Wednesday, July 13, 2011

Critiquing Some "Sovereign Investing" Concepts

A fellow private investor asked me today for my assessment of the following portfolio ideas for a hyperinflating economy:

- Physical gold and silver
- Agricultural commodities
- Cash-rich large-cap stocks

Those ideas were mentioned in today's edition of "The Sovereign Investor" email from Eric Roseman.  Here's my critique. Physical gold and silver don't come in small denominations.  They will be quickly depleted in a barter economy.  Try dividing a gold brick into spare change at the grocery store and you'll see what I mean.  Gold and silver have to produce some kind of yield - like dividends from mining stocks - to be practically useful. 

Foodstuffs make excellent stockpiles of hard assets for hard times.  I have many shelves full of canned goods and will keep adding to my pile.  I would have to take a serious look at agriculture-related stocks' fundamentals (five year ROE, etc.) to complete this part of the portfolio. 

Cash-rich large cap stocks can be deceptive; it all depends on what the balance sheet is hiding.  GE was cash-rich in 2008 but took TARP money to avoid a bailout.  Investors would have to sift through a cash-rich company's financials to figure out just how quickly that cash would be depleted if hyperinflation pushed up raw material costs faster than the firm can raise prices. 

It's not bad advice in general because it covers several asset classes that are mostly non-correlated.  The key is to translate these things into forms that are fungible and allow investors to pay for their daily existence without depleting their portfolios. John T. Reed's book on hyperinflation is a much better guide to assembling a portfolio. 

Full disclosure:  Long GDX with covered calls.