Derek Sivers

Crash Proof 2.0 - by Peter Schiff

Crash Proof 2.0 - by Peter Schiff

ISBN: 047047453X
Date read: 2009-10-25
How strongly I recommend it: 1/10
(See my list of 320+ books, for more.)

Go to the Amazon page for details and reviews.

Opinion on what to do if the dollar crashes, as the author is strongly speculating that it will. I highly recommend reading the Investor's Manifesto after or instead of this, for a strictly fact-based non-speculative approach instead. But still this is interesting to hear this point of view.

my notes

Replace your endangered U.S. dollar holdings with a portfolio of foreign securities that offer less long-term risk, significantly higher current yields, and more upside potential.

It isn’t the dollars you are trying to conserve; it is the purchasing power that those dollars represent.

In “communist China” entrepreneurs have more freedom than they do in America. It is far easier to go into business there than here.

The country with the greatest currency risk is our own. Here at home we call it inflation risk or purchasing power risk.
The way to avoid it is by investing in those foreign currencies that are expected to rise significantly as the dollar falls.

Of the three sources of profit, dividends are most assured, assuming you selected stocks with sound fundamentals.
If the stock goes down but the currency goes up, you’ve got the dividends so you’re two out of three.
Most of the time you’re going to get at least two out of three.
In the worst-case scenario, you’re going to get two down and one up: currency down and stock down, but the dividend paid and offsetting the currency or the stock.

I strongly recommend you put all your invested money in foreign currencies.

I will be talking mainly about the equity markets, although all investors should have an emergency fund in the form of cash equivalents and near-cash, such as money market funds or bank certificates of deposit (CDs).

My preference for equities is grounded in my belief that all governments that issue fiat currency will inflate, which will tend to reduce the purchasing power of those currencies.

By owning equities, whose income streams and value can rise to offset inflation, we get a hedge against foreign as well as domestic inflation.

Currency gains on foreign bonds or certificates of deposit are taxed as ordinary income at maturity.
By investing in equities we can either put off taxes on foreign currency gains indefinitely or realize those gains but pay taxes at the lower capital gains rate.

I buy when prices represent value, my portfolios have growth potential, but I view capital gains as a bonus.
Dividends paid by a growing company will usually increase as profits grow, but dividend growth is also a bonus.
Current dividend income must justify the purchase.

Don’t give your foreign stock order to any brokerage firm, discount or full-service, that will route it through a Pink Sheets market maker for execution. Not only will you get hosed on the price, but you’ll potentially pay a fat commission on top of that. Stay away from the Pink Sheets, period.

Key to my strategy for trading foreign stocks is to have your order executed directly on the foreign exchange that lists the stock you want to trade. That ensures you get the best price.

To trade directly in foreign markets, you will need a broker that specializes in foreign stocks.
1. What exchange rate do I get? Currency conversion should cost you 10 to 15 basis points
2. Can I be certain my order will be executed directly on the local foreign exchange, and not by a market maker in the United States using the Pink Sheets?
3. Can I place limit orders (orders restricting execution to a specified price or better) in foreign currencies?
4. Can I elect to receive dividends as well as proceeds from sales directly in a foreign currency?
5. Are there minimum transaction amounts, special fees for overseas orders, other hidden costs, or miscellaneous fees? Please provide a list of all charges.

Your best bet would be to ask your broker to help you buy a no-load mutual fund invested in foreign money market instruments, such as the Merk Hard Currency Fund.

Since we’re looking for conservative stocks, we don’t want to jump from the frying pan into the fire. So we avoid emerging, developing markets and developed markets where there is any question of political risk.

Structure a diversified portfolio of conservative stocks with high dividend yields in developed markets.

Canada, which, surprisingly, now has one of the best-positioned economies in the world. We’ll be looking at industrial sectors as our next step, but Canada happens to be part of the natural resource block, which includes Australia and New Zealand and, to a lesser extent, South Africa and the Scandinavian countries, like Norway.

My two favorites there are Hong Kong and Singapore, followed by Japan.

Initial impact of a dollar collapse will be most disruptive in Asia, while Europe will be affected to a much lesser extent. As a result, in the short run, non-Asian markets might do better, but in the long run Asia has the most to gain from the dollar’s collapse.

Electric, oil, and gas utilities are attractive equity investments.

Real estate, especially when it can be owned in the form of property trusts, as it can in most mature foreign markets, has both high yield and tax advantages. I prefer property trusts that are mostly commercial.

When you’re buying property trusts, you’re really not in the stock market; you’re in the real estate market, and the rents are coming to you in the form of dividends. What’s good about it is that you have diversification, immediate liquidity, lower transaction costs, and professional management, and you don’t have to worry about collecting rents or getting insurance. It’s a very convenient and easy way to buy real estate, particularly if it’s halfway around the world.

I am particularly bullish on commodities.

Now my thinking is that as the dollar collapses, the currencies that will rise the most will be Asian, particularly Chinese.

We’re going to see tremendous demand for the raw materials necessary to satisfy the demands of the far wealthier emerging Asian economies, once their full purchasing power is finally unleashed. Commodities, natural resources, raw materials—all names for one sector—are therefore a great play in my judgment.

Many Canadian oil and gas companies pay dividends of 12 percent to 15 percent. Coal producers pay dividends averaging something like 11 percent, and companies mining nickel, zinc, and lead are paying 7 percent to 10 percent.

What we won’t be buying are companies that have significant exposure to the United States. Those companies will be good candidates to buy after the dollar collapses and their stock prices fall as a result of lost export sales.

Have exposure to the foreign currency through companies that generate their revenues in their own local markets (a Japanese retailer would be an example), not by exporting to the United States.

It is important that investors understand basic analysis and valuation tools so they can understand the language of research reports, corporate financial information, and financial news.

with relative simplicity and convenience, you can have a diversified portfolio of conservative foreign equities and earn an annual dividend yield of around 8 percent.

stocks of the caliber we’ve been talking about will probably never need to be sold and will provide a lifetime of increasing income. That

when augmented by rises in the value of the principal producing it, will likely offset declines in the purchasing power of the U.S. dollar

Crash Proof is subtitled “How to Profit from the Coming Economic Collapse”, not “How to Profit from the Coming Stock Market Collapse.” The economic collapse is still in its early stages, its progress being delayed in ways that only ensures greater devastation when the process concludes.

my enthusiasm for commodities stocks, such as copper, lead, nickel, agriculture, and energy, is stronger than ever with a resurgence in demand and limited capacity promising higher prices and huge gains. I am certain that the recent sharp decline in commodity prices will reverse, and that bull markets will return stronger then ever.

My greatest fear is that people who stayed in cash and think they did the right thing based on 2008 will stay in cash too long and watch their cash lose its purchasing power. For now those still holding cash feel like they dodged a bullet. However, what they fail to realize is that they are standing on a land mine!

What percentage of your overall portfolio should be in physical gold and mining shares? My recommendation would be 10 percent to 30 percent gold-related investments and 70 percent to 90 percent conservative foreign stocks. The more aggressive investor would weight gold higher, while the more conservative investor, particularly if current income is required, would weight it lower. So an aggressive investor could have a $1 million portfolio with $700,000 in conservative foreign stocks and $300,000 in gold, apportioned as I suggested, while a more conservative investor might have $900,000 in stocks and only $100,000 in gold.

that gold stood its ground in a strong dollar environment means it should perform extraordinarily well in the weak dollar environment we are ultimately headed for.

Remember that the only reason the dollar became the world’s reserve currency was that it was not only backed by gold, it was redeemable in gold. The whole idea behind having reserves behind a currency is that currencies in and of themselves have no intrinsic value. Now that the dollar is backed by nothing, it makes no sense to hold dollar reserves, which is the same thing as having no reserves at all. So I think we are going to be moving in the direction of gold becoming a greater percentage of central bank reserves relative to dollars or other leading currencies. China recently announced it had quietly doubled its gold reserves from 2 percent to 4 percent of its total reserves and is now the world’s leading gold producer.

I continue to feel strongly that it is wise to have some gold and silver offshore and recommend the Perth Mint for the reasons I gave in the chapter.

the Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies chosen for their value as protection against the depreciation of the U.S. dollar relative to other currencies.

If instead of buying a house now, you rent and invest the down payment money outside the United States, you’ll be able to afford a much bigger down payment in a few years and perhaps even own the house without any mortgage at all. If housing prices decline 50 to 60 percent and the dollar declines 70 percent, a $500,000 house would become a $200,000

I do not see a foreign stock sell-off combined with a bear market rally in the dollar happening a second time. In other words, I think it is unlikely we’ll see foreign stocks selling at such low valuations again, and think that holding cash will get increasingly risky as purchasing power declines, which it surely will. I see gold headed much higher, as discussed in the previous update.

Bottom line? In my view, the big asset sell-off has come and gone, so I don’t see the same buying opportunities looking forward that argued for liquidity when I wrote the book, and I see more danger in holding cash.

Inflation is about as sure a thing as anything these days. Since it clearly benefits debtors at the expense of creditors, since debt becomes repayable in cheaper dollars, the smart money would logically run up as much debt as possible,

With mortgage rates below 5 percent, for example, it might make sense to buy a house that has dropped in price 40 or 50 percent, not because I think real estate has bottomed, but because if you can get a 30-year Freddie or Fannie mortgage, you can make money as a debtor. Even though real estate is going to lose value, the dollar will lose even more value, giving you a profit.

Anybody owning a home that is unencumbered or has substantial equity should take out the biggest mortgage available while rates are below 5 percent.
If you can borrow any where close to 5 percent it would make no sense not to do.

I was even more surprised that the bursting, although devastating enough to create the crisis we’re currently experiencing, didn’t yield even greater fallout.
Though I correctly anticipated that the powers that be, both here and abroad, would try hard to blow the bubble back up, I underestimated how effective their efforts would be.
As a result, though some air has seeped out, a dangerous amount remains trapped inside.
As long as these counterproductive and ill-fated efforts continue, so too will the slow leak.
But sooner rather than later the rest of the air will come gushing out, and the real economic collapse will finally be upon us.

Using a variety of tools and techniques as well as reading corporate reports and interviewing managers, fundamental analysts try to answer such questions as:
• Is management up to the challenges it faces? Are there any succession problems? Are there any imminent changes in senior management?
• Is the balance sheet strong enough, that is, liquid enough to pay current obligations, and not overloaded with debt?
• Are sales and revenues increasing and is the company gaining share in a viable market?
• Are expenses under control?
• Are any major capital expenditures being planned? If so, how are they going to be financed?
(An issuance of additional stock might cause dilution, a given increment of earnings spread over more shares, resulting in lower earnings per share.)
• Did any special events affect last year’s earnings?
• Are earnings per share increasing?
• Is the company’s share price higher or lower than it should be relative to earnings per share?
• To what extent are the company’s operations multinational? What is the exposure to foreign currency and political risks?



Operating profit margin:
This is net operating profits divided by net sales. It is key to measuring a firm’s operating efficiency because it reflects purchasing and pricing policies and control of costs and expenses directly associated with the running of the business and the creation of sales. It excludes other income and expenses, interest, taxes, and depreciation. This ratio is meaningful when compared to different periods or to industry norms.

Net profit margin:
You get this by dividing net income by net sales, and it measures management’s overall efficiency. In other words, it goes beyond operating efficiency and measures management’s success in borrowing money at favorable rates, investing idle cash, and taking advantage of tax benefits. Businesses that work on volume (the quick nickel as opposed to the slow dollar) will have lower net profit margins. Return on equity: Divide net income by stockholders’ equity. It is the bottom line as a percentage of the money shareholders have invested. The higher the better, as long as it doesn’t invite competition.


Current ratio:
This balance sheet ratio divides current assets by current liabilities. It measures the extent to which a company’s short-term creditors are covered by assets expected to be converted into cash within a year or less. Generally speaking, a ratio of 2 would be conservative, although much depends on the kind of company and the composition of its current assets. The more liquid the asset mix, the better.

Quick ratio:
This refines the current ratio by excluding inventory, the least readily salable current asset. The quick ratio, sometimes called the acid-test ratio, divides current liabilities into cash and equivalents plus accounts receivable. Ideally, this ratio would be 1.


Debt to total assets:
Here total liabilities are divided by total assets to measure the proportion of assets financed with debt as opposed to equity. Owners usually like a high ratio because it means they are being financed with other people’s money. Banks and other lenders like a low ratio because it is a cushion in the event of liquidation.

Long-term debt to total capitalization:
This takes total long-term debt (bonds and term loans from other lenders) and divides it by total long-term debt plus stockholders’ equity. It measures the portion of permanent financing that is debt as opposed to equity. Where the ratio is low, it might benefit the company’s owners to issue bonds rather than stock or otherwise to increase its leverage.

Debt to equity (debt ratio):
This most basic of ratios divides total liabilities by total stockholders’ equity and measures the reliance on creditors, short- and long-term, to finance total assets. A high debt ratio makes borrowing difficult and a low ratio makes owners feel assured they will be protected in liquidation, since assets tend to shrink.

Fixed-charge coverage:
Earnings before taxes and interest charges divided by interest charges plus lease payments results in a figure showing how many times fixed charges are covered by earnings. Put another way, it tells the extent to which earnings could shrink before the company is unable to meet its contractual interest and lease payments. Failure to meet interest payments is an event of default in most debt agreements. The ratio is sometimes calculated using interest charges only.


Price to earnings:
Popularly called the P/E, this ratio is the market price of a share divided by the earnings per share, computed using the previous 12 months (trailing P/E) or, less commonly, estimated (projected) 12-month earnings (forward P/E). It reflects the value the market puts on a company’s earnings and on the prospect of future earnings. The ratio is most meaningful when compared to those of other companies of the same type and size.

Price to book value:
The market price of a share divided by the book value per share, excluding intangible assets, provides an indication of whether a company is over- or undervalued by the market relative to its net asset value. Since the basic rules of accounting require that inventories be carried on the books at the lower of cost or market value, and fixed assets, such as plant and equipment, are carried at their depreciated value, which may be more or less than their market value, the ratio is only the roughest measure of what shares would be worth in the event of liquidation. Having said that, though, there is no other ratio that relates share value to asset value, and a relatively (compared to similar companies) low price-to-book ratio might well be a sign of value and warrant closer analysis.

Price to sales:
This ratio is market price per share divided by sales and revenues per share. It is preferred by some analysts to the P/E ratio because whereas earnings are subject to accounting methodology and are affected by a multitude of variables, sales and revenues tend to be less volatile and a more reliable indication of how successfully a company is competing in its marketplace.

Dividend payout:
By dividing dividends per common share by earnings per common share, we learn what percentage of its earnings a company pays out in dividends. As a general rule, the more mature a company is, the higher its dividend payout ratio is, since rapidly growing companies tend to reinvest their earnings to finance growth. Utilities and property trusts usually have high dividend payout ratios.

Dividend yield:
This is the company’s annual dividend as a percentage of its market price. It is calculated by taking the company’s most recently reported quarterly dividend and annualizing it, that is, multiplying it by four, then dividing by the market price per share. Dividend yield, as discussed previously, is the cash-on-the-barrelhead reward for owning a company’s stock and is the basic feature of all the stocks I own.