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Postulates of Private Investor

26 january 2009

With the start of the financial and industrial crisis the problems of “where to invest,” which worried many investors, fell off by themselves. Their money has just disappeared. However, for those who had CONTROL over their investments and were able to timely protect their deposits this problem has turned even more acute.

The time has come to call a spade a spade and stop listening to delusive songs sang by investment impresarios. The crisis has proved it quite clearly: no one should ever be trusted with your money without any control on your part! Any investment vehicles, which have been so far popular, have turned out to be discredited. Structured, diversified, hedged investment products and shares, bonds and other virtual surrogates as well as industrial investments have proved to be just plain air, which vanished from the busted financial bubble.

The reference systems have changed and those unaware are doomed to fight a losing battle! The simplest laws of physics known to any preschool child and impeccably functional on the Earth cease to be such in the outer space… And the world’s economic and financial systems are now under zero gravity conditions! Stock market movements are currently looking as premortal jerks, the real estate market just got frozen despite a horrid price slump, bank deposits do not offset even inflation and there is no guarantee at all that your bank will not go down the drain. If you are still going to invest into conventional instruments, come hell or high water, then it would be more reasonable for you to transfer your money straight to the Red Cross and get a thank-you letter on the headed paper of this esteemed organization to your moral satisfaction…

Investors who had no control over their investments are at best sitting in their “long positions.” This foreign term is actually synonymous to what in Russian may be put as “losing one’s hope indefinitely to get back the principal amount of investments to say nothing of any profit.” Now have a look at the following most important investment aspect. For instance, you are up to turn some of your investments into cash and move your capital to some destination via, Lord forbid, a foreign bank… You will have to be ready to tiresome cordial talks with your banker about the origin of your funds, to fill in pounds of questionnaires, while no one will be able to guarantee that your banker, wishing to be on the safe side,  is not going to block your funds for an in-depth check lasting an indefinite period. There is just a congeries of such cases. If you avoided this destiny, you are a lucky person. Taking advantage of anti-terror and anti-money-laundering laws emerged after 9/11, back-alley bankers use the slightest chance to abuse them thus bringing not insignificant profits to their bank with equal losses inflicted on their customers.

The major postulate of any investment

Investments must be controlled by their investor to the maximum if not completely! The time has passed for unconditioned confidence in men dressed in expensive suites, manipulating facts and trying to convince you to get free of controls over your own money investing it in yet another fraudulent financial scheme. Later the same people will offer you an equally cynical and reasoned explanation why you lost your investments. Nice-looking American old fellow Bernard Medoff bitterly resembling the caricature of Uncle Sam has smartly used his formidable pyramid to swindle such business giants as Credit Suisse, Banco Santander, Fortis Bank, and HSBC... And it was a no-nonsense game with a stake of billions of dollars…

The modern financial and economic crisis is nothing else but a crisis of CONFIDENCE towards compromised financial institutions provoked by the dollar unipolarity. Let us consider a simple example. For instance, some American Mickey Mouse Bank gives a mortgage credit of $100,000 at 10% per annum to good fellow John Smith on security of “uncle Tom’s cabin,” which is hardly worth $50,000. The bank is not even curious about the real value of the “cabin,” or John’s income level, or his ability to pay. And indeed, why should they? The credit is collateralized and then insured by an insurance company, for instance by AIG, but the main thing is that Mickey Mouse Bank will take the credit money form another bank, for example from Swiss UBS. In what way? In a very simple way, just having signed a credit agreement with John at 10% per annum, Mickey Mouse Bank will issue a five-percent security and sell it to UBS. UBS will eagerly buy it. It is a safe deal because the credit is insured and the bank has an excess of free funds. In this way, dear investor, your money, which you entrusted to “conservative” UBS, was used to credit good fellow John Smith from Massachusetts or Colorado…

One after another Johns start to bilk their credit payments. The snowball of payment defaults starts to grow at a mad pace. Mickey Mouse Bank takes the “cabin” away from John and is frantically trying to sell it. It is no go! There are too many cabins on the market and no one needs them…  Mickey Mouse Bank runs to his insurers, but they are besieged with their own problems. The insurance company is drowning in compensation claims. So the clerks there just gesture their manicured hands to say they can do nothing about this little force-majeure but offer their excuse… Respectable UBS is disrespectfully losing a very respectable sum exceeding $10 billion thus breaking a loss record for a single bank in the entire history of financial institutions. The UBS top manager uses this opportunity to retire taking a 10-million-euro bonus to live on quietly at old age…

Is there any sober investor who would like the way his or hers money was treated in this above case? So let us then turn back to the major postulate of investment, which is CONTROL. Let us look for ways to make investments controlled to their maximum and at the same time being profit gaining, protected and liquid… Let us refer to history. Where at all times did the smart part of the human race put in their bills and coins? Of course, in diamonds! Diamond prices were growing continuously during many ages, from those times immemorial, when prices started to be registered in account ledgers of medieval merchants. Those skeptically incredulous will say it is not a very liquid investment since Russian prices for diamonds are very high, while there is virtually no secondary market for diamonds in Russia. To tell the truth, offering such a conclusion they will be right. But tell me, who is compelling you to buy or sell diamonds in Russia? You did buy real estate abroad and shares of foreign companies traded at foreign stock exchanges. Why then not invest in diamonds abroad if you have legal capital… With diamond mining going at a modern pace the existing diamond fields will peter out completely in 20 years. This is absolutely official information from De Beers’ experts.

Investment postulate No. 2

Buy low and sell high. Due to almost single-pole domination of De Beers on the rough diamonds market diamond prices have lately been pushed sky-high to become absurd. This has put polished diamond manufacturers into the most whopping situation within the chain going from rough mining to polished retail. As if it was no enough that they had to buy rough diamonds at unbelievably high prices paying 100 percent in advance, they had to sell polished diamonds to wholesalers with payments deferred for one month or three months or six months, all this after they had put in an incredible amount of labor, experience and knowledge to get that unique diamond masterpiece… Offering such a financial service diamond manufacturers were trying to gain at least some reasonable profit… This vicious scheme was maintained more or less operational till the first signs of crisis. Now wholesalers stopped their payments and at best are suggesting that diamond manufacturers take their stones back and at worst turning their companies bankrupt – once again offering their excuses for this little force-majeure…

Diamond polishers have accumulated enormous amounts of diamonds. Since the concept of investing into diamonds has not so far become universally popular, potential diamond demand is much lower than potential diamond supply. Is it not the best time to negotiate prices and make expedient investments? Polished diamonds are of course a form of money and only then an investment instrument, a luxury object or romantic gift. In other words, investing into diamonds you remain not only in control over your investment, but you receive the most stable, compact and easily transportable, convertible and international currency in the world. No green or other-color pieces of paper can event theoretically match this currency. This is not gold, aluminum, natural gas or oil whose prices are governed by industrial demand and appetites of monopolistic extracting companies and speculators.

What is kept in safes, what is worn and flaunted by wives, lovers, daughters and mothers of the high and mighties of this world setting the rules of the global game? It is a simple guess – diamonds! Is there any sensible person able to imagine at least for a second that all “the girls’ best friends,” these objects of passion and worship will turn into nothing? Well, tell me how does it look like to you? I’m sorry darling, Silvio Berlusconi will say to his beautiful wife Veronica, but you may give that five-carat diamond ring, which you got as my gift for your birthday, to your mom because it isn’t worth anything anyway… Or Nicolas Sarkozy will languidly inform his Carla that her diamonds have turned into bijouterie… Or  Barack Obama will attempt a similar stunt on his first lady, Michelle? If it will ever happen, then you’ll get a real crisis indeed!

If in the course of almost one hundred years private wealth was measured in something denominated in greenbacks printed in the North American Continent, then why now, after they have been completely discredited, private wealth cannot be denominated in carats? As of today, there are hundreds of billions of dollars worth of rough and polished diamonds in the world. One of the ways for the global economic and financial systems to come out of the current deepest crisis may be to set up alternative financial centers in the world and an alternative world currency firmly tied for instance to energy resources, to the barrel of oil, cubic meter of gas or kilowatt of electric power. This was exactly the pattern used by the world economies in the beginning of the last century to come out of the crisis, which seemed absolutely fatal. The German mark was tied to one kilo of rye flour, while the U.S. dollar to the troy ounce.

In this situation, Russia as a country possessing on its own territory (which is important to stress) an enormous reserve of energy resources, including hydrocarbons, fresh water, plough-land, forests (producing atmospheric oxygen) has a historic chance to become the navigator of the world economic and financial ship, run aground by the overseas pilots, letting it out to high seas. However, all this is related to global financial problems tackled by corporations and industries, but as far as individual private investors are concerned there is just no sensible alternative to diamonds in the foreseeable future.

Michael Törner, Vice President, 4C-Diamond