Investment Challenges

One Black Eye Too Many?

Today I would like to discuss some CIT (Contender Investment Themes) and challenges faced today. Investing at the time of writing is a mine field. We are in one of the most volatile financial periods in recent years. An economic crisis is ongoing in the western world while concerns about sustainable growth in emerging markets are frequent in the financial press.

Managing Inflation

Inflation is most often described as prices are going up because materials and labor etc are getting more expensive.... Really as I see it this is a fallacy - money is actually loosing its purchasing power as there is more of it.

Like everything in life we have supply and demand balances. The more abundant something is the less it is worth to the consumer. The same is true of the current version of "money" we have in the world. We are creating vast amounts of money - mainly electronically. The more there is, the value of each unit decreases over time. In the UK I have seen the cost of a loaf of bread increase by 2.5 times over 20 years but if anything we have more global grain supply now.

Inflation is a real concern in the MIT list. It affects our investment choices, pension allocation and impacts our ability to build and protect our savings. Inflation is like a stealth tax - legal theft.

It is of utmost importance to plan for a significant rate of inflation and make sure you have assets that compensate for any increase in prices \ decrease in the value of the fiat currency in the future. Examples of investments that could grow at the same rate if not faster than inflation:

1. Companies with strong brands, advanced distribution and manufacturing networks \ economies of scale can raise prices in line or above inflation (such as consumer goods companies)
2. Energy and raw material producers
3. Stable currencies and precious metals (scarcity value)
4. Agriculture (we are not creating any more land on the planet)

A note on CASH and GOVERNMENT BONDS. Cash and bonds are deemed safe investments. Bonds will pay some interest and you can buy inflation protected products. In MIT I consider these investments \ savings as dry powder for opportunities when there is "blood on the canvass":

"I am not so much concerned with the return on capital as I am with the return of capital." - Will Rodgers

 

Ethics

A challenge to MIT is that we are trying to be ethical investors. From experience THE.CONTENDER has lost significant sums with several ethical investments and companies.

Investing in the latest green technology without it being widely used or if it receives a high subsidy is too risky for me. I have invested in solar and bio diesel companies in the past both investments were poor. Technology was new and unproven. I prefer to invest in the utility company themselves and you can choose companies that are actively perusing a green policy. Sustainable woodland could be considered another ethical business providing it is not at the cost to the indigenous species.

Another way of being ethical is avoiding what I consider unethical practices. For example avoid the tobacco industry as I have seen the affects of this at first hand. Buy as much locally sourced in season produce as possible to reduce our carbon footprint.

So my point here is that you can be ethical in your day to day consumption of goods and services. From an investment standpoint there are some safe ethical plays. Do not get drawn into a sales job on the latest free energy promise until it is proven (yes I did consider buying in algae fuel, Thorium, Super heated Salt Sun Farms,...).

Growth Stocks 

Get quick rich by choosing a huge growth stock. I have read about many an investor that has done this. What you don't get to hear is the other 99% who loose money. My definition of a growth stock is one that is exposed to emerging markets or global trends but is a good size profitable company that ideally pays a dividend.

Emerging countries want to improve the basics first. China and India have huge infrastructure projects all of which need to be maintained. With the population getting access to electricity on a large scale they will want a fridge and air conditioning. Currently they have limited healthcare this will grow. So companies that either provide the raw materials or the energy (oil, or the utility company) are probably a better entry point to the market that trying to choose a fridge manufacturer.

Technology stocks fall into my growth category. I however struggle to invest in this area as the barriers to entry can be quite low. The hottest website one year could come under huge pressure the next by the new upstart with a better or cooler idea. Yes if you are looking for the quick rich stock this is as good as any a point to start along with the junior mining industry but you need professional advice on what to choose and be prepared to take huge losses on individual companies who don't make it. Beware says the THE.CONTENDER who has been there and done that.

Income Stocks and Dividend re-investing 

 

A good starting point for dividend stocks are the following

1. Free website Top Yields run out of the Netherlands.
2. "The Dividend Letter" for UK stocks by Stephen Bland. Fee paying newsletter
3. "Dividend Opportunities" - Carla Pasternak's High-Yield Portfolio. Again there is a fee to pay, but again there not such thing as a free lunch
4. Free Ft stock screen

In these unsure times I like to invest in big companies that have had stable dividends for years. My preference is Energy and Utilities as well as pharmaceuticals and consumer goods. Once you have your choice of stocks you can either choose a high yield fund to invest in (remember you are paying a management fee) or individual stocks which you will need to diversify yourself.

My preference is for individual companies to cut out the management fees but I bear the risk of a company running into difficulty.

Many brokerage accounts offer automatic dividend re-investment for a small fee generally far below their usual rates. Once a dividend is paid it is automatically used to buy shares of the same company.

Here is what we do which is slightly different.

1. When a dividend is paid we take the cash.
2. We choose the next closest dividend stock date from our portfolio
3. Buy those shares, and again and again.

The reason for doing this is a lot of shares in Europe pay annually, bi-annually or quarterly. Monthly is very uncommon. So if you get a dividend from a company you may have to wait a whole year for another one.

By choosing your next choice for the closest dividend you can get dividends coming in faster. A word of caution here is that the stock price generally goes up before the dividend and down after it is paid so be very choosy on the next stock you buy. This is much easier when you consider a stock that pays annually of bi-annually due to the large wait between dividends.

Other investments

Other investments not currently in the CIT and for discussion another day. Mrs C loves art and wants to grow crops on farm land.

1. Buy to let property
2. REIT's (real estate investment trust)
3. Farm land
4. Lending clubs
5. Private Equity
6. Collectables
7. Micro-credit

Risk

As of writing this post in Aug 2012 we have a huge debt problem across the western world. This could result in the extreme deflationary depression of high if not hyper inflation. These are real risks as the world is run on paper money and has no real commodity grounding to the "money". Central banks can create as much paper money as possible "at very little cost" and to the flip side derivatives, CDS's, CDO's etc are all electronic digits on a computer.

As a result we avoid highly indebted companies or securities related to debt. We look for companies that have real assets that people really need. We also look to diversify sovereign risk by investing in perceived safer countries.

Like everything in life there is risk so we take it seriously and consider possible consequences of world events on our investment decisions. We believe the system is due a re-set and will do our best to manage the risk. Diversification and modern portfolio is great providing the system is stable but "Black Swans" do come along like the 2007 crash and you need to have some protection against them. (Black swan is a term coined by Nassim Nicholas Taleb).

Wrap up

I have covered some of the key MIT, i.e. my approach to investing. Large companies that have been around for a long time, monopolistic utility firms, varied cash and precious metals, energy firms and some emerging market funds. It has worked so far - will it have to change in the future - for sure.

Good luck avoiding those black eyes!

THE CONTENDER

 NEXT UP MORTGAGE VERSUS RENTAL DEBATE AND SPREADSHEET

Welcome New Contender Readers! Take a look around. Start at the first article, browse the all posts or just go for a Random Post

Keep in Touch:  RSS Feed, follow our Tribe on Twitter or subscribe to posts by email: