Risk of inflation

Nobody with any sense denies that the greatest risk of fixed income investing in inflation. A lot of people are forgetting how insidious inflation is, and don't consider the current low levels (from 2 to 4%) dangerous.

Basically, general macroeconomic inflation is a general raising of the prices throughout the economy. Simply, there's a relative rise in the amount of cash going through the economy compared to the amount of goods and services available for sale in that economy.

My macroeconomics teacher in college used to like to tell us that if we wanted to reduce inflation we should burn money. It was such a shocking thing to say about money (and nobody, including him, volunteered their personal money for this stop-inflation project), that we didn't get that it was one of those jokes that was funny because true.

If you have two apples for sale and two dollars -- each apples costs a dollar. Print two more dollars so you have a total of four -- but the number of applies remains the same -- and the price of apples will go up to two dollars each.

A simplified example like that makes it clear. Our real-world economy is much larger and more complex but operates the same.

We can't eliminate inflation because there's a general call for the government to keep on creating money by spending it. Congress votes to spend some money et voila! checks are issued and then cashed and a welfare mother is paying her rent to her landlord or a defense contractor is paying its suppliers.

Some of this comes from the tax money taken from us taxpayers, of course, but when Congress authorizes more money than is already in the Treasury Department collected from taxpayers, then bonds are issued to raise the money, and the American budget deficit keeps on growing.

But people who receive the money directly (welfare recipients and defense contractors) or indirectly (landlords or raw materials suppliers) like having that cash flowing into the economy.

Retired people who are receiving only Social Security and pensions and interest on bonds are not so happy to see the price of bread go up the next time they visit the supermarket.



inflation
inflation

Is entertainment including gambling really of value?

One of the investment ezines I subscribe to is the The Rude Awakening from William Bonner of Agora, and the other day it published an interesting article contrasting an oil refinery with a casino, and drew implications that clearly condemned the modern American economy, for building casinos but not refineries.

It mentioned that casinos do not create wealth, only transfer it from the customers to the shareholders of Harrah's while providing a little entertainment value.

Yes, this is certainly true, and it's true that refineries do add value to the economy by turned crude oil into usable gasoline and other petroleum byproducts, and that our economy is weaker because we don't have enough refining capacity.

I also agree that most gambling is stupid (some forms which also require skill, especially poker, are winnable if you're good enough).

But if spending money on entertainment is bad, the whole world is going down to the tubes and also has. It's true that the developed world spends huge amounts of money on "entertainment" (all nonessential activities), but so does the developing world.

Spectator sports, cigarettes, alcohol, snack foods, movies, music, novels, games of all kinds . . . people in the developed world spend large amounts of money on these things also. Perhaps, in proportion to their total wealth, more than people in the developed world.

I think that there's a valid argument that all this economic activity simply transfers wealth from customers to producers. Yes, much of it creates something permanent (movies, for example), but still there's no utilitarian value to a good movie. It's valuable only for the experience of the people who enjoy watching it.

And this includes gambling. People all over the world play cards, bet on lotteries, go to casinos etc. Americans having many gambling options besides going to Las Vegas, that's new. Internet gambling is new. But gambling itself is not new at all.

As far the American economy . . . I don't know the figures, but I'd bet that our trade deficit would be a lot higher if we didn't export Hollywood movies, professional sports, pop music, and junk food (Coke is the best known brand in the world). It's probably not significant compared to the world economy as a whole, but lots of people from all over the world go to Las Vegas to see the sights and to lose money gambling, including our greatest economy rivals, the Chinese and Japanese.

Time to invest in oil?

As I write, some people are upset about Iran taking 15 British sailors hostage. One person who is outspoken is Tony Blair, Prime Minister of Great Britain, and he has been making veiled threats. Naturally, this entire situation is making the price of oil go up.

I believe that the only reason we don't just blow the shit out of Iran's military, and their oil infrastructure is of course our dependence on that oil. Iran has the capability of shutting down oil transportation from the entire Persian Gulf, and probably would do so if attacked.

So is this time to join the commodity bulls and buy up oil stocks? I'm sure not going to say such stocks aren't going up. There's little doubt that prices at the gas pumps are going to go up due to this crisis -- quite possiblly a lot.

A local radio show morning host likes to repeat that this increases Iran's income, so that's why they like to provoke us by creating these crises.

Yet the more oil prices increase, the greater the incentive for alternative fuels.

So I still advise people to invest in chewing gum, electricity and real estate.


oil crisis
oil crisis

Mergent to bring out bond indexes

Here's good news for fixed income investors. Mergent, formerly known as Moody's, and Ryan ALM have teamed up to produce benchmark indexes of bonds.

Mergent already provides a great service to dividend investors through keeping its index of Mergent Dividend Achievers -- those are companies that have increased their dividends every year. The Dividend Achievers index forms the basis for a number of exchange traded funds, making it easy for income investors to buy a large number of companies that have consecutively raised their dividends (for U.S. companies, at least 10 years in a row). It also has version of Canadian and companies from other parts of the world which have raised their dividends at least 5 years in a row.

The press release did not give any details about what the bond indexes will focus on. Obviously, bonds don't raise their interest payments every year (don't we wish!), so they must be considering some other measure of quality.

You can learn more at:

Mergent and Ryah ALM bond index partnership



Mergent bond indexes
Mergent bond indexes

Define investing success

One common -- make that, "near universal" -- mistake people make with investments is to clearly define what they mean by "making money."

See, there're hundreds of investment techniques and methods of various kinds, and things to invest your money in. And they all "make money." Even HYIP scams make money for somebody -- everything can and sometimes does make money in the short term.

After all, any given investment can only go up or down. Sometimes they're essentially sideways, but sooner or later they choose one direction or the other.

So the odds are you can make money whether you choose investments for value, technical analysis, tea leaves, Gann squares, the Elliott Wave, astrology, Nostradamus, Edgar Cayce, growth, momentum, a gypsy medium, a crystal ball, dream analysis or any other nonsense. It also explains why so many investment newsletters stay in business. Some of their picks are winners and some readers put their money on those picks and are happy. So you should be careful about evaluating the records of anybody trying to sell you their stock picks or stock picking system or software.

But the real question is how much money, for how long, and for people actively buying and selling, how much of your gains is lost through transaction costs and paying capital gains taxes to the government.

That's why most people would be far better off to just put all their money into an S&P 500 index fund.

And in my opinion most people would be far better just putting all their money into investments that pay dividends or interest and holding on to them.

define investing success
define investing success

What goes up, comes down, and goes up and down again

The market had a terrific week last week. Now, of course, the question on everybody's mind is, will it keep going up this week.

Is that on your mind? I hope now. You have better things to do. Your job. Your business. Have fun with friends and family. Continue your education. Exercise. Watch a good movie.

Is this heresy? To some people, yes. I advocate that you just not care much what the market does unless it plunges so far that the overall economy is affected a la 1929. If it causes another Great Depression, then of course you should be concerned.

But these daily/weekly/monthly ups and downs just aren't worth the effort people put into tracking them. Even day traders. Last week the market went up big time, but I'm sure that most day traders lost money. And when it goes down, some day traders make money. What matters to all short term traders is how well they guess (or, to be nice, predict) the trends of the stocks or market they trade.

For you and me, we should just be buying up income-producing assets and focus the rest of our minds on living our lives. This of course should include doing well on our jobs, in our careers and in our businesses to increase our incomes so we have more money to invest.

But it doesn't include caring about the short term noise of the market. It goes up, it goes down. Care about your dividend and interest checks.






stock market noise
stock market noise

John Bogle interview

John Bogle started up the Vanguard family of mutual funds, known for their industry-shaking low expenses. I use that adjective "industry-shaking" for good reason -- most mutual fund companies want grab as much of your money as they can get away with. Bogle pioneered funds that take as little as possible, making their profits from volume.

Bogle understands that your longterm investment results are directly related to the price you pay, and keep paying in the form of expenses -- both front-end and back-end loads and annual management expenses. So he kept those down as much as possible. All investors owe him a debt of gratitude, because probably expenses at all mutual fund families are lower than they'd be if he hadn't founded Vanguard.

Bogle also made it easy for investors to simply buy the overall U.S. stock market through Vanguard's pioneering S&P 500 index fund.

This article focuses on Bogle's predictions for the stock market, and doesn't even mention the risks of investing in bonds, but he expects poor overall returns.

In my estimation, all the more reason to invest for income, because there's not going to be large returns from capital gains. The article mentions international diversification at the end, since Bogle apparently shares the general pessimism regarding the U.S. dollar's prospects. However, he doesn't even mention the greatest risk facing the U.S. (and many European) stock markets -- the retirement of baby boomers. What will happen when baby boomers want to sell their stocks for a big profit? Who's going to keep on buying?







John Bogle
John Bogle

A balanced income portfolio

One of the best known income investing "gurus" is Roger Conrad, who edits a free ezine UTILITY AND INCOME, as well as monthly newsletters UTILITY FORECASTER and CANADIAN EDGE, which is about Canadian Royalty Trusts.

So I was interested in his answer at a recent conference about how to have a balanced income portfolio. He favored income investors being in at least 7 or 8 different sectors:

1. Royalty trusts

2. Limited partnerships

3. Real Estate Investment Trusts (REITS)

4. Power and water utilities

5. Telecoms

6. Preferred stocks

7. Regional banks

8. Foreign utilities

9. Super oils (I'm assuming he meant stocks of big oil companies)

10. Selected bonds (with no details given, I'm not sure whether he includes Treasury Inflation Protected Securities

11. Convertibles in growth industries such as defense and mining.

An interesting list that I need to check out more. And he's not included some traditional high dividend payers such as companies with consumer brand names such as Altria and Coca-Cola. I have to wonder why not.

If you want to know more, check out his sites at: UTILITY FORECASTER and CANADIAN EDGE.

balanced income investing portfolio
balanced income investing portfolio

Subprime mortgages stories

If you're at all invested in companies doing subprime mortgages then you should know there's a risk, and you're buying stocks that pay dividends based on consumer goods you shouldn't see any drop in income.

In all the hand-wringing about problems in the subprime mortgage market dragging down stocks in the U.S., I have to wonder what's happening with American Equity Mortgage Company.

This company was started here in St Louis years ago by Ray Vincent and his wife. The importance of their respective roles has been argued at length, but there's no doubt that a lot of consumer awareness of this company was generated by the numerous radio commercials ending with how Ray pronounced the company phone number "ninety-nine, ninety-nine" in a sort of twang.

Years passed, and American Equity Mortgage made a lot of money going after the subprime market through radio commercials, and the Vincents' marriage came apart and wound up in divorce court. That's when Ray's radio voice was silenced, as the couple argued over who should get the money and the company.

That's not to mention the many other interesting aspects to their arguments -- him getting drunk and breaking up furniture, being thrown out of a Vegas casino, custody of their dog, her hiring a security service and then sleeping with the head of the company . . .

But there was a lot of money to split up. Finally, not long ago, their divorce went through. I think Ray got a lot of money but his wife retained control of American Equity Mortgage.

Now Ray's back on the radio with more radio ads and another mortgage company going after the subprime market, and another phone number with the last 4 numbers "ninety-nine, ninety-nine," though I've heard that his ex-wife is suing him over that, claiming it's an American Equity Mortgage. He claims it's a number and she has no right to keep him from saying a particular number, which makes sense to me.

Who says high finance is boring?


subprime mortgage lending
subprime mortgage lending

How does mining gold create new wealth?

Back in the late 1970s when predictions of economic doom and gloom were very popular, I read some of those books lauding the gold standard. In a lot of ways it makes sense to have money back up by some type of universal standard and store of value.

But I kept thinking -- if gold is true wealth, then the only way to create new wealth for the world was simply to mine gold. How did digging more of that yellow metal out of the ground add to the wealth of the world?

How does getting rid of that yellow metal destroy wealth? Does the world's supply of food or industrial capacity change if some gold is sunk to the bottom of the sea as when Spanish galleons were sunk by British ships during the 1700s?

There seems to be no comforting, solid yardstick for financial value. Everything is relative, including currencies. The value of the U.S. dollar can go up today against the Japanese yen but down against the euro. Tomorrow it may be the opposite. It's totally out of our control, but has very real consequences for businesses, consumers and travelers.

Yet as long as people are able to get their needs and desires met, the economy is functioning. And new products and innovations keep expanding our options and therefore our wealth. The real store of value is the "means of production" coupled with the ability to market what's produced to the end consumer. Consumer desires do change, so the challenge for businesses and investors is to keep up with that.



gold standard
gold standard

Company risk is often one person risk

One of the competing theories of history is the conflict between the Great Man theory and Tolstoy's concept as explained in his novel WAR AND PEACE. The Great Man Theory, more popular here in the individualistic West, is that history, or at least much of it, is the result of the actions of individuals, whether for evil such as Hitler or for good such as Lincoln. Tolstoy maintained the opposite, that such leaders were simply the people who saw a parade and jumped in front of it. According to Tolstoy, tens of thousands of French men just decided to all of a sudden invade Russia, and Napoleon just called himself their commanding general.

However, large scale businesses seem to prove that the Great Man theory is the more correct. Did a whole bunch of computer programmers just all of a sudden decide to move to Redmond Washington, and Bill Gates just jumped in front of them and called himself the CEO of Microsoft? Or did Bill Gates first found Microsoft and then hire those programmers?

Obviously, the second explanation is more reasonable. And there's a clear implication that the fate (and therefore the stock price) of businesses are highly dependent upon one or a few individuals.

This is most obviously true of start up businesses which are usually the result of the vision of one person. Sam Walton and Bill Gates are two prominent examples, but almost every small company depends upon the vision and/or research and/or ideas of a founder or chief scientist.

This is probably more true even of large companies than we recognize. Where would General Electric be now if Jack Welch had never become CEO?

Yes, of course the work of a company is done by thousands or more of its employees, and the contributions of some other few individuals are very important. But it's also true that for maximum effectiveness their efforts must be directed and shaped toward a corporate goal.

McDonald's has good cashiers and bad cashiers, and always has, but its fate does not depend upon any one cashier, and never did. But certainly McDonalds would no longer be in business today if Ray Kroc had died a year after taking the business over. I wonder how many great businesses never got off the ground because their founders died prematurely.

So my point is that much of what is technically termed "company risk" is actually "important person" risk.

This seems to me a serious issue for people who think that they've found a company that's going to make them rich in a few years, whether the stock tip came from their broker, a buddy at work or an investment newsletter or the Internet.

Do you want your financial future to be just one fatal car crash, one heart attack, one untreatable case of pancreatic cancer, one bitter divorce, or mental breakdown away from disaster?

That's why it's important to diversify your investments. It'd be great to get in early on the next Wal-Mart, but none of those investors had a guarantee that Sam Walton would live as long as he did.




important person company risk
important person company risk

Stock tips on the morning radio

This morning I was listening to the Allman and Smash in the Morning radio show on my way to work. That's a talk show generally oriented toward politics (on the conservative side), but they do go off in other directions, and Jamie Allman was talking this morning about how he fails to invest in companies he knows about.

Unfortunately, it was the kind of conversation that feeds people's belief that making money in the stock market is about making quick capital gains.

Jamie started off saying that he should have known to invest in Google at its Initial Public Offering or IPO because he went to some conference for investigative journalists about that time and all of them were using Google. Well, online Google itself was firmly established as the best search engine.

Then Jamie mentioned that way back in 1990 or 1991 he lived next door to a guy who told him once that his brother in Israel or some other Mideastern country was working for a company called Adobe, and Jamie should invest in that. Jamie blew his neighbor off, but now knows that Adobe is a great software company.

So Jamie was lamenting about his lost chances to make money, but added that he didn't lose money either. He just hadn't made any. I think a lot of tech stock investors would like to trade places with him.

Unfortunately, Smash didn't help point this out. He added that he bought MTV a long time ago, then years later sold it to be his house in Chesterfield (a wealthy suburb of the St Louis area).

Ah, if only it were so easy to get good stock tips. We'd all be rich and wouldn't have to work :)

Jamie, read AMERICAN SUCKER by David Denby (lost a million dollars in NASDAQ stocks) and A MATHEMATICIAN LOOKS AT THE STOCK MARKET by John Allen Paulos (lost large amounts on WorldCom) and be glad you haven't lost money.


stock tips
stock tips

Rule breakers -- certificates of deposit

I haven't finished reading either book yet, but I've started on both a RULE BREAKERS, RULE MAKERS by Motley Fool and also a book on Enron. The first section of the Motley Fool book is on how to identify and profit from buying "rule breakers." Those are growth stocks that you can tell are just going to be giant successes (well 2 out of 3 times). Reading about how Enron in the early 90s transformed itself from a gas pipeline company to one actively engaged in numerous gas-based derivative contracts, I couldn't help but think that Enron was by Motley Fool's definition a "rule breaker." No other energy company was applying advanced financial strategies to the industry. And I wonder how you would have figured out in the early 1990s that Enron's growth would eventually fail. They were no doubt pioneers in their particular field. If they'd kept their accounting honest, I guess they'd still be in business.

I shouldn't pick on Motley Fool, who're not an investing icon, but I think I'd rather put my money into certificates of deposit than try to guess which young "growth" companies at any point in time are going to be the rule breakers which keep them growing quickly. They describe some in the book, but how easy is it to catch them prospectively instead of retrospectively? And how easy is it to distinguish the ones who're going to be successful from the "faker breakers?" Especially if you're not familiar with a particular industry?



certificates of deposit
certificates of deposit

Her dividend income grew bigtime

For some reason, Anne Scheiber is on my mind today. Maybe because I'm thinking about retiring from my federal civil service job, and I'm older now than she was then.

You may have heard of her. Despite her graduate degree, she was repeatedly denied promotions, so she retired from the IRS in 1944 at the age of 51. She had saved up $5000 (even though her highest annual salary was $3150).

She spent the rest of her life living in a rent-controlled apartment in New York City on her civil service pension. She apparently spent very little money. She read THE WALL STREET JOURNAL every day at the library of a nearby woman's college, Yeshiva University.

When she retired, she took that $5000 savings and invested it in stocks. By the time she died -- 50 years later -- she had a portfolio worth $22 million. The dividends and interest she received annually amounted to over $800,000. She reinvested this money based on her research in THE WALL STREET JOURNAL.

She bought stocks because she noticed during her career with the IRS that rich people owned a lot of stocks. In later years she did move some money into bonds and such fixed income investments.

She got her revenge on the federal agency which refused to promote her. She never sold any of her investments. Therefore, she never paid any capital gains tax.

Also, when she died she donated the entire $22 million to Yeshiva University, no doubt to make sure they never stopped subscribing to THE WALL STREET JOURNAL so that other thrifty and eccentric multi-millionaires could read it.

She never benefited from the capital gains her investments earned, since she never sold her stocks. But she could have avoided paying capital gains taxes and still spent some money on herself thanks to the dividends her stocks kept paying her.










dividends
dividends

Penny stocks can be permanent options on market

I see this site listed in almost every website directory I go to:

penny stocks

Of course, that doesn't mean I recommend penny stocks. If I want to gamble, I'd go to a local riverboat. Even if you don't live in an area close to legalized gambling, you'd probably be better off going to Vegas of Atlantic City for the weekend.

I have bought penny stocks, I confess. Years ago I bought some software designed to help people buy Vancouver mining stocks at their lows, when they're basically shells, and then wait until the promoters push them and raise the stock price. One of the companies I bought did have a price surge a few months later, but it wasn't enough for me to sell, and then it dropped back down. You can't tell if a stock is at its low even if it's only a few cents. They can go to tiny fractions of a cent!

A few years I decided to buy some of the small gold mining companies I saw used to advertise newsletter subscription. This time, my thinking was that these were like put options on the market as a whole. If the economy fell apart and gold shot up to $2000 an ounce, then these stocks would shoot up in price.

I still think that's a fairly reasonable strategy if you're worried about the price of the stock market or just the economy as a whole. Buy some small gold/oil other such stock that would benefit from commodity/energy price increases and general economic disaster. Then just hold it. If the economy keeps on going well, you paid for some cheap insurance that, unlike put options on the market, will never expire (unless the company goes out of business). If the economy does collapse, the price will go up and you can sell it to buy $10 a gallon gasoline.

However, the one natural resource company I've seen mentioned is BHB Billiton of (I believe) Australia. And it does pay dividends, since it's on the Mergent International Dividend Achievers list. Therefore, if you want to profit from price rises in gold, that would be a good option.

penny stocks
penny stocks

Investment basics -- human desires and needs

Sometimes it's good to take a step back and think about the fundamentals. What is business? Fundamentally, business is people taking care of the needs and desires of other people. If we could all satisfy our own needs and desires, we wouldn't need to have businesses. We'd just do it everything for ourselves.

But even when we were cave people we weren't totally self-sufficient. No doubt some cave people were better at making bear skin coats than others, and perhaps traded their labor for extra food. No doubt save cave men were better hunters than others. But perhaps one guy was better at making spear tips.

There does have to be a reciprocity. I satisfy your desire for a terrific bear skin coat only if you satisfy my desire for two freshly killed rabbits to eat. This is how it works between free people. Of course there is slavery, both in the older form and in the modern form of welfare.

Money makes the reciprocity a lot easier. Instead of making a bear skin coat for two rabbits from you, half a deer from Joe, and a pile of eggs from Sue -- I simply charge everybody the same five dollars. This gives the system a lot more flexibility. You earns his five dollars from hunting, Joe from fishing, and Sue from carving necklaces.

All this sounds obvious, but it was a comfort to me when I came to understand that income from a company was safe as long as it met the needs or desires of many other people. As long as it does that, it will stay in business and general interest or dividend income for investors.


investment basics
investment basics

Subprime mortgages sinking stock market?

More turmoil in the stock market. Just when it seemed it was safe to buy stocks for price increases again, after the late February drop caused by the drop of Chinese stocks on the Shanghai index, market pros are now upset over the situation of the American mortgage industry.

There's been so much money connected to mortgages that lenders have totally relaxed their standards -- borrowers were not even required to prove their income. I can't hardly imagine that - I remember the hoops I had to jump through when I bought my two houses. But interest rates have been so low this century that people have been able to buy far more house than they would have been able to before. Even if they're not able to keep up the payments.

So one of the biggest "sub-prime" lenders, New Century Financial, is on the verge of bankruptcy. Foreign markets in Asia and Europe have just tanked, because they're afraid Americans will no longer be able to buy up 95% of all consumers goods sold in the world.

Like all things, these excesses will worth themselves out, but it will be painful. Possibly very painful, according to some predictions. Of course, I've never advocated buying any mortgage or mortgage related securities. It is possible that some financial institutions that normally have been paying good dividends, such as Citigroup, will be burned by this. Citigroup apparently owned a lot of subprime mortgage risk.

REITs, which mainly collect rent, should not be as big a problem, except as the businesses they rent to are affected by any general economic slowdown.




stock market risks
stock market risks

What's real role of Federal Reserve Board?

One big factor that affects the bond market is of course interest rates. No matter how high the credit ratings of a bond issuer, even if it's the United States government, its bonds' market value will go up if interest rates fall and down and if they rise. So depending upon the whim of the Chairman of the Federal Reserve is not one of the advantages of fixed income investing.


What did the economy do before the Federal Reserve was created to manipulate interest rates to affect the economy. Gosh, they went up and down based on the market demand for borrowing money. During booms periods, there must have a large demand for money, which automatically drove interest rates up. When interest rates got too high, then the demand had to drop . . . slowing down the ability of businesses to expand and be created, thus slowing down the boom.

Once the boom slowed down, demand for money slowed down, and so banks would have had to lower interest rates to make loans, and thus help stimulate the economy to get it out of the bust period.

In short, the interplay of supply and demand for money would have worked automatically to help curb the excesses of the business and economic cycles. Variations in demand for money should have done what we now depend on the Federal Reserve to do for us -- slow the economy down during a major boom and stimulate it during a major bust.

What do we need the Federal Reserve for anyway? Why not just let banks set interest rates based on market demand for money?


advantages of fixed income investing
advantages of fixed income investing

A question about investing basics

Here is one of those investing basics that I've always wondered about:

Company stock prices that do better than the market average (beta) during a bull market go down more than the market average during a bear market.

Seems to me that if the market were truly efficient, that wouldn't happen. Here's my logic -- if a company is better managed than average (which makes it price go up more than the average during the bull market), then it should also be better managed during the bear market as well, meaning the stock price should go less than the average.

I gather that part of the answer lies in the differences in how macroeconomic factors affect different businesses -- for instance, some businesses flourish during periods of low interest rates but are taken down more than average during period of high interest rates.

But some of the answer is simply psychology -- during bull markets, investors drive prices of "sexy" stocks higher. These are usually connected to high tech. During bear markets and hard times these companies don't do as well.

Some of this is related to the phase of growth that a company is in. During its intial growth phases its stock price does better than average because traders assume its growth rate will continue for years to be higher than stodgy old "mature" companies that are well established (and which make up most of the market, determinining the market average). But during bad times these companies do worse because they're not established. They don't have reserves to draw on.

So that's another reason to invest in stodgy old "mature" companies that pay dividends. Their stock prices don't go up as much during bull markets, but their prices don't down as far during bear markets.


investing basics
investing basics

Income investing goals don't include penny stock tips

Since income investing goals don't include buying penny stocks and riding them while they rise in price (you hope) and then selling for a big profit, this information is no good to me. But some of you still probably listen to stock "tips," so may you'll like these. Heck, maybe they're good tips and you'll make money from them.

I get a lot of financial newsletter solicitations in my mail, and most of them try to entice me by profiling a penny stock that the newsletter publisher claims is the most promising they've ever seen, but just a taste of what you'll get if you subscribe to their newsletter.

Has the EPA really mandated that motor oil be changed to eliminate the sulfur and phosphorus that's added to oil? Will Platinum Research Organization (PLRO) really revolutionize the motor oil industry with their formula that improves motor oil performance without causing the emission of sulfur and phosphorus? I don't know, but it does look good.

And I really hope Acro Security Technologies (ACRO) is everything this mailer/promotion claims. They've allegedly found a quick and easy way to test for peroxide-based explosives. That's the kind used on the London and Madrid subway bombings, and the kind used in last summer's plot to blow up airplanes flying from London to the U.S., and the cause of the onerous restrictions on bringing powders, liquids and gels onto airplanes.

While the mailer for PLRO irks me by asserting that human-caused global warming is true (maybe, but not proven yet), the mailer for ACRO makes me glad it recognizes the true threat to the world posed by jihadist terrorists. I hope that ACRO's product catches all of them trying to blow up the world.

If these companies do succeed and grow, and maybe they'll start paying dividends to their shareholders. That's when I'll be interested. I don't like gambles. And I don't like selling stock to get the benefit of a gamble I took.



income investing goals
income investing goals

Growth real estate investing info

This article on real estate investing info is interesting in that a company has picked out 10 areas of big cities that are now considered "up and coming," which -- as the article points out -- is a nice way of saying that the reason the houses are relatively cheap is because of the danger.

The neighborhood listed for St Louis is Tiffany, which I'm somewhat familiar with due to having walked around it many times in the late 1980s when I was a cable TV salesperson. Also, I still work for a government agency and much of that neighborhood is part of our area. Though I don't go there in person now, I see and know many people who stay there.

As the article says, it's multicultural. It doesn't mention that it does not contain any Laotians, because they all moved out years ago -- at the same time, immediately following the shooting death of a Laotian man by an African-American neighbor.

Even when I was selling cable TV, I did notice that there were affluent-looking young whites living in some of the more developed buildings right next to Grand.

Of course, areas do change. When I first started selling cable TV, I felt comfortable walking up and down streets such as Lafayette and McRee. It was years later when I was there and a young African-American said, "What's a white person doing here?"

There's been money pouring into other low-income, high-crime areas of St Louis, such as Dutchtown. I remember driving on Delmar between Grand and Kingshighway and being startled by seeing some brand new, nice red brick houses -- often next door to condemned, dilapidated old buildings.

Seems to me there's a parallel between moving into such high-risk neighborhoods in search of real estate values that you hope will grow a lot as time goes by and the bad people in the neighborhood move away (you hope) and investing in growth stocks. You're taking a gamble. Myself, having lived in South St Louis both before and after it became a "Hood," I would be scared to death to move to such places, even though I can see the attraction for young people looking for affordable places to live and hoping to reduce transportation costs.

The whole gamble depends on enough other people making the same move behind you -- from the suburbs back to the city. Again, I can see the value for young people, but once they have children, they should want to get them out of the St Louis city school system.

So when you buy a growth stock with a good story, get a lot of good investing info. Remember that your future return depends on a lot of other people buying that stock behind you. You may be paying a lot of money for a condo that's next door to a crack house.



investing info
investing info

investment guru Harry Browne

I got an email today from The Soverign Society reminding me of the investment writer and libertarian Harry Browne. He wrote a number of investment books advocating people get Swiss bank accounts, stock up on gold and silver coins, and so on. The 70s were a terrific decade for advice of that nature, since our economy was stalled and seemed to be failing, and many predicted total economic collapse. I can't give out that kind of investment advice, especially since if we have total collapse it will be most likely due to a terrorist attack. Paul Volcker as Chairman of the Federal Reserve and Ronald Reagan's tax cuts got us through. But Harry Browne also wrote a book on the libertarian philosophy called HOW I FOUND FREEDOM IN AN UNFREE WORLD. I think that anyone, a fixed income investor or not, can get a lot out of that book, so I highly recommend it. It never got the attention it deserved.

Stick to income growth investments

I get a lot of investment newsletters and ads disguised as newsletters
in my email. Today there was a general trend in them about "green"
investing. Al Gore may not have convinced all climatologists that
humanity is causing global warming (I'm not a climatologist, but I
know that the amount of radiation the sun emits has varied by up to
30% over the eons, which is why Earth has been both much colder and
much warmer than it is now, millions of years before people discovered
fire, so I know that any climate model that disregards the role of the
sun's radiation -- as the recent UN study did -- is scientifically
flawed and no doubt politically motivated.)

However, there's no doubt that -- whether the planet is warming up or
not or whether people caused it or not -- we do need to find more
efficient ways to generate energy and slow down and ultimately clean
up pollution. Hey, I rode my bicycle to school on the very first
Earth Day! And I was an anti-nuke activist in 1980.

So it's fine with me to learn that AOL head Steve Case and Lee Iocca
have teamed up to invest in a Flexcar. And that major company are
financing research into alternative sources of energy such as wind and
solar power. Not being an engineer up on these things, I don't know
how to judge whether the optimists or pessimists are correct in
evaluating their potential.

And one newsletter talked a lot about nanotechnology is helping, though
without going into detail. I'm certainly no expert on nanotechnology
but I always figured that would be most useful for cleaning up
pollution. Release a cloud of anti-PCB micro-machines and in a few weeks or months all PCBs could be removed from the environment.

So there's no doubt that "green" is a growth industry, and it could
well be that nanotechnology is going to fuel the next stock market
boom. But I have to maintain that ordinary investors should stick
with income growth stocks that pay dividends.

If you have the deep pockets of Steve Case or Lee Iococca and you want to help the planet, fine -- I applaud you. Let's face it -- if the FlexCar fails, Steve Case and Lee Iococca may well lose millions of dollars but they'll still have many more millions. It won't affect their lifestyles. I think it's wonderful they are risking any amount of their money. But for us ordinary investors, stick with investments that pay you money.



income growth
income growth

Soap is more valuable than gold

Unfortunately, I can't remember the name of the book or the author, but years ago I read a great commentary on the value of investing in gold. The author was a marine stationed in Japan immediately following World War 2. While there, he needed to raise some money, so he took a gold watch to a Japanese gold dealer. He found the man depressed and uninterested. The dealer points to all the gold watches, jewelry and so on in his store. "Everybody wants to sell gold," he said. "Nobody is buying."

But a buddy of his shows him how to make extra cash. They were given allottments from their PX for chocolate, soap, stockings and cigarettes. The buddy takes his allottment to a Japanese black market dealer who happily pays top yen for these items.

Faced with rebuilding from the enormous wartime destruction, the Japanese people tried to raise cash by selling the gold items they owned, but none of them could afford to buy gold. But consumer items such as chocolate and cigarettes, and soap (Japanese highly value cleanliness) -- they still wanted those.

So when you get the direct mail packages from newsletters telling you about how gold is soon going to go through the roof, because of the demand in China and India, and the Malaysian gold-backed currency, and so on . . . it's probably true.

I don't doubt that the price is gold is going to rise in coming years. But how much income does gold provide? It's a metal. It's a useful metal. It's a valued metal. But it doesn't pay you any money. People who have money will certainly pay for gold jewelry.

If you buy gold directly in the form of bullion or coins, you definitely have something that you cannot profit from unless you sell it -- and pick the right time. You can also buy gold mining stocks, but how many of them pay dividends? And how many will continue to pay dividends for 20 or more years? The income return from gold makes fixed income investments such as bonds look good.

Buying gold is hoping for or preparing for hard economic times. They may well come. But if they do come, people will still want consumer staples.




fixed income investing
fixed income investing

Time to go shopping for high dividend yield, income growth stocks

The following on the currently low risk premium in the light of the current market. Since last week was the worst week for U.S. stock prices in four years, the author assumes some people may go hunting for stock bargains, and makes the case that stocks still are not at bargain prices.

Of course, this author does not know what's going to happen in the short or long run.

But I think that a critical flaw in this article is that it calculates the risk premium based on the P/E or pricer/earnings ratio. But a company's "earnings" -- even assuming they're not being manipulated -- is NOT what you the shareholder "get."

Oh, sure, in principal you "get" your proportionate share of those earnings, since legally speaking you are a owner of the company. But how can yhou spend that? YOu can't, unless you sacrifice your ownership by selling your shares.

Therefore, a much more logical place to start is with dividend yield. It's quite possible that with last week's and today's sell-offs, you can get good dividend-paying stocks at a lower price than two weeks ago, and therefore get a higher dividend yield than 2 weeks ago.

I say, go for it.

As for comparing the dividend yield to the interest rate on long term Treasury bonds, you must remember that stocks that pay dividends are an income growth form of investment. Your dividend yield is usually lower than the interest rate of Treasuries, but if you choose good companies with good businesses they will raise their dividend payouts over time. Furthermore, they won't stop paying you after 20 years, as Treasury bonds will.



income growth
income growth

The Chinese people should look for an income investment

This has been a wild week for stock markets around the world. One question I have -- would the U.S. stock market have reacted so badly to a Chinese plunge 10 years ago? Even 5 years ago?

This article on the Chinese stock market plunge this week explains that the fall was due to the Chinese government proposing interest rates hikes and taxes on capital gains.

These conditions in China do not directly affect the U.S. stock market or those of other countries, yet it seems that "investors" -- really, traders; true investors do not sell for such reasons -- are itchy and ready to sell and "take profits" as the media so often says. (Though I've had traders complain that more often they cutting losses than taking profits.)

I'd even say that since capital can now flow around the world so quickly, the imposition of such measures in China would be an advantage to other stock markets. That's because people who take their money out of Chinese stocks will want to invest it somewhere else, increasing cash flows to all nonChinese stock markets.

I'm not sure how much freedom the Chinese people have to put their money into nonChinese stocks. Quite possibly they're not allowed to. So the fear of paying capital gains taxes made them take profits before being required to pay taxes on them.

I wonder how many Chinese stocks are an income investment? I suspect that the vast majority of Chinese people are caught up in the illusion of capital gains. I don't know how many Chinese stocks pay dividends, but my advice to the Chinese is to focus on them. That's the best way to avoid paying capital gains taxes.


income investment
income investment

Income investments are better than worrying about Chinese stocks

This week's events in the stock market are a good illustration of the risks of investing in the market for capital gains.

China's stock market dropped about 9% in one day, due to a large number of traders suddenly changing their minds about the price of Chinese stocks and deciding they are overvalued. This large drop then affected a lot of stocks in other Asian and European markets and, and then American traders decided the same.

But what is all this based on -- rationally? I'm certainly not saying I'd want to buy Chinese stocks at their old prices. But I seriously doubt that the true value dropped 9% in one day. And what's the connection between the value of these Chinese companies and American companies? OK, there're some correlations between companies in the same industry, but what's the casual connection between overvaluations?

These sorts of events confirm my belief that financial markets are anything BUT "efficient." They're driven by greed and fear, and this week fear has predominated.

Now, I'm not saying that there aren't realistic reasons to fear for the U.S. economy. We're spending far too much money, the trade deficit is too high, the dollar is too weak and so on. We're much too dependent on oil. Etc etc etc.

So you just don't know what stock prices are going to do in the short term. Or, to tell the truth, in the long term. Yes, the long run they've always gone up and I hope that will continue but I don't have a crystal ball. We do have enemies, and we have no guarantees.

But if you just put your money into income investments all you have to think about is cashing your checks.


income investments
income investments