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The Most Important Wealth-Protection Step You Can Take

By Tom Dyson, publisher, The Palm Beach Letter
Monday, May 10, 2010

They're calling it the "Flash Crash"...
 
With a market cap of $25 billion, Accenture is one of the largest technology, consulting, and outsourcing companies in the world. For a few minutes on Thursday, Accenture's stock price fell to zero. Its stock market value literally vanished.
 
Something similar happened to a dozen other companies and funds. Even Proctor & Gamble, one of the largest and most stable companies in the world, dropped 37%. CNBC observed it was a loss of $35 billion in market cap.

A few moments later, everything returned to normal...
 
Some are blaming an electronic trading glitch. Others say high-speed trading programs caused it. Some are even saying an individual trader caused the crash by entering a position incorrectly into the system.
 
But my first thought was the Daemon...
 
The Daemon (pronounced like "demon") is the fictional creation of author Daniel Suarez, in a novel titled Daemon.
 
The novel is centered on Matthew Sobol, a genius game designer from California. He creates a program, called Daemon, to hack global computer networks and wreak havoc.
 
Infiltrating the computer systems of major corporations is one tactic the Daemon uses. Once embedded in a corporate data system, the program contacts management and threatens to destroy the company's databases. The Daemon will allow the databases to function – and the business to operate – in return for billions of dollars in ransom.
 
Some companies refuse. The Daemon destroys their financial records, and their stock market values vaporize, just like we saw happen to Accenture last Thursday.
 
I'm not saying this was a cyberattack on the stock exchange. Truth is, I have no idea what caused this "flash crash," and nor does anyone else it seems. Even the Wall Street Journal refrained from speculating in Friday morning's edition. But a dozen stocks saw their value go to zero, and the stock market lost 10% of its value in seconds.
 
Now... think about how much of your business depends on the smooth functioning of computers, databases, and the Internet. Think about how much of your life is now online and vulnerable to genius computer criminals. If you're like most people, you don't know much about how it all works... You just go along with everyone else and trust the system.
 
As yesterday's stock market glitch – and our series on personal Internet security – showed, trusting 100% of your life and money to technology is risky.
 
Or as one of the characters in Daemon notes, "Apparently, people thought nothing of hanging their personal fortunes on technology they didn't understand."
 
Daemon is a brilliant book. I read it cover to cover without stop. It discusses all kinds of technology I didn't know about... and does it in an entertaining way. Best of all, all the technology featured in the book exists today. In other words, the book's premise is absolutely plausible.
 
The point Thursday's market action reinforces is this: If you hold wealth in electronic form, you're taking a risk. That risk is technological failure. It may be a tiny risk... or it may not be so tiny. You can't know. But are you willing to risk so much on something you don't understand?
 
Fortunately, it's an easy risk to insure against. You simply have to keep a small percentage of your wealth in physical gold, silver, and cash. And don't trust anyone else to store it. Keep it yourself, secure it, and don't tell anyone about it. And consider taking some of the online security steps we've discussed here before.
 
We've all come to rely and depend upon technology we don't understand to store our wealth. We're taking a small, but potentially catastrophic risk. By keeping a stash of physical wealth, you're taking the first step in mitigating this risk.
 
Good investing,
 
Tom




Further Reading:

Early last year, Steve Sjuggerud's family ran into a $32,000 problem with computer criminals. Get the story here: A True Story: It Happened to Us... It Could Happen to You. He also recently discovered the government can legally access your Internet activity without asking for any permission. Get steps to protect your privacy here: I'm Personally Taking Drastic Measures.
 
Our own Jeff Clark has been keeping an eye on algorithmic computer trading systems, which are responsible for a lot of unusual trading activity over the last 12 months or so. Find out more here: Wall Street Super-Computers Are Stealing Your Money.

Market Notes


NEW HIGHS OF NOTE LAST WEEK

Volatility (VIX)... we told you it was cheap!
Eldorado Gold (EGO)... gold
DIRECTV (DTV)... satellite television
St. Mary Land (SM)... oil & gas
Coinstar (CSTR)... coin counters
Whole Foods (WFMI)... expensive groceries
Sturm, Ruger (RGR)... guns
Boyd Gaming (BYD)... casinos
Thompson Reuters (TRI)... publishing

NEW LOWS OF NOTE LAST WEEK
 
Euro currency... becoming toilet paper
British pound... also becoming toilet paper
Eni SpA (E)... Big Italian Oil
France Telecom (FTE)... French telecom
Vimpel-Comm (VIP)... Russian telecom
Nokia (NOK)... cell phones
Exelon (EXC)... electrical power
Advanced Battery (ABAT)... batteries
Energy Recovery (ERII)... desalinization tech
McAfee (MFE)... tech security
Gilead Sciences (GILD)... biotech
Monsanto (MON)... even its customers hate it
Broadwind Energy (BWEN)... wind power equipment

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