Investment Ideas from Prison

I have a friend of mine doing hard time in the California State Prison system. Drugs and armed robbery were his crimes, but the real roots lay in his childhood. I told him as much, and urged him to take a look at his childhood upbringing in the hopes that he might exorcise some of his demons. Towards that end, I sent him the book One of a Kind: The Rise and Fall of Stuey ‘,The Kid’, Ungar, The World’s Greatest Poker Player.

I’m sure most of my readers will have no idea who Stu Ungar is, but, as the title of the book says, he was the greatest poker player the world has ever seen. He is estimated to have made over $30 million dollars over the course of his poker career, but he’d continually throw the money away on drugs or other gambling addictions. He went from broke to millionaire and back to broke four separate times over the course of his life. He died so penniless that this friends had to take a collection for his funeral.

I send my friend this story because I wanted him to understand that talent and ability are no replacement for a good understanding of yourself. That’s a lesson I hope he’ll come to learn before he gets out.

He wrote me this letter and I wanted to share it with my readers:

I finished “One of a Kind” & wanted to write & let you know that I really appreciate it. The story was engrossing even though I was expecting the sorrowful ending. It’s horrible how otherwise good people can wreck their lives with drugs & gambling addictions. I’m a pretty good example of that.

Anyway, thank you for sending it to me. I don’t know when you ordered it, but I got it on the 7th.

Preston, I want to ask you what you think about scooping up Citi-group stocks right now. I’m only asking ’cause my cellmate is all gung-ho on the idea & he has his wife dumping a lot of $ into them. I remember you saying that you were considering a job with an investment company so I just wanted your input…

I’m doing fine here. Still have the same mindfucking distractions going on but, again, I’ll fill yo in on that once it’s come to a head.

I think of you & your girlfriend out there in Venice & I can’t help but smile. I hope you’re getting on great out there. I hope you’re making use of the strand & all the patio cafe/bars. Another strand that’s that’s really cool (even more so in my opinion) is Hermosa beach. The housing prices there are astronomical, but for a look-see it’s a cool place to go watch a surfing competition & do a little pub crawling.

At any rate, I’m gonna go for now.

Citigroup’s an interesting case. The contrarian in me wants to declare than whenever you’re getting stock tips from prisoners, it’s a good idea to dump the stock. The arguments for Citigroup are that it’s too big to fail. So why not rush in and buy a lot at a cheap price?

The arguments against it are that Citigroup not only made trillions of dollars of shaky loans whose full liabilities have yet to be realized.  In addition, Citigroup absorbed  Wachovia when it was facing a possible bankrupcy or FDIC seizsure of its own. Along with Wachovia came potentially even larger loses.  The future for Citigroup is as uncertain as the entire banking system. For the US Government to allow the banking system to fail is politically impossible. That much is certain. But just because the government is bailing the bank out does not necessitate that the bank bail the share holders and bond holders out.

One solution for the banking system’s current woes is for the government to acquire them in much the same way that Chase acquired Washington Mutual: the assets get stripped out and everyone else gets nothing. With that being a possibility, I’d advise people treat Citigroup like a tech stock. Maybe it’ll hit, maybe it won’t. I’m not going to stake any money on it.

As regular readers know, it’s gold for me. If the government keeps printing money (which they will) then some of that money will find its way onto Citigroup’s balance sheet. Maybe enough will make it on there to make their losses seems bearable, maybe it won’t. Either way, gold is set for a solid gain.

Now, if add the foreign investors back into the equation, things start to get really dicey. Bonds increased in price when the Fed announced their money printing shenanigans, but the value of the dollar dropped more sharply than the price increase. That means that, adjusted for exchange rates, our money printing policies are directly impacting all foreigners that are holding our bonds. And with more deficits announced, you can believe there’s going to be more printing.

At some point (probably this year) we’re going to see a point where “too big to fail” really gets put to the test. I’d hate to be holding Citigroup when that happens.

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