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Nov 272012
 

Preppers should approach the issue of investing from a different perspective.

A reader comment in reply to our article about not investing in gold made us realize that we need to consider not only what are not good investing strategies but also what truly are good investing strategies, from the perspective of the prudent prepper, and with an eye to an uncertain future.

First of all, a disclaimer.  We are not registered or licensed in any form to provide any sort of financial advice, and our own past record of investing has seen some colossal losses and mistakes.  As always, do your own prudent research and consider all perspectives before choosing where and how to invest your own funds.  Most of all, realize there truly is no such thing as a ‘guaranteed winning investment’.  If there was, everyone would rush to invest in it, and so the opportunity it represented would quickly disappear as the law of supply and demand resulted in the return this mythical investment offered diminishing down to the same as everything else.

One more disclaimer.  This applies any time anyone is suggesting you invest in anything, particularly if they are professional brokers or other forms of investment advisors/salesmen.  Ask the person who is recommending the investment exactly how much of their own money they have already invested in the same thing, and – quite reasonably – ask them why, if it is such a great deal, they are now sharing the opportunity to make money with you rather than secretly making the investment only themselves.  Also, ask to see a record of their past investing history.  Lots of people claim to be experts on financial matters, and if they are truly expert, then surely the proof of their expertise is obvious for us all to see, in their bank balance and overall net worth.

Investing Strategies in General

Let’s start off with some general comments about investing strategies – things for you to keep in mind when assessing all the different ways you can invest your money.

There is no such thing as a perfect investment, or a ‘best’ investment.  Your choice of what and how you invest depends on many things to do with your own personal situation, so that what is best for you is quite likely very different to what other people may feel to be best for them.

This means that anyone who tells you that something is a great investment without first taking the time to understand how you approach investing, and what your needs and concerns are, is clearly not someone who is sensitive to finding the best product for you, but rather someone who is more interested in simply selling whatever investment it is he is recommending.

Here is a far from complete – but still lengthy – list of factors to consider when evaluating investment alternatives.

  • Are you willing to accept a risk of losing some or all of your principal, or must you protect your principal at all costs?
  •  Are you a passive or active investor – are you willing to spend time participating in your investing and/or your investment?
  • Do you have any special skills that can help you to effectively manage an investment better than other people might?
  • Do you need to receive a monthly/annual income from your investment or is it acceptable to have nothing happen for years or decades before then cashing it in for a capital gain?
  • Do you want to make an investment as a one-time lump sum deal that you don’t have to pay anything further on, or are you comfortable buying an asset which will probably go up in value, but which has some associated ongoing costs of ownership?
  • Might you need to be able to get your money back from your investment at short notice, or are you happy with a relatively illiquid investment that might take a long time to cash out?
  • Might you need to cash in your investment in stages?  In other words, can your investment be a single thing that is either owned or sold in its entirety (like a piece of land) or something that you can sell in stages as and when required (like stocks and bonds)?
  • Do you have personal preferences that impact on the form of investment you will consider?  For example, some people choose to only invest in ‘green’ companies; others refuse to invest in arms-related companies, and so on.
  • What about tax implications – are you in a high or low tax bracket, and does the potential tax liability on your investment return make a significant difference?  A tax-free return on an investment is worth a great deal more to someone in the top tax bracket than to someone in the bottom tax bracket.
  • Do you have any special knowledge that can help you evaluate and invest in a less well-known opportunity?
  • Do you have any relevant circumstances that might cause an investment to provide you with other non-investment benefits as well as financial benefits?
  • Are you looking for short-term or medium term or longer term investments?
  • How much money do you have to invest?

Please keep these and any other factors that are important to you carefully in mind any time you consider any sort of investment.

Background and Assumptions Relevant to Prepper Style Investing

First, if you haven’t done so already, we recommend you read some of our articles in the section on economic issues after TSHTF.

To quickly summarize, we make several key points in these articles.  We predict that normal regular money will become much less valuable and will be less and less generally accepted, the more severe and extended the social disruption becomes.  So too will gold, silver, diamonds, rare art, collectibles, and most other current forms of storing abstract wealth.

You can’t eat or drink gold (or any of the other ‘valuable’ items such as those listed in the previous paragraph).  You can’t create or maintain shelter with such items.  The only things of value will be those things with intrinsic real value – those things essential to the preservation of life – shelter, water, food.

We see a new form of currency evolving to permit more convenient trading, and it will be a return to an asset backed currency rather than a ‘fiat’ currency such as our nation uses at present.  Furthermore, we suggest the type of asset backing will not be an artificial thing like gold, but rather will be the essential building block of everything we need and value in a Level 3 situation – energy.

So, what does that mean to us, today?  How can we best protect the assets/wealth/money we currently have, and how can we do the best we can to ensure our current things of value don’t lose their value if/when TSHTF but rather will keep their value or increase in value?

At the same time, we also need to protect our net worth in the present day world and economy, too.  Let’s never lose sight of the fact that while we’re preparing for an adverse future, it is not something we wish for, and indeed it is something we hope may never happen.  Our modern-day life as it currently is will always be better than anything we can recreate TSHTF and society collapses.  We need investments that will maintain or hold their value in the ‘normal’ world as well as investments that will maintain or hold their value in a Level 2/3 situation.

This means that the primary form of prepper type investing – investing in more goods and supplies that can double as trading goods in the future – while prudent in preparing for a Level 2/3 scenario, is not so good as a multi-purpose investment for the present day world.  Buying up bulk supplies of fuel or ammunition, while clearly beneficial WTSHTF, is not so useful if you need to cash them in next week.

Two Current Factors that Suggest an Investment Opportunity

We see two distinctive things in the country at present.  The first is the drop in property prices that has occurred in the last four or so years.  This was an unusual but not an unexpected thing.  It was a correction, returning property prices to something closer to their underlying sustainable rate of appreciation and value.

We don’t see the drop in property prices as now making the concept of investing in property a questionable concept.  If anything, we see it as validating the concept, and now that property prices have dropped back to where they perhaps should be, perhaps now is a good time to consider getting back into the property market.

The second factor is that interest rates are at all time lows.  They are unfortunately and ridiculously low if you are depositing/lending money, but they are excitingly low if you are borrowing money.  Now is not a good time to be saving money, but it surely is a great time to be borrowing money (assuming you have some way of productively using the money at the greater than 3.5% or thereabouts it will cost you to borrow it).

These factors apply whether the world continues as it is, or if it changes dramatically.  Indeed, let’s consider three more things.

Economic Impacts of a Level 2/3 Situation

What would occur if TSHTF and we find ourselves dumped into the middle of a Level 2/3 scenario?

First, what happens to any money that was sitting in a bank account?  That money has gone, hasn’t it.  You’ll probably not see it again – maybe you’ll never see it again, or maybe you’ll not see it again until after order has been restored.

Second, what about any money you’ve borrowed?  At the very least, there’ll probably be a freeze on the money you owe, and perhaps the business you owed the money to disappears entirely.  If nothing else, how will you make payments to the company that lent you the money?

Maybe, just like with money you had deposited somewhere, your debt will reappear at the end of the Level 2/3 situation, but that is at some uncertain point in the future rather than during the period of the crisis.

In addition, maybe there will be a period of inflation such that the value of your real estate increases, while the cost of the monthly payments decrease.

Now, for a third factor.  There will be a shift in the values of property.  All of a sudden, those fancy penthouse suites on the 35th floor of the downtown building won’t be quite so desirable when the elevators no longer work, and when the water pumps have stopped working too, meaning the closest tap water will be somewhere hopefully not too far from the building, and on the ground level.  Most of all, there’s nothing except tens of thousands of starving people all around, all with no forms of food production.

But the cheap farm land, remote from the big city – land you could buy up for a few thousand dollars an acre today; that will now become the most desirable type of land there is.  That will increase in value.  Now you mightn’t be able to sell it for dollars, but you for sure can trade it in some other way that would be advantageous to you in a Level 2 or 3 situation.  Maybe you’d not trade it in at all – maybe you’d rent it out to tenants who would work the land and pay you rent in the form of a share of the crops they grow.

Rural land is appreciating in value anyway, due to normal pressures and economic forces, and it is likely to expect that the combination of population growth and associated ever-increasing demands for food, exacerbated by land increasingly being taken out of ‘inventory’ due to environmental exclusions, and land being increasingly required in larger and larger amounts for agro-energy production, rural land prices – for land suitable for farming – will continue to increase.

A Warning About Rural Land Values

Although we’re very positive on the concept of rural land values, we also very much subscribe to the theory that there is a natural sustainable rate of value appreciation, and any time that values for anything get substantially ahead of that rate, there is the risk of a correction occurring in the future to drop values back down to where they should be on the timeline series.

This is part of what happened with housing prices over the last four or so years.  The rapid rises in prices during the five or more years previously were over-valuing property prices, and so, eventually, the correction occurred.  For some people it meant their property prices froze in value or dropped slightly, for others, it meant their property values dropped by half or even more.

Some farmlands, over the past few years, have undergone enormous increases in price; in part because of the growing demand for bio-fuel production and government subsidies that are driving that market unnaturally, and in part due to speculator action, buying up farmland not from a perspective of what makes economic sense in terms of the productive profit the land can generate, but rather from the perspective of hoping the land will go up still further in price.

If you do choose to buy farmland, make sure that its price is at a level that is sensible and realistic, related to the ability of the land to ‘pay for itself’ through normal farming activities.  If the land is overpriced – perhaps because it is expected to be annexed into a city, or by speculators hoping the prices will continue to rise irrationally, you are running a risk that the inevitable correction may occur while you are holding on to the land.  In addition, your ability to have the productive return from the land help you to pay for the costs of buying/owning the land will be greatly diminished.

So, we are saying that fair priced land is a good investment, but overpriced land is not sensible.  It is hard to disagree with that logic, isn’t it.  But be careful not to get swept up in ‘irrational exuberance’.

Any Crisis Will Have a Financial Dimension

No matter what sort of crisis might occur in the future, it almost certainly will involve some type of financial crisis – either as the thing which causes the crisis in the first place, or as an outcome of the crisis.

As we’ve discussed in other articles in our series on the Economy, a Level 2/3 crisis will probably see the banking system collapse.  The loss of electricity would kill ATMs, for a start, and as soon as backup power supplies failed, banks would lose access to their central mainframe databases, too.  How can you prove you have money in your bank account, if the bank’s computer system is down?  The simple reality is that you can’t prove this at all.  Even if you could somehow prove it (and don’t think a bank statement would help – the bank would worry that between the statement printing date and when you showed it, you had somehow cashed all the money out, or written out checks, or who knows what) how could the bank then give you cash and keep a record of it and update their systems.

Even if all this was possible, guess what?  The banks would all quickly run out of money.  These days, most of the ‘money’ in our society is not real paper money, but instead is represented by credit cards and other electronic forms.  If the electronic money forms failed, there wouldn’t be enough paper money to go around.

So when a crisis hits, you’ll pretty much be limited to the cash and assets you physically have with you.  You might have millions of dollars in bank accounts, and billions of dollars worth of shares, but none of that and not even all of that will buy you even a single cup of coffee until the banking system and stock exchanges re-open.

Who knows when banks might recover sufficiently to allow normal banking withdrawals to recommence, and who knows when stock exchanges will open their floors to trading again; and who also knows what value the shares in any company might then have.  Meanwhile, until those uncertain times, you may need to buy food and water, and to survive in general.

Our point here is a very simple one.  By all means have some of your savings and capital tied up in ‘abstract’ forms, but you need to realize that all non-tangible investments you have may become inaccessible and possibly meaningless and of no value during a crisis.

Considerations for the Prudent Prepping Investor

So, put all of the above together, and what do you have?  Clearly, after looking at all the different issues to consider, each person’s best investment strategy is likely to be different from each other person’s strategies.  There is no one obvious automatic ‘best’ scenario for everyone to slavishly follow.

Furthermore, it is one of the fundamental concepts of investing to not ‘put all your eggs in one basket’. For example, a normal person investing in the stock market would be well advised not to buy shares of just one company, but instead, to spread their money among several different companies.

Not only should you invest in more than one company, you should also invest in more than one industry.  Maybe some of your investment is in high-tech, but you should also have some investments in other sectors, whether it be health-care or energy companies or whatever other sectors you feel are suitable for you.  That way you are less affected if one particular company fails – although the balancing part of that equation is you also benefit less if one particular company becomes spectacularly successful.

Most people are happy to accept a lower rate of potential return as a fair trade-off in exchange for a much lower risk of losing some or most or even all of their investment.  You should be the same way.  Never risk any capital you can’t afford to completely lose.

We suggest that at least some portion of your overall total savings and capital be in ‘prepper-appropriate’ forms.  In other words, don’t have all your savings tied up in shares and bonds and other intangible forms – our expectation is that in a Level 2/3 situation, many companies will completely fail, causing their shares to become worthless, and we’re also not at all clear on how readily you’d be able to cash in bonds in the middle of a crisis.

Don’t invest all your money in physical assets that have little or no intrinsic value.  In other words, don’t invest in gold or other precious metals, don’t invest in artwork, or other types of ‘asset’ where the value of the object is unrelated to its productive value.  This also means not investing in ‘investment’ wine and whisky – in a crisis, your $10,000 bottle of whisky will be no more valuable than the next guy’s $10 bottle.

Don’t invest all your money in things that are only valuable and can only work if society continues to function normally.  Maybe you are investing in, for example, internet routing equipment (sure, a crazy thing to invest in, but this is an example, not a suggestion) – this would only  have value as long as the internet was still functioning.  Maybe you might own your own cell phone tower – again, this only has value as long as the cell phone networks are functioning.

The best form of tangible asset to own is agricultural land.  Although in the short-term, land prices may go down as well as up, in the long-term, land will almost always go up in value, both in good times and bad.  And in a crisis, your land immediately translates into a crisis-appropriate resource.  It provides you with somewhere to stay and live, and provides you with the base on which to become self-supporting.

We recommend you invest in productive and producing land.  If you invest in residential real-estate, what happens in a crisis when your tenants say ‘I’m sorry, we can’t afford to pay you rent any more’?  Maybe you evict the tenant, but who else will be able to pay you rent, instead?  And in a lawless scenario, an empty property is vulnerable to being looted and damaged – you’d almost want to pay your tenants for them to stay there as caretakers!

But land – if the present person farming it for you says ‘I can’t afford to pay you to keep renting your land from you’, you either say ‘That’s okay, I’ll take a share of the crops instead’ or you say ‘That’s okay, there are millions of other people who will work my land for me and share the proceeds with me instead’.

Summary

Put all this together, and what do you have?  You have a chance to borrow money at lower rates than probably any other time in your life, and you have a type of land/property that may continue to steadily appreciate, both in normal times and in extreme Level 2/3 situations.

If your financial situation can withstand it, we’d urge you to buy farmland.  And don’t just buy some empty land and ‘sit’ on it.  That means you’ll be paying land taxes each year, but not getting anything back.

Maybe you can build your retreat on part of the land you now own.  Maybe you can hire a farm manager to manage your farmland for you, or maybe you simply lease the land to someone to use to grow their preferred crops on.  You might be able to rent land for housing horses, for growing crops, or even for grazing cattle or growing trees.

It doesn’t really matter what type of land use your property is being used for, but it does matter that your new asset is not only slowly appreciating in value, but is also paying its way in the meantime through some type of productive use, with the income from the land’s use being used to cover the costs of owning the land (ie land taxes, and possibly property maintenance, both of dwellings and fences and other improvements on the property) and hopefully a good measure of the payments on the money you borrowed to pay for the land you bought.

If you don’t have enough cash to put a down-payment on a suitable piece of land, consider going into it as partners with other friends or family members.  The legal procedures to create a partnership or limited liability company or some other legal entity suitable to allow a number of people to make unequal contributions to the subsequent purchase(s) of land are fairly simple and inexpensive to create, and it is an easy thing to specify the formula for how much each investor will receive in proceeds from the land’s ownership and possible resale.

Another opportunity which might be appropriate for people considering investments in a wide range of different amounts would be to consider investing in the Code Green Community.  Even if we do say so ourselves, the underlying dynamics of this scenario are positive both for investors and for participants.

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David Spero[suffusion-the-author display='description']

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