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Friday, June 26, 2009

Bill Bonner's two reasons to hold some stocks today

[W]e believe stocks are getting ready for another big fall. As we wrote yesterday, the smart money is short the stock market.

“If you think that, how come you’re not 100% short the stock market?” asked a friend.

In fact, we’ve still got about a quarter of our family wealth in stocks. Why?

Well, the simple answer is: we may be opinionated, but we’re not crazy. It’s one thing to have an idea about what will happen. It’s another thing to stake your whole financial future on it. Also, we treat our family money differently from our own, personal money.

Why do we own stocks, even though we think the stock market will probably go down?


1) We know someone who is at least as smart as we are who believes that buying stocks – at bargain prices – is the safest, surest way to wealth over the long term. He and his team spend all day, every day looking for extremely undervalued companies. He operates a private, family office…not available to the public…and only buys when they’re priced so cheap that even if they had to be broken up and sold off in parts the shareholders would still come out ahead. We figure our children’s money is at least as safe with him as it is with us.

2) While we expect a downturn in stocks, we’re not sure how this downturn will be expressed. A big increase in inflation could send stocks’ nominal prices up.

As we explained yesterday, you can deleverage in one of two ways…the old-fashioned honest way…by repaying your debts. Or, you can inflate your debts away. If the feds succeed in causing substantially higher rates of inflation, stocks could go up as investors buy them in order to escape inflation.

Of course, the best defense against inflation is gold. But gold doesn’t pay dividends. And gold has no earnings. And gold doesn’t send you quarterly reports that you can use to light a fire.

We think there will be no recovery…that the feds WON’T succeed in causing inflation soon…and that stock prices will fall. Still…we hedge our bets in some very cheap stocks…just in case.
--from "The Triple Crown of Financial Catastrophes" by Bill Bonner (6/10/2009)

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