2011 – Year of Investment Gulag; 2012 – Year of Crises & Surprises

Relativity of investment success in 2011

Investment accounts of most pyramid investors have finished this year with large draw-downs. Last four months were especially brutal. In such circumstances, it is hard to claim success or at least, the success is far from obvious.

Considering our emotions and sentiment about dollar valuation of our accounts, there is little room for celebration. We feel as prisoners in investment gulag. Few have remained with hope about ever being released from the gulag. However, Pyramid Investing is not about letting your emotions govern market actions. It is about proper risk capital allocation and robotical execution on a plan.

Even though Gold had 11th up year in a row and intra-year peak of 35%, Silver was smashed few times and eventually finished down. Expectations would be that account draw-downs were small or nonexistent. However, many pyramid investors had great deal of portfolio in different junior mining companies, explorers or various resource companies for that matter. The whole sector was literally obliterated in 2011 that made the gulag theme prominent. Resource equities fared significantly worse than actual resources they were involved with. Beating continued throughout the year and little chance was given for accounts to recover. Constant selling pressure was relentless. Just take Uranium sector for example after tsunami in Japan.

Irrespective of account draw-downs, pyramid investors need to focus on acquiring quality assets at favorable prices and acknowledge that there is something far more important than net liquidation value of investment accounts.

Gold is wealth, wealth is Gold

Here’s a simple question: What is WEALTH?

Simple answer: GOLD is wealth!

Of course, by Gold I assume Silver too. And energy (Oil, Natural Gas, Uranium…) and food (Wheat, Corn…). Or perhaps even all commodities (real stuff).

Once you know what wealth is, you also need to know: How is wealth MEASURED?

Few know correct answer to this question. And yet having clear understanding of this concept is absolutely critical:

Gold, as wealth, is NOT measured or expressed by its dollar valuation. Value of Gold is measured by scale! An ounce of Gold always has the same value irrespective of its price expressed in dollars, euros or whatever other currency. Wealth is in weight!

I would also venture to say that even value of your cash should be expressed in terms of ounces. Weight should be your base currency. In the world of relative values, you need a reference point to measure real and absolute values.

Number of ounces you have represents how much wealth you have. Grasping this concept is foundation of wealth building which assumes increasing number of ounces in possession. Increased number of dollars only comes as a consequence of increase in Gold weight and it should never be your primary objective.

Back to our performance in 2011: Even though dollar valuation of investment accounts is lower, accumulation of equities at significantly discounted prices as well as additional ounces acquired on price weakness result in greater wealth. Profits created by pyramiding in and out of positions are ultimately converted into Gold and that is all that matters. In light of such mindset, pyramid investors can claim that 2011 has been a successful investment year!

Just for the record, here is a snapshot of futures performance for year 2011 by FinViz:

1-Year Performance of Futures (during 2011)

Recommendations for 2012

There are many reasons for 2012 to play out as a year of crises, as a year of continued crises and as a year of intensified crises. There is nothing linear about crisis and disturbances are unavoidable part of it. While disturbances and instability are more appropriate terminology for engineering systems, in everyday world of investing, economy and politics, surprises are the equivalent.

In order to deal with surprises in as safe manner as possible, your 2012 investing approach should respect the following recommendations:

1. Do not use ANY leverage in your account. Whether large or small, temporary or permanent, planned or accidental, leverage will always get you! 2012 will be a year in which you definitely don’t want to mess with taking chances with leverage.
2. Maintain high levels of cash. Even though this may look absurd in an environment of heightened risks of cash devaluation, it is more important not to get into a situation where you would need to tap into your Gold stash for whatever reason. This is of course under assumption that you DO have plenty of cash to begin with.
3. Increase percentage of your net worth that is kept outside the system. Since risks of losing what you have in the system are elevated, it is only prudent to get some of what you have while you still have it and while you are still able to get it out of the system.
4. Reduce trading. First, reduce the percentage of your net worth that is dedicated to trading (this of course includes pyramiding). Second, increase steps and ranges of your pyramids which complies with expectations of mind-boggling volatility.
5. Keep more of your assets as a core. Keep that core extremely tight and far from your own reach as you will undoubtedly be exposed to many pressures to sell it. Far from your reach means, for example, to take possession of share certificates for your core positions. Such move is also in accordance with recommendation #3 and it helps fight against those who borrow your shares to sell them short.
6. Keep your emotional stability. Never be tempted to price chase anything under any circumstances, no matter how much things look desperate or are running away. Wait for price to come to you instead.

I wish you all happy, healthy and prosperous New Year 2012!