The Commodity Roller Coaster

Jeff asks if there are any physical commodities Dave would invest in to protect against the dollar dropping. Dave says no.

QUESTION: Jeff on Twitter asks if there are any physical commodities Dave would invest in to protect against the dollar dropping. Dave says no.

ANSWER: Not commodities. Real estate is not a commodity, but it is a physical item. No, I do not invest in physical commodities as a hedge against inflation or a hedge against hyperinflation. I do own a lot of paid-for real estate. I love real estate. I’m a real estate guy down to the soles of my feet.

All of my personal investments are really in three things: my business, real estate that is paid for in cash that produces income or that maybe will produce an income someday, meaning a piece of raw land or something, and good growth stock type mutual funds. I really have about five types of mutual funds.

All of my retirement—my IRAs and 401(k)s and those things that I have invested in over the years—are all in four types of mutual funds: growth, growth and income, aggressive growth, and international—all with 10-year or more track records. Above that, I use both regular growth stock mutual funds—traditional growth stock mutual funds—and also some index funds, some S&P 500s. The reason I do those is it’s what’s called a low turnover ratio, which means that the stocks inside the mutual fund are not sold very often because they’re pretty much matching up with an index like an S&P 500. Since the stocks are not sold, you don’t pay tax on the increase in value until the stocks sell or until you sell the mutual fund. For instance, if you buy a share of Home Depot for $50 and the share of Home Depot went up in value from $50 to $75, you don’t pay tax on that until you sell it. It grows without taxes. It’s a capital gains growth. You don’t pay tax on it until you sell it, so it effectively allows you to have tax-deferred growth and it’s taxed at a 15% tax rate. In my case, it’s more than that because I make over the Obama you-are-rich-so-you-must-be-punished limits, so now I am punished. I’m now paying 20% in capital gains rate on that. That’s still less than I pay in income tax because that’s 40%. It’s still a tax-efficient investment, in other words, compared to other things that are out there.

I like low turnover mutual funds, and a good place to find a low turnover mutual fund is an index fund. I’ll throw money sometimes into an S&P 500 and just let it lay there three or four years or five years, and I end up with substantial funds in those things as well because it’s my side investment over and above traditional retirement savings. I’m usually actually putting it there until I buy a piece of real estate with it.

I buy some other funds, too, but that’s pretty well it. I don’t buy single stocks. I don’t buy commodities. I don’t buy gold. I collect a few things, but those are hobby things. They’re not really for an investment. I joke about investing in guns, but it’s not really an investment. I just like guns. I’m just a gun guy. I also have several boats and water skis, but that’s not because I think they’re going to go up in value. I’ve got a huge collection of antique water skis. That’s all just hobby stuff that has nothing to do with investing. I don’t believe in collectibles, in other words, as investments. I’ve got some other items that are collectible items, but they don’t qualify in the investment heading. They may go up in value, but that’ll just make me smile as a hobby. It won’t make my family’s wealth change. Real estate and mutual funds will.

I just keep it real simple. The reason I do that is this: I’ve studied wealthy people. Most wealthy people don’t have extremely sophisticated things they do. They find a couple of things that they like they’re good at that they understand what they’re doing with money, and they do that with money. And it makes them more money. Then they stick with that. Most of the time, they don’t have any secrets to being rich. They just make money.

It’s not a big tax scam. My effective tax rate and the people I know who make serious money is a lot more than the President’s. His was just printed. It was 8%. Most people who are making serious money are paying 30% to 40% of their income out in taxes. This idea that the rich don’t pay taxes—truthfully, it’s just a lie. I know them. I sit with them. We work with them on their financials. We know what they're doing. There aren’t all these hocus pocus things that only the big guy knows about and the little guy can’t get ahead. That’s all mythology brought to you by television and liberals. It’s just not real.

Invest in stuff like that—good growth stock mutual funds—and that’s what I do. It’s real simple. It’s real clean. I don’t play commodities. I don’t play currencies. I don’t play single stocks. I can’t give you a stock tip because I don’t know any. I’m not looking for them. I had a friend the other day who tried to get me into a deal. They’re doing a private offering on a business they’re opening, and he wanted me to put some money in there and was telling me how I could triple my money. No. It’s just not what I do. I’m not that desperate to make money. I’m okay.

The tortoise wins the race. Every time I read the book, he beats the hare. The best way to get rich quick is to get rich slow. I’m just not doing that stuff. I don’t need it that bad. Therefore, I don’t have a bunch of risk, and I don’t have a bunch of drama, and I’m okay. I’m not freaking out.

That’s why I don’t invest in commodities. I’m not fretting that we’re going into hyperinflation. If we do, real estate and good growth stock mutual funds are invested in things that increase as inflation items increase. For instance, if your mutual fund owns a bunch of oil companies, one of the primary things that causes inflation is the cost of gasoline going up. If you own Exxon in your mutual fund, it’s going to hedge against inflation. If you own stock in your mutual funds in companies that make money as inflation goes up, they are the cause of inflation, so to speak, then you are hedging inflation. You’re offsetting inflation by owning it. You’re benefiting from it. The same is true when you own real estate. It’s a big component of inflation. When houses and office buildings go up in value, that’s a component of inflation. The way you hedge against inflation is you buy components of inflation. Gold is not one of those. The Iraqi dinar is not one of those. Bushels of corn is not one of those. Barrels of oil is not one of those. Those are commodities. Those are based on fear and somewhat based on supply and demand, which drives some of the fear. And they’re based on greed.

Look at the volatility of a barrel of oil. You will see that it will go from $70 to $150 and then back to $70 and then down to $50 then back to $170. It is a roller coaster ride that’ll make you throw up in your sleeve. If your mutual funds did that—if the stock market did that—the news media would be crying blood in the streets. They’d be saying the whole world’s coming to an end. If the stock market went in half and then doubled and then went in half and then doubled every three or four or six months, you people would have whiplash. That’s what commodities do. I just don’t play with that. I don’t like that much risk. I work too hard for the money.

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