Sal's Corner

Is Big Money Starting to Move?

As I mentioned in my last blog, the dollar seems to be taking a breather, the past few days it has been gaining ground agaisnt other currencies.  Apparently investors think that the Fed is done lowering rates and if nothing else, the next move may be upwards.  This will provide some support for the dollar, in addition, it is believed that the European Central Bank will be lowring rates.  The dollar is oversold and it is expected that it would recover some, the long term trend is a different matter.  As the dollar has been increasing, commodities have gone down to some extent, gold is down, oil is down, and many other commodities have been trading down the last few days.  Another interesting piece that I just read in Barrons is about big money (you know, the institutions with lots of moeny to invest), they seem to be optimistic about the 2nd half of 2008, and the consesus predicts that the stock market will finish up this year, and may even reach the 15000 level by next year. 

When I hear comments like this I pay attention, after all, it is these guys that make or break the market, not people like you and me trading with a few thousand dollars.  This makes me think that betting on the Dow, the S&P, or any other major index may not be a bad idea, recently I started taking a position in IOO which is an ETF  global index that contains the major 100 companies globally, this is a good way to play the market and with les risk.

The soccer season is almost over and I'm ready for it, our team has been doing great this season, we have lost just 1 game.  At the same time my son is trying out this week in a more competitive league and mey be moving next season.

Common Wisdom

There is nothing wrong with common wisdom, many of the things you learn through common wisdon are time tested philosophies that work out.  The problem is when you try to use common wisdom in investing, the fact that is common means that everybody follows it and if everybody knows about it, there is no advantage for you anymore.  This week I started reading a book on this very topic, the title is "The Thre Questions that Count."  It is a thought provoking book, and will make you feel uncomfortable with some of the beliefs you hold dearly in your brain.  But after all, it is by reading and listening to people that think of opposit of the way we do that we grow intellectually.  If you have not read this book, I would recommend you to get your copy, it will be money well spent.

Last week while talking to a friend I learned that he pays about 1.6% of the value in his portfolio for someone to manage the investments and tell hims how to allocate his money, the problem with this is not only that you will start in the hole before you even get to start investing by paying someone to tell you what to do, the second problem is that in addition to what he will be charging you, the investmenst that he recommends (mutaul funds) will charg a comission or expense ratio as well.  The third and final problem, and probably the most grave of them, is that very few people manage to beat the market consistently on a regular basis.  As my friend tells me, he's already lost about 6.2% in this quarter only, not to mention the fees for the advisor and the fees for the funds he's invested in.  My advice to him is to give his advisor the boot and invet the money himself, you do not need to be an expert to do better than most of the self-proclaimed investment gurus.  All you need is discipline and knowing not to mess with your allocations even if you see the market dropping. 

In order to minimize costs, you have to stikc to index funds, indexing is probably the cheapest way to get into the market from the expense ratio point of view, given the fact that they are passive, they can keep expenses to the minimum, but the question still remains, which funds to buy?  I will show a simple portfolio that is relatively conservative for someone in his late 40's to mid 50's.  This is a portfolio I like and involves natural resources, emerging markets, dividend paying stocks, and bonds.

5%     iShares Gold     (IAU)

5%     iShares Pacific ExJapan     (EPP)

10%     iShares Lehman 1-3 yr bond     (SHY)

5%     iShares Select Dividend (DVY)

10%     iShares GS Natural Resource (IGE)

10%     iShares Lehman Aggregate    (AGG)

10%     iShares Europe, Asia, Far East     (EFA)

5%     iShares Emerging Markets    (EEM)

10%     iShares S&P Global     (IOO)

15%     iShares TIPS     (TIP)

5%     Silver ETF     (SLV)

10%     Cash

I use this portfolio for a significant portion of my long term money, it is easy to implement and the only discipline you require is to re balance every year to keep expenses low.  Expenses to buy each fund will run anywhere from $8 to 12 dlls per trade which beats paying someone $1000 every quarter to tell you what to do.

The Real Liquid Gold

You think oil is a hot commodity right now? just wait a few years and you will see about water.  Water will turn out to be real liquid gold.  People in Israel is complaining about Israel exporting tomatoes and watermelons, they say that the water contained in the fruit is worth more than the fruit itself and is leaving the country.  A couple years ago I recommended an ETF that tracks a few water resources companies (PHO).  Back then the fund was trading at $19.00, today it is trading still low at $21.00.  I do believe that water will turn out to be the most valued commodity of this century.  According to experts, one of the problems that could halt China's growth is lack of water, and some say that this is already being felt in the north part of the country.  So if you have some money to invest I would recommend that you look at some of the water resources stocks.  I bought shares a couple months ago in a French water resources company called Veolia Environment (VE), it pays a good dividend and it has a presence in China.
Oil keeps scratching the $100 mark, and according to experts, it is just a matter of time before it reaches and crosses $100/barrel.  It is a wide opinion that we are in for a rough ride, no one anticipated China's and India's energy needs a few years back, now they are siphoning oil at a record pace, this will keep oil prices high for years to come.

The Rule of 72

So what is a good return on your investment? It all depends, it depends on the balance between risk and reward, if you want a high rate of return, you'd better be ready to accept a larger amount of risk.  It has been said that the 91 day T-bill represents a risk free asset, currently that rate is at about 4%.  Said that, if you were to put all of your money in T-bills, you would probably be outpaced by the governments invisible killer (i.e. inflation).  Inflation is an invisible tax that the government puts on you and me.  But back to my original question, what would you consider a good return on your investment?  Well, considering that the stock market has return an average of 8% per year, and ignoring taxes for now, a good return would probably be 9%.  You may also be wondering why my blog is titled "The Rule of 72"?  Here's the deal: if you ever want to figure out how many years it will take for your money to double at a compound interest rate of lets say 9%, all you have to do is divide 72 by the interest rate, in this case it would be 72/9 = 8.  That means that if you do not add any extra money to the original amount, and you let your money compound at 9% per year, in 8 years you will have twice as much as you do now.

Consider something else, from the mutual fund managers, there is a very small percentage that can beat the market over a 10 - 15 yr period, that means that if you could effectively achieve a 9% annual return on your investments, you would be doing better than perhaps 88% of all the fund managers.  So there you have it, today you learned the rule of 72.

Twenty five days and counting, only 25 days and this year is gone, yesterday I was talking with a friend and discussing how I need to re evaluate over the next couple weeks where I want to spend my energies next year, he suggested me to try to come up with 150 goals, when I heard this I went: "A hundred and fifty???"  truth of the matter is that this exercise is designed to think about what one truly wants, once you start writing your goals and you get over the trivial ones such as having a big house, a nice car, a new TV, etc.  You start getting deeper and finding out the true meaning of your life, whether it is to solve world hunger, help people, or simply spend more time with your family, after you get done writing your 150 goals, you may start identifying a common theme and this may help you discover your passion.  If you have never done this, go ahead, I will be doing my goals over the next few days and perhaps I will post them in one of my next blogs.

Happy Holidays!!!

Will the Fed Spook the Markets this Halloween?

Oil is going for more than $90/barrel, gold is trading almost at $800/OZ, yet the Fed is being hard pressed to cut rates this week.  The housing situation is not looking any better than it did a month or 2 ago, and as a matter of fact it seems to be getting worse, so what will the Fed do?  I will not try to to guess, but either way his decision will move the markets.  If he cuts rates inflation fears will be aggravated, the markets will probably like this move and the Dow Jones will keep going up.  If he leaves the interest rates unchanged, the markets will probably won't like it and you can expect some pessimism from investors.  As for me, I keep holding on to my gold and commodity stocks, I have said that if you have the patience and stomach to tolerate the volatility, you will probably do fine in the next few years by investing in commodity stocks.

This weekend I went on a retreat with my family, the weekend was as nice as it could have been, almost picture perfect, we had a nice and relaxing weekend, and now is back to work.  The year is winding down and as such, my work load is increasing as well.  Next week I will be traveling to Salt Lake City for a conference, hopefully I will have some time there to write a little more, there are a couple of books that I have read and I want to share my learnings on those.

Happy Halloween!!

What is Next?

So what is next for the market?  Truth of the matter is that if I knew I would not be here writing this blog, I would probably be with the likes of Warren Buffett.  And let me tell you something else, very few know what is next.  One theory I have heard is that we are in the initial stages of a speculative world wide bull run.  That could be possible, but it may also be possible that we could have a down turn in the next few months, the economy is not in the greatest shape, but investors do not seem to care.  I'm still fully vested in the market, but I keep a close watch.

As far as as gold and other commodities, I have said all along that we are in a secular bull market and tangibles have not peaked or even reached their full potential, but if you want to profit from the trend you'd better be ready to stomach the volatility.

The Magic Formula

I was asked recently if I had followed Joel Greenblat's magic formula to invest in stocks.  The short answer is that I have and I haven't.  I use some of this criteria, but if you want to see it work you have to do it for a number of years.  The truth of the matter is that the best formula is one that you could come up with as long as you stick to it.  Lets say that you decided to buy stocks that start with A every 2nd tuesday of february and sell them 9 months after that.  If you were to do this without paying attention to the every day news, you could beat even the pros.  The truth of the matter is that we are not very good at investing because we are human and as humans we are very irrational.  The people that have managed to stick to a formula for a long time (such as Greenblatt) are the successful ones. 

I'm halfway through the season coaching soccer.  So far we have not done very well, but I have realized that coaching a little league soccer team is more than winning games, is about encouraging the kids and teaching them good values and sportsmanship.  Once I heard that life is a game where it does not matter wheter you win or lose, but the important part is how you played the game.

Happy Times for Gold

Well... What do you know, gold touched today the $703 mark.  It seems like the world is catching up to the fact that the central banks are creating too much money.  Liquidity problems? I don't think so, there is plenty of liquidity, the problem is that people does not want to lend money the way they used to.  Just be patient, gold is a good hedge against bad things happening, and it is certainly showing that more people is buying the precious metal.  After all what is wrong with buying those little golden coins that have outlasted any kind of fiat money. 

This weekend we have our first soccer game of the season, soon I'll be able to find out how the season will turn out although I believe I have an excellent group of kids and more than likely we will do fine.

How about the Market?

During Thursday and Friday we saw the US stock market head south over 500 points.  One thing I have learned is to ignore the experts, the market will do whatever it wants to do, not what the experts think.  Sometimes the experts will be correct, for even a broken watch is correct two times every day.  If I was to guess, I'd say the market will bounce back before it goes down for good.  In the past couple years the market has done this a few times only to correct and go even higher, right now I do not see any ominous signs that the stock market is about to collapse, but then again, in 1987 no one saw the market plunge coming. 

As for me, I consider myself to have a more or less conservative portfolio right no and one that is made up of dividend paying stocks only, I also have some gold and oil stocks, I do not intend to sell, and if nothing else I will wait for this correction or decline to buy more.  In the short term, it does not pay to time the market, in the long term, we know the market moves in long secular cycles and the future does not look very promising for the stock market as a whole.

We are half way through the summer and my kids will be going back to school in 3 or 4 weeks, it has gone by very fast, and we have yet another exciting trip in the works.  I will be taking 2 of my kids to Mexico to visit relatives.  To be honest the place is not the most glamorous, but we have a lot of fun because of family.  Every time we go there we get back more tired that when we leave, with get togethers almost every day, and staying up until late at night, it makes for a tiring week, but one that we are excited about nonetheless.  I will be writing about it some more, and while I'm there I will try to get a real feeling for the economic and political situation in the country.  I have read one or two stories about the drug cartels in Mexico making the situation really bad, and although I will not be reporting from the field, I will try to gage how serious it really is.

Dow 36000, watch out here we come!!!

Today the Dow broke the 13,000 barrier, where does it go from here?  Long term nowhere, short term my guess is that this hype has a little more room to grow.  I cannot help but watch in amazement at how the Dow is being inflated.  Sometimes I think that may be this time is different, but I quickly realize that those famous words have never been true.  What we are seeing may be an effect of the inflation that we are about to go through.  Everything is going up so why not the Dow.  As for me, I'm not buying any more stocks than I already have, right now you should be very cautious.  In the short term, my guess is that may be the market hype will pick up steam as people at bars and social gatherings start talking about the Dow climbing and how well their investments have done recently.  But lets not forget that in the long term, the Dow right now is overvalued and will probably go down.  How fast and how low?  I do not have those answers.  It would not surprise me to see the Dow climb higher, I think 13000 is a significant psychological barrier, and once this has been crossed, the market will keep going up before it comes back down.  If you are thinking about getting into the stock market right now, I would recommend caution.