Our Spring blog series includes excerpts and basic financial lessons from the book In A Most Delightful Way, by our founder and CEO, James Twining, CFP®. The book aims to explore and simplify concepts based on the author’s own recollection of his early life and storied career path. The formula includes a story or anecdote (the “Spoonful of Sugar”) as well as “medicine” in the form of a lesson learned. Request a copy of the book anytime from your FP Inc. advisor or staff member.

Spoonful of Sugar: Moneybags and Silver

By James B. Twining

When my grandfather passed away after an eight-year battle with Alzheimer’s, my mother disclaimed a portion of her inheritance by giving $10,000 to me and each of my three sisters: a generous gesture. Nowadays, it doesn’t sound like very much money, but to me in 1981, it was the windfall that changed everything.

I had been reading about investments and had taken a special interest in commodity futures speculation. A former guitar student/become friend of mine, Chris “Moneybags” Storc, had some practical experience in futures trading, and together we studied various trading systems for hours almost every night. We were subscribers to a newsletter authored by Howard Ruff[1] called The Ruff Times. Howard Ruff was an advocate of storing up survival gear, food, and water against the certain and imminent collapse of society. He also preached that gold and silver were the only true store of value and that everyone should have at least one bag of “junk” silver (old silver quarters, nickels, and dimes) because gold and silver would be the only currencies accepted when the paper dollar became worthless in the coming collapse.

Chris and I scheduled an evening appointment with a commodities broker in San Diego and went to his upscale office to visit him. He gave us his trend-following system for rapid-fire trading, which involved the frequent buying and selling of futures contracts. He required $5,000 to open a trading account. We each deposited $5,000, but instead of using his trading system (which would have been expensive because of the excessive commissions it would have generated) we both bought a $100,000 silver contract.

It is not hard to see why commodity futures are so attractive to the speculator. The tremendous leverage that can be obtained magnifies the profits and losses.  In my case, I was controlling $100,000 of silver with only my $5,000 deposit. If the price of silver bullion increased by 5%, my contract would be worth $105,000; a gain of $5,000. In other words, because of the leverage involved, that 5% gain in the price of silver would translate into a 100% gain on my investment. In the commodities market this could happen within the course of a few minutes.

Of course, the reverse is also true. If silver were to drop in price by only 5%, my complete investment would be wiped out. Worse yet, if it were to drop by 10% I would not only lose my entire investment, but in addition I would owe the broker another $5,000!

Fortunately for me, silver rose in price and after a few weeks I had turned my $5,000 into $20,000. “Moneybags” and I really had it figured out. This was easy!  We turned to a different commodity: Heating oil. The almanac was predicting a cold winter in the east, and we were convinced that the price of heating oil would rise. We invested our $20,000 into heating oil.

I can’t remember if that winter was cold or not but I do remember what happened to the price of heating oil and to the value of my account: they went down in a hurry. As fast as you can say “sucker” my account was back down to the original $5,000. Moneybags and I withdrew our funds and departed the scene, tails between our legs.

Later on, I found out that over 80% of all commodity speculators eventually lose all of their money, so I suppose I should consider myself lucky. Moneybags and I were textbook examples of do-it-yourself investors who prove the old adage “a little knowledge is a dangerous thing.”

But we really had not fully learned our lesson. Moneybags and I went to a local Smith Barney office and spoke with a stockbroker who explained to us how easy it was to make a killing in stock options. Since we were “gold bugs,” believing that gold and silver were going to appreciate back to the levels not seen since their glory days in 1980, we purchased call options on an American mining company called Homestake Mines.

Once again, the gambling gods were with us and we profited handsomely. Over the course of a few months, I had convinced my stockbroker that I was King Midas. Almost every gold mining stock option I bought appreciated in value.  Like the commodity futures, we had tremendous leverage. I studied the various components of option premiums and complex options strategies. In the end it was all for naught; my early profits were eventually reversed by losses and commissions.

I left the speculating scene no richer but perhaps a little wiser. My $10,000 was now sitting, still intact, in a bank savings account.

The Medicine: If you think you have it figured out, think again. Speculating is gambling, and most gamblers lose money.

Investing, on the other hand, is not gambling. It is the ownership of securities which represent the equity or debt of profitable enterprises. In other words, investors share in earnings. A properly diversified, cost effective portfolio held over a very long time will fluctuate in value, but has almost always been ultimately profitable.[2]


[1] Wikipedia bio:  Howard Joseph Ruff (born in 1930) a financial adviser and writer of the pro-hard money investing newsletter The Ruff Times. Ruff is the author of Famine and Survival in America (1974), How to Prosper During the Coming Bad Years (1979), Survive and Win in the Inflationary Eighties (1981), Making Money (1984), and other books. He has later updated and re-released his most successful book, re-titling it How to Prosper During the Coming Bad Years in the 21st Century (2008).

[2] Of course, the mandatory disclaimer: past performance is not an indicator of future results.

Read Part 5: You’re Fired!                          Read Part 7: How to Pluck a Chicken in 5 Minutes