24 February 2013

How to make safe investment decisions

In turbulent times safety becomes vital. And safety stretches out on many levels. A safe job, a safe car, a safe home and a safe investment.

Safety comes with Understanding. Understanding is that inner ‘Yes, this it how it works’ and lets one move into the right direction. Understanding comes with knowledge. True knowledge is transported here and the right direction is a sound decision that suits your objective and benefits you.

A beneficial investment is an investment that increases your wealth or stays stable in purchasing power when everything else crashes.

The following information is designed as a recipe. The purpose of a recipe is to work every time – all the time. Make use of this recipe to check your current investments or double check before you invest in the future.

The recipe that makes a good investment – an overview:
1. Understand the vehicle: The current monetary system
2. Understand Fundamentals
3. Understand Price and Value
4. Understand Cycles
5. Timing and Exit Strategy

How to work with the recipe:
1. Understand the vehicle: The current monetary system

Having read our past newsletters and the ‘Goldbook’ you have a basic understanding ‘How the system works’. If you haven’t read that information then do so and in addition browse through the internet and learn about fiat-currency, fractional banking and Keynesian economics. You don’t need to become a pro; a simple understanding of how things work is enough. 

Your understandings should be:
• Knowing fractional banking
• Paper-currency has always failed as money – Gold has never failed as money
• The self-destructive component of interest rates and
• How inflation works
• The media and government data scams
• Sources from where you get real and truthful information

2. Understand Fundamentals

Fundamentals are facts about an investment that you look at before investing in something. All of these questions need to show green before investing:

  • • What is and was the price and demand of the market?
  • • Have there been fluctuations, technological developments?
  • • How high is annual production and how high is the inventory?
  • • If planning to invest into something tangible: Is the source finiteand inventory in a downward trend, meaning is the investment getting rarer?
  • • Is it something you understand how it works?
  • • Is the company and/or asset financially healthy?
  • • Is the target group growing or shrinking?
  • • Do the demographic figures of the target group support the investment?

3. Understand Price and Value

There is a difference between price and value. Before investing you need to determine this crucial difference. For example the price could show a low number compared to a few years ago – you think, that makes a good investment, but the asset is completely overvalued. Always invest when the market you think of is undervalued – that’s the safest bet.

In a paper currency system which we have right now, one always needs to calculate the inflation into the equation. In a world that prints money with no end, you need to ask, why is everything going up? If stocks, bonds, real estate, commodities like oil and gold all go up – where does it come from?

The only reason the stock markets go up is a massive amount of Dollars, Euros, etc. that flood the system und bolster everything up artificially.

So the question is: How much is my investment worth – what’s the value? 

And that leads you to the view at the investment in terms of purchasing power. To shine light on your investment of choice you need to compare it with other ‘stuff’.

Let’s look at the stock market for example:
How to make safe investment decisions 

The Dow Jones was in the year 2000 trading at around 10.500 points. Today the Dow trades at 12,848 points. A nice 22% gain. The price is higher that compared to 12 years ago. A standard advisor would tell you, this is a good investment and compared to a savings account – even with the terrible dip in 2008 they believe long-term this is a good investment and much, much better than a savings account.

Oh, wait a minute… but what about the value of Dow? Did the value go up or down?

These charts reveal the truth:

 How to make safe investment decisions

You know this chart already from page 6.
How to make safe investment decisions

The two charts above measure the Dow Jones with real commodities – Gold and Oil.

The last chart shows the No. 1 and most useful commodity that is of value for us humans ‘Oil’. One share of the Dow Jones in the year 2000 was worth around 800 barrels of oil. Now, in 2012, it is only worth around 130 barrels. A 83.75% decline in 12 years.

The chart of the Dow Jones measured in Gold says, if you would have sold your one share of the Dow Jones in the year 2000; you could have bought 40 ounces of gold. Currently you only get 7.46 ounces of gold. You would have lost by investing or staying in shares – The charts with the Dow Jones represent shares as an investment in general.

This is the difference between price and value.

Determine in which trend your preferred asset is – is it gaining in value or loosing in value. Invest only if it gains in value… which means it is undervalued and that leads us to the next chapter:

4. Understand Cycles

Cycles are everywhere; a cycle is a part of nature. We have seasonal cycles like planting and harvest cycles for example. There are economic cycles that are created by the cyclical behavioural patterns of humans. Humans are a part of nature.

When you have read the Goldbook, you know that the world economy is in a ‘Winter’ cycle. Professor Kondratieff researched economies and found repetitive patterns over and over and interestingly divided these patterns into the four seasons – Spring, Summer, Fall and Winter.

If you are familiar with the Elliott Wave Theory, you know that there are smaller cycles within a grand or super cycle – matching Professor Kondratieff’s theory.

Throughout history humans have moved from one asset to another asset and then moved backed again. This is what gives form to the cycle.

The key is to find out when an asset is undervalued or overvalued. Buy when it’s undervalued – sell when it’s overvalued. That’s the theory.
By now you know, that making a decision based on price alone is a gamble. Deciding on value is safe.

The Elliott Wave and Kondratieff cycles give you a good idea where we are and where we are going. In addition to these two methods you can identify the position of your investment by looking at these three more cycles:

P/E Cycle – The fluctuation in stock prices relative to earnings

On the peak of the dot.com bubble P/E ratios of tech companies reached levels of 200 and more. Meaning it could take 200 years to get your money back. At the time some clever guy came along and invented a dynamic P/E, titled PEG (Prices/Earnings/Growth) which includes the future growth to indicate a ‘true valuation’ of the share… well the rest is history.

Looking at a P/E ratio cycle gives you an idea on the fluctuations of under- to overvalued.
How to make safe investment decisions
Looking at the historical S&P500 P/E chart tells us, a P/E ratio of 4.8 to 9.4 indicates undervalued where as– P/E Ratios of 24 and above indicate overvalued.

The next cycle you can watch is the ‘Tangible and Intangible’ Cycle.

This cycle indicates the fluctuation of the public interest between paper based investments such as stocks and hard investments such as gold.

You look at a long term chart such as the Dow Jones in Gold chart that we looked at before to identify where the turning points are.

The third cycle in addition is the ‘Real Estate’ Cycle

The same wave pattern that exists in the S&P500 chart and Dow Jones in Gold chart happens to exist in the real estates markets. People move in patterns. And it turns out that these three cycles summarized in one chart give a pretty powerful tool.

By looking at different assets measured in something tangible gives you an indication where you are. The turning point in this chart is the year 2000 and since the year 2000 gold and silver started their bull market. This is the decade of gold and silver – as we’ve often said.

A changing pattern in the long term cycles is not likely to happen before the year 2015 - 2020, so enjoy the ride.

5. Timing and Exit Strategy

There is a saying in the financial world: You can never go broke by taking profits.

Once you don’t swim against the tide, things become easy. The trick is now to cash in when the time is right and the next cycle starts.

By keeping an eye on the long term cycles helps you make good decisions. See that the current P/E ratio is starting to fall having been at 15 on average.

Once they reach 9 – look closely what real estate and stock indexes like the Dow are doing and if the they still keep falling and if gold and silver keep rising – stay in.

When the P/E ratios keep falling and reach 5 confirmed by a drop in gold and silver prices – that’s your sign to change your gold and silver into a different asset, most likely into real estate.*

This point in time will show up the closer we get to the year 2020. In the meantime this long term bull market for gold and silver has a long way to go as we have discussed many times. The current situation is one of the greatest opportunities for your wealth – swim with the tide.

*We don’t recommend selling your gold and silver in general. Keep in mind that the paper currency will fail. You need gold and silver in such a phase. If a new paper currency is established – one need to cash in and swim with the next tide that most likely real estate.

Author: by Stefan Krämer

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