Be Prepared, Take a Chance, But Don’t Be Reckless

by JDH on February 9, 2013

From my desk here in the basement of my home in Southern Ontario I can report that, for once, the weather reports were correct. They predicted a big snowstorm, and we got one. It wasn’t a monster-storm-of-the-century storm, but 25 cms (just under a foot) and high winds is enough to make life miserable. This is Canada, it snows, we’ve seen it all before, so life goes on. The snow isn’t interesting, but our reaction to it is.

My reaction was to work from home on Friday morning to let the brunt of the storm pass, and then a spent an hour and half with my snow blower clearing the driveway, so I had no problem getting to the road. Unfortunately, living on a side street, the snow plows had not yet visited by street (as they were concentrating on the main roads), so I was able to drive my car as far as my neighbor’s house, at which point I got stuck.

Fortunately I anticipated that I would probably get stuck when I was leaving my office later in the day, so I wore my big boots, and I had a shovel in the car. Apparently I required the services of the shovel sooner than I expected, and I spent a few minutes digging my car out from then end of my neighbor’s driveway. That was enough of an adventure for me, so I maneuvered the car back to my house, and spent the afternoon working from home.

The lesson in this story: be prepared, take a chance, but don’t be reckless.

The Bank of America (which I assume is a Big Bank in America) tweeted that you should make a trip to the ATM for cash. Interesting. If I’m snowed in at home with no power, what good will a bunch of cash do me? In fairness, they did also say to “Fill up your gas tank & cupboards. Charge your cell phone” which is good advice, but here’s my point: That’s good advice all the time, not just before a winter storm.

I’m an accountant, not some bearded, gun-toting prepper, but I’m also a realist. I have a cord of wood in the garage and an un-lit fire built in the fireplace, so if the heat does go out I can light the fire and keep warm for weeks. I’ve still got a stash of potatoes, sweet potatoes, turnips, carrots, onions and garlic from our garden stored in the fruit cellar in the basement, with lots of canned goods, so we won’t go hungry. I’m prepared.

Are investors prepared?

Are investors prepared for the next phase of this market? Good question.

DowFeb9

The Dow closed on Friday just shy of the magical 14,000 level, after exceeding 14,000, intra-day, on both Tuesday and Friday. Will we see a close above 14,000 next week? Probably. Does it matter? I have no idea. 14,000 is just a number, no more important than 13,999 or 14,001, but if we do get a 14,000 close it will give the talking heads lots to talk about.

Of greater interest is 14,100, which would exceed the 14,093 the Dow closed at on October 8, 2007, which would give us an all-time high. We all realize that a new high would be bogus, because even using the government’s estimate of inflation 14,093 in 2007 equates to 15,898 today, so we are a long way from a new high in real dollars. The public, of course, doesn’t realize that, so if and when we make a new high it is likely to encourage those on the sidelines to finally take the plunge back into the soup.

I won’t plagiarize the charts, but Zero Hedge has the charts that demonstrate that the markets are at the Euphoria stage, just as we were immediately preceding the collapse in 2000, and the crash in 2008.

So what’s my advice?

Be prepared, but carry a shovel.

It was obvious to me at the height of the snow storm yesterday that we were in a snow storm, and there was a lot of snow on the ground. But it also appeared the snow storm was ebbing in intensity, so I ventured out, but in a prudent manner, with a tank full of gas, winter boots, gloves, a hat, and a shovel. If the roads were clear I would have reached my destination with no issues. They weren’t, but I didn’t suffer any dire consequences, since I had a back up plan in the form of my trusty shovel.

We therefore have two strategies for playing these markets.

First, you could simply stay home. Wait for the storm to pass. In a sense that’s what many investors have done for the last five years. They haven’t suffered any losses, but they have missed the bear market rally from under 7,000 to over 14,000 on the Dow.

The other option is to get in the car and start driving, but be prepared, buy employing three strategies:

  1. Hold some cash, so that if there is a crash you can use the cash to buy shares at significantly depressed prices;
  2. Hold precious metal shares, and bullion, on the assumption that continued fiat money printing will continue to increase the price of gold; and
  3. Buy some shares that benefit from an economic recovery, in case the world doesn’t end.

As for point #2, you can buy the juniors in the hopes of a big discovery, but you can also hold the dividend paying blue chips, like RGL.TO – Royal Gold Inc. that pays a dividend, so you get the up-side to a rising gold price, but also an income stream.

What shares benefit from an economic recovery? Everything else, I guess. I will search for some ideas on this front, and if I find anything I’ll report back next week. Feel free to post your suggestions on the Buy High Sell Higher Forum.

For now, there’s a lot of snow in my backyard, so I’m going to put on my 25 year old cross country skis and see if my old body can make them work.

Thanks for reading, and see you next week.

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