Dear Daily Crux reader, –––––––––––––––––––––––––––––––––––––––––– The Daily Crux: Chris, you created your Max Yield currency strategy over 40 years ago, as a way to earn safe income on your cash. In that time, it has made some astonishing gains. Can you explain the idea for us?
In today's installment of our "World's Greatest Investment Ideas" series, we're featuring an extraordinary idea from our friend Chris Weber.
Longtime Crux readers are probably familiar with Chris' astonishing history in gold and precious metals. At the age of 16, Chris began investing in gold with $650 he'd saved from his paper route. Less than 10 years later, he was a millionaire... And he's been a professional investor and world traveler ever since.
However, you may not know that Chris has also developed an unusual way to compound your wealth. This idea is as safe and simple as putting your money in a bank, but produces returns that have beaten inflation and the stock market over the past 40 years.
To learn how this idea works – and how you can put it to work for yourself – read on...
Regards,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com
The Daily Crux Sunday Interview
The World's Greatest Investment Ideas:
The Max Yield Strategy
Chris Weber: Sure... Max Yield is really just about diversifying your cash. Investors often go to great lengths to diversify their investment assets, but often overlook this idea when it comes to their cash savings. If you're like most people, all of your savings are in your home country's currency.
For most Americans, this means your savings are completely tied to the dollar. So Max Yield is really just about keeping some of your cash where it's likely to be treated best. And if you're a U.S. investor, more often than not that has meant keeping it outside the United States.
I know many Americans think of foreign currencies as risky, but this really isn't the case.
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First, holding foreign currencies is inherently no riskier than holding dollars. In fact, during times when the dollar is falling dramatically – as it has for most of the past decade – it can actually be riskier to hold dollars. When you consider how far the dollar has fallen – both in real terms and against many foreign currencies – holding them has been a terrible proposition.
Regardless of what the dollar is doing now, it has the potential to fall again... perhaps dramatically. You don't want all your savings to fall with it.
Max Yield – or Max as I often call it – is just a way to turn the tables and protect yourself from this situation, by putting your money in safe foreign currencies.
Crux: How does your Max Yield strategy work?
Weber: In practice, it's quite simple. The strategy literally involves making just one yearly decision.
Each year, you find the safest country paying the highest yields, and you put your money there in short-term government bonds, or T-bills. That's it. The next year, you again move your money to the safest country paying the highest yields, which may or may not be the same.
By doing this, we've averaged double digit returns since 1970, which has turned every $10,000 into over $670,000 today, with only nine losing years out of 40 and no major losses.
Crux: How does the strategy produce such big, consistent returns on cash?
Weber: Well, there are three factors at play here.
Obviously, a large part of the return comes from the high interest rates we're able to capture. By moving our money out of the dollar and into high-yielding – yet relatively safe – currencies, you're able to make far more than you would stashing your money in the bank or a money-market fund in the U.S.
We've also benefited from currency appreciation. Max places your money in countries where it is likely to be treated well... relatively safe countries paying high rates of interest. This situation attracts other money as well, which tends to push the value of the currency up versus others. So more often than not – in 26 out of 40 years so far – our Max Yield currency has appreciated against the dollar, meaning we've made additional gains when we convert our money back to dollars.
Let me give you a simple example.
Suppose this year, T-bills in Country X are paying 5%, compared to U.S. T-bills paying practically 0%, so you decide to put your money there. Next year, when you move your money, you see that the dollar has actually fallen 10% versus Country X's currency. So when you convert your money back to dollars, you've made 5% in interest from the T-bills and 10% from currency appreciation, for a total gain of 15%. Not a bad one-year return for buying boring, short-term government bonds.
Of course, that's just an example and you won't always see gains from currency appreciation. But it's been a significant part of the total return.
Finally, this strategy takes advantage of compound interest. You can of course safely compound your money at a low interest rate in your local bank. But because Max Yield seeks out safe high-yielding currencies, the effects of compounding can be exponentially greater.
If you had kept you money in a U.S. bank over the past 40 years, you would have been lucky to have kept up with inflation. On the other hand, Max Yield beat inflation by 781%. This return shows the power of compound interest, coupled with the general decline of the U.S. dollar over that time.
Incredibly, Max has even outperformed the stock market. On January 1, 1970, the Dow was 809. At the end of December 2010, it was 11,578. That's an increase of 1,431%. Over the same time period, our strategy returned 6,788%.
Admittedly, the return on the Dow does not include dividends, but even including dividends would not get you close to the total return of the Max Yield strategy. Even better, Max suffered through none of the crashes of the stock market. The worst that happened were temporary plateaus.
Crux: That's impressive. What are the risks of this strategy?
Weber: The most significant risk is that you won't be paid back. Whenever you buy bonds – regardless of whether they're T-bills or high-yield corporate junk bonds – there's some risk of default. But for Max Yield's purposes, we can effectively cancel out this risk by taking a few simple precautions.
As I explained before, Max involves selecting T-bills from the safest country paying the highest yields, which is not necessarily the country paying the absolute highest yields. It would make no sense to try to capture the 50%, 100%, or even higher yields of shaky emerging market bonds – or even Greece to take a current example – because the risks of not getting paid is too great.
So the Max Yield strategy sticks to the T-bills of the major world currencies. Some examples of previous currencies we've owned include the British pound, Japanese yen, French franc, Australian dollar, New Zealand dollar, and even the Italian lira and Spanish peseta (before the euro was created).
By sticking to these countries, and buying only short-term government bonds, the risk of default is essentially zero.
The other significant risk is currency depreciation or devaluation – the opposite of the currency appreciation Max has benefitted from so often – where your Max Yield currency could fall in relation to the dollar, and wipe out some or all of your yield for that year.
Again, the risk is minimized by buying only short-term bonds, and by choosing your Max Yield currency carefully.
Of course, even then there will be some years when your Max Yield currency will depreciate against the dollar and you'll lose some of your gains. But like I mentioned before, this has only happened in nine out of the last 40 years.
So even if other currencies do better some years, using Max long term and simply compounding at the highest available annual interest rate on a major currency year in and year out, your few losses are overwhelmed by your overall gains over the years.
Crux: Anything else we should know about the strategy?
Weber: Well... As good as Max has been to us, there is no guarantee that it will continue to be in the near future.
Interest yields around the world have been plunging to levels no one could have predicted. Even the highest yielders today are no more than 5%. Of course, like I mentioned before, you could theoretically get 100% by buying Greek bonds. But who knows what's going to happen there? The risk of default is just so large.
So finding safe, high-yielding currencies is a lot harder than it used to be. The key to keep in mind is the miracle of compound interest. It is harder to compound at 1% than at 10%. But over time – and I mean over years – compounding is spectacular... and sooner or later, this era of low interest rates will pass.
If you do get into Max now, the important thing is to lower your expectations a little, and prepare to follow it for the longer term. In all compound interest methods, after about seven or eight years, you'll really start to see its great power to create wealth.
Crux: Great advice, Chris. Thanks for talking with us.
Weber: You're welcome. It was my pleasure.
Editor's Note: Today, Chris writes the Weber Global Opportunities Report, where he shows subscribers exactly what he's doing with his own money. Chris' track record places him among the greatest investors we know. In fact, we've never seen him wrong about a single major market call. To get instant access – and read this week's special alert on gold and silver – click here.
Sunday, 25 September 2011
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