You may have heard of Warren Buffet.  He is considered by some to be one of the “genius” investors.  From what I hear, a thousand dollars invested in his investment vehicle (Berkshire Hathaway) when he started his investing career is now worth tens of millions of dollars.  

But we may not have heard that in 1973, Buffet’s investments lost 23%.  Then, during 1974, that 23% loss increased to minus 50%.  People who had invested with that guy during the early 1970s were not happy campers.  Of course, subsequent bull markets that started in the early 1980s “floated almost all boats”, but unlike Buffet, most investors were too clever to stay a course.

Another legendary investment manager is Bill Dunn.  He also has a superb record dating from the mid-1970s.  Again, though, he has had a number of loosing periods.  During those times, he lost clients when a few of them, rather than staying the course with Dunn, decided that Dunn was morphing into a loser.  Such starts and stops can produce good returns during favorable long term environments, but short term viewers miss a lot of progress.

Clearly, there were some big successes over the past several decades. However, one might ask how much of these successes as well as other investors’ successes have come from inflating the money supply? Indeed, increasing the money supply [and debt] in circulation from $474 billion, in 1974, to $10.4 trillion, by March of 2006 (an increase of about 22 times), markedly influenced worldwide asset prices. Also, interest rates dropped from a peak near 20% in the early 1980s to 1 percent of today, making it much less costly to speculated on equities.  A few years ago, one might have concluded that “happy days were here, again”.  That is, more or less like the “roaring 1920s”.

However, don’t count on such favorable environments returning soon; they didn’t in the 1930s.  Interest rates won’t decline by another 20 points; that’s not going to happen unless borrowers are paid 19% to borrow.  And, my guess is that the money supply won’t ballon as it has done previously.  That’s because people are no longer disposed to going out on a potential bankruptcy limb for personal financial speculations.  Regardless of money printing to cover past excesses, there is little incentive for printed money to get out into the real economy.

So, let’s just consider a future with a highly conservative financial environment.  Will gold, silver, and other inflation hedges continue to increase in value?  Only time will tell, as the US$ is printed to cover trade shortfalls.  But it is highly unlikely that the economy of the USA and of other “developed world” economies will return to what people who are 30 to 40 years years of age consider to be normal. Longer term horizons reveal ups and downs along the way to what we collectively have considered to be normal.  It is just possible that the excesses of past years will require a lot of “backing and filling” before a prosperous future can be built.  And that backing and filling will probably put a several year lid on any positive run of investment returns.

Although I am not qualified to give anyone any investment advice, my own investment approach will be a conservative approach.  First, I will stay away from long term bonds - - interest rates must increase and that means bond valuations will decrease.  Then, I’m going to search out investments in the BRIC economies because that’s where the action will be.  And because of increased growth probabilities in developing nations, my investments in those economies will have a lot more upside than investments in developed nations such as in the USA and Western Europe. In the meantime, my investment funds may take a break by sitting in inverse ETFs.