Be Prepared

(www.warren-buffett.org)

In a recent conference, Warren Buffett made this joke about the US/Obama:

"I like to invest in companies which are so profitable that any idiot could run them. The US is such a good country that any idiot can run it!"

Buffett had the luxury of growing up in the Post-War era. (Born 1930, he would have started forming concrete views of the US during WWII). At that time, America accounted for over half of the world's economic output and was a creditor of nations. The 'Almighty Dollar' was a statement of fact - not a punchline. Regardless if the nation were run by warmongers, Watergate nutjobs or even peanut farmers, the nation remained the world's gold standard. For this reason, Berkshire Hathaway has invested primarily in American businesses, buying and holding shares in sound companies.

However, with a Debt to GDP ratio of 99%, deficits topping 10% annually and a Federal Reserve printing money like its going out of style, Buffett's patriotic buy-and-hold investing needs serious revision. Recently, 'Independent Trader' Alessio Rastani ranted on the BBC that the savings of millions would be wiped out in less that a year. I will go out on a limb here and predict that there will be no mass liquidation, no hyperinflation and no catastrophic alien invasion; however Rastani's warning is to be heeded.

Investors are gamblers - whether they invest for 20 years or high-frequency trade for 20 milliseconds - they play the odds. Most people would agree that the odds of making money in today's market are very poor following the Buffett model. In fact, Berkshire Hathaway, the bastion of American Capitalism, has returned a paltry 10% over the past 8 years. After inflation, the Oracle of Omaha has lost investors money. 

Berkshire Hathaway Class A Shares. 8 years, no growth! (www.finance.yahoo.com)

So the question becomes how can we put the odds in our favour, taking for granted that the future could be rife with hyperinflation, low or negative growth or even an unforseen boom?

Inflation

Investors can easily hedge against inflation through two major market instruments: precious metals (gold, silver, etc.) and TIPS (Treasury Inflation Protected Securities). An ounce of gold in 1920 could buy you a well-tailoured suit for $30. An ounce of gold can still buy you that suit today for $1000, with plenty left over. Precious metals can be bought in bullion, or in ETFs (Exchange-Traded Funds). TIPS give the holder a rate of return equal to the CPI index (Consumer Price Index).



Quant fund DUNN Capital made 52% in 2008
 and has seriously outperformed the S&P
(http://www.trendfollowing.com/perf.html)



Bull or Bear Market?

Who cares? Trying to figure that out has caused the majority of fund managers to underperform key indices like the Dow and the FTSE. The only class of funds that beat the market consistently are quantitative hedge funds. These funds build trading robots which automatically buy and sell instruments ranging from gold to the Swiss Franc to Pork Belly Futures, based on mathematical formulas known as algorithms. Typically, investors pay 2% in management fees and give the managers 20% of the profits. All these fees are often worth it though, since quant funds can make money in both bull and bear markets, whereas most other funds are long-only (can only buy). Unfortunately, UK and US governments only allow high-net worth (rich) investors to invest in quant funds, because the government believes the wealthier you are the more informed/educated you are. Under that logic, both governments should have negative IQs as they have each been in perpetual bankruptcy for 50 years, but I digress. If you don't have the cash, you can try to build your own quant system using NinjaTrader, MetaTrader or TradeStation, although it will take a month or so to learn the computer code.

World Bond Funds

If the market scares you, but you want to earn more than the .1% that the banks give you, consider a world bond fund. Bond funds typically invest in government debt that is secure but giving a fair yield. German Bunds and US Treasuries are often well represented. Typical returns are 6% per year, enough to almost double your money each decade at a low risk.

Bottom Line: Don't buy and hold like Warren Buffett, don't run for the hills and please don't keep your money at the bank - be prepared!