Thursday, September 17, 2015

Some sage advice from Captain Capitalism

Captain Capitalism (a.k.a. Aaron Clarey) can be foul-mouthed, misogynistic, and more than a little crude at times, and I don't recommend his 'dating' or 'relationship' advice at all;  but he's also got a very shrewd, inquiring mind, and I think his economic and investment perspective is far more accurate than not.  He's written an article pointing out that as far as investing our hard-earned money is concerned, traditional options are offering very poor returns indeed at present.  He recommends a different approach.  Here's an excerpt.

First, the market is so overvalued for anybody looking into government sponsored retirement plans it's just not worth it.  For the past four decades trillions of dollars in retirement money has been flooding the stock market driving up prices WELL above what the earnings and dividends warrant.  You throw in the added 2-4 trillion dollars recently in QE money and ZIRP-financed corporate buybacks, and the stock markets no longer reflect an investment opportunity, but irrelevant numbers that speak more to inflation, government policy, and central banking policy than earnings, profits, dividends, and future growth.

Second, this then forces the SAVVY investor (ie-one who looks at rates of return and not just “super happy funny magic capital gains on paper”) to look at alternative investments.  Ones that provide higher rates of return and compel you to part with your money.  But since the public markets are horrendously overvalued, it is the private markets we must look at.

Peer to peer lending.
Lending money to friends.
Investing in a small business.
Taking a crack at entrepreneurship yourself.
Crowd funding ... And other forms of “micro-equity investing.”

. . .

Third, these returns are typically so much higher than the rates of return you realize in public investments that they more than pay for the tax benefits you passed up on in 401k's, IRA's, etc.

. . .

Admittedly, there is no guarantee that your private investments will more than compensate for the opportunity costs of tax benefits that come with government endorsed retirement plans, but the difference between returns can be that wide.

Fourth, as I mentioned before, control.

I can't go to Apple's corporate headquarters and talk to their limp-wristed CEO.  You can't go to Starbucks and chat with their American-hating, leftist CEO.  And neither of us have the connections nor the money to vote in even ONE member of the board of directors to reflect our interests.

However, if I lend money to my friend to purchase a rental property, I can put it in the contract that I have significant say and control over the management of that property.

If you invest in the horse farm down the road (though I'd advise against that), you can stop in and check in on the employees to ensure they're doing whatever it is that makes horse farms profitable (glue).

. . .

Fifth, the risk of confiscation.

All the government has to do is flip a switch and your 401k, IRA, Roth or not, is now part of Obama's or Trudeau's “Wealth Equalization Happy Bunnies Act.”  All those digital records of you having that hard-saved $540,000 in your RRSP is “poof!” gone, or (a la Cyprus) 50% of what it used to be.  And the reason why is because it's so easy since it's nothing but digital and electronic records.

But a duplex you've gone halvsies in with your buddy is NOT a digital record the government can just “take.”

Those silver coins are not the “Silver ETF” the government just took 25% of, but physical silver coins that are in your physical possession.

. . .

Admittedly, these investments are not as liquid as say the easily-confiscatable stocks, bonds and other publicly traded securities, but you never invested in them for their liquidation.  You invested in them for their RATES OF RETURN.  Which leads us to the final point,

Sixth, you are actually INVESTING.

Understand that buying stocks, bonds, mutual funds, etc, in your IRA or 401k is NOT investing.  The “investment” happened long ago when those companies issued the original shares or stock or bonds, took the proceeds and then invested that in property, plant, or equipment.  After that it is nothing more than secondary “investors” trading very expensive baseball cards in the forms of stocks, bonds, and mutual funds.  You buying your “Vanguard Index Fund” from somebody else on the NYSE does NOTHING to increase the amount of investment in the country.  You merely traded cash for stocks and they, stocks for cash.

. . .

Contrast that with investing personally in either entrepreneurial ventures, micro-equity investments, peer-to-peer lending, etc., where that transaction ACTUALLY IS INVESTING, not only providing you a rate of return, but creating something of value, not to mention, likely hiring people in the process.

There's more at the link, including an example from his own experience that illustrates his point.

I think Mr. Clary is right.  Certainly, as far as my own finances are concerned, I'm going to try to follow his approach.  If you're in a position to manage your money properly (i.e. give it the time and attention it deserves), I think there's no other investment opportunity in today's markets that offers the potential returns of his approach.  I think "micro-equity investing", as he calls it, has far more upsides than downsides if one chooses carefully and invests wisely.

Best of all, if we choose people whom we know and trust personally, and help them with timely, suitable investments, I think we have a far better chance of making a return on our money than if we trusts an amorphous, computer-driven, dog-eat-dog market that's beyond any small investor's control.  Remember, "whenever you don’t know who the loser is in a transaction, then the loser is you".



John A said...

Yes - and no. I do not know anyone who is dong anything needing any investment money. Well, apart from a guy I met casually who intends to "retire" from being a drug dealer and become a legal marijuana distributor, and has eight investors but needs two more to rent a warehouse...

Another possibility? Many years ago, I bought triple-tax-free (no local, State, or Federal taxes) bonds. At the time they returned about three per cent, but being tax free the actual return was about five per cent Against this idea is they are usually for projects, such as building a dam, of a foreign government so try to be aware of their politics and likelihood of default.

Inconsiderate Bastard said...

First, he's right - stocks, bonds, IRAs, 401s, etc. are just amorphous promises to hold your money, add something to it over time, and then - hopefully - return it to you.

Concrete investments in which you can have some say about the operation of offer greater control, but beware of the hidden attached strings. Being a partner in a neighborhood hardware store is good, but that store's success is dependent upon obtaining merchandise to sell, which may not always be the case.

Anonymous said...

"Lending money to friends" is better than investing in an IRA? He's kidding, right?

Divemedic said...

@ Anonymous:
It can be. I have made a few loans to friends at a profit. The terms are usually that I loan you $1,000 and the friend pays me back $200 a month for 6 months. That works out to a 40% rate of return, which is a bit higher than sub prime credit card rates.
Before you ask, no I don't feel guilty at all, and I don't view it as gouging. There is a significant amount of risk there that I must account for, and if my friend doesn't like it, he can go get a bank loan.