Tag Archives: Investing

Disgusted

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Amusing yes, depressing yes… Therefore I ask are we just pawns in a game. A host to a virus that will keep us alive to survive. Do we go about our merry lives content with how things are and vote or not — knowing it doesn’t matter? Or worse voting and thinking that it makes a difference? If I am that absolved to complacency then I might as well live on the isle of Gauntlett, an ecosphere… self-sufficient, self-sustaining, and apart from all. Ron Paul lies it out all out in Revolution: A Manifesto, but as I’ve mentioned people don’t want to listen, and are complacent with being robbed and then blaming it on corporations when the culprits are government officials. I want freedom, personal rights, and property rights with a just law. Without those how can I plan for the future. What incentive do I have to invest if the rules are continually changing? 

If someone continually takes a penny from pocket at an ever increasing rate what motivation do I have to produce pennies or for that matter anything?  

Stocks for the LONG LONG LONG term

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“The best therapeutic move for long-term investors is to turn off your TV so as not to get caught up in all of the sensational headlines. The stock market has been and will continue to be the best source for wealth creation over the long-term.”

–Patrick J O’Hare, Briefing.com

I love hearing that the stock market for the long term is the way to make money. Close your eyes and prey. Whoa… Did you close your eyes and watch the money flow into your pockets when you labored every day for what you have invested?

What happens if you are in individual stocks and some of them go bankrupt? The indices adjust and find another company to take the failed ones place. Yes, the market has gone up in the long term, but what if you invested at one of the tops before the crash and had to wait 16 years to get your money back? I don’t know about you but I’d rather sit on the sidelines and wait it out. There are ways to see the hurricane of in the distance, but if you are unwilling or unable it will hit you.

When Columbus was making landfall the natives didn’t see his ships because they weren’t part of their reality. If we can’t adjust our thoughts to accept something new or different then how are we going to prepare for a possible change of future direction?

Read the following article… There is a grim reality facing us all. Investment banks have used up their ability to lend to businesses. Considering that the growth of our economy depends on the ability of credit we are facing a MAJOR did I say MAJOR issue in front of us.

Money Central Article

I’m also hearing local news radio having discussions about what to do with your money to keep it safe. Last night I heard someone saying that this is the time to start thinking about buying. Sure there is the old adage that when there is blood in the streets buy. When if the blood is only at a trickle when it will be a river?

WaMu — Everything is okay!

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So, a friend of my sent this my way and I started shaking my head. Washington Mutual is assuring the public that it is a sound bank. A quick look at their chart says otherwise… How are they going to raise any capital?  Their bonds are trading down significantly, and selling preferred shares are out of the question.  The Fed, Treasury, and the FDIC can’t save all the banks and investment firms in trouble.  Is a domino about to fall in the financial sector?  

The ETF SKF is looking pretty tasty these days unless you think that the banks are way oversold.   My concern is as this crisis deepens when it will start to spread like a virus into other sectors?  

WM 2 year chart

WM 2 year chart

 

And now I present the lovely letter that WaMU is sending out to their mail lists:

 

A letter from Washington Mutual

A letter from Washington Mutual

Probable Future Outlook for the United States

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What concerns me most is looking at the highly probable future outlook…

The gov’t is looking to bail out the Freddie and Fannie (dependent upon congressional approval), which will help out new, but not existing home buyers. By adding their debt the gov’t is using our tax dollars and inflation adjusted dollars to secure them. However, we are projecting a $500 billion dollar short fall this year in the budget, and the national debt is at about 9.7 trillion, and growing ever so rapidly. If we tack on unfunded liabilities now we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when the gov’t revenues begin to decline due to the slowing economy, baby boomers starting to take their retirements, baby boomers soon to be taking Medicare, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

Consumers purchased houses as money was cheap. Everyone felt rich so they purchased more consumables, which had no productive value. These weren’t investments into something that would have future economic value, but only immediate gratification and immediate depreciation. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point the rest of the world is going to tire of this. Then after our HELOCs were maxed out we started to use our credit cards.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the markets and purchase any tangibles possible. Money is a commodity just like gold and silver, but it can easily be created. However, due to the nature of its existence it is a exchangeable commodity and considered legal tender. As people want dollars the price rises and as people desire them less the price falls. Why would anyone want dollars when you look at the future for the US economy besides necessity and political reasons.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages.

In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. – US News and World report 2/28/2008 — Link to the story

The GSE bailout will help to prolong the issues that the financial industry is facing. The USG will do everything in its power to support the system through its tax system. It also gives individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

And Gary North just posted this lovely article that illustrates that nobody has a clue as to the extent of what is really going on. Link to the article Unfortunately this is for members only, which I highly recommend subscribing to. I don’t get paid a dime on referrals.

I’m getting the sense that things could get a whole lot worse than any of us imagine. In that case I’d consider moving out of the county. Sure the dollar is rallying, and commodities are falling, but how long will this last? Peak oil has passed so we are biding our time before demand outstrips supply. Without oil or with really expensive oil life becomes much more difficult. Panic would ensue in the streets.

For those of us who believe in the concept of revision to the mean take a look at the Case Schiller index since 1890. Looking at the graph we have never seen housing prices rise so dramatically so quickly. Every boom period was followed by a bust or contraction and revision to the mean. We are beyond the mean… we are in outer space. Thank you Fed for the cheap money, and for removing banking reserve restrictions, and inflating the money supply. Hey it had to go somewhere and housing seemed the place to be. Then it went to commodities, which are now taking a fall as well. However, I see no reason that the long term forecast for commodities won’t be higher. The commodities I speak of in this case are precious metals, petroleum, and food. Essentially all the necessities to keep the world moving.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing will be a good asset to hold onto. However, if we have a depression I could argue the opposite. In a depression the purchasing power of your dollar increases. Depression means contraction of the money supply, which isn’t necessarily a bad thing. In fact part of the Fed’s charter is to contract the money supply when needed, but that hasn’t been the case as of late.


Full Story from Mises.org

And what’s next? Commercial Real Estate?
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.

Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. “We’re going to see a whole lot more trouble going forward,” said Peter Steier, vice president of Inland Mortgage Capital in New York.
Link to the article

It continues:

Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.

“One of our biggest problem areas is pretty much the state of Ohio,” said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. “If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland.”

I discoved this last bit from Chris Martenson @ www.chrismartenson.com.

Conquering your Ego

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Investing in your ego is perilous to your bottom line.

So, why is it that when we come across a investment idea that we wait until a confirmation to act? We act after a major move, get it when everyone else already has and act like sheep. Have you ever said to yourself – “I knew that was going to happen”. Sure we all have had moments of genius, and done nothing about them.

When an idea or potential action is at its infancy we hesitate for a variety of reasons. For me personally it is the fear that I might be wrong. Well, there are things to safeguard against such fears such as stop-loss orders, options, hedges, etc… Staying paralyzed does us no good as the opportunity will pass as quickly as it came.

Jumping onto the boat or making a trade late in the game might sound like a good idea. However, one must carefully evaluate if that is true. After a major move is your initial idea still valid? Has the environment changed? What is your time horizon?

Instead our ego jumps into the picture and says don’t be left behind, or I was right then so I’m still right. Then once you are in and want to be right about the direction you choose you hope and prey, but alas it is going against you. First a couple points, and then a few more. You are almost to your stop-loss (assuming you placed one) and decide to move it down a bit more. You know you need to keep it in place, but your ego jumps in again and says you were right so hold on.

Well, the more I read and also the more I understand myself the above isn’t fantasy, but a harsh reality. We all like to be right and love to feed our ego’s. If your ego is still running full-ahead (remember Titanic) – if you are saying “what ego?” or “I don’t know what you are talking about” then I recommend reading the following:

I read it and it is a start to get my ego in check, and emotions out of the markets. If you are able to see that your ego is acting on your behalf you are one step closer to knowing your strengths and weaknesses.

Questioning Your Investments

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So, investing is an art form much like any of the other “things” we do in life. If you are a musician you must practice until you become proficient, and then to become a master takes many years of dedication. Even then there will be people above and below you in terms of proficiency and skill, but that doesn’t mean you aren’t great.

As each day passes I look to myself trying to figure out what investment style will suit me best, and I’m coming to the conclusion that an intermediate to long-term perspective will probably be best for me at least for now. That doesn’t mean that short-term trading won’t be a part of what I do, but it will be minimal.

Why? Well, the longer-term trends make more sense. Say for example with our current credit crisis at hand. The USD is being devaluated at an alarming rate. As the Fed continues to pump money into the system (mind you it is created out of thin air) thus each dollar is worth less due to there being more of them in circulation. Well in that case what do you do if the dollar continues to fall? Well, purchase other currencies that you think will be stronger against the dollar and / or purchase commodities as they are valued in the dollar. As the dollar weakens the commodities go up in value. However, you have to be careful as you are also dealing with supply/demand issues when it comes to raw materials. To say there are hard and fast rules is dangerous. For example while it may be supposed that an increase in gold is a indicator that inflation is coming, to abide by that rule in every situation may get you in trouble.

Okay so I’m almost finished with Harry Browne’s Investment Strategy and wanted to write about the questions we need to ask about our investments and the questions we normally ask, which lead us astray.

1) RISK: Is there any risk?
Well there is always risk in any investment. The only risk-free investment or the closest thing to it is T-Bills, which is considered the risk-free rate.

If risk is inherant in any investment then what?
1) What economic conditions will cause the investment to decline in value?
2) Are any other investments inversely correlated with this investment to compensate for its decline?
3) What is the most you can lose? (Generally this is 100% of what you put in, but remember that if you are using leverage you can go beyond 100%. Imagine futures for example and you are locked limit down if you are long. You can’t get out and may end up having to pay your broker even after your sell.)

Safety: Is this investment safe?
Well, safety is somewhat misleading. The cash in your bank account is safe as long as your bank doesn’t collapse, and if it does hopefully the FDIC will have enough capital to guarantee your account. But say inflation is at 10% and you are earning 3% interest your capital is depreciating at 7% per year. Yikes!
1) Under what circumstances would I lose a substantial portion of my capital — say 20% or more?
2) What would cause my entire investment to be worth nothing?
3) Can I lose more than my investment. (See #3 under Risk)

INCOME AND CAPITAL APPRECIATION: What is the investment yield?
Your investment can appreciate in 3 ways (sometimes a combination of a, b, c):
a) Price appreciation
b) Interest earned
c) Dividends

Also, there is a tradeoff between income and appreciation with regard to taxes. b and c provide immediate income with a tax liability, while a also provides income, but taxes are deferred until you sell thus generating income.

Chasing high yields means chasing a risker investment as the general rule is that the higher the yield the greater the risk. So, if a T-Bill is yielding 3% and a corp AAA bond is yielding 6% the corp bond has a greater risk of default. I’m not saying that the corp will default, but the possibility is greater. Also, with high inflation purchasing a bond at 6%, while inflation is at 12% means as I stated earlier that you are losing money.

1) Under what circumstances, if any is the investment likely to appreciate?
2) Under what circumstances, if any is the investment likely to depreciate?
3) In good circumstances for the investment, will the overall return — yield plus capital appreciation — help your portfolio?

Note about mutual funds: You want the fund paying the lowest yield. Any dividend paid simply reduces the price of the fund by a comparable amount. You also have to pay taxes on the dividend, whereas it could have stayed in the fund invested being compounded.

TRACK RECORD: How did this investment perform in recent years?
Investments go up and down, the economy expands and contracts. There is no written rule that says if it has been going up for the past number of years that it will continue to do so in the future. You may be buying at the top and selling at the bottom. The same may hold for an investment advisor. They may be hot, and by the time you invest with them they went cold.

1) What kind of economic climate should cause this investment to prosper. (IE: Inflation and Gold)
2) When the climate HAS existed, DID the investment prosper?
3) If this investment is for a balanced portfolio will it give you too much exposure to one category of investments?
4) If this is a speculation, do you think we’re heading into an economic climate favorable to this investment?

SPONSORS: Who things this investment is about to rise?
Nobody can predict the future! I don’t care what anyone says, but they can’t. All we have a various indicators, past events based on similar circumstances, and the moon!

1) Why is this person recommending the investment? Do their arguments make sense?
2) What do they believe it will add to your portfolio?
3) What will have to happen for their forecast to come true?
4) Do you want to bet on that event with funds you can afford to lose?

TAKING THE PLUNGE: How much should I invest?
Nobody can tell you how much to invest because we all have different objectives, and risk tolerances. I will say however that for risk management Van K Tharpe has some helpful information. One book I would recommend in this area is Trade Your Way to Financial Freedom.

Balanced Portfolio:
1) How much of the investment do I need to provide the proper balance against my other investments?
2) How large of an investment would overexpose me to some potential event?

Speculation:
1) The entire investment could be lost. How much can you afford to lose?

TAKE OVER CANDIDATE: Is this company a potential takeover candidate?
If you are acting on the possibility of a takeover or some other event materializing such as a product being successful… if it doesn’t happen there will most likely be a drop in its price as it failed to meet expectations.
1) Do you interpret the widely known information different from what most people believe?

Investing with the crowd isn’t much of a profit maker. Generally the price of the asset already reflects what is widely known. Therefore if something is out of favor or not on the radar screen of everyone, if it performs you could make out quite well. ie: where will the next bubble be? Can we say the green movement?

Unpopularity isn’t a guarantee of profits, but it is a prerequisite.

POPULARITY: If this investment is so good, why don’t I see it recommended in newsletters or Money magazine?
1) If you are discussing an off the radar investment with someone are they trying to help you decide if it is right for you? Or are they simply guessing that the investment will go up in price?

If the latter ignore the price — remember the future is unknown.

TECHNICAL ANALYSIS: Do the technical factors favor the investment now?
Technical indicators have a chance of being right or wrong. There are a vast number of indicators people believe in. Some may be correct due to the self-fulfilling prophecy. If enough people believe in them and use them to trade or invest then they will exist.

1) Is there something more interesting on TV that in the charts?

SUMMARY:
You must be able to define what you are trying to achieve. HAVE A PLAN! Without a plan you will be riding a very large wave without anyway out, only to later be crushed. To have a plan will enable you to ask the right questions. A plan also will enable you to evaluate what you see and hear. Lastly, you will be able to decide if an investment is in line with your goals.

–Most of this was a paraphrase of Harry Browne with a few of my opinions added in. Most of it is common investment wisdom, but alas from what I can tell most of us are looking for the Holy Grail. Van K Tharpe talks about the Grail… It isn’t what you think. There is no magic answer, there isn’t a system that is fool proof, and again we can’t predict what will happen with certainty. Good Luck!