in the past, all asset classes correlate to the downside.

Gold which peaked at $1030/oz earlier this year, has been trading in the $700 range for a few months. There has been a flight to safety, which for most people means buying US Treasuries. Indeed, the flight has been so large that it has pushed the yields down to absurdly low levels. The yield on the 3-month Treasury was almost zero at 0.4% and the 10 year is 3.52%. (The yield on the S&P500 was 3.55% this week, higher than the 10 year Treasuries rate for the first time since 1958).

The way that demand affects interest rates is that as people clamor for T-bills, they push up the prices for these bonds. Since the bonds pay out a fixed interest rate, the effective yield (also called yield-to-maturity or YTM) drops. So it’s the demand for stability in the current globally volatile economic environment that is pushing up bond prices and pushing down yields to almost nothing.

On the flip side, prices for a product fall as the demand drops off. So we’d expect the decrease in demand for gold as the cause of it’s low price. However, there have been several news reports stating that demand for gold is 50% higher than it was last year.

Demand For Gold Hits A Record Even As Institutions Head For Exits (November 19th, 2008)

The US Government Mint had to suspended retail selling gold coins and silver eagles earlier this year, and the Perth Mint just announced suspending production of gold coins.

So even though there is an increased demand for Gold, the prices haven’t been increasing proportionately. There have been several articles speculating on the reason for this.

According to:

The Disconnect Between Supply and Demand in Gold & Silver Markets (August 18th, 2008)

Obviously, enough people are willing to pay for gold and silver, at the previous $978 and $19.50 per troy ounce price, because the U.S. Mint could not source enough metal at those price, and had to suspend coin production.

This proves that people are more than willing to fork over, in whatever currency they are using, the previous prices for gold and silver, in such quantities, that a shortage was already existing, before the price collapse, especially in the silver market.  It is true that people in poorer countries like India, might have back on their consumption.

But, while they were cutting back, demand and consumption of gold in North America, including Canada and the USA, was soaring.  For example, before it suspended production of bullion coins, due to shortages, the U.S. Mint’s statistics show that it was printing 2.5 times as many gold coins, and almost 4 times as many silver bullion coins, this year, compared to last year.  Gold and silver bullion, in bar form, was also flying off North American retail shelves.

Bottom line: Enough people were buying, when the price was high, to exhaust the supply. Basic economics says that, in a free market, this means the price must rise.

Seems like somethings fishy in Denmark! The author further adds that

We have a disconnect between reality markets and fantasy markets.  The COMEX and London Metals Exchange are fantasy markets controlled by the big bullion banks.  They must be engaged in market manipulation, because nothing can explain a big price collapse, in the midst of widespread shortages and robust demand.  A group of big financial institutions, deeply enmeshed in the global trading system, and heavily involved in the gold and silver market, must be deliberately inducing temporary panic, for their own purposes.  These malevolent characters will eventually be able to buy back their short positions at low prices, and, possibly, also, even collect a significant long position.

I definitely think the prices are being manipulated, even though I’m not entirely sure why. One thing I do know is that you cannot manipulate prices indefinitely. Especially in the face of rising demand. Here’s an interesting snippet from the Standard.

(The Standard, Nov 14) Hong Kong: The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

That article was published last week when gold was trading under $720/oz. Since then, its jumped to almost $800/oz, with most of the move occurring yesterday.

Gold Prices for November 21, 2008

The bright green line is yesterday’s movement. Gold moved from under $750 to nearly $800. Looks like gold has become strongly correlated to the stock market after all!

I think the price of gold will continue to rise over the long term. It’s just a matter of how long it takes.

Should Congress Bail-Out The Auto Industry?

I got into a lively debate yesterday with a fellow student about the bailout of the auto-industry. He said the social ramifications of letting them fail were too high. The impact on the local communities would be too high and so they should be bailed out by the tax-payers.

I said they were not cost-effective and there wasn’t enough demand for their cars to keep them in business. Even if the government gave them $25 billion, they’d plow through it and be back at the door asking for another handout. The government, too ashamed to admit it had wasted the first $25 billion would probably hand them another $25 billion. (This is called the Concorde effect, after the failed Concorde partnership between England and France which was a financial disaster).

I read some articles with also drew similar conclusions, but with different viewpoints.

In 2006, the average hourly wage of a person with a high school diploma was $13.46 per hour. For those fortunate enough to receive insurance and other forms of compensation, the average was $17.50 per hour in total compensation. These averages encompass all age groups.

However, if you are a Detroit auto worker with a high school diploma, your total compensation comes to: $67.78 (Ford), $70.43 (GM) or $72.59 (Chrysler) per hour.

That’s right, it cost Detroit 4-5 times more to hire unskilled labor! I think it’s the auto unions who are driving the US car manufacturers out of business.

I think its said that someone who spent 4 years in college and graduates with a student loan has to work for about $20-$25/hr while an unskilled worker makes more than that. Even grocery baggers in California supermarkets used to make $27/hr after working there for 7 years because of their union deal! That’s a pretty sweet deal if you can find it.

But moving on…

All of this brouhaha about bailing out the auto industry and how destructive it will be to the country – sounds a lot like the moans and groans of the steel industry (and steel unions) a few decades ago when the Japanese and Koreans were killing the U.S. companies with low prices for bulk steel. The biggies, like U.S. Steel and Bethlehem, went under.

And you know what? Small, progressive and aggressive steel companies arose in the U.S. – not for the cheapo junk steel, but for the better grades, for alloys and for hi-tech steels. And in a few decades, the industry bounced back better than ever. The U.S. was THE place to buy the good stuff. The Far East was where you bought the cheap bulk stuff. Did it ‘hurt’? Yeah, for a while, but you know, we got over it and came through it all the better. We just forgot what we learned.

How many innovative car companies do you think will start popping up in the U.S. when the dinosaur Big 3, and their fat-assed dinosaur management, are finally gone? I don’t think that innovation is completely dead in the U.S.; it’s just been shut down in favor of huge management bonuses paid for killing industries through blind stodginess. Let’s see, how many U.S. car companies were still trying to crank out SUV guzzlers when gas prices were scaling Everest? Let the dead die so that the living can grow.
 
Sorry, unions and union members, but the day is over that a dumb back can command a sizeable (read uncompetitive) wage and benefit package just for showing up to do a job that, in many cases, a monkey could be trained to do. Better get some education. The new companies will be high-tech – there will be plenty of jobs for those with a reasonable education and training. Dumb backs will get to clean toilets at a commensurate wage.

Hear that Fed and Treasury and Congress? Don’t waste money trying to resurrect dinosaur corpses. Put the money into opening up investment in new technologies, good products and well-run companies. Put the money toward training a labor force that can be part of competitive industries. And start the ‘do it or fail’ philosophy in the schools. First-grade would be good.

This reminds of an excellent book I read a few years ago called God Wants You to Be Rich: How and Why Everyone Can Enjoy Material and Spiritual Wealth in Our Abundant World. The author states the example of automated farming techniques introduced in the early 1900s, reducing the workforce required for producing food from 30% of the population to the 3% we have today. Did those people starve to death? No, they went on to find other jobs. I think society, (and by society I mean the US taxpayer) is better served by having an overpaid segment of society go find some other work to do.

And lastly, if the economics isn’t enough, lets look at how poorly managed these companies are.

The execs for the Big Three automakers each took private jets to their testimony before Congress yesterday. Average cost for the flight from Detroit to Washington? $20,000… Northwest had flights available that day for $288 coach, $837 first-class.

“It’s almost like seeing a guy show up at the soup kitchen in a high hat and tuxedo,” Rep. Gary Ackerman, a Democrat from New York, said of the dynamic trio. “Couldn’t you have downgraded to first class or something, or jet-pooled or something to get here?”

Maybe they should have driven?

The southern states make cars like Honda, Acura, and Nissan. They don’t have the high labor rates and are actually profitable car companies. Obviously they’re opposed to the bailout because it use’s their tax money to help the competition.

So what do you think of the car industry bailout?

 

Passive Income For October 2008: A New Record!

I’ve been busy with Business School and it’s been an insanely hectic month. Forget about writing posts, I haven’t even had much time to sleep!

I just ran the totals for passive income for October and I found out I’ve broken my previous record for monthly passive income that I set in June.

Monthly Passive (alternative, online & dividend) Income was $3,454.99.

The total online income was $2160.67 which is lower than my record by ~$95. However, my investment in a Japanese REIT paid a quarterly dividend that pushed up my dividend income over the usual $1000/month to a total of $1259.18.

Here’s the breakdown of the $3,454.99:

Online Income:$2160.67

Dividend/Alternate Income: $1259.18

  • ING Savings Account: $111.18
  • Direct Oil Drilling Investment: $397.53
  • Dividends from Canroys: ~$412 (after tax deducted at source)
  • Other Dividends: $338.47
  • The affiliate income from Ebay was almost $650 last month. Year to date, I’ve made $2,220 from my Ebay sites. Adding storefront on this site has also helped my income.  The store targets people who want to buy online businesses, cheap real estate and timeshares, gold coins and other income producing ventures. I recently added a go-kart for sale page.

    Some of the other ebay affiliate sites are .info sites that I bought .info domains for $0.99 from GoDaddy and created them using BANS software, which automatically pulls the relevant content from Ebay. They’re all hosted on Dreamhost, for which I pay under $119.40/year for unlimited domains, 500GB of bandwidth and some couple of TB of data. Dreamhost is currently running a special, where you get four times the usual disk-space and bandwidth! Also if you prepay for 5 years you get $150 off.  They’re currently running a special where you get unlimited bandwidth and disk space at no extra cost for the next 11 years. Use code PassiveIncome to get $19.40 off your hosting or Dividends to get a free domain registration.

    Note: Setting up BANS on Dreamhost requires a little bit of tweaking. If you’re not very familiar with setting up websites then I strongly suggest using HostGator for your hosting. They cost about the same and have pretty good compatibility with the BANS software. But don’t ask me for support!

    If you want more info on how to generate passive income from sites, look at the 2nd half of this post (look for the section on Niche Sites). I also recommend  the secret cash plan ebook. It’s a primer on the different methods to create online income. It has a very good section on finding niche market segments. It only costs $20 and it has a money back guarantee.

    For more info on the other online sources of income, check out my previous passive income updates.

    But while my passive income is up, my stock portofolio has been almost decimated. While it’s actually update 20%+ from the lows of last month, its down 50% for the year. Luckily I barely have any leverage, otherwise the account would have been wiped out!

The World’s Most Successful Depression-Era Investor

I subscribe to a lot of newsletters. One of them Capital & Crises by Chris Mayer had a very interesting write up on John Maynard Keynes:

You probably know John Maynard Keynes as an economist, but may not know that he was also a great investor, maybe the most the successful of the Great Depression era. And for that reason, given all that our own markets are going through, it may be a good time to look at his investment career.

Keynes managed Cambridge’s King’s College Chest Fund. The Fund averaged 12% per year from 1927-1946, which was remarkable given that the period seemed to be all about gray skies and storm clouds – it included the Great Depression and World War II. The U.K. stock market fell 15% during this stretch. And to top it off, the Chest Fund’s returns included only capital appreciation, as the college spent the income earned in the portfolio, which was considerable. I think it must be one of the most remarkable track records in the annals of finance.

Keynes also made himself a personal fortune as an investor. When he died, he left an estate worth some $30 million in present-day dollars, which surprised his contemporaries. How he did it is the subject of this essay. A new book by Justyn Walsh, Keynes and the Market, is our chief guide on the subject.

As Walsh points out, Keynes spent his last six years as an unpaid Treasury adviser. He outlived his parents, who left him no inheritance. And Keynes was a great patron of the arts, financing many ventures out of his own pocket. To finish with such a grand sum sent London society abuzz. “Some surprise has been expressed about the large fortune left by Lord Keynes,” reflected the Financial Times. “Yet Lord Keynes was one of the few economists with the practical ability to make money.”

It wasn’t easy for Keynes, as these things seldom are for anyone. Keynes began as a run-of-mill speculator and trader, trying to anticipate trends and forecast cycles. The Great Crash of 1929 sent him back to the drawing board.

Keynes was, in fact, nearly wiped out in the Great Crash. His personal net worth fell by more than 80%. He then had a great conversion. Trading the market demanded “abnormal foresight” and “phenomenal skill” to work, he concluded. “I am clear,” the new Keynes wrote in a memorandum, “that the idea of wholesale shifts [in and out of the market at different stages of the business cycle] is for various reasons impracticable and undesirable.”

After the crash, he became an investor, rather than a speculator. His new ideas on investing began to presage those of value investing icons Ben Graham and Warren Buffett. Interestingly, the crash hurt Graham too and motivated him also to think deeply about the process of investing. The two great money minds came to nearly the same place in their thinking.

Keynes now focused less on forecasting the market. Instead, he cast his keen mind on individual securities, trying to figure out their “ultimate values,” as he called them. He summed up his new philosophy in a note to a colleague: “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these.”

He also became more patient. Paraphrasing from his own analogy, Keynes described how it was easier and safer in the long run to buy a 75-cent dollar and wait, rather than buy a 75-cent dollar and sell it because it became a 50-cent dollar – and hope to buy it back as a 40-cent dollar. Keynes learned to trust more in his own research and opinions, and not let market prices put him off a good deal. When the market fell, Keynes remarked: “I do not draw from this conclusion that a responsible investing body should every week cast panic glances over its list of securities to find one more victim to fling to the bears.”

Keynes also developed a fierce contrarian streak. One of his greatest personal coups came in 1933. The Great Depression was on. Franklin Delano Roosevelt’s speeches gushed with anti-corporate rhetoric. The market sank. America’s utilities were, Keynes noticed, extremely cheap in “what is for the time being an irrationally unfashionable market.” He bought the depressed preferred stocks. In the next year, his personal net worth would nearly triple.

Keynes was an adviser to an insurance company, as well as manager of the Chest Fund. In a note, Keynes laid out his understanding of the quirky, contrarian nature of investing. It is “the one sphere of life and activity where victory, security and success is always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the board of my insurance company to buy a share, that, I am learning from experience, is the right moment for selling it.”

He also learned to hold onto his stocks “through thick and thin,” he said, to let the magic of compounding do its thing. (In a tax-free fashion, too, by avoiding capital gains taxes.) “‘Be quiet'” is our best motto,” he wrote, by which he meant to ignore the short-term noise and let the longer-term forces assert themselves. It also meant limiting his activities to buying only when he found intrinsic values far above stock prices.

Keynes also came to the conclusion that you could own too many stocks. Better to own fewer stocks and more of your very best ideas than spread yourself too thin. Committees and others repeatedly criticized Keynes for making big bets on a smaller number of companies. In a typically witty reply, Keynes defended his views. In this case, his critics accused him of making too large a bet on Elder Dempster: “Sorry to have gone too large on Elder Dempster. I was suffering from my chronic delusion that one good share is safer than 10 bad ones.”

He rejected the idea, as Buffett and other great investors have, that you dilute your best bets by holding a long list of stocks. At times during Keynes’ career, half of his portfolio might be in only a handful of names, though he liked to mix up the risks he took. So though five names might make up half of his portfolio, they wouldn’t be all gold stocks, for instance. “For his faith in portfolio concentration,” Walsh writes, “Keynes was rewarded with an investment performance far superior – albeit more volatile – than that of the broader market.”

In the depth of the Depression, Keynes lost a friend, Sidney Russell Cooke, who took his own life after suffering severe losses in the market. Keynes, perhaps reflecting on this experience, wrote that investors need to take losses with “as much equanimity and patience” as possible. Investors must accept that stock prices can swing wide of underlying values for extended stretches of time.

Keynes’ investment performance improved markedly after adopting these ideas. Whereas in the 1920s, he generally trailed the market, he was a great performer after the crash. Walsh dates Keynes’ adoption of what we’d think of as a Warren Buffett sort of approach as beginning in 1931. From that time to 1945, the Chest Fund rose 10-fold in value in 15 years, versus no return for the overall market. That is a truly awesome performance in an awfully tough environment.

As investors wonder whether we face a 1930s-style market or not, I found a review of Keynes’ investing career useful and inspirational. The more I study investing, the more this same handful of ideas and principles seems to recur.

I know what book I’ll be reading over Christmas!

Heard On The Street

What’s the difference between a pigeon and a Wall Street banker?

The pigeon can still make a deposit on a Porsche!

Meanwhile, in what looks like a stunning display of stupidity, the Federal Reserve recently hired someone to “assess the safety and soundness of domestic banking institutions.” The new employee is none other than Former Bear Stearns chief risk officer (from 2006 to 2008) Michael Alix. Unbelievable! The Fed hired the guy who let Bear go bust.

Regular readers know that I’ve been saying the US government is broke for a while now. As if our national debt and unfunded future debt obligations weren’t enough, Henry Paulson proposed spending $700 billion to buy mortgages and other toxic “assets” from banks. Well, not only does the Treasury now want to spend bailout cash on all kinds of financial companies (from banks to bond insurers to specialty-finance firms like GE Capital) it’s becoming more and more obvious that the government didn’t actually have $700 billion lying around. The Treasury has borrowed $600 billion since mid-September, and it wants to borrow a record total of $550 billion during the fourth quarter of 2008 to help stabilize the financial sector.

In July, the Treasury estimated third-quarter borrowing would be $171 billion. It actually borrowed $530 billion, $300 billion of which was for its Supplementary Financing Program, launched in September, to keep Wall Street from melting down.

While people may argue that this was the best thing to do (of course you should bail out your buddies on Wall Street!), the fact is that this level of government borrowing and spending will have an inflationary affect. It’s still not too late to buy some gold coins and hedge against it.