Month: August 2012

By MoneyMorning.com.au

The three-legged stool is one of the world’s great, unsung inventions.

It ranks close behind the wheel and clothing.

No-one knows who invented any of those three things.

One day someone realized it’s easier to move things using a wheel or rollers. One day some ancient person figured they could keep warm using animal skins…

And one day someone worked out that a three-legged stool solved the problem of wobbly four-legged stools.

That’s the thing. The mark of a three-legged stool is its stability…you can trust it to stay firmly in place.

In short, a three-legged stool isn’t something you fear could wobble and collapse at any moment. And yet, one global investment manager says investment markets are ‘resting on a three-legged stool’.

You won’t believe which economies he says are the three strong legs for investments…

Stable or Shaky Investments?

Today’s Australian interviews Alex Friedman, chief investment officer of UBS Wealth Management. The article says his investment group manages USD$1.6 trillion.

According to The Australian:

‘He likens the investment markets today as “resting on a three-legged stool”, with one leg being the eurozone, one being the US and the other China.’

Oy, vey.

We don’t know about you, but that’s not a stool we’d want to rest our derriere on…especially not $1.6 trillion-worth.

But Mr Friedman likes what he sees. The article goes on to explain his view:

‘”In China, we think essentially that the landing has already taken place and that it’s a soft landing. We see growth being somewhere between 7.5 and 8 per cent”…

‘”The US is a bit more complicated. We think it’s going to be reasonable but sub-par growth, 1.5 per cent, maybe 2.3 per cent in the second and third quarter.”

‘As for the eurozone, he says it has several things working in its favour.

‘”Its surprises are becoming less negative and the European Central Bank is kind of acting in a more dovish way and markets are getting excited.”‘

In other words, China will keep growing – because those clever central planners have stopped the economy crashing.

The US economy will keep growing and people will keep spending – that must be true because a chart in yesterday’s Australian Financial Review forecast the cumulative US budget deficit will be about 400% of annual spending by 2077.

And as for Europe, well, all the bad stuff isn’t as bad as the bad stuff we’ve already had…so that must be good!

Investment Blindfolds and Earmuffs On

Understanding what the big money managers think is key to making money in this market.

It’s part of the reason why Slipstream Trader, Murray Dawes plans on chewing the fat with hedge fund types in London this week.

He’s already had an off-the-record chat with one guy. Not surprisingly, the message he’s heard is that China will be fine. Apparently the market is focusing on the wrong things.

What? Like the fact that the Chinese credit boom is bigger than the US and UK credit booms of the 2000s…

And bigger than Japan’s 1980s credit boom, and Korea’s 1990s credit boom?

But still, China is different.

Because rather than the pesky market identifying and purging unsustainable booms (as happened in the US, UK, Japan and Korea), China is a centrally planned economy. That means the market can’t punish the economy for all of its bad investments.

And that’s a good thing is it?

We wouldn’t bet on it. If someone’s sawing away at one of the legs on your three-legged investment stool, you’d probably like to know about it.

Wearing earmuffs and a blindfold may let you ignore what’s happening, but not for long. You’ll find out what’s happened when one of the legs is gone and you’re lying flat on your backside.

Anyway, that’s what we think. But it’s not what the big investment pros think…

Invest in Stocks…Carefully

Whether it’s China, the US or Europe, the big pros like UBS’s Alex Friedman are clearly getting bullish again. And unless we’re mistaken, based on what we’ve heard from Murray while he’s in London, he’s hearing the same message too.

That tells us we’re right to advise you to have at least some stock market exposure (10-20%, as a rough guide).

Because when you’ve got big fund managers throwing around $1.6 trillion in the market, there’s no doubt it will impact all asset prices. If the market rallies another 20% or more from here, you don’t want to miss out.

But that doesn’t mean you should put your whole wealth into the markets. Because, as we’ve said many times, the stock market is high risk.

In simple terms, China, the US and Europe aren’t a sturdy three-legged stool. They are three highly leveraged and highly indebted economies that are trying to hide and postpone everything that’s wrong with them.

In our view that’s a recipe for disaster rather than strength. But with big money flowing into the market it still makes sense to follow the actions of the big moneymen.

Just proceed with caution.

Cheers,
Kris

Related Articles

Market Pullback Exposes Five Stocks to Buy

Why I’ve Done a U-Turn on Solar Energy

How to Invest Outside the Government-Controlled System

This Three-Legged Investment Market is About to Get Wobbly

By MoneyMorning.com.au

Corn prices are officially through the roof, spiking to record highs. It’s been headed this way through six years of crazy volatility. Now the spike is undeniable. At the same time, crop yields are lower they have been since 1995.

Everyone blames the drought, as if the market can’t normally handle a supply change. The real problem is that the corn market is fundamentally misshaped by government interventions that have made a mess of this and many more markets. The distortions are never contained, but spread and spread.

The implications are quite radical, especially given the food price riots around the world the last time this happened.

It is probably going to hit the U.S. this time. Internationally, some writers are raising the spectre of a price-driven famine in parts of the world.

‘Corn is the single most important commodity for retail food,’ Richard Volpe, an economist for the USDA told the Los Angeles Times. ‘Corn is either directly or indirectly in about three-quarters of all food consumers buy.’

Fine, then, answer me this, Mr. Government Economist Man: Why is 40% of the corn crop being burned up in our gas tanks? The answer is a Soviet-like, fascist-like, stupid-like government mandate. It is actually relatively new. It came about in 2005 and 2007. It mixes nearly all the gas we can buy with a sticky product now in rather short supply.

An Indefensible Mandate

Of all the government regulations I’ve looked at in detail over the last 10 years, the ethanol mandate is, by far, the worst. There are no grounds on which it is defensible. None!

Of course, you might just think that it is great to vastly subsidize Illinois farmland and corn growers and ethanol makers, at the expense of everyone else in the planet and for zero savings in energy. In that case, we should agree to disagree.

I don’t recall much debate in 2005 and 2007 when these draconian, civilization-attacking laws were imposed in the name of the environment and security. If a debate took place, it sure blew right past me.

Organizations like the Institute for Energy Research and newsletters like The Daily Reckoning were trying to draw people’s attention to what was taking place, but most people figured this was just some wonky and forgettable concern.

Kate Incontrera spoke the truth in the The Daily Reckoning, July 16, 2007: ‘One of the obvious side effects of the ethanol craze is that the price of corn has risen 73% in the past year – but that isn’t the only food whose price is on the rise… And because animal feed with corn in it is more expensive, that cost trickles down to chicken, beef, eggs, cheese and – making soda-chugging Americans cringe – high fructose corn syrup.’

The more you look at this, the more you see that this is halfway to the realization of the freakiest dream of the Rousseauian left: the abolition of the internal-combustion engine as we know it. It is a sledgehammer to the whole idea of market-provided energy. And paradoxically, it represents the worst of crony capitalism: an outright subsidy to agribusiness.

Looking this up and examining the history, it appears that government has been trying to put corn in our gas tanks for decades, even back to the 1960s. There were tax breaks, subsidies, lofty national goals, smiley stickers for executives who publicly backed this nonsense, but none of it took. Finally, our masters brought out the brass knuckles and everyone shaped up, culminating in a coercive mandate imposed six years ago.

The Market Did Not Choose Ethanol

Now we are stuck with this de facto mandate that we have to put corn in our gas tanks, all based on the kooky idea that fossil fuels are just too primitive, that we have to mix our gas with a movie-theatre treat to make it truly clean and efficient.

But clean and efficient are two things that ethanol is not. The reason your edger and weed whacker don’t fire up in the spring months is most likely due to the presence of corn in the tiny gas tanks.

The fuel mixture does not stay stable over time and tends to gum up engines. This is why the store shelves are filled with gas-tank additives of all sorts that did not used to exist. The whole point is to correct for the mess that ethanol makes.

Of course, there is a huge industry out there dedicated to debunking the idea that there is anything the matter with ethanol. But here’s the problem: People who make the pro-ethanol argument are either 1) the same people who think we ought to turn our toilets into composting pits or 2) speaking for industries highly dependent on the many forms of ethanol subsidies, so they have every incentive to deny the obvious for as long as possible.

But ask people who depend on a stable and reliable fuel for their livelihoods, and sometimes their lives. Talk to any boaters. You don’t have to know any. Head over to any boaters’ forums and see what they say.

They go out of their way to find the few gas stations that actually sell ethanol-free gasoline, mainly because they can’t afford to take risks that come with bad gas and bad engines. They find stations that sell no ethanol gas, like those listed at pure-gas.org.

Another fact: Though people have thought for centuries that corn is a decent fuel, it took the mandates to force it into cars. Why? Because consumers knew better. Manufacturers knew better. The petroleum industry knew better. Government and the corn industry had a different idea and gave it to us all good and hard.

Nor is it efficient. As even Paul Krugman admits, ‘Even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains.’

We also have to add the huge expenditure associated with fuel additives, engine fixes, lawn mower replacements and the vast frustration that comes with the regulatory wrecking of the internal-combustion engine.

Now let’s look at what’s happened to crops since 2005. The percentage of crops devoted to corn have gone from 24% in 1999 to 30% today. Meanwhile, the crops devoted to soybeans, hay and wheat have all gone down, thereby increasing feed costs for ranchers and consumers. Again, this is not the market talking. This is not what any actual market players are pushing. This all results from government mandates.

US Government Distorting Prices Everywhere

Meanwhile, the price index of Illinois farmland has tripled in the same period. Even though every price signal would otherwise indicate to farmers to plant less corn, they plant more.

And even though land values all over the U.S. went into a major bust in 2008 and following, Illinois farmland goes up and up. This is a result of government intervention, building artificiality into the system and creating unpredictable distortions.

It almost seems hard to believe. It’s a scandal that government has degraded home appliances, indoor plumbing, paint, cosmetics, gas cans and so much else. Yet the ethanol nonsense might be the worst of all, because it represents a fundamental attack on the technology and literal fuel of modernity itself. As you look back at it, it’s been going on a very long time, from the initial ban on lead fuels, and now look where we are.

In the name of efficiency and “clean fuels,” the government is shutting down the technology essential to life as we know it. And the spillover effects are everywhere, affecting nearly everything we eat.

As usual, all these regulations are premised on the supposition that conditions will never change and that the state can take the existing world and pound it into its preferred shape. But the existing world as the state knows it is always a world of the past. Introduce one change and the whole model blows up.

That is what is happening with ethanol right now. The mandate is causing vast distortions and crazy costs for everything and everything. The scandal is how little we know or care. Maybe famine will make the difference?

Jeffrey Tucker
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in Laissez Faire Today

From the Archives…

Trusted With Trillions, Bankers Can’t Even Work Out a Two Dollar Puzzle
10-08-2012 – Kris Sayce

What This ‘Junk’ Tells You about Stock Prices
09-08-2012 – Kris Sayce

How to Defeat Your Worst Enemy in Investing: Yourself
08-08-2012 – John Stepek

The Mining Boom is Over
07-08-2012 – Dan Denning

Why the Doc Should Have Flown Further West
06-08-2012 – Kris Sayce

The Amazing Ethanol Scam in the USA

By TraderVox.com

Tradervox.com (Dublin) – Last week, we saw a resurgence of fears about the Euro zone progress and worries about global economic growth escalated. This pushed the US dollar higher against major currencies as the US economy showed some signs of improvement. Here is a brief analysis of major events this week.

Tuesday 14

At 0830hrs GMT, the UK Inflation data will be published in London. June’s data showed a drop in inflation, which touched 2.4 percent from a 2.8 percent registered in May. The market is expecting another drop to 2.3 percent. At nine o’clock, the Euro zone German ZEW Economic Sentiments report will be published, where a small improvement to negative 18.7 is expected. The economic sentiments among Germans dropped on July to minus 22.3 percent. The US Retail Sales and PPI will be released at 1230hrs GMT, where the US Retail Sales is predicted to increase by 0.4 percent and the Core Sales to gain by 0.5 percent. The US PPI will increase further, adding 0.3 percent to the 0.2 percent gained in May.

Wednesday 15

The first report at 0830hrs GMT will be the UK Employment Data. In June the people claiming for unemployment benefits increased by 6,100 while the total number of unemployment people in the country reached 2.58 million in the same month. The market is expecting an increase to 6,600 for the number of people claiming unemployment benefits. Further, US Inflation Data report will be released at 1230hrs GMT. The market expects the prices to increase by 0.3 percent in US.

 Thursday 16

Two reports from the US will be released at 1230hrs on this day. The US Building Permits and the US Unemployment Claims data are the two major reports from the US. The Housing Permits are expected to rise to 777,000 from the 755, 000 registered in June. After an unexpected drop to 361,000, the number of people claiming for unemployment benefits in US is expected to rise to 365,000 this time round. Another major event in the US will be the US Philly Fed Manufacturing Index which will be released at 1400hrs GMT. The index was at minus 12.9 points in July from minus 16.6 in May. The market expects another improvement to minus 3.7 point in June.

Friday 17

The first major event for the day will be the Canadian Inflation data which will be published at 1230hrs GMT. The CPI and Core CPI dropped by 0.4 percent in the previous reading for June; this time the market expects both indices to rise to 0.3 percent. The other report is the US UoM Consumer Sentiment which will be released at 1355hrs. The Market expects a small increase to 72.3.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

EURUSD failed to break below the upward trend line from 1.2042 to 1.2134, and rebounded from 1.2241, suggesting that a cycle bottom is being formed on 4-hour chart. Further rise to test 1.2442 resistance would likely be seen, a break above this level will target 1.2600 zone. Key support remains at the trend line, only a clear break below the trend line support could signal resumption of the longer term downtrend from 1.3486 (Feb 24 high), then further decline towards 1.1700 could be seen.

Daily Forex Forecast

By The Sizemore Letter

This is Part 1 of a two-part series on “Naughty and Nice” dividend stocks.

Perhaps I’m some sort of anti-social deviant, but I’ve never been a big fan of socially-responsible investing.  It has always seemed crazy to me to ignore profitable investment opportunities because a company’s product happens to be politically incorrect at that particular moment.

And yes, notions of what constitutes “socially responsible” do happen to shift over time.  Not too long ago tobacco was considered a harmless vice and arms manufacturers were considered patriotic.

Likewise, all-American companies like McDonalds ($MCD) and Coca-Cola ($KO) are considered respectable investments today, but what about tomorrow?  After all, like tobacco companies, both sell products that are bad for your health.  And like cigarettes, many cities are starting to tax and regulate sugary soft drinks for public health reasons.

Nevertheless, I suppose there is nothing wrong with owning companies that make you feel good about yourself, so long as you maintain your objectivity.  I’ll give you five of my favorite “warm and fuzzy” stocks today.  To make this list, the company has be engaged in socially responsible businesses and must pay a respectable dividend.

Let’s start with Swiss food and confectionary giant Nestlé ($NSRGY).  Nestlé is one of the largest food and health products companies in the world, making everything from instant coffee to baby food.  (The ice cream and chocolate businesses might make Nestlé a little naughty, but we’ll wink and look the other way this time.)

Nestlé has recently made a smashing success of its Nespresso pods, endorsed by actor George Clooney—himself no stranger to feel-good charitable causes—and the company takes pride in its social responsibility. Nestlé’s former CEO Peter Brabeck-Letmathe summed up the company’s position: “As stewards of large amounts of shareholders’ capital, it is my firm belief that, in order for a business to create value for its shareholders over the long term, it must also bring value to society.”

Nestlé has backed up its words with actions over the years.  Nescafé, one of the company’s most iconic products, came out of an effort in the 1930s to help Brazilian coffee farmers deal with a serious oversupply coffee beans. Nestlé has done well by doing good.

The U.S.-traded Nestlé ADRs pay a dividend of 3.4%, which is quite a haul in today’s low-yield world.

Next on the list is electric utility PG&E Corp. ($PCG).  One might not normally think of a producer of electricity as being particularly socially responsible, but PG&E generates more than half of its power from non-greenhouse-gas-emitting sources.  24% comes from nuclear, 16% comes from hydroelectric, and another 16% comes from other renewables like wind and solar.

The company even generates a modest amount of power from bovine emissions.  Yes, you read that correctly.  They harness the methane put off by cow manure.

Even the company’s more mainstream sources are moderately green.  Natural gas, which accounts for 20% of PG&E’s output, is certainly cleaner than coal or petroleum.

True enough, California’s strict green energy standards have a way of creating energy shortages in the state and driving up costs.  There is something to be said for the “more is better” approach of my native Texas.

Nevertheless, PG&E has an energy portfolio that even a tie-dyed hippy from Sausalito could approve of.

PG&E pays a healthy 4.00% in dividends, so investors can enjoy a nice income stream while saving the environment.

The next company on the list—Japanese auto giant Toyota Motor Company ($TM)—might be a little bit of a stretch as a “dividend” stock.  At current prices, it only yields 1.6%.  Still, in a low-yield environment, that’s not half bad and it’s better than the current yield on the 10-year Treasury.

Toyota makes this list because it is the maker of the Prius, the car that made it “cool” to own a hybrid. For any readers that haven’t had the experience of driving one, the Prius is an impressive piece of engineering, to the point of sounding like something from a science fiction movie.  Even the brakes are a high-tech wonder; every time you put your foot on the brake pedal, the kinetic energy that would normally be lost to heat gets recaptured and converted into new power for the car.

Just a few years ago, I might have thought this was something from a Star Trek episode, but Toyota has made this technology available to the masses.

Global auto stocks are cheap and out of favor right now, and Toyota is no exception.  At current prices it trades for just 9 times expected earnings, 0.49 times sales, and 0.96 times book value.

Next on the list is operating system and office productivity  behemoth Microsoft ($MSFT).   I include Microsoft not so much for the company’s social responsibility as for the actions of its iconic founder, Bill Gates.  As the founder and co-chair of the Bill and Melinda Gates Foundation, Bill Gates is, in effect, the largest philanthropist in the world and one of the biggest supporters of HIV/AIDS research.

One may question some of Gates’ business practices while building Microsoft into its dominant global position, but no one can question that he has decided to make good use of his vast wealth.  He’s also acted as an inspiration to other high-profile billionaires, such as Berkshire Hathaway’s ($BRK-A, $BRK-B) Warren Buffett. (Berkshire Hathaway would have made this list, by the way, as I consider the company a model corporate citizen.  Alas, Mr. Buffett does not pay a dividend.)

Microsoft pays a respectable dividend at 2.6%, but Microsoft is also one of the fastest dividend growers of any large cap stock anywhere in the world.  Microsoft grew its dividend by 25% last year and by 23% the year before.  It may not keep up this torrid pace forever, but it is safe to say you won’t find this kind of dividend growth just anywhere.

And finally, I’ll add American consumer products giant Procter & Gamble ($PG).

Procter & Gamble makes everything.  Diapers, laundry detergent, shampoo, razor blades…you name it, they make it.

The company has made basic necessities affordable for hundreds of millions of people around the world and has improved world sanitation and health. Its Children’s Safe Drinking Water Program has made previously unsafe water drinkable in more than 65 countries and saved tens of thousands of lives.  Likewise, through its Live, Learn and Thrive cause, the company claims to have improved the lives of over 300 million children throughout the world with health and educational programs.

This charitable work is good for business as it builds goodwill and brand loyalty in the emerging markets that are the company’s future.

Procter & Gamble yields a safe 3.4% in dividends, which makes it one of the highest-yielding stocks for a company its size.

So, there you have it.  I’ve given you five socially responsible stock picks that you can feel good about owning while also getting paid a nice stream of growing dividends.  Watch out for Part II, where I’ll offer five delightfully naughty ways to enjoy the same.

Disclosures: Sizemore Capital is long MSFT, NSRGY and PG

Related posts:

• European Dividend Stocks: What You Need to Know
• Is There a Bubble In Dividend Stocks?
• Five Smart Money Dividend Stocks

By Central Bank News

London Gold Market Report
from Ben Traynor
BullionVault
Monday 13 August 2012, 06:30 EDT

U.S. DOLLAR gold bullion prices rose to $1625 an ounce during Monday morning’s London trading, towards the higher end of gold’s range over the last three months.

Silver bullion climbed to $28.18 an ounce – in line with last week’s close, after briefly dipping below $28.

Stock markets were broadly flat following news that Japan’s economic growth slowed sharply in the second quarter.

The cost of an ounce of gold bullion minus that of an ounce of platinum meantime breached $230 an ounce Monday, a new record high for the gold-platinum premium.

“Sentiment [towards gold] has gotten better in the past few days with investors focusing on central banks,” says Dominic Schnider at UBS Wealth Management in Singapore.

On the currency markets, the Euro rallied above $1.23 Monday morning, pushing Euro gold prices down to more-or-less where they started the day, around €42,400 per kilo (€1318 per ounce).

“Speculation that the [European Central Bank] might take some concrete measures is making it a little hard for the market to sell [the Euro] too aggressively,” one Tokyo-based trader tells newswire Reuters.

ECB president Mario Draghi said last month that the central bank is ready to do “whatever it takes to preserve the Euro”, comments which have been interpreted by many as a hint that it might intervene in markets to support government bond prices and thus prevent borrowing costs rising too high.

Draghi subsequently added that governments would first have to approach Europe’s bailout funds, the European Financial Stability Facility and its successor the European Stability Mechanism, for assistance, describing this as a “necessary…but not sufficient” condition of ECB action. Germany’s government however will not be in a position to ratify the €500 billion ESM unless this is approved by the German Constitutional Court, which is due to rule next month.

Some European leaders have expressed skepticism over the effectiveness of ECB bond buying.
“We haven’t forgotten what happened in August of last year,” said ECB Governing Council member and Belgian central bank governor Luc Coene in newspaper interviews published Saturday.

“We bought Italian bonds and right after that the Italian government reneged on its pledges…the conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.”

“We’ve got a critical view on [ECB bond buying],” added Finnish prime minister Jyrki Katainen in an interview with Germany’s Der Spiegel on Sunday.

“The European Central Bank purchased sovereign bonds on the secondary market, and it only helped temporarily.”

Yields on 3-Year German bunds ticked back above 0% Monday, having fallen into negative territory again last week. Yields on 2-Year bunds remained less than zero this morning.

“I’m skeptical of investing in zero-yielding paper,” says Johannes Jooste, senior strategist at Merrill Lynch Wealth Management in London.

“I’m not convinced the current yields are justified…the risk that Germany will have to issue more debt to finance the bailout [of struggling Euro members] is real.”

Over in the US, the Federal Reserve should begin a third round of quantitative easing, according to Federal Reserve Bank of San Francisco president John Williams.

“[The economy is] at the point where it is definitely tilting toward taking further action,” Williams said in an interview published by the San Francisco Chronicle Friday.

In New York, the difference between bullish and bearish contracts held by gold futures and options traders on the Comex – known as the speculative net long – fell by 7.6% in the week to last Tuesday, the day of the week for which the Commodity Futures Trading Commission publishes such data.

By the end of Friday however, open interest in gold futures had ticked higher, gaining 2.3% on Tuesday’s volume.

The world’s biggest gold ETF, the SPDT Gold Shares (GLD), added 3.2 tonnes of gold bullion to its holdings over the course of last week, taking the total to 1258.1 tonnes.

By contrast, the world’s largest Silver ETF, the iShares Silver Trust (SLV), saw its holdings fall 16.6 tonnes to 9742.4 tonnes.

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Forex Daily review brought to you by REAL FOREX | www.Real-forex.com

 

Article by Investment U

Do you have a tendency to sell stocks when the market is down only to buy them again when it recovers? If so, you’re probably a frustrated investor… and definitely not alone.

It’s hard to stay calm when a lifetime of savings is at stake. (After all, this is real money we’re talking about.) But one way to overcome emotional and counterproductive tendencies is to build a personal stock portfolio. Here’s what I mean…

Many years ago, in an earlier life as a stockbroker, I had a particular client who found it impossible to overcome his worst instincts. Whenever the market had a sudden downdraft, he’d run to cash, abandoning his investment discipline. Then when the clouds cleared and the market rose again, he’d resume the confidence to invest again.

As you might surmise, this had disastrous consequences as he was forever buying high and selling low. After trying unsuccessfully to calm his fears, I finally hit upon a solution that allowed him to ride through the tough patches in the market with relative equanimity: a personal stock portfolio.

“What kind of car do you drive?” I asked when he inquired about the market again.

“A Toyota (NYSE: TM),” he said.

“Ok, we’re going to buy a few shares of that,” I said. “What kind of computer do you own?”

“A Mac.”

All right, we’ll pick up some Apple (Nasdaq: AAPL).

“Who is your local utility?”

“Dominion Resources (NYSE: D).”

“Check. We’ll buy some of that.”

“Who’s your favorite retailer?”

“I don’t have one,” he said. “But I can tell you my wife’s is T.J. Maxx (NYSE: TJX).

“We’re going to buy some of that, too.”

Before long, we put together a blue-chip portfolio made up not just of his automaker, local utility, computer company and clothing retailer, but the businesses that provided him with financial services, telecommunications, prescription drugs and hospital services. All in all, there were 25 stocks in the portfolio.

It didn’t take long before we got a chance to put this new strategy to the test. When the market started to keel a few months later, he was on the phone.

“Things aren’t looking so good,” he said in that familiar tone of fear and dread. “I’d feel a lot more comfortable sitting on the sidelines right now.”

“Hold on,” I said. “Are you still sending in that car payment every month?”

“Yeah.”

“Are you still paying your power bill?”

“Of course.”

“Is your wife still shopping at TJ Maxx?”

“Regrettably, yes.”

“Well if you’re still patronizing these businesses, chances are the other customers are, too. Why would you sell your shares now when they’re so cheap?”

He thought about this and said he’d have to call me back. But you know what? He didn’t. Not for several weeks.

When we did finally did talk again he admitted that he had gotten over his jitters by remembering that these were real businesses – ones he was patronizing – not just stock quotes or paper certificates. Putting together a personal portfolio turned out to be his salvation.

How about you? Are you sending a check to Duke Energy (NYSE: DUK) every month, carrying a Visa (NYSE: V) card or shopping on Amazon (Nasdaq: AMZN)? Take a look at how these stocks have performed through the recent financial crisis and weep. They could have been part of your personal portfolio.

This approach isn’t without its drawbacks, of course. No strategy is. For instance, you may bank with Citigroup (NYSE: C) or use a Blackberry (made by rapidly failing Research In Motion (Nasdaq: RIMM), in which case you would have had a few stumbles – minimized by using a trailing stop).

Still, if all else fails, a broadly diversified selection of great companies you actually patronize may give you the wherewithal to respond unemotionally to market volatility rather than cutting and running at the first hint of danger.

If emotions have plagued your own stock market approach, maybe it’s time to consider a personal portfolio.

Good Investing,

Alex

Article by Investment U

Article by Investment U

If you watch enough NFL football, you’ve probably heard the term “West Coast Offense.” For those not familiar with football, it’s an offensive strategy devised by Hall of Fame NFL coach Bill Walsh. Today, most teams in the NFL use the strategy in some form or fashion.

Why? Because it works.

It’s been proven over time to be sound and versatile enough to be successful over a changing NFL landscape where defenders have become bigger, faster and even smarter. When you throw all this into the equation, others will emulate.

You see where I’m going… I’m about to draw a parallel between the NFL and investing. It’s August and like plenty of other red-blooded Americans, I have NFL fever. But let me get back to my point.

Investment strategies work in the same manner. Some people may get tired of hearing what Buffett, Soros and Rogers think. But you shouldn’t. Show me one head coach in the NFL that thinks that what Bill Walsh and Paul Brown taught and invented is now irrelevant – especially when it still works.

Withstanding the Test of Time

In the same fashion, what Warren Buffett told investors 50 years ago applies today. And much of it is reflected in our time-tested Investment U principles.

Jonathan Burton wrote an interesting piece in MarketWatch a few weeks ago about the early shareholder correspondence that Warren Buffett disseminated and how that message has remained on course for a half century. In 1962 he was stressing:

• Preserving capital in bad economic stretches.
• Resisting the urge to follow the herd in runaway years.
• Focusing on long-term challenges and results.

It sounds familiar because he still says it, it’s proven to be successful and it’s worked for over 50 years of dynamic economic and geo-political changes.

So, with the background established, I think it’s beneficial to look a little deeper into Mr. Buffett’s specific strategies – strategies that have and should be successful going forward.

As Thomas Jefferson once said, “In matters of style, swim with current; in matters of principle, stand like a rock.”

In his 1963 letter to shareholders, Buffett presented seven requirements for his partners that he called “The Ground Rules.” The following one strikes a chord especially in our present market climate:

“While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the Dow. If any three-year or longer period produces poor results, we all should start looking around for other places to put our money.”

This goes back to that long-term focus tenet. What is happening presently is going to happen and affect the equity market. But what market history has shown is that those equities that are well-positioned and well-run will usually weather the storm. Buffett has historically used strategies that will win in the long run. And one of his strategies conjures up visions of knights and castles.

The Moat Strategy

Buffett has said he seeks “economic castles protected by unbreachable ‘moats.’” What he means is that when the price is right, you want to buy companies that dominate their industry for now and the foreseeable future. Basically, these are industries where the barriers to entry are just so overwhelming they discourage any would-be competitors.

Although they may have advantages, “wide-moat” companies cannot avoid the trials of shaky economic times. The difference is that these firms’ strengths and abilities to be dynamic during these periods will keep them above water and put them in a place to thrive when the recovery finally comes.

Also along those lines, in these times of economic difficulty, wide-moat stocks create attractive value plays. Warren Buffett has for a long time discussed his love for what he considers bargains in the market. They’ll get beat up when the market decides to punish everybody for no valid reason, but they have much more potential when there’s opportunity for a rebound.

This “moat” concept has become pretty mainstream. In fact, Morningstar has embraced it and describes five ways in which moats develop.

1. The network effect where a service becomes increasingly more valuable as more consumers begin to use it.
2. A situation where consumers have no incentive to embrace the competition.
3. A company possesses a virtual monopoly or control of a limited market.
4. Registered brands, patents and licenses that give a company steady cash flow.
5. A pricing advantage where you can produce a better quality product at a lower cost than the competition

The Morningstar Index

About five years ago, Morningstar created its Wide Moat Focus Index ($MWMFT), made up of what it considers to be the 20 least-expensive wide-moat stocks within a pool of nearly 1,200 domestic equities. The majority are large caps with a broad customer base.

And once again, a Warren Buffett strategy has proven to be successful.

The index is set up so that each of stocks represented accounts for an even 5% of the weighting. The portfolio is rebalanced quarterly. For the last five years, it’s gained 7.4% annualized with dividends. Now compare that with a little bit over a 1% total return for the S&P 500 stock index.

So how can you take advantage of the “wide-moat” strategy?

Well the first thing you do is take a look at the current components of the Morningstar Index. Check out all 20 companies that currently make up the portfolio here.

If you want something cheaper and more manageable, you may want to look at the Market Vectors Morningstar Wide Moat Research ETF (NYSE: MOAT). It’s only been around for about three months but already has nearly $40 million in assets under management.

Good Investing,

Jason

Article by Investment U