Monday, September 17, 2012

Avoiding the Portfolio of Doom

Last time I compared the current investing environment to an Indiana Jones movie.  So what can the average investor do to prevent his holdings from becoming the “Portfolio of Doom”? 

You must cross the high, rickety, bridge to the acceptable rate of return on the other side, without plunging into the crocodile pit below.  Here is some advice on how to do this. I am not a financial professional, however I do manage the GeoDon Fund, a portfolio of stocks and bonds that was originally put together by my grandfather George over 50 years ago.  The GeoDon is up 11.1% YTD vs. 15.4% for the S&P 500.  Not too shabby for a conservative rated fund.

Diversify and Then Diversify Even More

Diversification is needed by the average investor to prevent you from making big mistakes and to spread out your risk.  Because the current environment is so risky, you should diversify even more than normal.  For stock and bond people, this means putting $5000 into two stocks or bonds instead of $10,000 into one.   I know that this increases your investment costs, but paying extra commission reduces your risk is and this makes it worth it right now.

For mutual fund investors, if you are in three mutual funds in your 401-K (the minimum I recommend), consider now spreading your money into two or three more.  Just make sure the additional funds are solid ones.  Look at the five-year history and be aware of how they performed in the worst year because things could get nasty again.

Gold and Silver

Gold should be considered strictly a defensive action and this can be a valid strategy for some people.  Do not consider it a value generating investment.  If you lose money, you received a benefit from hedging against disaster.  If you make money, consider it insurance that paid a dividend.  To rely on it as an investment is the same as an NFL team expecting their defense to score enough points to win the game.   Also, it has been reported that Russia is hoarding gold.  This is driving up the current price, but if Russia decides to unload its holdings in the future, the small investor could get stuck.

Silver is like a gorgeous woman that flirts with you, deceives you, seduces you and causes you to fall deeply in love with her.  It is a sultry, steamy, romance until she crushes your spirit and leaves you poor and brokenhearted.  All the good things the commercials say about silver is true, but don’t be sucked in.  The silver market has a history of suddenly imploding for no reason at all.  A careful investor should avoid the “Silver Mines” when climbing through this wilderness.  And copper presents some danger also.  China has been stockpiling copper, so it could be overpriced and the risk of a future sell-off exists.


People always say “I wish I would have got in at the bottom of that one”.  Well there are two sectors that are very close to the bottom that offer a potential big upside:


Demand for clean water is expected to greatly increase in the future.  Companies that purify, transport and provide this water are still very cheap compared to their potential growth.   You can do the research to determine which are best.  I am planning to add a water company (or ETF) to my portfolio in the near future.


Uranium prices are still very low.  China, India and Turkey are expected to build many nuclear power plants in the near future.  In addition, even Japan is expected to replace its old, damaged, nuclear power plants with new plants featuring the latest in safety technology.  Next year, demand is expected to rise while supply, due to some unusual circumstances, is expected to temporarily fall.  This creates a potential for a big price spike.
Of course investing in uranium companies is very risky.  But the downside is limited because uranium prices are already depressed and should not go much lower.  I do have some money invested in two uranium companies.  Please do your own research to determine what you may want to do here.

Looking Under the Rocks

This tricky investment environment makes it necessary to look for opportunities in unusual places.  The quest to find good investment takes some creativity.  I have used my new “hyper-diversification” strategy to make small investments in two riskier companies, but there are logical reasons for both.

Can he be trusted with your money?
I invested a small amount of money in the Bank of Scotland.  The bank suffered during the European financial crush, but has made an impressive comeback.  I figure that the Scots are so tight with their money (I am allowed to say this because I am part Scottish) that after almost losing it once, they won’t risk letting it happen again.

I also invested a little cash in a Spanish electric utility.  Again this may look very risky, but it really isn’t.  If things totally collapse in Spain, the very last thing to shut down before all the lights go out would be, well, the electric company.  Until then, the stock is up 47% in two months and I can still sleep well at night.  Invest wisely my friends.

Monday, September 3, 2012

The Sound of Silence

It’s quiet, real quiet, too quiet.  The stock market is quiet, the economy quiet. It’s so quiet, it’s downright eerie.  And just like an Indiana Jones movie, you know when it gets this quiet that something very terrible or very good is just about to happen.  And while this makes for a great movie, it makes things very nervous for investors right now.

Investor “Wall Street” Jones is searching for high returns with low risk, which is now as difficult to find as the lost ark.  Jones survived being crushed by the giant rolling debt crisis in 2008, but now is trying to navigate a financial jungle filled with junk bonds, commodities and Chinese, Greek and Spanish obstacles. He must walk across a very unstable bridge that is built with Euros.  A few years ago the bridge was rock solid, but now the bridge is so rickety that it could suddenly collapse and send Jones plummeting to financial ruin.  He is trying to avoid building the “Portfolio of Doom”.
Jones is very concerning about the lack of activity as he navigates through this jungle.  He then reaches a clearing and realizes why things are so quiet.  All the creatures in the jungle are assembled watching two knights engaged in a brutal jousting match.  The winner will be deemed worthy to fight the nasty, fire-breathing, dragon that goes by the name of “Bad Economy”.
"Bad Economy"
One knight, Sir Barack, has been fighting the dragon for over three years.  The dragon has been winning this battle and in fact Sir Barack’s pants are currently on fire.  But Sir Barack believes he can slay the dragon if he is just given more time.  The other knight, Sir Mitt, believes the dragon should have been slain by now and thinks Sir Barack’s lance is flaccid and incapable of defeating the dragon.  Sir Mitt believes he is rather good with a lance since he has experience slaying smaller monsters.  The jungle is expected to be rather still until one knight is victorious and the battle with “Bad Economy” resumes. 

Quiet Until November?
This election is so pivotal and the difference in choices (and economic direction) is so great, that it seems like the stock market and maybe even the economy (lack of activity due to uncertainty) have ground to a halt.
In a normal presidential reelection year, the incumbent takes significant actions to stimulate the economy and thus improve his election chances.  Congress usually supports these actions because most of them are up for reelection also.  These actions usually work but can be harmful for the economy in the long-term.  However, an incumbent president doesn’t really care.  If he wins, he just thinks “Hey I’m in for four more years, suckers!”  If he loses, he just says to the winner “Good luck dealing with that mess sucker!”
But this year has been very different.  There have been no big economic stimulants and economic growth has been anemic.  Possible reasons for this are:
A.   The economic is so weak that it can’t be stimulated much

B.   The administration has already fired all the stimulus bullets in its economic pistol and so it has nothing left to try 

C.   The administration is so inept that it has no idea what to do (the Republican favorite) 

D.   The administration has all these great ideas (that for some reason were not tried before) but the stupid Republicans in the House of Representative are obstructionists and won’t agree to anything (the Democratic favorite) 

I’m hoping the answer is B, but I fear it could be A or C. (you can vote by commenting after this post)

Do Not Believe the Election Year Models
You may read articles about what the stock market does in certain months of an election year and for that matter what will happen after the election.  As I have said several times this year: the traditional economic models and indicators are broken.  This is a strange and unique situation so do not invest based on these historic-based models. 

Something Big is Going to Happen Soon
But things are too quiet.  Something big has to happen before the end of the year, unfortunately in this crazy situation it could be a spike up or a crash down.  If I had to bet, I would bet for a drop.  In May, I forecasted an S&P 500 Index low of 1245 this year before a recovery.  I expected the drop to have started already so I am much less confident of that forecast now.  But it remains quiet, much too quiet.  So put on your Indiana Jones hat, keep your head low, and beware of the snakes that can poison your portfolio.