As 7DB has been watching gold prices soar while the rest of the economy struggles back in fits and starts, an interseting question arises: Do investors actually know what they are buying when they buy commodities?
Many can recall Gordon Gecko, played masterfully by Michael Douglas, from the movie Wall Street in the '80s. The line everyone recalls form the movie is "Greed is good.", but another line may apply to today's investors buying things they don't understand.
"The most valuable commodity I know of is information."
When stocks went all topsy-turvy, people were convinced by their half-wit investment counselors to get out of the market and into commodities. Truly, what am I gonna do with a pork belly? My freezer is already full of turkey for Thanksgiving...where am I gonna store those?
Jokes aside for the moment, several thousand investors have money in sugar and sugar futures, and 7DB can guarantee they do not know about how approximately one in eighteen of the workers producing that sugar (from beets, in America) are slaves. Real slaves. Debt bondage, kidnapped from another country, even homeless people trucked in, plied with liquor and cheap drugs, then worked seven days a week, twelve hours a day.
The morality of money has always been of interest to this columnist, as too many actions are driven by the need for it, and even more alarming is the number of actions driven by the sheer want of it. The economic downturn has been attributed to investor greed and these made up 'credit default swaps', which are more or less insurance for investors against...loans going bad that were made and packaged by others who don't wish to reap the rewards of those loans.
A Reader's Digest breakdown: 7DB loans another lonesome blogger $1,000 at 10% interest, payable at one hundred dollars per month until paid off. That $100 in profit requires 7DB to wait eleven whole months to make a measly one hundred dollars, so the loan is sold to Bank X for $1,030. 7DB makes a profit, Bank X gets free money for doing nothing, and the terms of the loan do not change for the borrower. This is standard stuff.
Bank ABC thinks that Bank X is going to screw up the loan, so it buys insurance on the loan from AIG for the $1,000 loan for a total of $200. When Bank X tries to insure itself against the loan defaulting, their insurance is also $200. When the loan does default, due to the economy being unstable or what-have-you, Bank X and Bank ABC get paid $1,000 each from AIG. Bank ABC's involvement is on a credit-default swap.
So, to reset: Original loan maker makes $30, Borrower received $1,000 and never paid it all back, Bank X lost only $230 and Bank ABC made $800 for doing nothing. AIG loses $1,600 on the premise that most of the time, these loans get paid back. When everything goes sour too fast, AIG is too exposed, and the U.S. taxpayers step in with a few hundred extra billion, and all is paid in full.
Makes sense? Not to anyone without years in the business and to no one who does not have a bit of Gordon Gecko in them.
Hence, the broker can sell his clientele on commodities. Platinum trades at $1400-plus per ounce, gold trailing slightly at around $1150 as of this writing. The only applications of these rare metals that most people are aware of are sold by places that put the metals in a little blue box and mark it up 1500%, all in the hopes of some physical or emotional interaction with its recipient. These metals, like many other commodities, are up hundreds of dollars in these past few years, gold alone being in the plus an astounding 156% since 2005.
The question is: what are people buying when trading in this? Gold is trading at $1100-plus, but the local jeweler is probably paying about $350 an ounce for it. The melt places available online or by mail are paying in the low-$400's. Where do any of these come to a 'trading' number of $1100? It retails for more, but that is due to design and overhead from the distributors (Jewelry Mart, etc.), so there is no actual place that this commodity trades for this number outside of Wall Street.
All of this brings up the point of this diatribe, being there is one major investor whose name is well-known and whose policies on investing are proven and sound. Warren Buffett operates Bershire Hathaway, effectively a holding company that has shares trading for $103,000 per share. No splits, no 3.25-for-1.75 stock swaps. Just a stock that gains value all the time. The Class B stock, available for a far more reasonable $3,400 per share, gives investors a readily attainable way of benefitting from Buffett's strategies.
What are they? Buy stock in stuff that one can understand how it works and what it does. Buffett's most recent acquisition target was not sexy to most investors. He bought a railroad company. Burlington Northern, the biggest on the block, for $34 billion (yes, with a 'B'), knowing that these 'commodities' need to be transported somehow.
Berkshire Hathaway, without boring readers with too much minutiae, own parts of insurance companies (GEICO, with the little Aussie gecko), banks (Wells Fargo, U.S. Bancorp, M&T), consumables (Coca-Cola, Kraft Foods) and retailers (Wal-Mart) not to mention Nike, CostCo, Johnson & Johnson...you get the idea. All household names, all products and services that everyday life uses.
Want to prevent another fallout in the world's economy? Buy stuff you understand. Simple, isn't it?
------------------------------------------------------------------
Some stoner-looking kid won the National League Cy Young Award, given to the best pitcher in baseball each year. Tim Lincecum of the San Francisco Giants won his second consecutive of these, even though he looks like a fifteen-year old skater punk.
Lincecum won in a very close vote over two teammates who both could have won individually (and may have cost each other by splitting loyalty voting), Adam Wainwright and Chris Carpenter of the Saint Louis Cardinals. (Check this link to see Lincecum throw a ball with what looks to be a mini-hula hoop around his neck. http://sanfrancisco.giants.mlb.com/team/player.jsp?player_id=453311)
While the tall, skinny skater boy would appeal to Avril Lavigne fans around the world, the thoughts at Casa du 7DB revolve around the other two top vote-getters. Cardinals fans right now must feel a bit like Democratic voters in 2000, when Ralph Nader split the voter block and allowed G.W. Bush to make a very competitve election out of what would have been a runaway for the Inventor of the Internet and Savior of the Environment, Oscar and Nobel-award winner Al Gore.
Adam Wainwright was a closer for the Cardinals at one point, brought in to shut down any hopes of a rally in later innings of games to guarantee the victory. His aspirations (and robust success) as a starter very well could have cost Carpenter the Cy Young, and the $250,000 bonus that went with it. (Carpenter did get a $100k bonus for finishing 2nd, as did Wainwright for finishing 3rd in the voting.) While it may seem an insignificant difference to multi-millionaires, the long-term monies lost to Carpenter by not winning that award could be tens of millions on the free agent market.
No matter. I am sure that Lincecum will build a sweet halfpipe in his yard and let all his bros come and shred on it. Congrats, kid...
------------------------------------------------------------
***7DB note: A short post today, with a weekend column coming and two columns next week before all eight (8! We're growing!) readers take the long weekend off for mass tryptophan consumption.
Things that 7DB has to be thankful for: a lovely new wife (the aforementioned Ms. 7DB), a lovely new home filled with cool animals in a different city than where the last 18 years went by, a phenomenal new family of in-laws and cousins, oh my!, the Official Brother of 7DB and his fantastic wife and stepson, cousins and aunts and uncles scattered acorss the nation (making the 7DB voting bloc of considerable clout in Washington in 2012...YES WE CAN!) and many friends and extended (read: non-blood relative) family. From the 7DB family to yours, Happy Holidays...
Subscribe to:
Post Comments (Atom)
You lost me at Bank ABC.
ReplyDelete