How does mining gold create new wealth?

Back in the late 1970s when predictions of economic doom and gloom were very popular, I read some of those books lauding the gold standard. In a lot of ways it makes sense to have money back up by some type of universal standard and store of value.

But I kept thinking -- if gold is true wealth, then the only way to create new wealth for the world was simply to mine gold. How did digging more of that yellow metal out of the ground add to the wealth of the world?

How does getting rid of that yellow metal destroy wealth? Does the world's supply of food or industrial capacity change if some gold is sunk to the bottom of the sea as when Spanish galleons were sunk by British ships during the 1700s?

There seems to be no comforting, solid yardstick for financial value. Everything is relative, including currencies. The value of the U.S. dollar can go up today against the Japanese yen but down against the euro. Tomorrow it may be the opposite. It's totally out of our control, but has very real consequences for businesses, consumers and travelers.

Yet as long as people are able to get their needs and desires met, the economy is functioning. And new products and innovations keep expanding our options and therefore our wealth. The real store of value is the "means of production" coupled with the ability to market what's produced to the end consumer. Consumer desires do change, so the challenge for businesses and investors is to keep up with that.



gold standard
gold standard

Company risk is often one person risk

One of the competing theories of history is the conflict between the Great Man theory and Tolstoy's concept as explained in his novel WAR AND PEACE. The Great Man Theory, more popular here in the individualistic West, is that history, or at least much of it, is the result of the actions of individuals, whether for evil such as Hitler or for good such as Lincoln. Tolstoy maintained the opposite, that such leaders were simply the people who saw a parade and jumped in front of it. According to Tolstoy, tens of thousands of French men just decided to all of a sudden invade Russia, and Napoleon just called himself their commanding general.

However, large scale businesses seem to prove that the Great Man theory is the more correct. Did a whole bunch of computer programmers just all of a sudden decide to move to Redmond Washington, and Bill Gates just jumped in front of them and called himself the CEO of Microsoft? Or did Bill Gates first found Microsoft and then hire those programmers?

Obviously, the second explanation is more reasonable. And there's a clear implication that the fate (and therefore the stock price) of businesses are highly dependent upon one or a few individuals.

This is most obviously true of start up businesses which are usually the result of the vision of one person. Sam Walton and Bill Gates are two prominent examples, but almost every small company depends upon the vision and/or research and/or ideas of a founder or chief scientist.

This is probably more true even of large companies than we recognize. Where would General Electric be now if Jack Welch had never become CEO?

Yes, of course the work of a company is done by thousands or more of its employees, and the contributions of some other few individuals are very important. But it's also true that for maximum effectiveness their efforts must be directed and shaped toward a corporate goal.

McDonald's has good cashiers and bad cashiers, and always has, but its fate does not depend upon any one cashier, and never did. But certainly McDonalds would no longer be in business today if Ray Kroc had died a year after taking the business over. I wonder how many great businesses never got off the ground because their founders died prematurely.

So my point is that much of what is technically termed "company risk" is actually "important person" risk.

This seems to me a serious issue for people who think that they've found a company that's going to make them rich in a few years, whether the stock tip came from their broker, a buddy at work or an investment newsletter or the Internet.

Do you want your financial future to be just one fatal car crash, one heart attack, one untreatable case of pancreatic cancer, one bitter divorce, or mental breakdown away from disaster?

That's why it's important to diversify your investments. It'd be great to get in early on the next Wal-Mart, but none of those investors had a guarantee that Sam Walton would live as long as he did.




important person company risk
important person company risk

Stock tips on the morning radio

This morning I was listening to the Allman and Smash in the Morning radio show on my way to work. That's a talk show generally oriented toward politics (on the conservative side), but they do go off in other directions, and Jamie Allman was talking this morning about how he fails to invest in companies he knows about.

Unfortunately, it was the kind of conversation that feeds people's belief that making money in the stock market is about making quick capital gains.

Jamie started off saying that he should have known to invest in Google at its Initial Public Offering or IPO because he went to some conference for investigative journalists about that time and all of them were using Google. Well, online Google itself was firmly established as the best search engine.

Then Jamie mentioned that way back in 1990 or 1991 he lived next door to a guy who told him once that his brother in Israel or some other Mideastern country was working for a company called Adobe, and Jamie should invest in that. Jamie blew his neighbor off, but now knows that Adobe is a great software company.

So Jamie was lamenting about his lost chances to make money, but added that he didn't lose money either. He just hadn't made any. I think a lot of tech stock investors would like to trade places with him.

Unfortunately, Smash didn't help point this out. He added that he bought MTV a long time ago, then years later sold it to be his house in Chesterfield (a wealthy suburb of the St Louis area).

Ah, if only it were so easy to get good stock tips. We'd all be rich and wouldn't have to work :)

Jamie, read AMERICAN SUCKER by David Denby (lost a million dollars in NASDAQ stocks) and A MATHEMATICIAN LOOKS AT THE STOCK MARKET by John Allen Paulos (lost large amounts on WorldCom) and be glad you haven't lost money.


stock tips
stock tips

Rule breakers -- certificates of deposit

I haven't finished reading either book yet, but I've started on both a RULE BREAKERS, RULE MAKERS by Motley Fool and also a book on Enron. The first section of the Motley Fool book is on how to identify and profit from buying "rule breakers." Those are growth stocks that you can tell are just going to be giant successes (well 2 out of 3 times). Reading about how Enron in the early 90s transformed itself from a gas pipeline company to one actively engaged in numerous gas-based derivative contracts, I couldn't help but think that Enron was by Motley Fool's definition a "rule breaker." No other energy company was applying advanced financial strategies to the industry. And I wonder how you would have figured out in the early 1990s that Enron's growth would eventually fail. They were no doubt pioneers in their particular field. If they'd kept their accounting honest, I guess they'd still be in business.

I shouldn't pick on Motley Fool, who're not an investing icon, but I think I'd rather put my money into certificates of deposit than try to guess which young "growth" companies at any point in time are going to be the rule breakers which keep them growing quickly. They describe some in the book, but how easy is it to catch them prospectively instead of retrospectively? And how easy is it to distinguish the ones who're going to be successful from the "faker breakers?" Especially if you're not familiar with a particular industry?



certificates of deposit
certificates of deposit

Her dividend income grew bigtime

For some reason, Anne Scheiber is on my mind today. Maybe because I'm thinking about retiring from my federal civil service job, and I'm older now than she was then.

You may have heard of her. Despite her graduate degree, she was repeatedly denied promotions, so she retired from the IRS in 1944 at the age of 51. She had saved up $5000 (even though her highest annual salary was $3150).

She spent the rest of her life living in a rent-controlled apartment in New York City on her civil service pension. She apparently spent very little money. She read THE WALL STREET JOURNAL every day at the library of a nearby woman's college, Yeshiva University.

When she retired, she took that $5000 savings and invested it in stocks. By the time she died -- 50 years later -- she had a portfolio worth $22 million. The dividends and interest she received annually amounted to over $800,000. She reinvested this money based on her research in THE WALL STREET JOURNAL.

She bought stocks because she noticed during her career with the IRS that rich people owned a lot of stocks. In later years she did move some money into bonds and such fixed income investments.

She got her revenge on the federal agency which refused to promote her. She never sold any of her investments. Therefore, she never paid any capital gains tax.

Also, when she died she donated the entire $22 million to Yeshiva University, no doubt to make sure they never stopped subscribing to THE WALL STREET JOURNAL so that other thrifty and eccentric multi-millionaires could read it.

She never benefited from the capital gains her investments earned, since she never sold her stocks. But she could have avoided paying capital gains taxes and still spent some money on herself thanks to the dividends her stocks kept paying her.










dividends
dividends

Penny stocks can be permanent options on market

I see this site listed in almost every website directory I go to:

penny stocks

Of course, that doesn't mean I recommend penny stocks. If I want to gamble, I'd go to a local riverboat. Even if you don't live in an area close to legalized gambling, you'd probably be better off going to Vegas of Atlantic City for the weekend.

I have bought penny stocks, I confess. Years ago I bought some software designed to help people buy Vancouver mining stocks at their lows, when they're basically shells, and then wait until the promoters push them and raise the stock price. One of the companies I bought did have a price surge a few months later, but it wasn't enough for me to sell, and then it dropped back down. You can't tell if a stock is at its low even if it's only a few cents. They can go to tiny fractions of a cent!

A few years I decided to buy some of the small gold mining companies I saw used to advertise newsletter subscription. This time, my thinking was that these were like put options on the market as a whole. If the economy fell apart and gold shot up to $2000 an ounce, then these stocks would shoot up in price.

I still think that's a fairly reasonable strategy if you're worried about the price of the stock market or just the economy as a whole. Buy some small gold/oil other such stock that would benefit from commodity/energy price increases and general economic disaster. Then just hold it. If the economy keeps on going well, you paid for some cheap insurance that, unlike put options on the market, will never expire (unless the company goes out of business). If the economy does collapse, the price will go up and you can sell it to buy $10 a gallon gasoline.

However, the one natural resource company I've seen mentioned is BHB Billiton of (I believe) Australia. And it does pay dividends, since it's on the Mergent International Dividend Achievers list. Therefore, if you want to profit from price rises in gold, that would be a good option.

penny stocks
penny stocks

Investment basics -- human desires and needs

Sometimes it's good to take a step back and think about the fundamentals. What is business? Fundamentally, business is people taking care of the needs and desires of other people. If we could all satisfy our own needs and desires, we wouldn't need to have businesses. We'd just do it everything for ourselves.

But even when we were cave people we weren't totally self-sufficient. No doubt some cave people were better at making bear skin coats than others, and perhaps traded their labor for extra food. No doubt save cave men were better hunters than others. But perhaps one guy was better at making spear tips.

There does have to be a reciprocity. I satisfy your desire for a terrific bear skin coat only if you satisfy my desire for two freshly killed rabbits to eat. This is how it works between free people. Of course there is slavery, both in the older form and in the modern form of welfare.

Money makes the reciprocity a lot easier. Instead of making a bear skin coat for two rabbits from you, half a deer from Joe, and a pile of eggs from Sue -- I simply charge everybody the same five dollars. This gives the system a lot more flexibility. You earns his five dollars from hunting, Joe from fishing, and Sue from carving necklaces.

All this sounds obvious, but it was a comfort to me when I came to understand that income from a company was safe as long as it met the needs or desires of many other people. As long as it does that, it will stay in business and general interest or dividend income for investors.


investment basics
investment basics