Archive for May 2010
27
Gold: The Ultimate Salvation Investment
0 Comments | Posted by Alexander Green in Alexander Green
Gold: The Ultimate Salvation Investment
by Alexander Green, Chief Investment Strategist
Thursday, May 27, 2010: Issue #1269
There are a lot of reasons to buy gold.
Besides being lovely to behold, gold has an attractive combination of chemical and physical properties. It’s virtually immune to the effects of air, water and oxygen. It will not tarnish, rust, or corrode. And it is completely recyclable.
As Time magazine pointed out last week: “It is an amazing metal. It can be pounded into a sheet so thin that light passes through it, yet the sheet won’t crack. Gold can be stretched into wires thinner than a human hair, yet those wires will conduct electricity beautifully. Implant it in a human body in the form of a medical device, and it will resist the growth of bacteria. Gold is beautiful, pliable, ductile, strong. The Stone Age, Bronze Age, and Iron Age all came and went, but gold is forever.”
In short, gold is used in everything from wedding bands, to fillings, to optic lasers – and more…
- Thousands of mechanical devices require gold to ensure reliable performance over long periods.
- Billions of gold-coated electrical connectors are used throughout the computer, telecommunications and home appliance industries.
- Weather and communications satellites depend on gold-plated shields for protection from solar heat.
- Even the automobile industry depends on gold-coated contacts for sensors that activate air bag systems.
The price of “the barbarous relic” recently hit new all-time highs. But that has little to do with gold’s fabulous properties.
Gold is also the color of anxiety. And investors are fearful right now…
Why You Don’t Want to See $5,000 Gold
Like all sensible investors, I own gold and gold shares. But I truly do not want to see the metal soar to $5,000 as some are predicting. Why?
Because, in all likelihood, that will be bad news indeed for the economy and our standard of living, not to mention the rest of your investment portfolio.
By and large we are living in disinflationary times. Yes, the price of food and oil (and hence gas at the pump) have climbed over the past few years. But technology and deregulation have reduced the prices of many other things…
- Look at the computing power you get for the money today. (And look how those computers lower costs for business.)
- Deregulation has brought down the price of airline tickets 25% – in constant dollars – over the past 15 years.
- When I went to college out of state many years ago, I didn’t call home that often for one simple reason: I couldn’t afford it. But the break-up of Ma Bell has reduced the cost of long-distance calls to a pittance.
There is little threat of sharply higher inflation in the near term. But the longer term is a different story. And as the mess in Greece has proven, poor decision-making can cause long-term problems to suddenly show up on your doorstep.
Gold: Your No. 1 Economic Insurance Policy
Right now, gold is rising due to a lack of confidence in government and the reality that government bailouts don’t necessarily fix problems. Sometimes, they just kick the can down the road awhile.
All the European Union has done, for instance, is take the risk of owning Greek sovereign debt away from banks and other creditors and passed it on to taxpayers. Politicians often believe they can do magical things with other people’s money.
- We all know what happens when an individual exercises long-term irresponsibility in his financial affairs: personal bankruptcy.
- We’ve all seen what happens when a highly leveraged business can no longer service its debt: corporate bankruptcy.
- And in the years just ahead, Westerners may very well see what massive fiscal irresponsibility does to national governments, their debt ratings and their currencies.
No one can say exactly how and when this will play out. But there is a distinct possibility that gold will be your salvation investment.
That means – just like property and casualty insurance – that gold is something you really can’t afford not to own.
Good investing,
Alexander Green
18
Why Value Investing and Trading Don’t Mix
0 Comments | Posted by Alexander Green in Alexander Green
Why Value Investing and Trading Don’t Mix
by Alexander Green, Chief Investment Strategist
Tuesday, May 18, 2010: Issue #1262
Last week, I spoke at a special conference on value investing at the beautiful Driskill Hotel in Austin, TX.
Virtually every stock market investor talks about “recognizing value.” I’ve found that interest in value investing ebbs and flows depending on the market. No one wants to overpay for a stock, or keep holding one if the price gets nutty.
And that leads to a basic question: How do you find value in the stock market?
It depends whom you ask…
The Fathers of Value Investing
The fathers of value investing, of course, were Ben Graham and David Dodd, two teachers at Columbia Business School who wrote the investment classic, Security Analysis.
They argued that value investing is about buying companies that are selling below their intrinsic value.
How do you determine that? According to Graham & Dodd, that means buying companies that…
- Trade at significant discounts to book value.
- Have high dividend yields.
- Have low price-to-earnings (P/E) ratios.
Buying this way is not only supposed to lead to higher returns. It’s also designed to provide a significant “margin of safety.” The idea is that if you buy a security right, your downside is limited.
A number of academic studies have shown that if you follow the principles of Graham and Dodd, you should do very well over the long term.
But there are potential problems with this approach…
Don’t Let a Cheap Stock Suck You In
First of all, stocks are rarely as cheap as they were back in the 1930s when Security Analysis was written. Or even as cheap as they were back in 1982 when the typical stock sold for less than book value and eight times earnings and yielded more than 6%.
And if you sat out the last 28 years out because stocks were too expensive, you missed an awful lot of opportunities.
When you do find a stock that does meets Graham and Dodd’s stringent requirements, you also need to be patient. Why? Because companies that are very cheap are out of favor for a reason. Sales are often flat or down. Earnings are weak. Profit margins are low.
You can’t succeed just by buying a company that’s cheap. (It can always become cheaper.) You have to buy a company that will someday – and perhaps not too far off – be dear to others. Otherwise, when will you take profits?
So maybe Graham and Dodd’s message needs modifying. (Warren Buffett, Graham’s most famous student, has certainly found ways to modify it.)
The Problem With Defining “Value”
I’ve found that the definition of value and the tools to achieve a margin of safety are flexible. And The Oxford Club has found successful ways to bend them.
To my mind, any stock that goes from $10 to $50 was a “value” at $10. I don’t care what the P/E or price-to-book was at the time. With the luxury of hindsight, it was clearly a bargain. Why quibble?
But die-hard value investors will argue that if the stock was “overvalued” at $10, it’s only more grossly so at $50 – and therefore, you’re at great risk holding it.
I disagree. If you use our customary trailing stops, your upside is unlimited and your profits fully protected. As long as a stock keeps trending up, we’re content to hold on – no matter what the valuation. When the stock eventually turns, as all do eventually, our stops will keep the profits from slipping through our fingers.
As for value analysis, quite frankly, we don’t spend a lot of time poring over P/Es and book values. We’re just interested in identifying companies that are likely to show dramatic, better-than-expected growth in the quarters ahead. These stocks tend to be more expensive than average, just as companies that will show little or no growth tend to be cheaper than average.
This method works, too…
Do You Have the Key Traits to Profit From This Approach?
The independent Hulbert Financial Digest has ranked our Communiqué among the top five newsletters in the United States for 10-year performance.
And our approach has one significant advantage over value investing. It works quickly.
- Growth stocks tend to sprint.
- Profits often come sooner rather than later.
As someone who spent 16 years as a money manager, I know that most investors don’t have the patience to be good value investors. (John Templeton, for instance, held companies in his flagship Templeton Growth Fund an average of 7.5 years.)
Yet clients will start to grouse if a stock doesn’t move for six months. They call it “dead money” and start itching to move it elsewhere.
I understand this instinct. But deep value investing and rapid trading don’t mix.
If you’re a patient, truly long-term oriented investor, value investing can work wonders. If you’re not, you’ll be better off searching for companies that are set to smash estimates.
When a stock doubles or triples – or rises 50-fold or more like Apple (Nasdaq: AAPL) and Amazon (Nasdaq: AMZN) – don’t worry, other investors will concede it was a “value” before.
Good investing,
Alexander Green
P.S. If it’s value you’re looking for, look no further than The Oxford Club. For just $79, you’ll receive a whole year’s worth of our experts’ top stock recommendations, investment ideas and strategies that you can use to amass profits and build wealth.
You’ll see exactly why The Hulbert Financial Digest has ranked The Communiqué newsletter in the top five in the United States over the past 10 years and have a portfolio of your own that can weather the market’s storms, but thrive, too.
Take the guesswork out of the investing process and let some of the best, most successful analysts do the work for you. Sign up (risk-free) to The Oxford Club today.
10
Treasury Inflation-Protected Securities (TIPS): The Indispensable Investment
0 Comments | Posted by Alexander Green in Alexander Green
Treasury Inflation-Protected Securities (TIPS): The Indispensable Investment
by Alexander Green, Chief Investment Strategist
Monday, May 10, 2010: Issue #1256
Two weeks ago, I wrote a column recommending Treasury Inflation-Protected Securities (TIPS) as protection against potential inflation down the road.
It prompted a flood of questions and challenges. I want to address those, but let me start by briefly re-stating my case:
- Unprecedented government spending – including $108 trillion in unfunded liabilities for social security, Medicare and new universal healthcare benefits – is putting the nation at risk.
- With interest rates near zero, the Federal Reserve cannot take one traditional step – lowering short-term rates – to revitalize a weakened economy.
- In a severe economic downturn or double-dip recession, politicians – with the reluctant assistance of the Fed – could opt to spend even more massively to try to jump-start the economy.
- The result could be stagflation: slow growth with higher inflation. (And although we haven’t seen it here in almost 30 years, perhaps even hyper-inflation.)
I don’t know what the odds of this happening are – and neither does anyone else. But I think investors would be foolish not to at least consider the possibility…
Inflation or Deflation? Hedge Your Bets This Way…
Respondents who disagreed generally fell into one of two camps…
- They either believed that deflation is more likely than inflation.
- They thought inflation was likely, but since Congress will almost certainly be the culprit, they don’t want to reward the mischief-makers by buying any kind of government securities.
Let me handle the former objection first: Is deflation more likely than inflation? Perhaps. No one can say. You should probably own a good slug of Triple-A insured municipal bonds just in case. (Because future tax rates are almost certainly going higher.)
By all means, make some plans for a deflationary scenario. But plan for the possibility of inflation, too. This is what diversification is all about. Hedge your bets.
But why use TIPS as your hedge, rather than a traditional inflation hedge like precious metals? In my view, you should use both. But remember, gold and silver are less than perfect hedges.
They have both performed exceptionally well over the last 10 years, for example. Gold has more than quadrupled. Silver has done even better. But the 20 years before that were an unmitigated disaster.
But no matter whether inflation is low or high, TIPS will protect you. How?
The Benefits of Buying Treasury Inflation-Protected Securities
- Regular Interest Payments: TIPS pay interest every six months, just like a regular Treasury bond. But unlike traditional bonds, your principal increases each year by the amount of inflation, as measured by the consumer price index (CPI). Semi-annual interest payments also increase by the amount of inflation.
- Tax Benefits: The interest you receive is exempt from state and local income taxes (but not federal). TIPS are also less volatile than traditional bonds and are also excellent diversifiers.
There are three good ways to buy inflation-protected Treasuries:
- Directly: http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm
- Through the Vanguard Inflation-Protected Securities Fund (VIPSX).
- Through its ETF equivalent – the iShares Barclays TIPS Bond Fund (NYSE: TIP).
I recommend TIPS for two primary reasons…
- I’m not a moralist trying to claim the high ground. I’m just trying to protect myself, my family and my heirs from potentially destructive hyper-inflation. I don’t want to remain true to my free-market principles only to see the net worth I’ve accumulated over a lifetime torpedoed.
- There is no private-sector alternative here. For good reason, private and public companies don’t want to leave themselves vulnerable to sky-high interest and principal payments down the road if inflation takes off. So they don’t issue inflation-protected securities. That makes TIPS the only game in town.
I know that some libertarians and laissez-faire capitalists will refuse to buy Treasury securities, period. But as I’ve pointed out, other inflation hedges sometimes don’t work. So there is no small risk taking another approach.
In sum, there is only one investment that guarantees a return that exceeds inflation in the years ahead: TIPS.
And in my view, that makes them an indispensable part of your portfolio.
Good investing,
Alexander Green
Editor’s Note:It’s beaten the performance of the S&P 500 every year since 2003.
It’s churned out a remarkable 1,083% in cumulative gains over that time.
It’s been called a “superb, simple, smart, sophisticated strategy.”
It’s not risky or complicated… it’s a pragmatic, conservative approach to investing, based on a system that won a Nobel Prize for Economics.
And it could change the way you invest forever.
And this extraordinary, step-by-step plan to investing, beating the markets, making money and maintaining wealth is all laid out in Alexander Green’s groundbreaking book – The Gone Fishin’ Portfolio: Get Wise, Get Wealthy… And Get on with Your Life.
6
Why the Euro Has Further to Tumble
0 Comments | Posted by Alexander Green in Alexander Green
Why the Euro Has Further to Tumble
by Alexander Green, Chief Investment Strategist
Thursday, May 6, 2010: Issue #1254
Being a contrarian is a lonely business.
If you’re a regular reader, you’ll know that ordinarily, I am market neutral on stocks, bonds, currencies and commodities.
The truth is that markets are reasonably efficient. So most years, I don’t stick my neck out and make any market calls on any asset class.
That’s because the vast majority of the time, most assets are neither grossly undervalued, nor wildly overvalued. Rational, self-interested investors keep prices close to true value.
But I am not an efficient market theorist. Investors are always self-interested, yes. But they are not always rational. And I most certainly do not believe that all publicly traded securities are efficiently priced all the time.
That would be lunacy…
Anomalies develop (and opportunities alongside them). Sometimes, these anomalies develop into outright bubbles. When that happens, you will always see eye-popping valuations paired with extreme sentiment. (In other words, sky-high prices and unbridled optimism or rock-bottom prices with extreme pessimism.)
What surprises me is how few investors recognize a bubble, even when it’s right under their nose and they have many thousands of dollars at risk…
Bubble Watch
For example…
- When I warned about the dangers of Internet stocks over a decade ago – I actually quit my Wall Street firm to take possession of my soaring pension shares – most respondents told me I was clearly ill-equipped to recognize the nature of opportunities in “the New Era.”
- Readers similarly scoffed at my warnings about the housing market five years ago. “Real estate always goes up,” they reminded me.
- At $150 a barrel, I wrote a column calling oil “The Mother of All Bubbles.” Demand was already waning and supply was rising as oil hit a new all-time high on various “peak oil” theories. It then quickly lost nearly two-thirds of its value.
- Five months ago – again, right here in Investment U – I predicted that the much-maligned dollar would soar against the euro. And yet again, my readers insisted that I was grossly mistaken and that a weaker dollar was “the ultimate no-brainer.”
Except it wasn’t…
Europe’s Monetary Policy Mish-Mash
Today, the euro hit a 14-month low against the dollar ($1.2689) on increasing recognition that Greece’s fiscal problems are bigger than expected, more expensive than expected and potentially contagious.
Trust me, this is far from over. The 16-member states in the Eurozone are about to start bickering like an old couple that has locked the keys in the car.
Understandably, weaker states don’t like having their economic policies dictated from Frankfurt. And stronger states don’t like spending billions to bail out their profligate brethren from years of fiscal mismanagement.
“Preposterous” Expectations for the Euro Against the Dollar
When the euro was born on January 1, 1999, skeptics rightly worried that the then-11-member states were too divergent to share a single currency and monetary policy.
These fears were well-founded. And the euro promptly plunged on world currency markets to well under $0.90. Today, we know that problems among member states aren’t just possible… not just probable… but right here, stinking to high heaven on our doorstep.
Yet the euro is still trading around $1.27.
Expect it to hit $1.10 by the end of this year – and trade at parity with the dollar sometime next year.
Sounds preposterous? Yes, so I’ve heard.
Good investing,
Alexander Green
Editor’s Note: Find out how The Oxford Club’s “market neutral” investment approach, combined with a keen eye for lucrative contrarian recommendations, led the Hulbert Financial Digest to rank the group’s Communiqué in the top five investment newsletters over the past 10 years.
Sign up for a risk-free trial today and you’ll get all the latest investing ideas, insights and recommendations from our analysts that will give you the opportunity to make consistent profits year after year. Check out the full list of benefits here.
