Recently by Peter Schiff: Prescription for Disaster
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Now, I did not just sell without reason or cause, I had been developing a whole new philosophy towards investing, one which I will explain here, I will start with my new influences, move onto the investment themes I’ve drawn from them and finally into my current investments.
As I mentioned before, Schiff was the catalyst in my renewed interest in investing, especially as economics applies to it, I read Crash Proof and listened to Bull Moves in Bear Markets, here I’ll quickly go through his thesis from Crash Proof, then show how I’ve applied it.
Schiff sees America’s shift from production to consumerism combined with the Fed’s control of the currency to be a possibly killing blow to the dollar and recommends investing elsewhere to avoid the coming (and actually current) inflation.
Schiff starts the book by showing how America’s shift from producing things to outsourcing the production then borrowing money to buy the produced goods has created a mass of debt in the country, this debt is, for the most part, held by China. The consequence of this shift into consumerism over production has created a huge trade deficit.
The trade deficit can be a good thing because it shows the division of labor is high, but in America’s case we are not importing things using saved money, but rather from borrowed money, which is the root of the problem.
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Schiff then moves on to inflation and the fall in value of the dollar. Historically, fiat currencies have never worked — the dollar has fallen 95% since the creation of the Federal Reserve in 1913 (that is one dollar of purchasing power in 1913 is worth 5 cents today, or to flip it around if you bought a candy bar for 5 cents in 1913 it would cost one dollar today, and these stats are probably off as we’ve had a lot of inflation since the book was written in 2006).
Schiff follows the declining currency chapter to show how inflation screws up the market by creating artificial demand and changing the structure of production, then he shows why government’s need inflation (for their pet policies) and how they keep it ‘silent,’ that is fudge the numbers to make it look smaller than the reality.
Schiff then dedicates a chapter to refuting popular Wall St. notions (bonds are safe investments or using mutual funds is a good idea) and going ‘back to basics,’ to show how to value companies in which to invest. I’d like to point out that Schiff is a value investor, though he may not focus on it often. I listened to a podcast that was hosted by the lead analyst for his Brokerage Firm, and the analyst talked about how they evaluate individual companies by forecasting their cash flows out and buying them for only less than their true value.
After predicting the bursting of the housing bubble (which is where he gained fame) and once again touching on the consumer debt problem Schiff starts the second part of his book on how to invest in an inflationary depression.
Schiff has three parts to it: Buying Foreign Stocks, Buying Gold (and Silver) and Staying Liquid. Recently there was a lot of hoopla over people claiming he had not been right all along because a couple of his clients were way down in 2008, it seems those who criticized him had not read his book. The third part, staying liquid, mentions the fact that price of his recommended investments may fall even lower than they already are and one should keep some cash to average down, this is in fact what did happen.
So first, investing in foreign stocks: Schiff’s thesis here is that the US stock market will probably rise in the future, but the gains will most likely come from inflation, not from actual rises in production. He says that by investing in foreign stocks not only do you miss the loss in purchasing power in the US, but when you convert your shares back to the dollar you will profit from the fall in the dollar relative to the currency of the country where your company is. As an added bonus foreign stocks usually have a lot higher dividends than US stocks and Schiff speculates that investors should be able to find a conservative foreign portfolio with an 8% dividend yield.
Second, gold investment: Gold (GLD) has already moved up to $930 per ounce from $250 in 2000, further increases in demand, combined with inflation will push the price even further. Currently, gold is not used as money in any country in the world, Schiff believes this will change as seven decades of Keynesianism all over the world has produced solely economic destruction is noticed. He believes that even if most countries stall in changing to a gold standard, individuals will start doing it on their own and smaller more fragile economies will switch (Schiff mentions Russia here, which has, in fact, mentioned going back on the gold standard) as well. Add this to the protection investors will seek in gold, from inflation, and you get a huge surge in gold demand. This compared to the historic yearly increase in supply of only 2% per year will cause huge increases in the price of gold.
Schiff also shows how historically the Dow to Gold ratio moves in cycles and is currently in the middle of a down cycle for the Dow, but up cycle for Gold and the usual Gold:Silver ratio is way off implying big returns in silver as well.
In the end Schiff has contributed strongly to the outline of how I will invest, looking first at the impact of inflation and then allowing my other themes to follow that.
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I’ve known about Rogers for a number of years, but never took the time to read any of his books because they all deviated from the 100% ‘buy value stocks,’ philosophy I held. This was until I read an interview that Peter Schiff did with him on the EuroPac site.
The two main things I’ve learned the most from Rogers are:
- Rogers puts a huge influence on doing your own work and think differently from others. He also repeatedly talks about learning history and how to think, this is how he made so much money in commodities in the 70’s and how he’s done so well investing internationally in the past.
- Hot Commodities is a little dated now, five years after it was first published, but one can still learn valuable lessons in how to analyze situations from how Rogers does with each commodity in the book.
Rogers also shares Schiff’s view about dreariness of the future of the US economy and stock market; he moved his family to Singapore and advocates only investing in Chinese companies or commodities.