When the value of a dollar is falling, you don't want to be sitting on a big bank account. It's worth less every day - and there's always the danger that the bank will fail, which can be quite inconvenient. For this reason, in inflationary times and in times of economic turmoil, some people advocate buying gold in the form of bullion, gold mining stocks, or gold coins.

I won't deny that it sounds good, superficially. The problem is that it never seems to work out very well.

The Bigger Fool Theory

Uncle Bill used to figure that the best investment strategy was to spot a trend and jump on it. There would always be a bigger fool, he said, someone who would invest after you did, making the price rise even further. He was always boasting about owning some investment that cost him $3000 and was now worth $5000.

He never boasted, however, of having sold that investment at a profit - and when I helped aunt Katherine sort out her affairs after he died, it turned out that he still owned a lot of those investments, things he bought at $3000, watched them ride to $5000, and then continued to hold as they dropped in value to $300.

His problem, you see, was not that there was a shortage of greater fools, but that he was enough of a fool to fall in love with his investments. If you hold on long enough, he figured, they would regain their value. The problem with that is that you might not live long enough for that to happen. Bill didn't. He'd have been better off selling at $4000, crying as it continued to rise to $5000, and then rejoicing as it fell to $300.

Don't Fall In Love With An Investment

It's only an investment, after all, if you eventually sell it, or if by using it, you generate a profit in lower expenses. That diamond on your wife's hand is not an investment, because you'll never sell it. The new windows you bought for your house are an investment because you get your money back in reduced heating and cooling costs.

That's not the biggest problem with buying gold as an investment right now. The problem with buying gold right now is that gold prices are high. The time to buy gold, if you're going to buy it, is when gold is cheap. You know it'll eventually go back up.

But even when it's cheap, it's not a good idea to buy gold. It's a collectible. If you buy bullion, there's a significant expense involved in assaying the gold when you buy it and again when you sell it. If you buy gold coins, you pay a significant premium for the coin over the value of the gold itself. Then you need to spend money on a safe or a safe deposit box to protect the gold. If you buy gold jewelry, you pay an even greater premium for the jewelry than you'd pay for the same gold as coinage, but at least you can get some enjoyment out of wearing the jewelry.

The Danger Of Mining Stocks

Buying stock in companies that mine gold is even riskier. If their cost of producing gold is $300 per ounce, and the price of gold goes from $400 to $200, the price of the stock doesn't drop by 50%, it drops ten-fold. On the other hand, if the price of gold goes from $400 to $800, the price merely doubles. There's much more risk than reward - and there's also a risk of mismanagement. If the company goes broke during a period of low gold prices, you could be left holding nothing but wastepaper when the company files bankruptcy.

OK, so you've got some money, and you want to invest it. What do you invest in? Replacing those worn-out windows in your home has always been a good bet; energy isn't getting cheaper any time soon. Solar panels for your home would fall into the same category with the uncapping of electric rates, but like windows, these are illiquid investments. Not only it is impractical to sell them, it may be impractical to sell your house. Prices in Lancaster County are doing better than in the south and the west, but we're currently seeing 2006 price levels.

Avoid Wall Street

Stock prices have risen about 50% in the last year; the Dow Jones Industrial Average was around 6700 last March, and it's about 10300 right now. With the economy still fragile, though, picking the wrong stock could be a really bad move, and even picking the wrong mutual fund could be a big mistake. When the Cash For Clunkers campaign was going on, Toyota was getting the bulk of the new car sales; the bloom is off that rose, isn't it? It's even hard to think of a sector that's safe and sound at this point.

If it were a publicly-held company, I'd want to invest in Five Guys, the hamburger joint. They aren't perfect, but they seem to do an awful lot of things really well, and even in these recessionary days, they seem to be awfully busy, despite their relatively high prices. Caruso's just opened up a sixth location locally, and they take good care of customers, too. I can't think of a publicly-held restaurant that I'd want to bet on, though. Wendy's seems to be on a roll, and McDonald's has been doing well lately, but either could catch a variant of Toyota Fever at any time.

The Perfect Investment Is Yourself

I've said before, and I'll say it again: buying a deepfreeze and some industrial shelving for your basement is one of the best investments you can make, provided you have the discipline to use them wisely. Stock up on food when it's on sale. It does your body and soul good to eat beef you paid 99c/lb for, when the supermarket is charging $5.99. Paying $10 for a jug of shampoo concentrate that will dilute to make 24 bottles of shampoo that'd cost $3 each is less soul-satisfying, but it does the wallet a lot of good.

But there's only so much you can do along these lines.

Despite the fact that job losses have pretty much been stemmed, that doesn't mean that job growth is going to follow. There are a lot of companies that have closed or moved, and there's no company there for workers to go back to. We need to see a lot of new companies being formed in order to create new jobs.

And you might be the one who's looking for a job six months from now, or one year from now. You better be thinking about how you'd like to go into business for yourself.

Opportunity Sells At High Prices

Beware of anyone who wants to sell you an income opportunity. You may, indeed, do well with a ServiceMaster franchise, or a fast food franchise, but generally, when you get into one of these operations, you pay top dollar for everything.

Figure out what kind of business makes sense. It needs to make sense in the new economy, where energy and materials are expensive and mass production of cheap goods is uneconomic. It needs to be a good fit to your skills, talents and abilities. It needs to be a good fit with the geographic area where you want to live.

Next, figure out what kind of equipment you need for the business. Then start going to industrial and commercial liquidation auctions. You'd be surprised at the bargains you will find.

Bargains Abound

I bought a mixer at auction for $40 that sells for $4,000 new. Scratched and greasy? Yes. An hour of cleanup, and it looked very serviceable. Our plans for the mixer fell through, and I put a classified ad in the paper, selling it in 3 days for $1400.

Which brings us to the next point about these auctions. You need to pay attention, even if you think the merchandise is something you would never use. Once you know what something should sell for, you might want to bid on things you don't want, as the beginning bid. It'll be cheap enough that you can always resell it later. The auctioneer will appreciate the fact that you're getting the bidding going.

Friends In The Right Places

Once in a while, an auctioneer "knocks down" something, selling it for too little, just to wake up the crowd and get them to bid faster. The faster the auction goes, the more people stick around. If he sees you opening the bidding on stuff you don't want, trying to speed up the auction, he will appreciate it, and he'll sometimes let you be the beneficiary of that "knock-down".

And maybe you'll discover that buying at auction, cleaning up and repairing the merchandise, and selling it in the classifieds or on eBay, is the business you want to be in. It sounds like "Sanford and Sons" until you actually get involved in it, and you probably don't need anything more than a garage and either a pickup truck or a trailer hitch and a small trailer.

Avoiding Retail And Wholesale

As a rule, I recommend against retail and wholesale, because everybody has the same products, has the same sources, and sells to the same customers, and in order to have an advantage over the other guy, you have to buy right - which normally means you need to be the 800-pound gorilla of your market segment. When you deal in used merchandise, you can learn to buy better than the other guy, and because you are the sole supplier of what you sell, you may be able to demand higher prices.

But this is also a good strategy for getting started in your small manufacturing business. If you can buy your capital goods inexpensively, you can avoid an expensive lease payment that might otherwise sink you.

Other Bloggers On Related Topics:
auctions - bigger fool - bullion - buying low - Caruso's - collectibles - creating jobs - deepfreeze - eBay - Five Guys - franchises - gold - gold coins - hedging - inflation - investments - liquidity - McDonald's - mining stocks - strategy - Toyota - volatility - Wendy's