I just got back from a two-day marathon of seminars and interviews at the first-ever Money Show held in
Everywhere, investors asked me tough questions — in the meetings, the lobby, the corridors, the elevator. They wanted my opinion about financial markets, world politics, even social issues.
But the dialogue that ensued was never a one-way street. Money Show attendees are highly educated individuals with a wealth of knowledge and experience to share. Here’s just a small sampling …
“Martin, those oil experts are going to get caught
on the wrong side again. And I’m afraid that
this time you could get caught right along with them.â€
Q: Last fall, The Wall Street Journal surveyed the oil experts. Almost to a man, they said oil was going down. The guy from Goldman Sachs said it was going to plunge to $30. Some other guy said it was going even lower. Meanwhile, you and Larry were saying it was going the other way — to $65. I followed you, and I’ve made a fortune.
But today, what you were saying then sounds awfully similar to what many of those guys are saying now. Martin, those oil experts are going to get caught on the wrong side again. And I’m afraid that this time you could get caught right along with them. While oil is sinking to $50, you’d still be talking about oil at $100. Can that happen?
A: Yes, it can.
Q: So aren’t we close to the time when we should start taking money off the table?
A: Yes, we are. But not all of it, and probably not today. The oil market is more volatile now, but no less bullish. The risk is higher, but so is the potential reward.
Q: Why is that?
A: Back in the fall, the main engine behind the oil price rise was the steady push of demand from
Q: Last week we had multiple supply disruptions. Wasn’t that just a coincidence?
A: No. Virtually everyone in the oil industry — producers, tankers, refineries — is maxed out to 100% of capacity. So they’re using marginal equipment. They’re cutting corners on preventative maintenance. They’re relying more on less experienced workers. So breakdowns and bottlenecks are no coincidence. They’re the natural outcome of stretching systems to their limits.
“How do I make a killing in this market?â€
Q: You’re into safety. You have your Safe Money Report, your safety ratings, your safe this and your safe that. But I want to make a killing. How do I make a killing in this market?
A: By not getting killed.
Q: Let me rephrase that. Let’s say I have my cash stashed away in a safe place. I have most of my portfolio in conservative investments. But now, I want to peel off some money to swing for the fences. This oil market should be my opportunity. But I don’t want to spend the money for Larry’s energy service. What do I do?
A: You peel away only the money you can afford to lose, say, 10% of your liquid assets. That’s your play money. Then you avoid all instruments that can expose you to unlimited risk. So if you lose some, most, or even all of your play money, your keep-safe funds are totally insulated.
Q: Where’s the leverage in the oil market?
A: There are three layers of leverage.
The first is the oil market itself. Like I said a moment ago, it’s more volatile. That alone gives you more leverage.
The second is special categories of oil stocks. When oil rises, you want your stocks to jump. For example, we’re looking at companies with undervalued oil reserves that are ripe for takeover.
And we’re looking at oil service companies. When the price of oil rises above the threshold beyond which exploration becomes profitable, they suddenly come to life and explode higher.
“Leverage of the Third Kindâ€
Q: You forgot the leverage of the third kind.
A: Sorry. That’s options. When oil rises, oil stocks can jump; when oil stocks jump, oil stock options can go through the roof.
Q: I tried options before. But I lost money. Is there a way to invest in options without ever losing money?
A: No. But you can improve your chances if you stick to a few simple rules.
Rule number one. Don’t write “naked†options. When you do, you assume unlimited liability. It’s when you just buy them that your risk is strictly limited.
Two. Avoid expensive options. Try not to spend more than, say, $500 per contract.
Three. Shop for the lowest broker commissions. It’s no good if the options are cheap but the commissions are rich.
Four. With options, don’t use stop orders — either when you buy or when you sell. Otherwise, you could wind up buying high and selling low. Besides, if you stick mostly with inexpensive options, that should give you the risk protection you need.
Five. Use limit orders. When you’re buying, that means you’ll pay only your specified price or less. When you’re selling, you’ll only accept your price or more.
Six. If you miss the market, don’t chase it. Otherwise, by the time you buy, it may already be time to sell.
Seven. Budget your funds to cover at least a dozen or so different trades over a period of time.
Eight. Try to buy an even number of contracts. When you have a double, take profits on half and let the rest ride.
Nine. Move promptly. Options lose value just with the passage of time. So if you buy them and nothing happens, don’t hang around too long.
“My 3% yield is being wiped out by
taxes and inflation. … Do I just sit
here and watch it disappear?â€
Q: I have a big chunk of my cash money in a Treasury-only money fund, just like you told me to. Greenspan has raised interest rates, just like you said he would. But despite all this, I’m still getting only a piddly 3%. My 3% yield is being wiped out by taxes and inflation. Now what do I do? Do I just sit here and watch it disappear?
A: What’s eroded by inflation and taxes is your yield. But your principal is still 100% intact. And you need that. No matter what you do with your risk money, you need a core, bedrock of safety and liquidity.
That was a valid goal even when your yield was just a half of a percentage point. It’s six times more valid now at 3%.
Q: Do you expect inflation to get worse and the U.S. dollar to fall?
A: Yes. That’s why I think you should put some of your money in gold investments and some overseas as well.
Q: But if the dollar’s going down, why can’t I put all my money into gold and foreign currencies? Why should I keep ANY dollars?
A: Because you pay for everything in U.S. dollars — your mortgage, your taxes, your rent, your kids’ tuition. You buy all your investments in dollars. Even after you’re gone, your inheritance will be in dollars. That’s a constant. But the rise of foreign currencies is not a constant. Sometimes foreign currencies are going to be falling, and when you need some money, you’ll wind up selling at a loss.
“Isn’t there a danger of
hyperinflation in America?â€
Q: First housing prices surged. Then oil. Now gold. Soon, the price of everything is going to be flying, and our paper dollars will be worthless.
In the German Weimar Republic, after World War I and before Hitler, inflation got so bad that people needed a wheelbarrow to cart their money around.
One couple went into a store and left their wheelbarrow at the door, stacked high with marks. A few minutes later they were robbed. But all their money was still there, sitting on the ground. It was just the wheelbarrow that got stolen.
At the rate we’re going, isn’t this type of thing likely in the United States someday? Our prices are surging, just like they did back then. We owe trillions of dollars to foreigners, just like they did. So what’s the difference between the United States today and Germany in the 1920s? Isn’t there a danger of hyperinflation in America?
A: No. Take a time machine back to Germany of that era. Then look around you. What do you see? You see factories in ruins, railroads and rolling stock in shreds. The capacity to produce goods is physically destroyed. That’s the first difference with today.
The second difference is more subtle — you can’t see it with the naked eye. But go to London and talk to a British banker of that period.
The British banker is madder than hell at German banking authorities, and you hear an earful that goes something like this:
“After the war, at the peace talks in Versailles, they promised to pay us for the damage they caused, and they still owe us trillions of marks. Now they’re trying to pay us back with marks that are worthless. But we can’t do a damn thing about it. We’re stuck with these loans.â€
Now compare that to today’s situation. Talk to virtually any foreign investor who holds U.S. bonds and ask him what action he would take if it looked like the U.S. were going to do something similar to what Germany did in the 1920s.
His answer: “I’d pick up the phone, call my broker and utter one four-letter command: SELL. That way I get my money back immediately. But your government can’t afford to let me do that. They need my money to run the country, to meet government payroll, to pay for the military. So they have to convince me to hold on to my U.S. bonds and continue to buy more. I may cooperate, but only on two conditions: The U.S. must prevent hyperinflation. If that means they’ve got to raise interest rates into double digits, so be it.â€
Bottom line: U.S. inflation is headed higher and the dollar’s value will fall sharply. But unlike post-World War I Germany, you will not see the total destruction of the currency.
Q: How high do you think interest rates will go in the United States?
A: In the last cycle, the Fed Funds rate rose to 20%. This time, it’s perfectly reasonable to anticipate a rise to 12%. If you remember nothing else from this conference, remember that single number: 12 percent.
“Who controls long-term
interest rates in this country?â€
Q: The Fed controls short-term rates. Who controls the long-term rates in this country?
A: Bond investors. When they sell their bonds, they drive interest rates up. When they buy, they drive them down. And today, unlike the situation that prevailed during the first two centuries of America’s history, a large portion of those bond investors are overseas.
Q: So far, you’ve been right as rain about short-term rates going up. They’ve now risen from 1% to 3.5%. But long-term rates have gone down. How do you explain that?
A: It’s not that unusual: First, short-term rates surge. Then long-term rates follow, with a time lag. And the longer the lag, the sharper the subsequent rise. A key factor: Selling by foreign bond investors.
“Why should I sell good
investment real estate?â€
Q: I’m worried about people who own real estate with a lot of debt. If rates go up sharply like you say, they’re going to have trouble making their payments. But I own some rental property, free and clear — no debt. I have reliable tenants and a good income. Why should I sell good investment real estate?
A: To protect your net worth. Even if your income holds up, what is going to happen to the value of your property? Think about that. Then decide.
“What other Weiss
companies are there?â€
Q: In an e-mail recently, you mentioned you have a money management company. What other Weiss companies are there?
A: Weiss Group, Inc. has four separate subsidiaries:
Weiss Research, Inc., publishes Money and Markets, my Safe Money Report, Larry Edelson’s Real Wealth Report, Your Money Report and several other newsletters.
Weiss Capital Management, Inc. has approximately $400 million in individually managed accounts of individuals, corporations and pension funds.
Weiss Ratings, Inc. is the nation’s leading, independent rating agency. In a study by the U.S. Government Accountability Office (GAO), we were ranked number one in America for the accuracy of our insurance ratings. And more recently, based on data from Investars.com, Weiss Ratings has also been ranked number one in America for the performance of its stock ratings, as reported in The Wall Street Journal.
The, we also have The Weiss School, a pre-k, elementary and middle school in Palm Beach Gardens with a gifted curriculum. We started it originally for my son in 1989, with just eight students in a one-room school. Now it has over 250 students and should soon have many more. Years ago, Larry and I first met when he enrolled his three young children in the Weiss School. Now, his daughter, Kari just started medical school and his older son is getting his bachelors degree.
The other three companies used to be located in the
same building as the school. But as the number of students has grown over the years, and as the other companies also needed more space, they moved out to separate locations nearby.
I have always believed deeply in education. So did my father and mother. Maybe that helps explain why the entire Weiss Group is dedicated to providing education at many different levels. I hope we can continue to do so for you and your family.
Q: I have been paying through the nose for tuition — first my kids and now my grandkids. On top of that, the kids spend money like water, sometimes on things that cause us grave concern. Since you’re the only person I know who owns an investment research company AND a private school for kids, I figure you’re the right person to ask this question: What would you recommend to teach kids about money from a very early age?
A: Your first goal should be teaching them to read. We started with Anthony 22 years ago, when he was just a baby, using a method I developed based on the principles of Glenn Doman, co-author of How to Teach Your Baby to Read. Just be sure not to PUSH. Let it happen naturally.
Next, as soon as they’re old enough, introduce games. You know the famous real estate game — Monopoly. Well, there are also great stock market games, commodity games and business entrepreneur games. Plus, if they’re a bit out of date, you can always adapt them on your own, adding new cards and rules to represent new strategies and situations.
That’s the intellectual side. Even more important, though, is the emotional side. Educational opportunities for your children should be abundant, but money for your children must always be scarce. For people with abundant wealth, that’s not as easy as it may sound.
But it has to be done. Otherwise, the same money that gives them so many opportunities takes away the desire to achieve them.
Starting when I was 5, Dad made me earn every penny of my allowance. And when I was 9, I had my own newspaper route and savings account for my earnings. I don’t think that’s too soon to get your children or grandchildren started.
I hope this helps!
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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