The Great Copper Caper

NEW YORK ( TheStreet) -- As a value investor, anytime I know that I can buy $1 worth of assets for 50 cents, I will do so, all day long. Given the opportunity to purchase 2.38 cents worth of assets for a penny, I'd do that too.

In fact, Tuesday, I did just that, a few hundred times. Not a big money maker, but an interesting lesson as it applies to our seemingly forever-weakening dollar.

Here's the story: For part of 1982 and prior to that, pennies were comprised of 95% copper and 5% zinc. In 1982, the U.S. mint changed the formula to 97.5% zinc, a much cheaper, lighter and flimsier metal.

Given rising copper prices over the years, one copper penny, the same that you will find in your pocket change, contains 2.38 cents worth of metal. That's a 138% return for each copper penny you pull out of circulation.

Before you call me crazy, I do realize that it's difficult to build wealth 1.38 cents at a time. While $200,000 face value of copper pennies is worth $476,000; it's just not that easy to find them in bulk. I was curious however, as to how much copper I'd find in $10 worth of pennies, and Monday brought home 20 rolls of pennies from a local bank. The teller looked at me strangely when I asked for the pennies, but she clearly did not understand that I'm a value investor on a mission.

The first time I tried this experiment several years ago, when pennies contained 1.5 cents worth of copper, I found just 10 out of 1000, a miserable 1% hit rate. Monday was much better; there were 281. That's $6.70 worth of copper for a $2.81 investment. Not bad. Now with all the sorting that is required, you won't get rich, but I find this all very interesting.

The pennies themselves are a metaphor for what we've done to our currency over the years. If you compare a copper penny to one made primarily of zinc, you will notice some distinct differences. The pre-1982 pennies are thicker, the features are much stronger, they seem better constructed, make a great sound if dropped, and hold up very well over years of circulation.

The post-1982 versions seem weaker. The features are not as clear, they are lighter, and they don't hold up well over time, in fact, they appear to disintegrate when exposed to the elements. Scratches on the surface reveal that there is a very thin layer of copper on top of the silver-colored zinc. They make a very weak sound when dropped.

Weaker, flimsy, not standing up to the ravages of time; sounds a lot like our dollar. Given all of the money printing, the never-ending "stimulus," it's likely to get worse; which is why some investors have gravitated toward exposure to precious metals over the past several years.

This is not the first time that the metals in our coins have been worth more than their face value; prior to 1965, dimes, quarters and half dollars were made of 90% silver. That's why you don't see them in circulation anymore. At Monday's price, there's $2.25 worth of silver in pre-1965 dimes.

It might happen again with our nickels, which are comprised of 75% copper, worth nearly 3 cents, and 25% nickel, worth about 2.15. But unlike the penny, there is no sorting required, because since 1946, the formula has remained the same. That may change in the near future, as the mint considers cutting costs, and using cheaper metals. It now costs the mint more than 11 cents to make the Nickel; 11 cents for something with a 5-cent face value.

One caveat to this whole story for those who see opportunities to build wealth through copper pennies or nickels is that late in 2006, the U.S. Mint announced regulations making it illegal to melt pennies or nickels.

Melted or not, 2.38 cents of metal for 1 cent is not too shabby.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.