Prudent Investing for Perilous Times

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Bullion Bulls Canada) -- Ironically, there are few -- if any -- virtues in our society that are as under-appreciated/under-respected as humility. We are living in a me-first world that worships the "Alpha wolf," who aggressively takes what he wants. Humility is mistakenly interpreted as weakness or timidity. Being humble in no way implies being meek. One can be humble while still refusing to be anyone's doormat. In fact, humility is simply the opposite of arrogance. The arrogant individual is prone to being impulsive, over-confident and careless. The humble person leans toward prudence and caution. Much of what is taking place in the global economy is confusing (and frightening) to the ordinary person, so people need to be completely focused on being prudent and cautious when handling their financial affairs.

We have already seen once in the Crash of 2008 what happens to the arrogant; and as many commentators (including myself) are warning people, 2008 was nothing but a warm-up for the economic chaos ahead.

It is "humble" investment strategies which investors should embrace today, as opposed to the world of high-frequency trading , exotic financial products, and endless acts of paper-fraud -- epitomized by the ultra-arrogant Wall Street bankers.

Understand that with the most rigged, corrupt markets in history , with unprecedented volatility , and with entire governments literally declaring bankruptcy, we must be defensive in our investing.

When we are in a defensive mode as investors, the primary objective is the preservation of capital. I completely understand that because of the gross economic mismanagement of our corrupt, incompetent governments that many people feel they need to focus first on maximizing return, but that is the path to financial suicide. It was the people who were looking to "maximize return" who were especially devastated in 2008, and it those people who are certain to be wiped-out again in the years ahead.

As humble investors we should be seeking investment options which reflect prudence and caution, and with the ultimate objective of preserving our capital. For nearly 5,000 years, no asset class has come remotely close to preserving wealth (i.e. capital) as perfectly as gold and silver .

However, advising people what to do to become Humble Investors is obviously only half the battle. Equally daunting to the ordinary person is how to become a Humble Investor - i.e. how do people accumulate holdings in gold and/or silver in a prudent and cautious manner ?

As a commentator, I have simply abandoned attempts at forecasting gold and silver prices. It is literally nothing but a pointless exercise in guesswork. Over the long term, as I regularly remind readers, our most likely fate is extreme inflation and/or hyperinflation across most of the Western world - making "prices" nothing but nominal and arbitrary fantasy-figures

Short-term forecasting has become an even greater exercise in absurdity. With fundamentals totally out of the window, we are left with nothing but the hocus-pocus of "technical analysis"-- an exercise which by definition has zero mathematical validity in manipulated markets.

What have we seen in recent months? Gold and silver achieve impressive technical break-outs, only to immediately (and 'mysteriously' get stuffed right back into their trading range.

Alternately, the prices are suddenly and inexplicably driven down below key support levels, only to be quickly rescued, as big-buyers step in equally abruptly to "heal" the supposed technical damage. If people want to gamble, they should simply go to Las Vegas, where the casinos are much less stacked in favor of "the house."

Fortunately there is a humble investment strategy which we can use to accumulate our investments in gold and silver: dollar-cost averaging. For the novice investor not familiar with this term, dollar-cost averaging is nothing more than investing one's quota of capital in even, (more or less) regular intervals.

For example, if an investor had $10,000 to invest each year then dollar-cost averaging would dictate investing 25% of that (or $2,500) each quarter; or perhaps investing $1,000 10 times a year if someone wanted to micro-manage their investments more actively.

The theory behind dollar-cost averaging is that we don't pretend to be able to out-smart the market. By investing equal amounts of capital at regular intervals and if we are fortunate and happen to buy when prices are relatively low, we will obtain a greater quantity at that favorable price. Conversely, if we have the bad luck to buy when prices are relatively high, then we buy a reduced quantity at that unfavorable price.

We acknowledge that doing our buying at "the perfect time" is impossible, on any kind of consistent basis. So we instead adopt the conservative strategy of regularly buying a little at a time.

With dollar-cost averaging, investors immediately begin accumulating their desired holding, and in doing so they remove much of the urgency in their future buying. Suppose an investor has $25,000 which he wishes to convert to silver. If he seeks to make one purchase at the proverbial bottom of the market, he will rarely achieve that outcome.

The psychology of such investors is that as long as prices are falling, they expect them to continue to fall, and so no matter how low prices go they continue to wait for "a better price." Invariably, these investors only recognize the "bottom" after the market has already turned higher and then end up chasing prices higher with their buying. Often their one purchase ends up being made closer to a short-term top in the market than a bottom.

On the other hand, with dollar-cost averaging, that same investor would immediately purchase some silver with a portion of his capital, and with each subsequent purchase and greater accumulation, there would be less urgency and less pressure with future buying.

As we do our dollar-cost averaging, we are conditioning ourselves to buy regularly and be more patient. This is a wonderful frame of mind in which to be to make calm, rational, effective decisions and . And so even in a crazy, volatile, manipulated market URL: like the silver market; our dollar-cost averaging may allow us to develop at least a bit of a rhythm in our buying - and begin to allow the market to work for the average investor rather than always against them.

Meet "Kevin". Kevin is a real-life investor, and a long-time reader/member of our site. Given our focus on education , I was delighted when he recently posted on our forum his own experiences in purchasing silver as a Humble Investor.

Despite his background in mathematics and statistics, Kevin shunned the chicanery of technical analysis and opted to make dollar-cost averaging his default strategy. He has had no cause to regret that decision.

Below, Kevin was kind enough to chart his silver purchases over the past year or so:

We can make several observations from this pattern of purchases. To begin with, the general pattern of buying is clear: purchases made at fairly regular intervals. At the same time we see two obvious exceptions to that pattern.

On two occasions Kevin made two purchases in close proximity to each other. One doesn't have to be a mind-reader to know what was going through his mind. While it is impossible in manipulated markets to know in advance when silver will make one of its intermittent plunges (in the process of rising by more than 800%), any idiot (and certainly all Humble Investors) can tell in hindsight when such a plunge has occurred.

So on two occasions when Kevin knew that he had made his purchase at a (relatively) advantageous price -- and then the price went still lower and he made another purchase. Note that such behavior is totally in keeping with the behavior of the Humble Investor, and in no way demonstrates any of the short-comings of the arrogant, greedy investor.

On the two occasions when Kevin made his additional purchases, such behavior didn't imply that it was impossible for prices to go any lower. Rather, it was simply recognition that the current price was "a good price", and thus prudent and rational for him to get a little ahead of schedule on his regular purchases.

Looking at the pattern of purchases as a whole, we can make a more general observation. While dollar-cost averaging does not always mean Kevin can buy at the bottom of the market, it has been a very effective strategy to prevent him from buying at the "tops." As Humble Investors, that should be more than enough to satisfy us.

Obviously dollar-cost averaging is not some magical formula which guarantees we will never make a bad purchase. It is a tried-and-true method of playing defense and a strategy which can be employed by novices just as well as experts.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.