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

Alan Greenspan warns of possible recession

Alan Greenspan is warning that the U.S. could be in a recession by year's end.
Alan Greenspan in the financial news

What he says is true. It could happen. Also, maybe it won't. I'm not sure why such pronouncements are considered news, except that as former Chairman of the U.S. Federal Reserve Mr. Greenspan does have a lot of built up name recognition for the news agencies to exploit.

And of course a recession would affect all of us, even income investors. Although we shouldn't be concerned with ups and downs of the stock market, a slowing down of business would affect even the companies that pay dividends, so it could reduce their dividend payments in the future.



investing for income
investing for income