How To Invest With Coming Debt Crisis – Don’t Be The Turkey

Three extremely important pieces of information released over the last weeks for investors are:

  • The increase in US budged spending and consequently deficits.
  • The ECB’s public stance that they are going to print money, buy assets and do whatever it takes to prevent a recession.
  • The FED is ready to lower rates to keep economic growth stable.

My main concern is that we are in a Thanksgiving turkey situation and have a real turkey problem. What is the turkey problem?

The turkey is born, and fed more and more each day. The turkey thinks everything is perfect, food is coming in larger and larger quantities and there is absolutely no risk. As the days go by, the turkey’s wellbeing constantly increases. You can read more about Black Swans and turkeys in my Nassim Taleb articles.

1 turkey problem

Similarly, governments think they can spend money and not care about deficits. The central bank heads will do whatever it takes to keep things going well by printing more money and we, governments, corporations etc. all feel like turkeys. Think about it, aren’t you feeling good like a well-fed turkey and your wellbeing is constantly increasing?

There is only one minor issue, at some point in time, the butcher feeding the turkey, decides to prepare it for Thanksgiving. Similarly, the money printing game will end, it has happened a thousand times in history and currencies always debase, i.e. lose their value.

2 turkey problem

The key here for investors is not to be the turkey. Let’s start by explaining the economic fundamentals, the financial engineering provided by central banks and then conclude with how to invest so that your portfolio doesn’t end up like a Thanksgiving turkey.

Content:

Economy and monetary policy:

  • US budged deficits
  • Lower interest rates, money printing

How to invest:

  • Be like a government – have debt, but smart, good debt
  • S&P 500 to 5,000 points in 2030 but index fund investors will not be happy
  • Buy value like Buffett did in the last 50 years

US Budged Deficits

For me, one of the most important pieces of information over the last weeks was the ballooning of the US budged deficit.

3 us budged deficit

Source: Bloomberg

If we look at what the Congressional Budget Office has to say, The Budget and Economic Outlook publication shows how the US budged deficit will be larger than $1 trillion per year very soon.

4 budged defitic

Source: CBO

This means that the US total public debt will continue to grow at extremely fast rates.

5 total public debt

Source: FRED

The public debt is now 22 times higher than what it was in 1981. From my point of view, spending more than what you make can only last for a while, but sooner or later the butcher will come. Now, I know interest rates are lower and the debt cost servicing isn’t high, but interest rates can change if central banks lose control and history teaches us; sooner or later, central banks always lose control.

  • Lower rates, monetary easing and stimulus

Given what is going on with governments debt levels, corporate debt levels and even household debt levels, central banks have no other option to keep interest rates low, practically at zero, and promise to print as much money as necessary when necessary.

So, we have the FED saying how it will cut rates to sustain economic growth.

6 fed rate cuts

Source: WSJ

And we have Mario Draghi practically saying how the ECB will do whatever it takes to stimulate the economy.

7 draghi

Source: Bloomberg

My conclusion is that over the longer term, money will be printed and currencies debased or better to say sacrificed. Economies and businesses will be stimulated but sooner or later this too will pass. We have to be very careful, not to be the turkey.

How to invest to not end up like a turkey before Thanksgiving

If everybody has a lot of debt, especially governments, it means all policies will help the majority, i.e. those with debt. So, let’s say you have a 30-year mortgage with a fixed interest rate of 3.5% like I have and let’s say currencies lose 50% of their value over the next decade due to inflation. This would mean that the value of your house would go up 50%, your salary too, while your mortgage payment would remain the same.

8 inflation

You are practically playing the same game as governments.

Secondly, the ECB and the FED say they will buy assets, which means the value of financial assets will continue to go up as it did in the last ten years. I would not be surprised to see the S&P 500 at 5,000 points with index fund investors not happy about it.

If we see inflation, which is very likely to escalate somewhere in the future because it is never linear and the FED and ECB will lose control, especially the ECB that doesn’t have any kind of coherence within. Everybody is happy to get free money from money printing, but when things get ugly, we will see for how long will Europe last.

In 1961 it looked like there will be no inflation to worry about given that inflation was at 1.2%. However, over the following two decades, inflation was often above 5% and peaked at 13.5% in 1980.

9 inflation us

Source: FRED

My point is that by focusing on value investing, like Warren Buffett did over the last 50 years that have had significant inflation, you can do better than what the S&P 500 offers even if it doubles in the next decade.

The S&P 500 did go up 28 times since 1981, but Berkshire did just a bit better.

12 berkshire

The difference comes from the focus on businesses, that have moats, have pricing power and can consequently adapt to inflation. Therefore, when investing, and you have to be invested because currencies will be worthless, focus on buying value, businesses that will do good no matter what. Thus focus on risk and reward, exactly what value investing is.

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How To Invest $1000 – 6 Rules For Investing Your First 1000 Dollars

Before discussing the 7 rules to follow when investing $1000 and an example of where I am investing my $1000s, I first want to ask you a question that is extremely important when it comes to making the first steps in the stock market, a question that many stock market beginners overlook.

Do you just want to make a little money on stocks or do you want to create long lasting wealth, become rich?

Let me explain the difference. Making a little money on stocks means buying Tesla’s stock (TSLA) at $178 and selling it a month later at $215.

1 tesla stock

That would give you $200 on your $1000 investment which is a 20% return. Not bad, but that’s not investing, that’s betting. Many did the same in December of 2018 hoping to make 20% on TSLA.

2 tesla stock price

Their loss, as I am writing this, is 43%. If you want to make money trading stocks, I can’t help you as I don’t have a crystal ball. Trading can make you some money, but it is unlikely it will make you rich in the long term.

If you want to invest your first $1000, in a way to develop an investing mindset that is going to create long lasting wealth for you, then I can help as there are some simple rules to follow.

A great book about how to become wealthy, financially independent, live where you want to live and how you wish to live, is the Millionaire next door. The book describes how the real millionaires are not those with flashy cars, expensive clothes, living in Belair etc. The millionaires are those that save their money, let it work for them over time, invest their time and energy to make what they know, own or manage, more efficient, avoid crazy risks and build their wealth over a lifetime.

3 millionaire next door

Source: Millionaire next door

Similar rules can be applied to investing and I am going to share 7 rules that are going to help you create a long-term, wealth-building investing mindset.

7 Rules To Become A Stock Market Millionaire Starting With $1000

These 7 rules will help you on how to invest your first $1000 to develop a long-term wealth building mindset.

  • Make your $1000 work for you

When investing, the key question to ask is what do I get as a return on my investment? Investing is not about buying a stock that goes up and down in value. Investing is about owning a business that creates some kind of value. Over the last 20 years, investors putting their money into Amazon (AMZN), have in return received the best e-commerce ecosystem in the world. Some other businesses pay large dividends like Coca-Cola (KO) has been doing for Buffett over the past 30 years. His dividend now is above 60% per year on what he invested in 1988.

Focus on what are you getting back on your $1000, it could be dividends, buybacks or it could be some new value that is being created. Then, when you know what is the return, you let it compound.

  • Let it compound

When you find something that creates value, you have to let it compound over time. The key when it comes to investing for the long-term to become rich is compound interest.

4 compound interest

Compound interest is extremely powerful, you just need the patience and right mindset to take advantage of it.

$1,000 invested at 15% per year over 40-years becomes $267,863. That is the power of compounding. Now you are going to say that it is hard to get 15% per year and I agree with you. But you will hopefully invest $1000 many times over in your lifetime and some of those $1000 investments might even hit 20% per year, some will hit 5%, but some will definitely do amazingly. Just 4 investments that compound at 20% per year, something Buffett did over 50 years, thus $4,000, would become $5,879,086 in 40 years. And let’s say you invest $1000 one hundred times in a period, 4 of those 100 investments might give you 20% per year or even more. I invest 1000 per month and I must say how I really enjoy the compounding created over time in the form of business development, higher dividends, reinvested dividends.

This is just to show the power of compounding. And I’ll also tell you the only thing that is certain, if you don’t invest you will surely not take advantage of any kind of compounding. Therefore, invest and let compounding interest do the work for you.

  • Even more important than investing is saving, so add up

5 saving money

Source: AZ Quotes

Charlie Munges is a person that says it clearly. Save, thus spend less than you make, invest it and you have nothing to worry. Invest the money in something offering a return, possibly exponential over the long term and that is it. How to find such investments? This is a bit controversial, but I’ll say go into depth.

  • Go in depth versus width

Most financial advisers and talking heads tell you to diversify. They tell you that so that they can make you listen to that talk show for longer as there is more to talk about. However, too much diversification is actually diworsification.

If you understand the risks of an investment, i.e. what can go wrong where the best thing is to think about worst case scenarios, and understand the rewards you will likely get. The rewards in the form of dividends, growth, reinvested earnings, a business model that will compound over time, then it is better to go in depth rather than width.

The key is to specialize in a few areas, I am currently researching REITs (Real Estate Investment Trusts) and if I find something interesting to follow, I’ll start learning more about the specifics of the business over the next few years. I might invest only once in 10 years in a REIT stock, but I’ll probably know it very well before investing. Knowing something very well allows you to understand the risks and rewards of an investment. This makes it much easier to invest the $1000 you have.

Give yourself time and learn about 5 or 10 things to invest in over the next decade. This is mastering only one thing, sector or investment vehicle per year. I can guarantee that when you become an expert, you will be able to find those 15% investments that others might overlook. This can be in real estate, stocks, commodities, businesses…

Over time I have built my specialism in emerging markets, commodities as from time to time Wall Street doesn’t like commodities nor emerging markets. When Wall Street doesn’t like something, prices are usually cheap. For example, something that is going to be developed over the next 3 years is usually extremely under-priced. Most investors are so focused on stock prices that they omit long-term business developments, something we can take advantage of.

  • Buy businesses, not stocks – a quick example from my portfolio, a stock to buy

The key when it comes to investing is to be a business owner. Let’s say you own a nice hotel in Paris.

6 paris hotel

As an owner, would you constantly watch real estate prices to see whether you made something? Or, as a real owner investors do, you would not have any intention of selling such a property and the only thing you would care about is how to increase prices or occupancy rates and manage costs.

The downside to buying stocks is that there is a price that changes every second. However, what you are buying is a business that develops and grows over time.

Let me give you an example. I am a happy owner of a company called Lundin Mining (TSX: LUN, OTC: LUNMF) because of the following reasons:

  • I am bullish on copper as I see demand for it rising due to all the electrification that awaits us, due to all the Teslas, a growing global population, especially in emerging markets.
  • The company is family owned and the owners are conservative. This means that debt levels are carefully assessed and the goal is to create a vehicle that will grow and increase dividends over time. The current yield is low at 1.78% but a buyback has been announced and they are investing in growth.
  • Large investments in the future is what Wall Street rarely focuses on until those investments start to produce cash. They have invested a lot in 2018 and will invest another $745 million in 2019.

7 2019 investments

Source: Lundin Mining

Plus, they have recently invested another billion into a newly acquired mine.

8 chapada

Source: Lundin Mining

All of the investments will likely significantly increase production over the next few years, increase cash flows and probably lead to higher dividends.

9 production profile

Source: Lundin Mining

Given the 30% expected increase in production over the next few years, I expect a similar increase in the value of the investment, be it through higher dividends or through a higher stock price. Their cash dedicated to investments will significantly decline and therefore there could be much more for dividends or more acquisitions.

I like the management and their style and therefore I am happy holding this for the very long term. My expectations on current prices is for a 12% yearly long-term investing return. I am happy with that and over the past year I have invested $1000 in Lundin twice in my portfolio where I add $1000 on a monthly basis. That is also my plan, I’ll keep buying businesses that I like

  • Invest for the long-term

Lundin Mining, the company discussed above had a market capitalization of $14.5 million in the early 2000s and now has one of $3.7 billion. Both Amazon’s and Apple’s market capitalizations were below $100 billion in 2009 with AMZN’s being below $25 billion.

10 market capitalization

Source: MarketWatch

Their current market capitalizations are around $900 billion and might surpass the trillion for good in the future. This is a perfect example of how Wall Street focuses on what will happen in the next quarter, the longest term analysts might look a few quarters or a year ahead, but few think about how will the business they own look in 10 or more years.

By thinking about how will your investment look like in 10 years, investing becomes easy. You don’t waste time on noise like the current trade war discussions that were about tax breaks a year ago or about going to war with North Korea two years ago. You focus on what is important, the acquisition the management just made, the small but constant increases in dividends, the new facility that is being build etc or you see big structural risks like declining demographics in some countries, piling government debt or trends that take of market share like e-commerce is doing for retail.

By using a long-term common sense perspective, you can eliminate the short term bets from your portfolio and concentrate it on long-term businesses with positive tailwinds. Just think about what will the worlds and the business you own look like in 10 years.

  • Compare the investments you own with the rest of your finances

Do you have credit card debt of 11% or student debt of 8%? Pay that because it is an immediate return of 8% risk free. Investing in stocks, be it just $1000 requires a clean personal balance sheet. By clean personal balance sheet, I mean:

  • You don’t need the money, ever. If you need the money in a few years or something, you might behave irrationally and sell at the wrong moment in time. Unfortunately, most investors sell in fear of seeing their investments decline further. If you know you don’t need the money and you can weather storms, you can let the investments compound over the long term for you.
  • If you have any kind of debt with a high interest rate, pay that first and invest the monthly costs you save in stocks. This gives you an immediate return and gives you also piece of mind.
  • You know your life, income etc. doesn’t depend on your investments. If it does, you are again not able to make rational decisions when investing as there are outside, or better to say personal influences that unable you to buy when others are selling for example.

Summary

If you wish to develop a long-term wealth building investing mindset please subscribe to my channel. In this article I have given you the 7 key mindset tools to use long term and an example of how I do it.

The key is to have a long-term orientation even if investing just $1000 because your long-term financial success depends on the mindset you have. A correct mindset means focusing on investing in various good businesses of which I have given you an example of a business I am invested in and finally, the key is to have your stock market investments detached from your personal finances. Sounds easy when written like this but very few adhere to that. The result of not following such simple rules are terrible investment returns.

The average investor did 1.9% per year over the last 10 years even if all other classes did much better. If you have $1000 to invest, start building a vehicle that will make you rich in the long term by having the correct mindset.

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Stock Market Crash, Economic Collapse, Rigged Markets? How to invest rationally!

Good day fellow investors,

Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.

I’ve got this interesting email discussing how I am missing many points:

Underlying factors that affect the metrics you used in your article:

  1. The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
  2. Stock buybacks from the new tax code (fudging the numbers you are working with).
  3. The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
  4. The sheer number of Zombie companies and historic high levels of BBB bonds.

Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!

All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.

1 views

And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.

2 keynes

When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.

Contents

Stock Market Fear and Irrationality

THE MAIN QUESTION IS HOW TO INVEST?

Market rigging!

Stock buybacks from the new tax code (fudging the numbers you are working with)

Artificially depressed interest rates

Corporate credit, zombie companies, government debt

How to invest keeping the risks in mind

THE MAIN QUESTION IS HOW TO INVEST?

One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.

We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;

You know it is rigged,

You know buybacks are strong,

You know interest rates will remain low, or inflationary due to the huge debt,

You stay away from zombie companies, buy those that will do even better when the competition dissolves!

Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.

Let me put the things into perspective!

Market rigging!

The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.

Take advantage of it.

On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.

Silver price:

silver price

Stock buybacks from the new tax code (fudging the numbers you are working with)

4 smart

Source: Reuters

$940 billion of buybacks expected in 2019, that is 3% of the market.

There will be ups and downs, but some buybacks are smart if made below book value, or replacement value or intrinsic value, and those values are in the eye of the beholder.

5 bubyacks

Source: Yardeni

Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.

Artificially depressed interest rates

As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.

6 rate

Source: FRED

Corporate credit, zombie companies, government debt

Governments and corporations have increased their leverage as low interest rates allowed for lower borrowing costs. US government debt quadrupled in the last 20 years.

government debt

Source: FRED

However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.

How to invest keeping the risks in mind

Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.

You have three options to invest your money!

The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.

Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.

I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.

The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.

2 gdx

I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.

The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.

Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?

To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.

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$13 Million-Dollar Investment Bank Managed Stock Market And Bond Portfolio Review

A month or something ago, I was contacted by an investor that had just set up a portfolio with an investment bank. He told them that his risk tolerance is minimal and that he would like some capital appreciation in the long term. He asked me to review the portfolio and that is what we are going to do now.

Here is the video version, while those who prefer reading, can find the article below.

The topics:

$13 million-dollar investment bank managed stock market and bond portfolio review:

  • US equity portfolio exposure & issues
  • International equity portfolio exposure
  • Fixed income portfolio

General banking fees and value for money

  • Discussion about fees and risk reward opportunities

Investment strategy

  • Portfolio management
  • Risk and reward
  • What would I do differently?

Stock market and bond portfolio review

Here is how the portfolio has been structured:

US equity is 22.74%, international stocks 25.52% and as the requirement was low risk, 48.5% has been placed into US fixed income. This has been done by putting the money into 3 different bank funds (more about bank fees later). The yearly management fee is 0.9%.

Let’s start with US equity exposure.

US equity portfolio exposure

The portfolio positions are listed from the largest to the smallest. The client automatically replicates the positions held by the 3 funds within his account.

us equity portfolio

The largest position is Advance Auto Parts (AAP). I don’t know whether the fund bought the stock at the bottom in February of 2018 or it was a long term holding as the unrealized gains and losses in the above table go back to when the portfolio investment was made, which is February 2018.

AAP, has had free cash flows between $300 and $500 million per year over the last 10 years on a $10 billion market capitalization. I would expect the return there to be around 4% in the future. Auto parts are a competitive business but can be recession proof.

The next position is Comcast (NASDAQ: CMCSA), a company that recently won its bidding war and acquired Sky Plc for $38.8 billion. The all cash offer will put more pressure on Comcast’s balance sheet that already has $114 billion in liabilities. Plus, Sky Plc has had operating cash flows of around $2 billion per year in the last 10 years. This makes it a stretched acquisition as the interest on the debt will be close to the $2 billion of free cash flow coming from Sky.

Intercontinental Exchange (NYSE: ICE) is another stable company with high free cash flows and a potential return of around 4 to 5%. Free cash flows are $2 billion on a $42 billion market cap.

Danaher is the 4th largest US portfolio position (NYSE: DHR) is another stable company with $3 billion in cash flows on a $70 billion market cap.

Progressive Corp Ohio (NYSE: PGR) is an insurer and Kroger (NYSE: KR) is a grocer with similar characteristics as the above businesses. All have dividend yields of around 2%, stable business models, we can call them recession proof business models, and price to cash flow ratios of around 20 that should lead to a return of around 4 to 5%.

If we look at other portfolio positions, those mostly replicate the above. All good companies and fairly priced by the market. The portfolio also holds Google or better to say Alphabet (NASDAQ: GOOGL), American Express (NYSE: AXP), Mastercard (NYSE: MA) and we could easily say that the US equity portfolio reflects the client’s wishes: safety and quality.

US equity portfolio potential issues

I have two issues I want to discuss. The first is the value added in relation to the charged fee and the second is the fund management cost environment and investment process which is possibly even more important than fees.

Investment fees and value added

The first issue with the US equity portfolio part might be that there are 26 positions. If we look at professor and 1990 Economics Nobel prize winner Sharp’s seminal work on risk: Risk, Market Sensitivity, and Diversification, published in the Financial Analysts Journal in 1972, we see that as soon as you pass 20 positions in your portfolio, the risk equals the market’s risk.

Source: Risk, Market Sensitivity, and Diversification – CFA publications

We have seen that the expected returns from a price to cash flow standpoint will be around 4 to 5%. However, if we look at the top positions of the S&P 500, their price to cash flows don’t differ much from the ratios of the analysed portfolio and the businesses in the S&P 500 can be considered of quality too.

Source: iShares S&P 500 ETF

Microsoft (NASDAQ: MSFT) has a cash flow yield on price of 3.75%, Apple (NASDAQ: AAPL) of 8%, Amazon (NASDAQ: AMZN) of 1.8% but we might argue that in 10 years, AMZN might have higher cash flows than Kroger. Berkshire (NYSE: BRK.A, BRK.B) is a diversified portfolio focused on US equity by itself, it holds great businesses and it has a price to free cash flow ratio of around 4%.

This leads me to the question, is the 0.9% yearly fee our friend is paying for the above portfolio justified? One can buy the S&P 500 for a yearly fee of 0.04% which is 22.5 times smaller than what is being paid to the investment bank or there is always the option to simply buy Berkshire and let Buffett and his fellows manage the money at no cost practically.

To conclude on the investment fees, I don’t think that in this case, paying a yearly fee of 0.9% adds any kind of value given that the stocks might look a bit more conservative than the S&P 500 but such bet is based on past performance and not part of a strategy. In this digital era world, one might argue that Amazon is more defensive than Kroger.

Investment fund behavior

The thing when it comes to banks is that there is a lot your bank is not telling you.

Aside from the 0.9% yearly management fee, the bank makes money as they buy and sell through their own broker, perhaps they are even the market maker for the security, they pay for research, marketing costs, administration etc. that might not be included in the first fee you pay but might be included in the costs of the second fund that you actually don’t see. In this case, as the clients owns the positions directly, only the brokerage, custodian and market maker fees come into account, but that is still something extra.

Investment fund management process

Now, there is another thing when it comes to investment funds that is not discussed much. When things go well, all is good, but when things go south, some clients might want their money back. The investment manager is put into a tough spot because he then has to make investment decisions based on external inputs which might not be in the best interest of other clients. For example, if I manage a $1 billion portfolio, there is panic in the markets and clients want to cash in on $300 million. Liquidity usually dries up on the market too at such moments and you cannot sell your positions easily, especially your bond positions. (Remember that the positions discussed above are part of a much bigger fund)

The investment manager has no option than to sell the most liquid assets which might be the best assets to hold in the long term. Further, an investment manager has to be invested 100% all the time. Investment managers, collecting a fee of 0.9%, don’t have the option Buffett has. Buffett has $114 billion dollars practically lying on Berkshire’s bank account waiting for a market panic so that he can buy stocks on the cheap. (Buffett’s cash is invested in short term US Government Treasuries with an average maturity of 4-months – can be considered as cash)

This is something few think about when things go well, but crucial when things go south. Our friend has no influence on that and unfortunately this is where things often go wrong with funds managed by investment banks. An investment manager has to do as ordered, not as he wishes or what would be in the best interest of the client.

International stock portfolio overview

The international part is 25.52% of the whole portfolio and has a total of 68 positions. Since the inception of the portfolio, the performance of the international part has been really bad as almost all the positions are down with some like Ryanair (LON: RYA) down 34%. This is nothing strange given that international stocks and emerging markets have really suffered during 2018.

international stocks 1

international stocks 2

The largest position is Medtronic (MDT), followed by Unilever (UN), Compass Group (CMPGY), Aptiv (APTV) and Ryanair (RYAAY). There is a little bit of everything there with Tencent (TCEHY), BHP Billiton (BHP), the Indian Icici Bank (IBN), the Russian version of Facebook – Yandex (YNDX) and some interesting Chinese stocks like 58.com (WUBA) or South American payment processors like Cielo SA (CIOXY).

Now, Medtronic (NYSE: MDT) – the world’s largest medical device company makes most of its revenues and profits from the U.S. healthcare system but is headquartered in Ireland for tax purposes. Thus, this is not an international stock but goes under the international portfolio. Free yearly cash flows have been around $4 billion over the past 10 years and the market cap is $120 billion.

Nevertheless, holding 69 stocks doesn’t move the needle and we can expect them to perform equally as the market does. Therefore, one can simply buy the Vanguard Total International Stock ETF (VXUS) for a fee of 0.11% per year.

If I compare Vanguard’s top 10 positions and the portfolio we are analysing, I see that Royal Dutch Shell pls (NYSE: RDS) is in both portfolios, same as Tencent (TCEHY), Novartis (NVS), Roche (RHHBY) and Taiwan Semiconductor (TSM).

Source: Vanguard

So, a portfolio I am paying 0.9% to be managed has 5 positions that are also in the Vanguard Total International stock ETF top 10 positions with a management fee of 0.11%.

Let’s see if there is more value added in the bond portfolio.

US fixed income portfolio

48% of the portfolio is placed into a bond fund and the holdings are the following.

bonds 1

bonds 2

The majority of the bond portfolio is in US Treasuries, 18% of it, with maturities ranging from 2021 to 2026. The yield on those is less then 2% or around that. Then there is a bunch of other corporate bonds with yields between 1% and 4% on average and maturities ranging from 2022 to 2028 on average.

Now, the first thing is that if 9% of the total portfolio is in Treasuries, why would you ever have to pay any fees on that as with a $13 million dollar portfolio you can simply buy them yourself. Or, if you want, the Vanguard Treasury ETFs has a fee of 0.07%.

Secondly, the investment grade US corporate bond ETF from Vanguard, offers much higher yields for minimal fees.

Source: Vanguard

On a portfolio of 66 bonds, 60 excluding the Treasuries, I simply don’t see any difference except the huge fees. The intermediate corporate bond ETF, has a yield of 4.35% and is managed by Vanguard.

Conclusion – portfolio management and risk reward

The holder of this portfolio hoped that I can manage part of his portfolio and perhaps create an all-weather portfolio for his holdings. I declined because my current investing focus accepts a little bit more risk as we are focused on long term return maximization which isn’t what the goal of this portfolio is. I am completely devoted to what I do and creating another portfolio alongside building mine would be impossible. On the all-weather portfolio, I am partly working on it, but an all-weather portfolio focuses first on neutralizing risk and not that much on maximizing returns. You cannot get high, Buffett like returns with an all-weather and that is why I cannot focus my whole work around it and this portfolio. I takes at least a year of hard work to build a portfolio.

Secondly, if I would have to manage the money as required, the way explained above would be one way of doing it. I cannot charge $117,000 per year for the above as the investment bank is doing, I simply can’t. Well, you have it above for free.

What we actually did is that we have created a smaller part of the portfolio to follow my portfolio that I manage on my Stock Market Research Platform. This should add a bit more diversification as it is focused on absolute value and not that correlated to markets. Plus, there are some hedges too.

Portfolio risk reward

Now, what we still have to discuss are the risks of the above portfolio in relation to the rewards. We have seen that the yield on Treasuries now should be around 3%, and the return on equities could be at 4%, up to 6% on the international portfolio. Given the 10-year maturity of the bonds, that is what the holder can expect, deduct 2% inflation and you have a real return of about zero on the bond portfolio which would be closer to 2% with Vanguard.

50% of the portfolio is in stocks and given that the number of stocks held is 90, one should expect equal to market returns, US equity markets and international equity markets. The biggest risk here is a contraction in valuations. If global investors start to require a 6% investment yield in place of the current 4%, that could lead to a decline of 50% on global stock markets and a similar decline within the equity portfolio. Also, as bonds are priced in relation to interest rates, I would expect a significant decline in the bond portfolio too.

Thus, the upside is limited but the downside is pretty big. This is because there is no strategy behind the discussed portfolio, it is over diversified, there are no hedges in place, no real diversification as we have seen bonds and stocks move in correlation during the turmoil of the last few months.

What makes me sad is that most pension funds are managed in the above way with outrageous fees. In a video on Canadian pension funds I discussed how fees go up to 2% per year for practically nothing. This is outrageous and the first thing I would tell people to do is to start educating themselves about what can be done when it comes to investing their hard-earned money.

Perhaps, individual stock picking the way I do it will not be for most, but lowering a management fee from 2% per year to 0.1% makes a hack of a big difference within a portfolio. Actually, it makes almost a 100% difference on a long-term portfolio over 30 years based on current market return expectations.

If all that you change in your financial life and investment portfolio is that you get a lower fee or even eliminate fees, the above is how much it affects a $1 million portfolio over a 30-year period and 4% market returns per year. The differences are staggering.

Investment strategy

From a general perspective, an approach like the one discussed above offers no strategy, it is a purely market following and extremely diversified investment. Thus, such a general approach certainly doesn’t deserve to charge a 0.9% fee. The lack of alpha, the lack of an investment strategy, a portfolio that resembles an index is just part of what is not good in story we discussed up till now.

The following chart shows how there are different investment strategies and the one discussed today is probably the most obsolete. However, banks still manage to sell it to clients due to a lack of financial education.

My opinion would be that the investor should first create a clear strategy about what is the goal for his funds and then put that goal into a risk and reward perspective within a well-diversified portfolio based on a well-balanced strategy.

Such a strategy is what we focus on so if you enjoyed this kind of investment educational content shared above please follow, subscribe, like and share.

About the author: Sven Carlin, Ph.D. is passionate about investment research and value investing. He also manages the Sven Carlin Stock Market Research Platform based on long term value and business investing principles.

How to invest in businesses with dr. Per Jenster

I recently had the privilege to interview dr. Per Jenster. He is a Fullbright scolar, author of many books, former dean of the Kopenhagen Business school, entrepreneur with more than 20 ventures of which many went public for hundreds of millions and he is an investor that has his own hedge fund. A person from whom we can learn very much. Enjoy the interview.

In case you want to reach Prof Jenster or know more about how he invests, please go to … http://nichemastersfund.com

Here is the video and you can find the discussion topics below the video.

0:27 Who is Per Jenster

1:33 What to look when investing in a business

3:59 Fund based on a niche strategy

6:01 Companies we are investing in

8:30 Management

10:00 HIGHER PE for HIGH ROIC

10:44 Index funds

13:10 Trading

14:24 Strategic focus

15:57 Current stock market

18:25 Diversification

20:31 Investing education

21:36 Modern investing

23:32 Learn to be better at investing

 

How To Invest In Stocks

Investing in stocks requires answering the following questions:

How to invest money in stocks?

How much money to invest in stocks?

What are the best stocks to buy?

How to find the best stocks to buy?

How do I protect myself from a stock market crash?

What are the best stocks to invest in?

Should I invest in penny stocks? Should I invest in bitcoin? Should I invest in blockchain?

How to invest in stocks on your own?

Hi, my name is Sven Carlin, Ph.D, and I am an independent stock market investor and researcher. Before researching and analysing stocks full time, I was an Assistant Professor of Finance and Accounting at the Amsterdam School of international business and before that a researcher at Bloomberg in London. I am also a book author – Modern Value Investing – where I describe 25 tools to apply when looking at a stocks and other interesting modern value investing topics.

I want to explain what I do and how I go about these questions.

How to invest money in stocks? How much to invest in stocks?

I invest money in my stock market portfolio on a month by month basis. I have a model stock portfolio that I started with $10 thousand and I add $1 thousand every month no matter what. I do not necessarily buy with all the money that I add every month, that depends on the opportunities in the market, more about how I find opportunities and track them later.

My goal is for my stock market portfolio to be at $1 million in 20 years. This will be achieved if I reach an investment return of 12% per year. I believe, this can be achieved with proper research, good risk reward analysis and proper portfolio diversification. Investors that I admire like Seth Klarman, Warren Buffett, Schloss, have achieved even higher returns than 12% over the very long term. Other value investors are steadily above 15% which shows that this can be done over the long term with a smart value investment strategy.

The stock market portfolio is just one component of my investment portfolio that includes real estate, businesses, cash, and a separate option portfolio in the future, when the time comes for that. When I think stocks are generally cheap I might transfer some of my money from other asset classes to stocks.

As for you, see what your financial goals are, how many of those goals can be reached through the stock market, what is the long term return you can expect. Your long-term returns depend on the earnings the businesses you own deliver. This also answers the following question.

What are the best stocks to buy?

The best stocks to buy are those with good businesses that lead to growing earnings, cash flows and dividends over time no matter what is going on with the economy or stock market. The higher are the cash flows those companies make, the higher will be their stock price. For example, NIKE’s earnings in 2008 were $0.95 per share. In 2017 the earnings were $2.51, thus almost 3 times higher.

The stock price reacted similarly, or even a bit more as valuations expanded but you get the picture, the more earnings grow, the higher will your returns be. So, the key is to buy great businesses that will grow over time.

The market is now a bit overvalued from a historical perspective, so a fair price for NKE should be around $40 or $50, and that is exactly when I recommended it last summer.

nike stock priceSo, the focus for the investor should be in finding the best business earnings. This will also be the best stock to buy. So, how do you find such / best stocks to buy?

How to find the best stocks to buy?

Here it all boils down to research, looking for the best businesses, following sectors that are cheap at the moment due to temporary reasons. I was following the shoe sector last year because it was down due to fears about American retail, but for companies like NIKE it doesn’t matter if you buy in a shop or online, it is even better to buy online for them as their margins are bigger. I made my money relatively quickly in that sector last year. So, the key is to do constant research, keep the value models on lots of companies updated, research new sectors and keep an eye on the stocks you find interesting with a good business. By having a fair value model of many stocks, you know when something becomes a buy or no.

An overview of my research platform will give you a good indication of how this works. Please check the platform and the curriculum: Sven Carlin Research Platform

We have been looking at Argentina lately because those stocks are down 50% in the last few months, but many business have their revenue in US dollars, so not really affected by the Argentinian peso which creates an opportunity for those who follow such a situation. Solar stocks are also down, and there are other opportunities in current market.

But, this doesn’t mean a stock has to be down for me to buy it, positive structural long-term trends are also extremely attractive. For example, the electric vehicle revolution or 5G might really create great opportunities and there are too amazing value investments to be found because there are several ways to get exposure (nickel for batteries and copper but also the technology for 5g through stocks that have other good business segments too. I have found that the more research I do, the better are the risk reward opportunities I find, it takes a lot of time and I do this full time, but it pays with high returns of investment. My amatorial (unfortunately no audited track record yet) return since 2002 is around 18% per year on average.

You will be thinking that 18% returns sound nice but how do I protect myself from a crash?

How do I protect myself from a stock market crash?

Another question all would like an answer too is how to prevent your stock portfolio from crashing during a stock market crash.

Well, you can’t, let me tell it to you immediately. Peter Lynch, had seen his Magellan portfolio crash more than the S&P 500 each time the S&P 500 crashed 10% or more. That happened more than a dozen times while he was the manager.

However, in case of a crisis I like to be hedged against more money printing by owning gold miners. I like to be hedged against stupidity by owning stocks that produce things all people need and will need in the future, with good management, with a long term orientation.

Further, on stock market crash protections, you have to see when you need the money and then balance between cash and investing. Stocks to expensive? Have more cash and then balance as the market always fluctuates. The best protection is to invest in the best stocks.

What are the best stocks to invest in?

This is a bit different from the best stocks to buy because you sometimes buy on a merger arbitrage, or there are some catalysts that crate a positive risk reward situation. The best stocks to invest in are the best businesses at a fair price. When you see NIKE at a PE ratio of 15, you know your long term returns will be at first 7%, but those will grow by 10% per year over the next two decades and you will have 10%, 15% in time from a great business.

So, when you invest in stocks for the long term you simply buy the best businesses and forget about them. The returns will come.

Should I invest in penny stocks or bitcoin or blockchain?

Penny stocks and cryptocurrencies attract lots of people because big money can be made there fast due to the high volatility. However, that is speculation and you depend on someone paying more than what you paid. There might be penny stocks that are worth something but that requires huge research analysis of an investigative type that usually costs a lot and you don’t have much volume to make money on that. So be careful there and usually what you make here you lose somewhere else. Fortunately, those who tell you how much money they made on a penny stock or cryptocurrency don’t have to tell you how much they lost on something else.

On cryptocurrencies and blockchain, there is a big difference between investing in cryptocurrency scams or investing in the blockchain technology.

How to invest in blockchain?

To invest in the blockchain technology you are looking at long term investments in companies like IBM. There is even an IBM blockchain page.

ibm blockchain

This is something completely different than buying bitcoincash or other. The key is to know as much as possible about any form of investment assets, which will give us the answer to the final question.

How to invest in stocks on your own?

The first thing to know is to understand all the terms related to stocks and investing, all the accounting factors (I have to make a course accounting for investors, will come but I can’t promise when), read as many books as you can (we have made a summary of the intelligent investor here) and there is also my book, and give yourself time to learn. Invest the money you can afford to lose as tuition, you learn much better with real money.

Secondly, when you understand what is what, when you find your investment style you will also find what works best for you. If you like value investing, emerging markets, commodities, and pure common sense investing but don’t know how to do the research yourself or simply prefer to use your time in different ways, please check my research platform.

Should I Invest? It is a Positive Sum Game

Should I invest in stocks?

Investing in stocks is a positive sum game. By being careful in what you invest in, you can reap many positive returns just from how things work in this world. The economy, other people, trade and technology all work in your favor.

Stocks went up 280 times over the last 85 years. Take advantage of it.

stock market

What should I invest in?

The key is to invest in things that will do well over time no matter what. Stocks benefit from economic growth, their business earnings create your returns, and over the long term you are protected from inflation.

Why should I invest?

Except from protecting yourself from inflation, if you don’t invest, the value of your money is eaten away slowly day by day. You need $25 today to purchase what you could had bought with $1 back in 1913. On top of everything, the global economy will continue to grow and develop, stock earnings will grow and your dividends will grow.

How much should I invest?

That is personal, but even a small amount will develop a habit, which is the key for long term investing success.

What stocks should I invest in?

You can invest in mutual funds, which is a good option if you don’t want to think and look for better investment opportunities. If you are willing to put some effort, you can find better and better investments that protect your capital and give you higher returns over the long term.

Should I invest in bitcoin?

Investing in cryptocurrencies is the opposite of investing in stocks. Stocks have dividends which lead to positive returns, stocks are parts of businesses that own assets that generate profits. Those assets protect you from inflation. Cryptocurrencies like bitcoin and Ethereum only depend on whether somebody is willing to pay more for them and there is a hefty fee related to every transaction that makes it a negative sum game. This can be seen by the big swings in cryptocurrency prices, an example is the ripple price.

ripple priceWhat should I invest in 2018?

The key when investing is to create a portfolio of assets that are going to do the work for you but where you will also be diversified. This means that you should look to build your investment portfolio over time. More about that in tomorrow’s video about my portfolio.

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Here is a video about why should you invest in stocks:

 

 

The Intelligent Investor – 7 Things to Watch for the Defensive Investor

 

The Intelligent Investor by Benjamin Graham is surely the best book for stock market beginners as it gives you both the tools and the mindset to start investing safely.

We continue with our summary of it and discuss Chapter 14 – Stock Selection For the Defensive Investor where Graham gives 7 indicators to statistically approach investing that anyone can follow.

The criteria are the following:

  1. Adequate size
  2. Strong finances
  3. 20 years of dividends
  4. No earnings losses in the past 10 years
  5. 33% 10 year earnings growth
  6. Price to book not above 1.5
  7. Price to earnings not above 15

Enjoy the video where I discuss the above in more detail and explain how and why Graham approaches the above.