Smart people know when something is going on and therefore react in anticipation of trouble. Savvy investors that study trends, seasonal charts, Fibonacci numbers and other systems of “predicting” what the markets are going to do, know where to go once they cash out their positions and have their contingency plan lined up already.
Ask yourself a question : Why is it that gold prices have gone up so sharply precisely since the moment this current crisis started? If price obeys to the laws of offer and demand you got your answer right in front of your eyes.
At one point in time, during the very first trading course that I took, my good friend and financial coach told the story about his father always saying that a person should be invested in three key sectors and those are either Cash, Land or Metal, or if possibilities are sort of unlimited then all three would be just perfect. Let’s dig into this concept a little and try to make some sense out of it.
CASH
Courtesy of MIA Int'l Art Fair
How many times have we heard the phrase “Cash is King”, imagine if you owned a portfolio consisting of 20 condo units and right before the bubble burst, managed to sell them all at the peak of the real estate boom and kept that amount of cash at hand waiting for the right moment to re-invest it into something that after studying it and researching it and doing the proper due diligence seemed perfect; well I know first hand someone that did just that minus the part of “performing the right due diligence” or at least getting into something that he knew in depth, something that he could manage at will, this friend of mine took advantage and was riding a perfect wave that seemed to be such, cashed in a nice lump sum but did not have the sufficient knowledge or for lack of a better term, did not have the financial background to make a wise decision; he got desperate and felt that he had to do something right away with all that cash, as I mentioned on PART I of this post, some financial moves need to be done “with a cool head”, there is nothing more dangerous than an ignorant person with lots of cash in his hands and not knowing how to swim in turbulent waters surrounded by sharks.
You may ask yourself “Gee...I got cash....what should I do with it?” Read on!
LAND
Courtesy of GMAC Real Estate Northwest
Historically speaking, land does not depreciate, so nothing safer than that to have your money invested into....right?, but on the flip side it does not generate any return whatsoever and you are basically betting on its appreciation over time which depends on several factors such as “zoning” which eventually, and not for certain, may lead one day in the not so foreseeable future to high demand for it in that specific area ...in maybe the next 20years. The only certain thing is that it will not depreciate but “Time Value of Money” tells us that One Dollar today certainly does not have the value of One Dollar twenty years from now and if inflation finally hits then we could see that investment braking even over a long period of time or having the same value as its original cost which translates into being sort of a loss. Have you ever met someone or have you ever inherited a piece of land that was bought for X amount of money and fifty years later it is still worth the same amount with the “slight” difference that you cannot even buy a popsicle with that amount of cash? It is still worth the same, right? It might’ve increased steadily over the years and tripled its value but if you consider that it has not generated a penny and on top of that, property taxes have been paid every year on it, do the math and see where you stand. Unless you study, analyze and get advise from someone that knows about vacant land, don’t invest in it. A Realtor that specializes in Vacant Land (not my case) is a good source of knowledge but make sure that his own financial situation does not interfere with his advice, in other words you have to trust this guy since his “counseling” might be biased by his own bank account.
METAL
Aside from the music genre (which I love) I consider metal the best out of the three. I will get into real estate investments on PART III, but let me elaborate a little on metal. Have you "seen" gold prices? Please note that there is a huge difference between "seen" and "followed". Everyone knows that it has gotten almost to $2,000 an ounce, these are the people that have "seen" the price lately, price has come up all the way from around $600, imagine if you bought 100 Oz. of gold back in 2007, as people that have "followed" the gold trend did, these guys almost quadrupled their investment over the last 4 years, those are the people that knew something that the rest didn’t, cashed out their positions in other sectors of the markets and “parked” their cash in thousands of ounces of this precious metal; they did not do it for speculation, they did not certainly do it as a short term fliplike investment, they did it to be safe, to have their precious cash that made them Kings into something that would guarantee their King status, they knew where their safe heaven was until the waters got calmer and it was safe for them to navigate them again. Everyone’s waters by the way are different, what could be calm for one could mean a storm for others, this is based solely on the amount of knowledge that a person may have in a certain a determined area; me, for example, could never trade options because I simply do not understand them well, and that is exactly the approach everyone should have. DO NOT GET INTO SOMETHING YOU DON’T KNOW !
Regarding gold though, there is a BUT as in every other story.
On the other side of the (golden) coin, you must realize two main things, first you need a lot of capital to buy gold and second it is very volatile so, unless you have unlimited funds don’t get into it because every time gold prices correct, as it has done many times, your blood pressure will rise and your heart beat will make your head spin risking your health over it .
At the time of this post, gold prices are at $1,649.00 per Oz. and if you consider that in Aug/Sep of 2011 was above $1,900 per Oz. then you could calculate the massive loss if someone without the knowledge bought it at a peak, but if you see it from the stand point of someone that bought gold at $1,000 per Oz. he is still coming ahead nicely. The same happened with real estate, and the same happened with the dot coms and the same happened with..... you get the idea! Do you start to grab the concept of “financial education”?-
Courtesy of Forex Factory
Now, let’s talk about SILVER for a moment and let me start by saying that it has all the ingredients of being a near perfect investment, and I do not say “totally” perfect (make a note of it)- Silver has many applications in real life; it is bought by the photo industry, many pharmaceutical companies use it, surgical supplies are made thanks to this metal, so there is an actual real application, unless gold, that is used for the sole purpose of manufacturing jewelry and portray that image of power that all of us are addicted to since the beginning of time when in ancient Egypt Pharaohs would wear it even after death.
Silver prices perform better, it is not such a volatile commodity and the capital needed to buy it is not that big. I personally bought it at $13 per Oz and was forced to sell at $22; it went all the way up to $40 and now is down to $34, if I was still invested in it I would still have made triple my initial capital. The reason why I say that it performs better is just because the “jumps” are not that sharp and it goes up steadily like a goat climbing a mountain, the demand for it is there so it is more likely to keep on performing constantly without any sudden sharp and deep corrections as gold. The only downside of silver is “mobility” and that is why I cannot say that is a totally perfect investment; you will need room to store it and strength to move all that weight if decide to do so, since 1,000 Oz of silver are really heavy, but I consider that a happy problem.
To conclude this PART II let me tell you a short story about investing and lack of knowledge; I met a guy recently that decided to open a small “WE BUY GOLD” kiosk and the other day he was kind of pale, without him telling me anything I told him “Why don’t you hedge your position?” he looked at me like if I was from Mars,his eyes and the expression on his face staring at me screamed without saying one audible word "WTF is a hedge?" There you have it: Clear example of lack of financial education (Excuse my French by the way) This guy, obviously a nice person, got into this “WE BUY GOLD” business because of the frenzy, the race against time, the fear of not taking advantage of a bubble before it explodes, all of it without possessing the knowledge and he was caught right in the middle of a price correction that obviously has affected him; what will eventually happen is that if this is not indeed a correction of gold prices but rather a reversion of it (bubble burst) this guy will not be in business for long and who knows how deep he’s invested into his venture, that is exactly what is portrayed in the movie “Margin Call” about which I spoke on my very first post and I did that on purpose so I can relate my readers (if I have any) to the idea that I’m trying to render. My new “gold buyer investor” friend is in it over his head, his position is worth more than the current market value of his company and if the gold price moves against him a tiny bit more he risks the total loss of his whole capital invested; how do I know he is over his head in it? He wouldn’t been pale in color when gold prices hit almost $1,500 right around the end of year 2011, that shows that his resources are not unlimited and he does not have a contingency plan such as hedging his position or at least part of it.
So if you got cash, you are indeed king....temporarily! Manage to stay King by studying, reading, researching and don’t worry ....there’s plenty of time to look for the right investment but no time to recoup from a loss- You got cash? Keep it under a mattress until you really know what to do with it !!
Cheers !
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