Nothin' Up My Sleeve

I remember how fascinating it was to discover that Las Vegas sports books do not bet their money on anything as stupid and unpredictable as football games. Las Vegas bookmakers try to set the line so that exactly the same number of dollars are bet on each team. The casinos are quite content with the 9% or 10% they take from the winners’ share. If too much action is falling to one team, they will change the line to attract money to the other team. Back in the old days, handicappers who messed up the line and lost too much of their casino’s money were given one way rides into the desert in the trunk of a Lincoln Continental. The casinos are not gambling with their money. They are letting you gamble with your money.

It is fun to watch stage magicians practice their craft. You know it is a trick but you can’t quite figure out how it is done. My wife and I went to see Criss Angel’s Cirque du Soleil show when we visited Las Vegas in October 2008. It was pretty amazing. At one point Criss was flying over the audience on a wire. I could see the wire in the spotlights. Then the wire broke and Criss started to fall, out of control, into the audience. People screamed, the lights went out, and a second later when the lights came back on, Criss appeared safely back on the stage. How did he do that?

Penn & Teller, a pair of famous magicians, claim that there are seven principles of sleight of hand.

The Seven Principles are:

1.Palm - To hold an object in an apparently empty hand.
2.Ditch - To secretly dispose of an unneeded object.
3.Steal - To secretly obtain a needed object.
4.Load - To secretly move an object to where it is needed.
5.Simulation - To give the impression that something that has not happened, has.
6.Misdirection - To lead attention away from a secret move.
7.Switch - To secretly exchange one object for another.

It is interesting that some of theses principles are at work in Las Vegas casinos and various investment pitches, especially misdirection. The two silver coins that began this ministry resulted in a number of phone calls from an enthusiastic but ultimately unsuccessful salesman.

His pitch began with what Penn & Teller term “Simulation.” He attempted to convince me that the value of the dollar had already collapsed to nothing and that the price of silver was artificially depressed by the Sith Lords of Scotiabank short selling the commodity. He emphasized how important it was that I buy silver at that very moment. Even I know that for every short position their must be a long position.

Before the call, his company had done what Penn & Teller term “steal,” “load,” and “palm.” They had purchased silver on the open market and were now offering to sell it to me at 16% more than they paid for it.

The whole experience was an exercise in “misdirection,” an attempt to distract my attention from what was actually happening. What they are doing is neither illegal nor is it unethical. They are living on what is called the spread. In markets, there are two prices, bid and ask. The bid price is what the market maker is willing to pay for an item. Ask is the price at which he is willing to sell the same item. For example, if an item to be sold at $21.00 is purchased at $20.00, the spread is $1.00 or 5%. In currency trades the spread is 1/100 of 1%. In thinly traded exotic small cap stocks the spread is in the neighborhood of 1% to 2%. In most stock transactions the spread is at most pennies and is invisible to the retail customer.

These companies are quite happy to sell you silver for 16% more than they paid for it. As long as they have customers who willing buy their product and a supplier (the U.S. Mint), they can make a lot of money with very little risk. I imagine they try and keep their inventory in silver at somewhere around a 30 days supply, maybe less if they practice some just in time inventory scheme.

Silver can be purchased in the form of an exchange traded fund, I Shares Silver Trust ticker symbol (SLV), with essentially no spread and a brokerage fee of $12.95 per transaction at Schwab, less than that at the on line brokerage houses. So why, Mr. Salesman, would I pay you 16% plus another 2% in shipping and handling? Silver would have to increase by 18% before I would break even. Except for the inflation years of the late 1970s, I would be pretty happy to get an 18% increase on anything over a two year period.

I always believe that it is more important to watch what people do than it is to listen to their pitch. Just for grins, I asked the salesman how much silver he owned. The answer he gave was a very low figure, much less than he was attempting to sell to me. He told me he put most of his money into rare coins. Isn’t that interesting? Zig Ziglar, the famous motivational speaker, famously observed that with one question he could determine if an insurance salesman was successful or a failure. The question, “How much insurance do you own?” He believed that if a salesman was not willing to buy his own product he would never be a success. At least Ziglar’s maxim was correct in this particular instance.

If you must buy retail silver, check out the Gaithersburg Coin Exchange. The spread there was 6%. At least that is what it was back when all this started in 2007.

If you have never seen Penn & Teller perform the cigarette trick, check it out. It is a hoot.

http://www.youtube.com/watch?v=_qQX-jayixQ