What To Do With A Million Dollars

Aug 28. Hans Lysglimt
This week a friend asked “so what do you do with a windfall gain of one million dollars cash, or a few?”.

Well, first of all do not rush. We are in a falling market, and you should preserve the cash very very carefully.
You will make your money in the buying.
Several people I know with cash are now impatient, way to impatient. And the suits are all after them pushing various “investments” and “products” that as a rule of thumb one should shy way from like the plague right now.
My friend was holding a prospectus for a “China Private Equity” – fund. They are trying to raise money in Oslo for this fund, and list it on the Oslo Stock Exchange. I have one very short advice – stay away!
The very term “China Private Equity” tells me this is a scam from the very beginning. “China” is hot, and “private equity” is hot – so let us combine them into a fund, wow. Problem is that both China and private equity now stinks, and even worse they stink together.
China will face a major crash when the central bank eventually has to crack down on inflation by raising interest rates. Eventually China will be a buy, but not now.
Private equity is a very special, recent phenomenon driven by easy money. One has to realize that private equity is driven solely by easy money, easy access to credit. One private equity firm lends easy money, buys a company and restructures it so it can pose a collateral to lend even more money by someone else. It is a pretend game. It is a scam, that has worked, but will end in tears. Better to stay away.
When the nice golden boys of the private equity industry with their silver spoons up their… do their deals they leverage by lending. Some private equity groups of about a dozen people own a dozen large industires, this is outright crazy.
Remmeber, the money they lend are never “real money”, that is: this money is not someones savings from hard work and carefull planning. It is new money created from thin air out of a banks balance sheet. Voila!. So this scam will only work as long as the money is expanding. We now have a deflationary environment and the whole process will reverse. Many many private equity groups will go belly up in this round, some will survive, but most will close along with the banks that will stop financing them.
Second problem is that the firms will give themselves generous bonuses regardless of performance.
So you are buying USD 1 for USD 1.15. You are taking a 10-15%+ something loss from the very beginning. This fund is also guaranteed to be rather illiquid, it is a bad proposition from start to finish.

The way the private equity game is played in the west, with all the golden suit boys being in on the scam does not automatically translate to China. Everything works differently there.

This downturn will be severe, I repeat severe. There will eventually be tremendous bargains. But the bargains are not yet here. So you have to wait. The whole idea is to wait with placing your money on the table until the odds are stacked clearly in you favor, clearly.

As private equity goes belly up, and banks go belly up there will eventually be a massive fire sale of assets. That is when solid assets will be offered for the cheap. A good company can be a bad stock and a bad company can be a good stock. Many companies will be bad going forward but their stocks will be good. Natural resource companies that have been around for a long time and will be around for a long time will be offered on the cheap.

So wait wait wait until there are clear bargains. It will eventually be possible to buy USD 1 value for 30 cent. THAT is when you should buy.

Ok, so what do you do with a million?

First you buy 100 Oz of gold coins in 1 Oz and 1/10 Oz pieces. You digg them down in three lots in three secret places. I am not kidding. Then you carefully write down where you dugg them down and show your heirs where the notes are.

Then you pay off debt, most likely a good investment.

Then you find ways to improve your life, buy time. See Lifehacker.com.
Spend serious money on this, it is by far your best investment.

Then you find ways to blend your own work into your investments. In theory it should not be possible to make more than risk adjusted returns on anything in the open market. But if you blend you own expertise and work into it you can. So find ways to put yourself into the equation as a positively contributing factor. That is the way to go from 4-8% returns to 20-30%+ annual returns, by blending yourself into it. This is usually also also the way to defere taxes, a key to building long term wealth. How much you put into this depends on your age, total wealth, prefered work input etc. Somewhere between 10-30% of your total wealth most likely for most people.

Then you stay in diversified currency cash until there are bargain investments where you hold the direct title ownership to the investment. Again: direct title! Do not go by middlemen in funds, private equity etc. Direct ownership to a diversed portfolio of rental porperty, metals, shares (liquid shares only please!), bonds.
You ask yourself again and again, “is this a true bargain” before you invest in anything. Because there will be true bargains and you should not buy anything but a bargain. Buy at less than value, repeat this again and again. Do not listen to the suit peddlers, ask them “why is this a true bargain?” and be suspicious of the answer. Buying China Private Equity Fund now at face value is absolutely definitely not a bargain now, it is a preposterous proposition right now. When you are able to say a definite clear yes to the bargain question you start buying carefully to average down your entry cost to bargain investments. From today this process should carefully go on until the London Olympics in 2012. Don’t rush!

Good luck.

Oslo, Norway. Aug 28. 2008 Hans Lysglimt

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