Investing Into a Dep/recession

For months now, I’ve avoided giving what can be construed as investment advice – instead answering the many queries about “what to do with my savings?” with general commentary on the state of currency, property, local investment, commodities, and debt. This hasn’t stopped the queries for specific ideas on what to do with retirement savings, college savings plans, and other “real money” people are worried about.

Apocalypse scenarios aside, there are real, “traditional investing” things I believe people can still do with their (remaining) money to weather the continuing economic crisis. There’s two main goals to investing: capital appreciation (making money) and capital preservation (not losing money). And strategies for accomplishing these two things aren’t necessarily the same. Now that the economy is pretty sketchy, people’s homes are worth less, there’s less money to spend, businesses can’t borrow easily, and basic resources are costing more (because money is worth less), it’s one of those times when capital preservation might be more important than great winnings.

Still, there’s probably a few ways to win relative to others (which is the way our racetrack investment markets work). Here’s some of my ideas. I’m not a broker, and I’m not suggesting you do any of them.

1. Preferred stocks and similar bond-like corporate issues.
When big corporations want to raise money, they issue special shares and special bonds that are traded on the open stock exchanges – but they earn guaranteed dividends. Years ago, for example, GM issued a bunch of 25-dollar shares under the ticker symbol RGM, with an interest rate of 7.25%. As GM’s regular stock value has declined, so has the value of these bond-like shares (called “senior notes”). They’re now selling for under 10 bucks; but they still get the 7.25% interest based on the original 25 dollar price. This means that bought today, they earn over 17% interest. And this isn’t a dividend paid at management’s discretion; it’s a payment that can’t be cut unless GM goes bankrupt.

Now that’s a possibility, for sure. GM could go bankrupt. But even though oil may be over, automobiles probably aren’t. As electric vehicles and battery exchange stations replace gas guzzlers and gas stations, GM will still likely producing vehicles. And even if you hate GM and what they represent, buying these shares doesn’t give GM any money – they already got the 25/share when they first sold them. (You will have to like GM enough to hope they don’t go out of business, though. If that’s too much love for the corporation, find another similar out-of-favor high-paying instrument.)

There’s a bunch of these kinds of ‘senior notes’ and ‘preferred shares’ out there. All you need to do is pick one with a really crazily high rate, but from a company you think will not go bankrupt. The company does not need to do well at all over the next decade. They just need so survive – and you get 15% interest or better. Once the storm has passed, the price of the shares should go up, as well. If you know of reasons why these investments truly suck, please post below. I am longing to hear the ‘catch’ that I’m missing about this too-good-to-be-true investment.

2 – Gold. The recent 20% decline in the price of gold probably represents a good opportunity to pick some up. The easiest way is an exchange traded fund that buys gold, like GLD. This would be more a “preservation” play than an “appreciation” play.

3 – Water. The trick here is invest in companies helping making the water supply cleaner and more accessible – not companies profiting off starving developing nations of their rights to their own water. And this is harder to figure out than it looks. So far, of the water funds I’ve researched, the Claymore Global Water (CGW) seems the most invested in companies that are doing exploration, research, desalination, sewage treatment, and other activity to improve global water resources. Some of the other funds are more involved in activities you probably wouldn’t want to be supporting.

4 – Alternative Energy. T Boone Pickens and GE are both staking their futures on alternative energy. It’s really hard to pick individual companies to invest in, though, because you never know exactly which solar panel and windmill strategy will turn out to be the most efficient. Better to support the entire industry I think, especially in hopes of an Obama administration that prefers wind and solar over nuclear (plutonium and uranium are limited resources, themselves) and pointless off-shore drilling. I found an exchange-traded fund called WilderHill Clean Energy (PBW) which has done abysmally of late – but that might just mean this is a good moment to buy in. Other ideas?

5 – Currency. This one is hard, and I’m not doing it myself. The idea I had was that even if all money is becoming less valuable compared with real things, different currencies are probably descending at different rates. So you should be able to make money going to a site like Forex.com and investing in currency ratios, say, USD/NZD. In the short term, the US dollar is strengthening relative to the NZ dollar, which has had a good run for the past year or so. So if you owned an instrument like USD/NZD, it would increase in value as long as NZD got weaker faster than the USD.

But currencies are deeply strange, and moved around by people looking to exploit interest rates of different countries. The reason why the NZD went up so much is that Japanese (who get basically no interest on their savings) were investing in NZD bank accounts in order to earn some interest. This only works for so long before the currency shifts. In short, it’s really hard to know what currencies are going to do, and betting on their movements is tricky.

6 – Debt arbitrage.
Now Suze Ormond might disagree, and this is probably irresponsible. But if I had a mortgage at a good rate, I probably wouldn’t want to pay it down with savings. I’d be better off earning 10 or 15% on a good bond and paying 5 or 6% on the mortgage. This is profit of 10% just for doing nothing – which is the way capitalism works for people with capital. If someone is in that position, and leveraged with a low-rate mortgage (instead of a high rate credit card) I’d think they’d want to use the money they were allowed borrow at a great rate, rather than pay it all back.

My personal advice is to do whatever you’re going to do and get over it. Unless you’re going to be a professional trader, just get back to work doing the thing you really do.

Of course, you’re welcome to post your own ideas to the comments below. Nothing I’ve said (or that you say) should be construed as professional investing advice. We’re just real people sharing our thoughts on how to save for our kids’ educations.