Investing & Finance on Nabloid.com

Contrarian's Dilemma: Glass Half Full

As everyone panics, this may be the perfect time to buy assets and invest - when investments are at a discount to their underlying value. As far as I’m concerned, any large market decline is just an opportunity to buy quality assets at a discount. It’s bargain hunting time for investors! You have to view times like these as nothing more than an opportunity. If you don’t view times like these as an opportunity, you run the risk of turning into a pessimist who will not only act irrational (like some people who sell great companies for a fraction of what they bought them for just because the price went down and despite the fact that the company still has great fundamentals - does that make ANY sense?) but may miss many opportunities to make back the money that has been lost thus far.

A contrarian likes to do the opposite of the masses. As the masses have been selling, I’m sure there are plenty of contrarians slowly buying assets. The true dilemma for a contrarian is knowing when to buy and invest. A person only has so much cash on hand to take advantage of opportunities. I don’t believe the market is at the bottom at the moment - and that is the true dilemma. Should I wait for the prices to drop some more before investing or invest now? My inclination is to slowly invest all the way down. I’m not perfect and I make mistakes, so my best bet is to buy slowly all the way down.

The Sub-Prime crisis created our current economic woes. The Sub-Prime crisis was created by Democrat legislation that required (YES, REQUIRED) banks to lend to people that could not afford them. The program started under the Clinton administration and was accelerated by the Democrats in the last several years - post Dot Com Bubble Bust. In fact, Obama was involved in a lawsuit against CitiBank because he claimed it did not lend enough money to African-American neighbourhoods. So, in essence, he got his wish. The banks were being sued for not lending enough sub-prime mortgages. I dislike Bush as much as anyone, but little do you know, he tried to implement legislation to regulate the banks and prevent this crisis several years ago. The legislation never passed. Go figure.

As the banks began lending to literally anyone, the masses of people all had these large sums of money to go buy their dream homes. The real estate industry boomed. When people buy homes, they are spending a big chunk of the money they will earn over the next thirty years. When millions of people buy during a short period of time, a boom is created. Due to the lending practises imposed on the banks, the boom began. Artificial booms always lead to big busts. That is what we are witnessing now. I haven’t told you anything you didn’t already know, especially since I wrote an article about that a long time ago.

So here’s the ~~bad~~ good news. Many of these sub-prime mortgages haven’t even come due yet. I’m almost 100% sure that we are in store for a rough ride for the next 3 to 5 years. So as many people panic and sell their investments for a song (glass half empty syndrome) and as your investment accounts witness sharp declines, the smartest investors will be looking to buy and invest more of their money into great companies for peanuts. Yes, the next 3 to 5 years will present many great buying opportunities. So be on the lookout! Next time someone starts talking about the grim economic situation and their investments, just remember all the opportunities on the flip side - The glass isn’t half empty, it’s half full. Happy Investing!

September 30th, 2008

Researching Solar for Investment Purposes Proves Difficult

I have a problem. I have some extra money (not very much - a couple of grand) I want to invest and I really want to invest in a promising solar company - the kind of solar company that is not only Western based, but has a technological edge, leads the pack and yet is still small enough to have some massive growth ahead. Here’s the problem: I’ve identified two really good solar companies I’m interested in but neither is publicly traded! Argh. Guess those private equity guys have it much better than we do. They not only get to invest in private companies with their deep pockets, but they can also take public companies private if they choose to. Now you’re probably wondering the names of these companies and what makes them so great? Sterling Energy Systems and Nanosolar.

Sterling Energy Systems designs and manufactures sterling engines that uses concentrating solar power as the energy source. It’s basically a bunch of mirrors pointed at a sterling engine. It’s extremely efficient and they recently achieved 31.25% conversion efficiency on a solar to grid system. That is a world record. SES has two signed contracts (one with Southern California Edison and one with San Diego Gas & Electric) for 1,750 megawatts of power. These are the two largest solar power contracts in the world and will require 70,000 of SES’s dishes. The 500 megawatt contract with Southern California Edison will be on 4,500 acres of land. Oh, and the technology is actually grid competitive - yes, it can make electricity competitively, and in an old Inc. Magazine article from 2005, the founder claimed it can produce electricity for under 8 cents per kilowatt, but refused to say how much under… This is a company with 20 year contracts in hand and is able to make electricity competitively using the sun. I love it. Too bad it isn’t public. Though when I contacted them back in 2005, they had been discussing an IPO in 2008. But that was nothing more than hearsay from several years ago. I’ve not heard anything new on an IPO.

Nanosolar is a world leader in thin film solar - a really interesting technology that I think will ultimately make the big fat silicone solar panels of the past obsolete. They claim to be able to print thin film in an almost printing press fashion to manufacture and sell it for $.99 per watt. That’s really low and would make solar competitive. The material is thin enough to be built into many building materials as well. This is a promising technology and it’s here and being produced… Once again, too bad it isn’t public. It probably will go public, but not until the company is worth so much money it isn’t necessarily a small cap. With big name investors like Google founder’s Sergey Brin and Carl & Larry Page and eBay founder Jeff Skoll, and many others, you can bet your money they won’t go public a minute too early - they’ll unlock every penny they can. By the time a company like this goes public all the big growth is gone. I’m not saying it won’t be a good investment or grow - it will. I’m just saying I want in a little earlier -but don’t we all. I guess we’ll fight over the scraps.

Now that I’ve found two great companies I really like, I’ll add them to my IPO watch-list. My next task is to actually find an investment I can make that has lots of upside potential. I’m looking for a small cap company located somewhere in the Western world that has a competitive solar technology and is currently building it’s manufacturing facilities to put the technology into commercialization. There are actually quite a few different companies that may fit the bill but I really have to do some more research. Stay tuned.

1 comment June 4th, 2008

Global Warming & Investing

I thought it was time I go public with my opinion on Global Warming. I’ve never believed in man-made global warming. Perhaps its easy for me to say that while I watch a late-April winter storm that has lasted a week. I’m sure some of the believer’s of man-made global warming will even say it’s global warming that is in fact causing this unusually late winter storm. I still don’t buy it. Global warming may indeed be occurring, but I don’t buy the “man-made” part.

Man-made global warming is the biggest lie ever sold to the public in the 21st century. It’s funny how everyone watched a single documentary by a former politician and instantly believed the science to be gospel (people believe it like its a new religion!). The documentary is so absolutely flawed and filled with lies that I don’t dare mention its name. I find it even funnier that some powerful groups wrote that they wanted to use environmentalism and global warming to tax the food we eat and the air we breathe. Then, after Gore lost to his buddy Bush in the election, he went on to create the documentary that carried out the aforementioned plan. Gore was worth about one million dollars when he was running for President. After he lost he made a single documentary and now his net-worth exceeds $100 million.

Carbon dioxide has been chosen to be the enemy of mankind by Gore and the elites. Oh how funny it is. He didn’t choose air pollution or water pollution or any harsh unnatural chemical that we (as humans) are actually guilty of spewing into the atmosphere. Instead, the elites chose a naturally occurring chemical that can never be reduced to zero so that we can never declare we have won the war on carbon dioxide and man-made global warming. Carbon dioxide is essential to life on earth - without it there would be no life. We breathe in oxygen and exhale carbon dioxide. Plants would not be able to carry out photosynthesis without carbon dioxide - in other words there would be no plants and as such, no life on earth. Furthermore, the ocean and volcanoes produce massive amounts of carbon dioxide that make man-made carbon dioxide look negligible.

If carbon dioxide is so bad, why does it occur naturally with no ill affects on our health. The planet naturally creates massive amounts of it (much more than we do!). If you still believe carbon dioxide is the worst thing since Hitler, than perhaps you ought to boycott carbonated soft-drinks… Yup, the pop we drink has CARBON DIOXIDE in it. Oh my, I can’t believe we are still force feeding such a dangerous chemical down the throats of our youth! //end sarcasm. I don’t see bans or extra taxes on pop yet, but I’m just waiting for people to make the connection (and realize pop has CO2) and ban Coke and Pepsi in an effort to curb global warming. That would make me laugh. At least we can laugh about it, right?

As for the global warming part… there is scientific evidence that every planet in the solar system is warming up. We can’t blame the martians for driving cars around and warming up their planet nor can we use carbon dioxide to explain why all the planets are warming. We can use sun activity to explain the warming. Who would have thought the reason we are heating up could be due to the sun warming up? What a revelation! The sun just entered a new solar cycle and has been exceptionally active and has a plethora of sun spots for us to watch. Solar flares are also increasing. THE SUN IS WARMING. When my house gets too warm, I don’t blame my bad gas and heavy breathing (exhaling CO2) for warming it up due to an excess of CO2 in the house. I go check the furnace. Perhaps the sun is the first place mankind should look to when Earth begins to get a little hot? A little common sense could go a long way.

If I was to time travel back to the last ice age and go to the exact same spot I’m sitting at now, I would be under several hundred metres of ice (under a glacier!). In order to melt that glacier that covered where I’m at now, we didn’t start up our vehicles and begin belching. The Sun melted the glaciers from the last ice age. You see, there are natural cycles in the world, just as there are natural cycles in the Universe. The Earth has periods of warming and cooling, due to… drum roll…. the sun.

Now that I’ve debunked man-made global warming, I think it’s time to say I’m 100% against polluting, including air pollution and smog. I hate all the waste that goes on in the western world. BUT carbon dioxide is not our enemy.

There have recently been riots around the world, all about food. You see, the prices for different food crops have skyrocketed in the last year or two. Why? One of the reasons is increased demand from ethanol. Many crops are now being turned into a fuel that will pollute less than gasoline and diesel. I find this funny. If we were serious about reducing our footprint, we’d all switch to electric vehicles and we’d put all our money into inventing a more efficient battery technology so electric vehicles would have a longer range. Instead, we are now taking food and converting it to fuel, which increases the demand and price of crops. Not only that, but this ethanol is so inefficient it actually uses more energy than it creates! The poor from around the world are getting squeezed and it is becoming increasingly difficult to afford FOOD.

I said it earlier, Global Warming may be occurring. But it isn’t man-made. It’s selfish for us to think we have such a huge affect on this planet that every action mother nature takes is a direct result of us screwing with her. Go fly a plane. Look down. See how minuscule we really are. The Sun is causing the warming. The man-made global warming myth will lead to many politicians implementing new taxes on carbon (carbon is the building block of life - they are taxing it now) and carbon dioxide. This myth is also causing food prices to soar and the poor around the world to starve even more.

It’s not all bad. Pollution will be reduced due to so many new-found environmentalists. They may be targeting carbon dioxide, but in their efforts they will reduce all sorts of real pollutants. It will push us to look to new energy sources beyond oil. This is all good. I’ve talked about Kyoto in the past. It was flawed and would never work. Want to do your part? Invest in solar, wind, geothermal, battery technology and electric cars. Then go recycle, reduce your waste, buy some solar panels, an electric vehicle, and start composting and growing some of your own food in a small backyard garden. With any luck, and a little carbon dioxide, your plants will continue to do their part in providing clean fresh air and good nutritious food.

Want to make money due to this man-made global warming myth? Think about all the timber companies and how much of a carbon sink their forests are. If carbon credits become a reality (I hope not, they are dumb as hell), then all these timber companies stand to make a fortune. Carbon credits would be wrong, and I’ve outlined why in my old article “Kyoto is Lame“. Let’s just pray carbon dioxide is still around (lol, as if we could stop it!) so the forests don’t die. In fact, I sort of want to go out and make a PRO-CO2 fundraising dinner in an effort to save the forests… I’m just kidding, as we don’t have to worry, the Earth will continue to spew out CO2 from the oceans, land, animals and volcanoes and there ain’t a damn thing we can do to stop it. That doesn’t mean we can’t use the new green movement to do good things and make plenty of money!

6 comments April 23rd, 2008

Investment Areas of Interest

Over the next several months I want to start writing a lot more quality information about investing and investments. I haven’t been writing very much lately, and sometimes when I do the content isn’t always very good. So to get myself more focused, I thought I should write down what it is I intend to do so I don’t forget.

I want to start researching stocks. Here are some interesting areas I want to look into.

Solar Power - It’s the energy of the future. It’s where our planet gets all of its energy. Eventually it will overtake oil. Maybe not in my lifetime, but it will happen.
Wind Power - This is another alternative energy play. I don’t think wind will be the ultimate energy source, but I think its use will be increased worldwide and there is money to be made.
Battery Technology- Let’s face it, current battery technology is ancient. We need a new battery that will enable us to use electric vehicles and store energy more efficiently. Maybe nanocapacitators or ultracapacitators will be our answer?
Oil - It’s the energy that the world economies current utilize. There is plenty of money to be made.
Real Estate - Who doesn’t like a good REIT with those nice handsome dividends? Over the long term these can do quite well.
Gold - I still think gold is going to go up because I hate fiat currencies and the diminishing buying power. Bad reasoning, but that’s just the way I feel. Even if gold doesn’t move up, junior explorers can still make money if a big discovery is found.
Silver - Same as gold reasoning above.
Iron - This element is widely used to produce steel. Last time I checked, every building and car uses it and with a growing world population and industrialization of the third world, look for demand to increase.
Technology & Internet - I’m always on the lookout for a good investment in this arena and the industry is only going to grow.
Timber - Why timber? Lots of timber companies have a TON of land and with such bad prices right now, the industry is beat up and perhaps a bargain can be found.
Trains- Why a train company? They also own a ton of real estate, they can be profitable and they compete fairly well. Also, every-time I have to wait 20 minutes for a train to roll on by as it wastes my time, I want to at least think I’m getting paid for my waisted time. (I need to lie to myself to make the wait seem more pleasant.)
India & Brazil - I want to find a few international companies that are based out of these two countries. Why? They both have large populations, they are democratic and experiencing high growth and with all the other investors focusing on China, these two are being forgotten.
Health Care / Nutraceuticals / Supplements - It might be a good time to find a company in this industry as well. It’s only going to grow as the boomer’s get older and sicker.

I prefer micro/small/mid cap companies, but I’m not against investing in large caps. I want to find companies that have revenues, profits, growth and value. I want it all, but I’ll settle for less (like no revenue companies in the junior exploration area) if I think the investment has some good upside potential. I just want to position myself to do well for the big trends over the coming decades.

Although I will do research on many companies, it’s important for me to note that personally I do NOT like to be over-diversified as it makes it IMPOSSIBLE to beat the market averages. If you own too many stocks then you may be statistically tied to the market which makes it extremely difficult to beat it. Personalyl I don’t think I could EVER own more than 20 companies (unless I was a billionaire and wanted to diversify myself to protect my wealth). I’ve always said, diversification is a wealth protectionist strategy not a wealth building strategy. Most billionaires today made their fortune off a single investment. Think about it.

Add comment April 21st, 2008

Nabloid Solar #1 on Marketocracy for 1 Year!

For those of you that don’t know, Marketocracy is basically a website that allows you to run your own mutual fund. You are given $1 million to start with. You are required to follow ALL the diversification laws that the mutual fund industry is subject to and it tracks your performance against the performance of other members. There is even a REAL mutual fund that uses information gathered from the top 100 performing mutual funds. Enough about the site though.

Amazingly, out of 55,000 stock pickers and 65,000 mutual funds, guess who is ranked #1 for the last year? Me. That’s right. Nabloid Solar pulled in an astounding 112.86%. In fact, my solar mutual fund was once MUCH higher (2x what it’s worth now) and so my gain was essentially twice that (but I lost it, so can’t count it) - but at one point I was doing FAR better than I am now. Right now my net asset value is 16.44, but it was almost 25 near the start of the 2008. It’s definitely taken a hit in just a few short months.

What was my method? I wish I could tell you that I’m the best investor out of the bunch, or that I did more research than the rest, or that I actually invested in these companies and made a killing. To tell the truth, I was just using Nabloid Solar to keep track of a basket of stocks that I was interested in. I didn’t time the market and I didn’t pick stocks after an in-depth analysis. I just picked a group of 16 solar stocks that show some promise and decided to sit back and see what happens.

I’m not against investing in oil and gas (I’m actually FOR it), but I do in my heart believe that ultimately (it may take some time!) we will make a switch from oil to solar. It won’t be quick, and it won’t be all at once. I do think we need some better battery technology (perhaps ultracapacitators or nanocapacitators?) so electric vehicles become a true competitor (they do quite well but the range is a bit weak). Don’t get me wrong, there is a TON of money to be made in oil. But I think solar is the future and I have to keep an eye to the future.

So perhaps, since we don’t know what particular stock will soar, investing in a solar ETF is a good idea as this little experiment just showed? I need to do some more research on particular stocks. I see the benefits of ETF’s but I still prefer to weed out the weak stocks and invest directly. To each his own.

Add comment April 17th, 2008

A Contrarian’s View About The USD

I get a lot of emails from various investment newsletters. I recently got one from Investment U that was written by Louis Basenese titled The End Of The Weak Dollar. In his article Louis had 10 reasons why the USD is headed higher, not lower like many people believe. I can’t publish the entire article, but I can summarize his 10 points and then offer my thoughts on each. That is what I intend to do. Before I go on, please realize that either Louis or me can be right, but we won’t both be right. I don’t know what will happen in the future anymore than he does.

1. If not the weak dollar… Louis talks about how China has recently said they wish to diversify away from the USD. His response is that the euro simply doesn’t have enough liquidity to handle that and it would take more than eight years to diversify away. Besides that, he calls the euro experimental. Louis doesn’t think anyone can do anything but complain.

My take: China wishes to diversify away from USD. That doesn’t mean they will not take anymore USD, but it might mean they buy less USD in the future. That is always bad for the supply/demand ratios and it is NOT good news for the USD period. The Euro is NOT an experimental currency - it is a real currency that plenty of people are starting to place faith in. (In my opinion ALL fiat currencies are experimental and will ultimately fail.) In fact, the USD is losing faith of the people as it continues its slide relative to other currencies. In 2002 the USD was worth about $1.60 CND. Now? About ~$1 depending on what day you check. China isn’t limited to just buying USD or Euros… They can buy gold, silver, oil, CND, AUD, etc, etc, etc. There are plenty of asset classes to store wealth, fiat currencies aren’t alone.

2. The Fed… Louis believes the Fed is an ally of the dollar. He says in the short-term the Fed will weaken the dollar, but in the long-term the Fed will be forced to raise rates to deal with inflation and that will strengthen it.

My Take: The Fed is not an ally of the dollar and never has been. It does everything it can to butcher the value through inflation. Yes, raising the rates will deal with inflation to a degree. But it’s hard to deal with inflation by JUST raising the rates when you are also printing large amounts of money that also devalues the currency. If the Fed was so good at making the value of the USD go up then why has inflation continued and why did it only cost my grandpa a nickel for a coca cola? Seems to me the BUYING power of the dollar has been eroded over time.

3. What Goes down… Louis writes about what goes down eventually goes back up and since the dollar is at lows against most other currencies, the dollar is bound to go back up.

My Take: Not everything goes back up. If everything that went down eventually went back up we wouldn’t have to worry about “risk” in the stock market. Just because something went down doesn’t mean it will come back if the fundamental reasons causing it aren’t corrected or changed. Furthermore, much of the “going back up” part is often due to inflation that forces the prices of many asset classes to go up. Sure, if house prices are $100,000 and then fall to $80,000 at which point I decide to buy, in 10 years if house prices return to $100,000, I don’t actually think I made any money - Since it would now cost $100,000 to buy the exact same house. Inflation and buying power and the value of the dollar… stop thinking about the value of the dollar just based on other currencies… Instead think about the value of the dollar based on its actual buying power. It has always gone down. Fiat currencies suck. Louis is just discussing the strength of the USD in relation to the strength of the other fiat currencies, so we’re talking slightly different topics. I’d rather talk about the erosion of our buying power by using fiat currencies…

4. Warren Buffet, Jim Rogers and Bill Gross… Louis claims that these three legends can be wrong about the USD.

My Take: Duh. They aren’t gods. Just because they CAN be wrong doesn’t mean they ARE. Time will tell.

5. Pop Culture… Even in our pop culture there are now examples of people hating the dollar. Since pop culture hates the dollar, it must be near the end of its fall.

My Take: Just because pop culture is now paying attention to the falling dollar doesn’t mean it will now stop falling. The fundamentals will decide…

6. Unsophisticated are Now Speculating… Louis says that unsophisticated people are now better the dollar is going to continue going down because some shop owners are now posting signs about accepting euro’s.

My Take: Perhaps that shop owner used to be an Investment Advisor or run a large hedge fund. Just because shop owners are now speculating doesn’t mean they are wrong or that they are unsophisticated. They could and may very well be wrong, but you can’t tell how sophisticated someone is purely by their current job. Also, they are business owners that specialize in making money and they are currently making some extra money by accepting Euro’s.

7. The Amero… Louis goes on to explain that the Amero is a really bad idea and will NEVER happen because the U.S. will never want to give up control over their macroeconomic situation - besides which, it is nothing but a conspiracy theory.

My Take: The Amero is a really bad idea (I agree!). But, since the U.S. is so much larger than Mexico and Canada combined in both population and economics, the U.S. wouldn’t relinquish control but instead gain control over both Canada and Mexico. The Euro was a different situation since no one country controls a majority, but if the Amero were to occur the U.S. would be the majority and therefore have more power than Canada and Mexico.

The resources that Canada offer would also help bring stability to the currency by taking into account all those assets in the ground (ie, the assets backing the promissory note (which fiat currencies are) would be strengthened). If (a big IF) the USD was to crash or fall significantly, do you not think the U.S. government would try and come out with a new Amero currency? It would be more stable and better compete with the Euro… that said, I think it is such a bad idea for resource rich Canada. We would be giving up control over our fortunes… and yes, we are a VERY rich country. Our oil reserves are now 2nd in the world (and still climbing as we discover more!) and we have plenty of farm land and other natural resources contained within our vast borders. We are currently in SURPLUS territory for our government budgets and our economy is growing rapidly (in the resource sectors - perhaps not the manufacturing sectors - but that is a problem with labour and competing with the wage slaves in China that aren’t paid well.). Let’s hope this Amero never happens and that it is just a stupid conspiracy theory (though I have my doubts about whether its just a theory and that it might be a plan for the future).

8. A Weak Dollar Helps Nobody… Louis says it helps nobody.

My Take: It helps somebody because there are two parties to every transaction and somebody will be the winner and somebody will be the loser.

9. Not Decoupled… The world will feel the U.S. economic woes and will help cushion the dollar.

My Take: Yes, the world will feel any U.S. recession that may occur. That doesn’t stop the USD from going lower… the USD and the U.S. economy aren’t the same thing. The economy could grow jobs and wealth but the Fed could print billions of dollars of currency and have a low interest rate which in essence devalues the dollar. The dollar is just one tool to measure and conduct trade. Also remember that the developing world is growing because they are getting jobs and moving to the city. Even with a U.S. slowdown it’s possible that they will grow simply because they are in the middle up building up their countries with bridges, roads, automobiles, skyscrapers and the other first world luxuries. The U.S. isn’t the only country on earth that buys things from others and it’s percent of power in the world economy is beginning to decline.

10. Stocks love a strong dollar…

My Take: Stocks love inflation so that asset prices go up due to increased profits, even though some of that increase in profits is negligible because after inflation is taken into account that larger profit base still only buys the same amount of goods as the lower profit a year before. Stocks will rise due to inflation and that is one reason fiat currencies are so popular… you can disguise rising asset prices and rising profits and dress it up like its all good news… It’s harder to measure whether your BUYING POWER for the profits went up or not. You HAVE to increase your profits every year due to inflation - and then you’re only even. You have to increase profits QUICKER than inflation or your buying power really didn’t increase even though your stock went higher. Oh, and a weak dollar will help INCREASE profits for all international companies that are based in the U.S. since they will convert those profits from other currencies back to USD’s of which they will be able to buy more which will cause their profits to increase.

In fact, inflation and rising asset prices helps the tax man. Example: Let’s say I buy a stock that only raises its profit at 4% a year (the same as the rate of inflation). In ten years I sell the stock. It’s worth more than I bought it for (the stock also rose 4% per year) because the profits went up (even though the buying power didn’t). The stock is worth more than I paid for it so I now pay taxes on this gain. What a load of shit considering the stock is worth exactly the same amount of buying power it was 10 years ago when I bought it for less. The only difference is the tax man got to steal some of that money.

My Conclusion: Perhaps I’m the true contrarian. I believe that the way we measure strength or weakness within a particular currency is COMPLETELY WRONG! The only measure that matters should be the buying power of a currency. Using that measure, ALL fiat currencies have failed to be “strong”. I realize I’m discussing a slightly different topic than Louis since he is talking about the relative strength of one fiat currency (the USD) versus the strength of others. I just think that is the wrong way to look at a currency and I think it’s funny that our entire culture views strength or weakness of a currency only by comparison of other fiat currencies instead of purely based on the buying power year over year, decade over decade. All fiat currencies are failed. They are a poor store of wealth.

So who is ultimately right? Me or Louis? Well, he might be correct in his notion that the USD will eventually rise in value relative to other fiat currencies, but I KNOW I’m right and that the USD along with other fiat currencies will continue to go down in terms of buying power… in other words, the value of the USD and other currencies WILL go down. PERIOD.

Add comment April 13th, 2008

Why Own A Large Company?

Why does anyone own (or invest in) a company?

Some people start a business to have control over their work schedule or career while others invest in a business to do good things or help a family member out. There are hundreds of answers to the above questions and I don’t intend to go through them all (because I can’t and who cares about all the reasons!?!). We all have our own reasons. As an investor, the only reason I would want to own (or invest in) a company is if it’s able to provide positive returns on my investment or if the business is being used to do good. Nothing new here.

I’ve noticed that many successful private business owners are often looked upon with envy by those who are lower on the financial totem pole. Ordinary citizens look at business owners and assume they aren’t just being paid for their work in the company, but a portion of profits (if its a profitable company) as well. This is often true if its a profitable company that isn’t in its early rapid expansion stages where every dollar of profit gets reinvested.

Now the problem I’ve noticed is that many of those same ordinary citizens have stock portfolios that are invested in large profitable companies that don’t even offer a dividend or else the dividend is extremely small! Many stock investors look at their portfolio’s differently than they look at those who own a private company - but both are investments in corporations. If a profitable mature company isn’t paying a dividend, then the investor must believe the company will continue to grow the intrinsic value of the company quickly by reinvesting the profits for growth. I don’t think I could EVER invest in a large cap company that doens’t provide some dividends to its owners. For a large cap to continue to grow at double digit rates year in and year out, is extremely difficult (at least on a consistent basis). Let’s face it, it’s much easier to grow a $50 to $100 million market cap company at 20% a year for five or ten years than it is for a $200 billion market cap company.

I’m not against investing in a company that doesn’t offer dividends, so long as that company is either undervalued or in a high growth stage. There are different reasons to invest in a company and you MUST know why you invested in a particular company. It amazes me how many people don’t really know why they invested in a particular company. It also amazes me how many investors forget they are partial owners of a company - It’s not just a stock ticker that goes up and down. You are actually buying a portion of a COMPANY.

It seems to me that profitable public companies are treated different than profitable private companies. If you owned a profitable private company, you would almost undoubtedly give yourself some dividends since it’s often a lower tax rate than capital gains and an efficient way to get cash out of a corporation. But some public corporations that are profitable and large do not give out dividends. Another interesting thing to note is the high valuations on many public companies. If you go and look at the valuations for private companies, they are often much lower (hint: Some investors with a few million might be better off looking into investing in private corporations if the valuations are good and a solid management team is in place, though it certainly isn’t for everyone!). Now, there are some benefits of stock ownership in a public company - namely that fact that you can buy and sell whenever you want (you have to love liquidity!) and you don’t have to worry about managing the company (though you better vote and know the management team). But we often pay a premium for this hands-off convenience.

But I’m (as usual) getting off track. Damn my scatter brain. Why invest in a large company on the stock market? If you’re reaching the age of retirement, your investments should have a focus on generating income so you don’t have to start dipping into the value of your portfolio. Not every year will the stock markets or your portfolio go up. Dividends offer some income without forcing you to sell shares of a company. Dividends are often taxed at a lower tax rate than capital gains and is a more efficient way to get cash out of a corporation. If your young your reasons to invest will differ and will be focused on growing the portfolio as rapidly as you safely can. That may sometimes mean investing in high yielding dividend stocks depending on what the opportunities are. Regardless, dividends from a portion of the company profits can play an extremely important role in the long term performance of your portfolio so long as the dividend doesn’t come at the cost of the company’s long term sustainability.

I believe that owners (or investors) of a profitable company are entitled to a percent of profits if it’s a mid to large cap (which doesn’t have the same growth potential as a small cap). That doesn’t mean I want every penny of profit to be paid out in dividends - growth is good, I just like to see management be more efficient and not waste money. If you give management too much money to work with they may get lazy. If that same management team had 10% less money to work with but still needed to reach the same target growth rates in order to receive their despicable and insanely large bonuses, I think they will work their tails off and maybe actually deserve some of their bonuses… Make them earn it.

I like the fact that I can easily tell what my return will be by looking at the dividend yield. There are no guarantee’s that dividend will continue, but there aren’t many guarantee’s in life. But why be an owner of any large company if you aren’t entitled to a percent of the profits through a yearly dividend? For a mid to large cap company, if the management team is worth those big dollars we pay them, they should be able to give us investors a mix of dividends and company growth and anything less just isn’t good enough (especially when you look at their salaries!). So don’t expect less. And remember, in the next twenty years, stocks that offer dividends will probably do MUCH better than stocks that do not due the the large number of people that will be entering retirement and putting their portfolio dollars to work generating dividends.

1 comment April 7th, 2008

Income Investing Will Boom

We all know the baby boomer’s are going to begin entering retirement. While there are many different styles of investing, I believe that when one enters the retirement stage of life, Income Investing is by far the best. Investing in companies and bonds that offer high dividend yields can prevent one from being forced to start living off the capital in the portfolio. Nothing would suck more than outliving your portfolio and winding up a 85+ year old with no money and a big burden to your children or your country.

Finding high dividend yields will probably become increasingly hard. Why? As the boomer’s enter retirement they will most likely start searching for high yielding investments in large numbers so they can afford retirement. As the demand for these high dividend yielding investments increases, so too will the price of those investments, meaning that dividend yields may decrease. There is a wild card… perhaps many CEO’s will realize that investor’s are looking for companies with high dividends and maybe more companies will begin offering dividends so they can lure investment capital. I hope this happens and I’m sure it will to a degree, but I don’t think it will happen in large numbers.

I do like to invest for growth in a companies stock price, but I also want to be paid as an owner. Why should anyone own a company? To make money! Too many public companies fail to issue dividends, instead telling their shareholder’s that they are going to put all that money back to work to grow the company and it’s share price. This probably makes it easier for CEO’s and executives to grow the bottom line and get those big bonuses. But, as an owner, and while I LOVE growth in the stock price, I still want to be paid a portion of earnings. It doesn’t have to be a high portion, but I should be paid something.

There are benefits to increasing the stock price as opposed to issuing dividends. Obviously the company will ultimately be in a better financial position if it isn’t giving away its earnings. It will have more options to grow and compete. Heck, as long as you don’t sell the stock frequently, the paper gains over a period of 10+ years can all grow tax free. Yes, you will pay taxes when you sell the stock at a gain, but as long as you don’t sell it, you pay nothing. Dividends are taxable, but at a lower rate (at least in my country). So while I do like and understand why many companies don’t offer dividends, I still believe a company that is profitable and has a healthy balance sheet should give at least a SMALL dividend.

8 High Yielding U.S. Stocks

Harvest Energy Trust (HTE) 15.20% - Oil & Gas

GSC Investment Corp (GNV) 16.30% - Asset Management

Oceanfreight Inc. (OCNF) 16.20% - Shipping

Penn West Energy Trust (PWE) 15.00% - O