Since I have a weblog, a trading skunkworks and occasionally work for people in the quantitative finance domain, I’m occasionally asked by friends and acquaintances about investments. “Should I buy gold?” “What do you think of investing in company X?” or my favorite, “where should I put my money?”
The fact of the matter is, I don’t know the answer to these questions, and compared to most people, I probably am an expert on such things. I’d say, in reality, very few people in the world really knows the answers to these questions, and if they know, they’re not going to be telling you. To really understand why, consider what you’re investing in when you buy a stock.
When you buy a unit of stock, you’re buying a legal contract entitling you to part of the profits of a corporation. What is a corporation? It’s a legal arrangement for providing goods and services to the public, and providing some vaguely defined way of sharing the profits with the owners. The owners being, the people who own stock in the company. The owners are protected from legal risk incurred by the actual agents of the corporation. In other words, if a Lockheed executive tries to bribe a congressman and actually gets into trouble for it, the shareholders won’t go to jail. This is socially useful in that the shareholders can’t be expected to be accountable for the tens of thousands of Lockheed employees. While shareholders are protected from legal indemnity, they’re not protected against the financial shenanigans of the agents of the corporation. This is something that people rarely think about: if the corporation they’re invested in is manned by criminals, they probably won’t realize any returns. Even assuming the agents of the corporation are honest, that doesn’t mean they’re not dumb, or at least optimizing a utility which isn’t aligned with that of the owners. For example: many companies will incur massive debts; debts which could eventually bankrupt the company. Accounting systems are also a bone of contention. While most American companies are reasonably honest, the way that the accounting is done is hugely relevant to how a company is valued.
There are a couple of ways ordinary humans think about stocks. They may think the idea behind the company which issued the stock is a good, see a stock going up in price, and so they buy into the trend. They may actually know something about the the company: perhaps they notice lots of other people lining up to pay $4 for a cup of sugary caffeine water at the local coffee house, and so, see it as a good investment. That’s all well and good, but if you don’t know about the company’s plans, the intimate details of it’s accounting methods, and who is running the joint, you really don’t know anything about it. If you’re buying on the trend, well, that can work too, but unless you’re willing to sit around and white knuckle the trend to its ultimate conclusion and time it well enough to sell at the top, you are just gambling. Not that there is anything wrong with that.
My investment advice: invest in the small businessman. I have a minor celebrity pal who did time in Los Angeles. As all Angelinos are required by local statute to have perfect teeth, Veneers are an extremely profitable business. My pal ended up learning all about the various pieces of machinery which can be used to make this sort of thing easier on a dentist, as he had it done to his own choppers, and he ended up investing in individual dentists. He would do stuff like invest in the machinery, invest in young dentists purchases of business partnerships (Dentists usually buy into a practice, in order to have access to equipment and a ready flow of customers) and share in the profits. Since dentistry is a virtually risk free proposition, my pal made a good deal of money off of such investments.
I can see people shifting uneasily in their seats already. How did my pal know these Dentists would pay up? Well, my pal pretty much had to investigate only the individual dentists he invested in. If you’re investing even in one equity, you’re investing in a whole lot of people -people you will never know, who may or may not be honest people who are working in your interest. My pal also had a lot more legal leverage over his investments, as he owned substantial fractions of their enterprise; far more than you’d own in a given equity. In that sense, his risk is a lot lower than someone blindly investing in stock of a company.
Most people never seem to think of this option: investing in small businesses. It does require some social skills and imagination, but it seems to me, for the average joe who doesn’t even understand the rigors of double entry book keeping, let alone the difference between an accrual and an operating cash flow, this is a better bet. Otherwise, you’re just gambling. Investing in the latest trend in the stock market seems the height of folly for the regular schmoe who can’t be bothered to understand even how a very small business works. I guess if you can’t be bothered to invest in a small business, something like public utilities makes a lot more sense than speculating in something you don’t understand.
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Τρίτη 23 Νοεμβρίου 2010
Τετάρτη 22 Σεπτεμβρίου 2010
Forget stocks - Build your nest egg with unconventional investments
By Jeff Reeves - MarketWatch
In the fourth quarter of 2008, U.S. GDP contracted by 6.3% — the worst quarterly drop in over two decades — and by almost 6% again in the first quarter of 2009. Though we certainly have our troubles, there’s not nearly the gloom and doom out there that was persistent on Wall Street back then. The economy is still squeaking out a bit of growth, after all.
But does this mean it’s OK to sound the “all clear” for the stock market? Hardly. The fact is that while the economy is limping along, stocks are at best moving sideways with little appreciation. When you consider that a host of other investments are trouncing equities, it may make sense to sell off all your stocks and move your nest egg elsewhere rather than ride the roller coaster.
Here are seven investments beating stocks right now — and which may continue beating stocks going forward. Some are obvious, and some are a bit out there. But all have the potential to grow your nest egg in uncertain times.
Don’t care for messing with heavy coins? Well even retail investors could have shared in much of this boom. The SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 126.28, +0.07, +0.06%) ETF launched in November 2004, and those first investors in this fund are sitting on a hefty 170% return if they haven’t sold yet. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,739, -21.72, -0.20%) , by comparison, is off slightly in the same period. Read “5 Gold Mutual Funds to Play the Bullion Boom.”
Why? Because if managed properly, a self storage business produces annual returns of 5% to 10% like clockwork. You buy a property, outfit it with locks and collect rent checks — a landlord but without the hassle of fixing sinks and window latches for tenants. To top it off, you may also find some tax advantages to owning your own business and writing off expenses.
There are risks, of course — the least of which include active management to avoid high vacancy rates and prevent losses due to property damage and theft. Also, a self storage business is incredibly illiquid and may be difficult to get out from under when you’re ready to retire.
But done right, all you have to do is deliver the keys and pick up the monthly checks. Not a bad gig, and business is booming as a poor real estate market keeps many families in smaller lodgings without room for all the furnishings from their foreclosed homes.
The specter of deflation is brought up a lot by the bears. If you truly believe in this scenario, then go to cash — because it will “appreciate” just sitting under your mattress. Think of it this way: If prices drop 3% on cars, houses and other goods, you’ve just “made” 3% thanks to your increase in purchasing power. Add a trickle of a few percentage points in a CD and you’re not doing bad. After all, as Pimco icon Bill Gross said in July, “I think most asset classes are attractive but will only provide 4% to 5% returns going forward.” And don’t forget that unlike other investments, there are no fees to pay and you can’t beat the liquidity that cash provides.
Of course if the opposite takes place — inflation instead of deflation — then you’re in trouble. Read “A ‘Sure’ Bet on Interest Rates.”
Cell tower leases are picking up as major carriers like Verizon Communications Inc. /quotes/comstock/13*!vz/quotes/nls/vz (VZ 32.42, +0.04, +0.12%) and AT&T Inc. /quotes/comstock/13*!t/quotes/nls/t (T 28.66, +0.07, +0.25%) fight to upgrade their networks. Owners of well-situated areas can lease land or roof space to wireless companies for fees ranging from a few hundred dollars to a few thousand dollars a month.
Same goes for oil and gas deposits. Depending on the mineral resource, annual rentals can range from a few dozen dollars to hundreds of dollars per acre. And don’t think you need to live in Texas to tap in — rural areas of New York and Pennsylvania are rich with natural gas reserves.
The downside? For one, you have to get used to some new structures on your land. And in the case of resource wells, you’re much better off retaining a lawyer to navigate oil and gas law. But it’s hard to deny the appeal of just sitting there and letting your idle land work for you.
Obviously rates are much lower now, so future returns look anemic for current investors. But if the market moves sideways or dips further, then a 3% return each year may not look too shabby. It’s also worth noting that as recently as July 2007 investors could get as much as 5% yield on 10-year T notes. Smart money was buying bonds before the financial crisis and could reap the rewards.
So is smart money still buying bonds? Well, that is the real question. In May, before the sharp contraction in the markets, investors could have locked in nearly 4%. That may prove to be a good long-term return. But currently rates are south of 3% so the market has to stay very poor for the next decade — and rates equally weak — for such a move to be profitable. Read “What Investors Need to Know About a Bond Bubble.”
The first issues came out in April 2009 right after the market lows, and obviously didn’t keep pace with Wall Street’s surge in the spring and summer of that year. But over the long term they may prove wise investments, Some of the first BAB issues included a $250 million bond issue for the University of Virginia, with a 30-year maturity, a glowing triple-A grade from all three major rating agencies and a plump yield of 6.22%. Not bad, but the market’s roughly 30% gain since April of last year outpaces that and it would take a steep decline to bring the two to parity.
But looking forward, Build America Bonds have been doing very well lately as the market has hit a wall. They yield more than the 10-year Treasurys and there’s less fear of a default since the loans are in fact backed by Uncle Sam and the stimulus cash. For instance, just last week the North Carolina Eastern Municipal Power Agency priced $182 in 2021 debt at a 3.29% yield. That’s over half a percentage point better than 10-year T notes.
And if you’re not up for buying the bonds themselves and want more liquidity, consider the PowerShares Build America Bond ETF /quotes/comstock/13*!bab/quotes/nls/bab (BAB 26.62, +0.02, +0.08%) . The fund is up 8% this year, compared with a slight decline for the broader market.
Annual returns of 6% to 8% are possible according to industry experts — and best of all, in urban areas the land can be very profitable development real estate down the road (presuming an economic recovery, of course). An added plus is that owners can raise rates easily so there’s no fear of inflation and the ability to adjust quickly to keep business profitable.
Then again, the risks should be obvious to anyone who has walked away from an ill-lit parking lot entrusting their vehicle to an “attendant” texting his friends as he watches a portable TV instead of the cars. Skimming off the top of an all-cash business is easy for untrustworthy employees, and potential liabilities for damaged Jaguars and Cadillacs abound. But if managed right, the steady cash from a parking lot can keep you smiling and return more than your brokerage account in the years to come.
marketwatch.com
In the fourth quarter of 2008, U.S. GDP contracted by 6.3% — the worst quarterly drop in over two decades — and by almost 6% again in the first quarter of 2009. Though we certainly have our troubles, there’s not nearly the gloom and doom out there that was persistent on Wall Street back then. The economy is still squeaking out a bit of growth, after all.
But does this mean it’s OK to sound the “all clear” for the stock market? Hardly. The fact is that while the economy is limping along, stocks are at best moving sideways with little appreciation. When you consider that a host of other investments are trouncing equities, it may make sense to sell off all your stocks and move your nest egg elsewhere rather than ride the roller coaster.
Here are seven investments beating stocks right now — and which may continue beating stocks going forward. Some are obvious, and some are a bit out there. But all have the potential to grow your nest egg in uncertain times.
Investment 1: Gold
Gold bugs can get a bad rap because a handful wacky of gold investors really are convinced the U.S. dollar will disappear as a solvent currency and that we’ll all go back to bartering sheep.But it’s hard to knock gold’s performance, either in the last year or the last 10 years. The yellow stuff is up about 25% in the previous 12 months — compared to less than 10% for the broader stock market. And gold prices were around a measly $300 an ounce a decade ago — a quarter of current valuations — whereas the stock market has actually seen a small loss during that time.Don’t care for messing with heavy coins? Well even retail investors could have shared in much of this boom. The SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 126.28, +0.07, +0.06%) ETF launched in November 2004, and those first investors in this fund are sitting on a hefty 170% return if they haven’t sold yet. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,739, -21.72, -0.20%) , by comparison, is off slightly in the same period. Read “5 Gold Mutual Funds to Play the Bullion Boom.”
Investment 2: A self-storage business
There is always a bull market somewhere — and if you haven’t heard of the self-storage boom, it may be because the smart money is beating you to it. A recent Wall Street Journal article quoted the chief executive of a California self storage company now getting calls from institutional investors such as the State of Michigan Retirement System and Goldman Sachs.Why? Because if managed properly, a self storage business produces annual returns of 5% to 10% like clockwork. You buy a property, outfit it with locks and collect rent checks — a landlord but without the hassle of fixing sinks and window latches for tenants. To top it off, you may also find some tax advantages to owning your own business and writing off expenses.
There are risks, of course — the least of which include active management to avoid high vacancy rates and prevent losses due to property damage and theft. Also, a self storage business is incredibly illiquid and may be difficult to get out from under when you’re ready to retire.
But done right, all you have to do is deliver the keys and pick up the monthly checks. Not a bad gig, and business is booming as a poor real estate market keeps many families in smaller lodgings without room for all the furnishings from their foreclosed homes.
Investment 3: Cash
You knew this was coming, so I’ll be brief. The stock market is flat year-to-date, the five-year return for the S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,134, -5.51, -0.48%) is down nearly 10%, and the 10-year return is down 27%. That in itself is enough to entice investors to move their cash from a brokerage account to their bank account. But here is a more compelling argument with an eye to the future:The specter of deflation is brought up a lot by the bears. If you truly believe in this scenario, then go to cash — because it will “appreciate” just sitting under your mattress. Think of it this way: If prices drop 3% on cars, houses and other goods, you’ve just “made” 3% thanks to your increase in purchasing power. Add a trickle of a few percentage points in a CD and you’re not doing bad. After all, as Pimco icon Bill Gross said in July, “I think most asset classes are attractive but will only provide 4% to 5% returns going forward.” And don’t forget that unlike other investments, there are no fees to pay and you can’t beat the liquidity that cash provides.
Of course if the opposite takes place — inflation instead of deflation — then you’re in trouble. Read “A ‘Sure’ Bet on Interest Rates.”
Investment 4: Lease your land
Real estate prices are soft, so selling extra acreage now may not be wise. But if you live near an area of spotty cellular coverage or your family plot is located above a natural gas field, then you can put the land to work for you instead.Cell tower leases are picking up as major carriers like Verizon Communications Inc. /quotes/comstock/13*!vz/quotes/nls/vz (VZ 32.42, +0.04, +0.12%) and AT&T Inc. /quotes/comstock/13*!t/quotes/nls/t (T 28.66, +0.07, +0.25%) fight to upgrade their networks. Owners of well-situated areas can lease land or roof space to wireless companies for fees ranging from a few hundred dollars to a few thousand dollars a month.
Same goes for oil and gas deposits. Depending on the mineral resource, annual rentals can range from a few dozen dollars to hundreds of dollars per acre. And don’t think you need to live in Texas to tap in — rural areas of New York and Pennsylvania are rich with natural gas reserves.
The downside? For one, you have to get used to some new structures on your land. And in the case of resource wells, you’re much better off retaining a lawyer to navigate oil and gas law. But it’s hard to deny the appeal of just sitting there and letting your idle land work for you.
Investment 5: 10-year T notes
Those wise investors who jumped into Treasury notes with a 10-year maturity a decade ago have done very well. Interest rates in September 2000 were around 5.5%. The Dow Jones, on the other hand, is off 7% as of this writing, the S&P 500 has given up 26% and the Nasdaq /quotes/comstock/10y!i:comp (COMP 2,335, -14.80, -0.63%) is down 43% thanks to the tech bubble’s burst. Ouch.Obviously rates are much lower now, so future returns look anemic for current investors. But if the market moves sideways or dips further, then a 3% return each year may not look too shabby. It’s also worth noting that as recently as July 2007 investors could get as much as 5% yield on 10-year T notes. Smart money was buying bonds before the financial crisis and could reap the rewards.
So is smart money still buying bonds? Well, that is the real question. In May, before the sharp contraction in the markets, investors could have locked in nearly 4%. That may prove to be a good long-term return. But currently rates are south of 3% so the market has to stay very poor for the next decade — and rates equally weak — for such a move to be profitable. Read “What Investors Need to Know About a Bond Bubble.”
Investment 6: Build America Bonds
The Economic Recovery and Reinvestment Act — known colloquially as “The Stimulus” — created Build America Bonds. The goal was to reduce municipal bond borrowing costs via a federal subsidy.The first issues came out in April 2009 right after the market lows, and obviously didn’t keep pace with Wall Street’s surge in the spring and summer of that year. But over the long term they may prove wise investments, Some of the first BAB issues included a $250 million bond issue for the University of Virginia, with a 30-year maturity, a glowing triple-A grade from all three major rating agencies and a plump yield of 6.22%. Not bad, but the market’s roughly 30% gain since April of last year outpaces that and it would take a steep decline to bring the two to parity.
But looking forward, Build America Bonds have been doing very well lately as the market has hit a wall. They yield more than the 10-year Treasurys and there’s less fear of a default since the loans are in fact backed by Uncle Sam and the stimulus cash. For instance, just last week the North Carolina Eastern Municipal Power Agency priced $182 in 2021 debt at a 3.29% yield. That’s over half a percentage point better than 10-year T notes.
And if you’re not up for buying the bonds themselves and want more liquidity, consider the PowerShares Build America Bond ETF /quotes/comstock/13*!bab/quotes/nls/bab (BAB 26.62, +0.02, +0.08%) . The fund is up 8% this year, compared with a slight decline for the broader market.
Investment 7: Parking lots
Akin to self storage, parking lot ownership can be very profitable if you have good management skills. You just buy a big hunk of asphalt with a shack and some meters on it, and collect the daily and monthly dues. In fact, most urban areas that have need for parking lots also boast parking lot service firms so you don’t ever have to lift a finger.Annual returns of 6% to 8% are possible according to industry experts — and best of all, in urban areas the land can be very profitable development real estate down the road (presuming an economic recovery, of course). An added plus is that owners can raise rates easily so there’s no fear of inflation and the ability to adjust quickly to keep business profitable.
Then again, the risks should be obvious to anyone who has walked away from an ill-lit parking lot entrusting their vehicle to an “attendant” texting his friends as he watches a portable TV instead of the cars. Skimming off the top of an all-cash business is easy for untrustworthy employees, and potential liabilities for damaged Jaguars and Cadillacs abound. But if managed right, the steady cash from a parking lot can keep you smiling and return more than your brokerage account in the years to come.
Jeff Reeves is editor of InvestorPlace.com
marketwatch.com
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