Tuesday, September 30, 2014

Stock Talk - 3

President Obama doesn’t like Wall Street. That much is clear from his comments about “fat cats,” “homes in the Hamptons,” and the like. That much is clear and permissible. He was elected President by a majority of voters in 2008 and reelected in 2012. But you should be aware of the fact when you are investing.  He and his Administration think (correctly) that big companies spend a lot of time and talent trying to minimize their tax bite, and he and his associates especially hate the practice of “inversion,” in which a U.S. company merges with a foreign company and reincorporates in the more tax-friendly nation, which is never the U.S.  But they’re not the only targets. Financial institutions have been repeatedly fined for various transgressions, and the fines can be huge.

That being so, you have to ask yourself, when investing, “Do I really want to bet my money against the President of the United States?” The question doesn’t just involve financial institutions. The prevailing attitude in the political world is that small businesses are good and big business is bad. In this political season, how often do you hear candidates taking that line?

(The other day President Obama, explaining the quick rise of ISIS in Iraq, said that the U.S. had given Prime Minister Al-Maliki a functioning government, but that Maliki was too intent on building up his political base among Shiites and thus squandered his legacy, As I read this, I thought the same might be said of President Obama, who was too concerned with strengthening his base among Democrats and thus contributed to the divisive climate that characterizes Washington.)

Although the odds are that President Obama will lose the Senate in November, the divisiveness will probable continue through 2016. Question: How does one tailor his stock portfolio given this situation?

Favor medium-size companies. Big companies like Wal-Mart and Amazon are inviting targets for politicians, and small companies (those with annual sales of less than $1 billion) are too vulnerable to economic crosswinds. The ideal company is one with sales of a few billion and in a business that is out of the headlines. A dividend is a plus but not essential. 

International exposure used to be a plus. No more.  The geopolitical situation is volatile, and companies that are seen as surrogates for Uncle Sam are probably going to attract unfriendly attention.

There are many sizable, profitable, growing, U.S.-based companies that are worth considering. Many of them are companies you probably have never heard of.  I’ll give you some hints in future blog posts.

Saturday, September 27, 2014

Stock Talk - 2

Since there’s no way to tell whether a given stock will rise or fall tomorrow, it makes sense to invest in stocks with a long-term objective in mind. Not too long term, because stocks with a five-year gestation period could wear out your patience.  So you look for a stock that will prove itself in a year or two.

3-D printing and package delivery by drones are examples of concepts that probably will take too long to pay off.  If you happen to believe that shopping malls and newspapers are in for a long period of decline, you avoid stocks in those sectors – or even short them.

A word about shorting:  Shorting means selling borrowed stock, on the hope that you will buy it back (and close out the position) at a lower price and thus make a profit. Shorting is dangerous, because the loss is theoretically infinite, but having a small part of your stock-market portfolio short is not a bad idea – if the shorts are in sectors that are in long-term downtrends.  Risk-tolerance comes into play here; the shorts in my own portfolio are about 20 percent of the total.

Day trading – buying a stock in the morning and selling it in the afternoon – is something you should not even consider. Especially now, with the geopolitical situation so volatile, you can lose money for reasons that have nothing to do with your stock.  The popularity of day trading probably has something to do with the rock-bottom commissions brokerages are charging.

It pays to be well informed. My own tastes center on the New York Times, the Wall Street Journal, and The Economist.  There are others, but that’s all I have time for. I watch CNBC during the day – but very skeptically, because most of the people on that channel are “talking their book” – touting positions that enhance their own portfolios.  That’s also true of the writers at the Times and the Journal, but they are more subtle about it.

As we saw in a previous blog on the subject, dividend yields are all-important. My trading portfolio is smaller than my yield portfolio, and the yield portfolio has done better for years. There is little mystery to this; we have been in a bull market for bonds for decades, but most people have been sure that runaway interest rates are around the corner – and most people have been wrong.  Low-interest rates shift wealth from rich people (the lenders) to poor people (the borrowers), and that fits nicely into the Administration’s objective. As long as President Obama is in office and has a compliant Fed, the bull market in bonds will continue.

Thursday, September 25, 2014

Stock Talk

--> -->A friend recently asked why I didn’t write more about the stock market, since this is the field I worked in for most of my career – and, presumably, that I know best.  I answered that I didn’t want to play the role of investment advisor, but on reflection, that was a cop-out. So here goes.

Stocks are risky. No matter how much you think you know about a company, there are people who know more, and these are the people who want your money. Forget the rules that say if you plug your age into a formula, you will know what percent of your wealth should be in stocks and what percent should be in bonds. The risk is the same whether you’re 35 or 75.

A friend of mine (and my mentor in the 50s) told me that he had two stock portfolios, one specializing in stocks designed to generate capital gains, the other investing in stocks that paid high dividends. And – funny thing – the yield-oriented portfolio had a consistently higher total return!  Moral: Stocks that pay a dividend are almost always better, and the results are even better if the dividend is well protected (i.e., a smaller percentage of estimated earnings).

Of course, one can always point to exceptions. You could have made a killing if you bought some Netflix a year or two ago, and Apple (a dividend payer, now) has been a good long-term investment. I have a small percentage of my investments in such speculations. I read all the business papers and am reasonably well informed, but you know what? The yield portfolio out-returns the trading portfolio, just as it did for my mentor in the 50s. Some things just don’t change.

So my initial advice is this: Look for a well-protected yield. That’s especially timely now, when bank yields are so low. Second, use the low-cost, on-line brokerages. You can buy or sell a stock for $8 a trade or less, which is a small fraction of what I paid 20 or 30 years ago.

Now that I’ve broken the ice, I will indulge in more “stock talk” in future blogs.



Thursday, September 11, 2014

I've Heard It All Before

As I listened to President Obama last night, I kept thinking, "I've heard it all before." We began the Vietnam War, our longest at the time, by sending in advisors, the first arriving in Saigon by helicopter in 1961. How easy it is to start a war, how hard it is to end one!

Then it was the Domino Theory, the notion that if Vietnam fell, China would have hegemony over all of Southeast Asia. In the case of Iraq, it was Weapons of Mass Destruction. Today it is the threat of ISIL. There's always a threat, sometimes real, often magnified by the hawks or the neocons or, as President Eisenhower had it, the military-industrial complex. There's never a lack of threats, because we live in an imperfect world, and there's never a lack of appetite for violence - unless you are one of the victims.

Although I disagree with President Obama on most issues, I am grateful today that he is our President, and not John McCain, who would surely have us at war with Iran, ISIL, and possibly Russia. Thank God for small favors.

If you missed it, scroll back a couple of blogs and read the lyrics for "I've Heard It All Before," from the musical Shenandoah. It's very timely.