XIPWIRE is Live!

Not a typical post for this site, but I am so excited about our new business; XIPWIRE.

Please come check out the new way to send money.

XIPWIRE

Thanks,
Joe

A Question for our readers...

The Income Investor wants to know if you buy and store gold... Gold does not generate income but it can satisfy that first rule of investing, don't lose money. With our government printing money like it's free, gold becomes an attractive store of value.

We'd love to hear from you in the comments.

ETF’s – If it looks like a duck…

A good friend sent in the following comment and questions. I am copying them here with the attribution of his initials in deference to his right for privacy. If you email your comments instead of linking them here, please let me know if you would like recognition or some form of privacy. Also, let me know if you would like a link to your website included.

“I am in total agreement with the long-term approach and believe it is necessary to identify the industries and sectors positioned to dominate the economic landscape for the next decade. The obvious question being which sectors are these? How long do you think the finite resources game will last? Is a good idea to set up a portfolio which is long oil, natural gas and other commodities at the same time it is long alternative energies, biotech and environmental awareness. How about water as the next scarce resource?” – CK

By far the easiest way to capture industries and sectors in your portfolio is to purchase large blocks of ETF’s (Exchange Traded Funds). As “C.K.” indicates, buying these industries/ sectors and holding them as they dominate economic activity is a way to benefit from obvious macro trends.

An exchange-traded fund is usually an open-ended mutual fund that trades intra-day on the exchange (like a stock) for retail investors (us), but allows large institutional investors to purchase large blocks of new shares for cash. This greatly decreases the cost of the fund by reducing customer interaction, limiting the amount of cash it needs to retain for share redemptions, etc.

The method by which the price of ETF’s are kept in line with their underlying NAV (Net asset value) is so cool that it will be a math problem for my seniors this coming school year. Anyway, the arbitrage process of the institutional investors does keep the price of an ETF very close to the price of it’s underlying investments.

An Example:
You believe the June 13th issue of the Economist (page 101) that “if the world continues to produce oil at the same rate as last year, global oil supplies will last another 42 years… US oil reserves will last 12.4 years…” Therefore you expect oil prices to rise relative to the dollar for the next twenty years. During that same time you expect people to begin to diversify their energy supplies and wish to profit from oil price appreciation as well as alternative energy capital allocation.

Solution:
Buy a block of VDE (Vanguard Energy ETF) http://www.vanguard.com/us/FundsSnapshot?FundId=0951&FundIntExt=INT&Source=JMPE&Select=PEVDE

This ETF captures a beautiful cross-section of the energy sector. That means you would “own” shares of some of the most profitable companies in a very profitable sector during a time when their product (energy) increases in price relative to other goods.


Now to “C.K.’s” big question, “How about water as the next scarce resource?”

Here I am a little reluctant to recommend VPU (Vanguard Utilities ETF) as I think it is under-represented in water but it is a nice way to profit from regulated markets. Utilities are often regulated monopolies with terrific pricing power and consistent returns.


So, it sounds great. Why not just build a portfolio of ETF’s and risk-free return assets and then balance as time goes forward? Well, for many investors this would be a reasonable approach. ETF’s are cheaper than most mutual funds (no 12b-1 fees) to own and have lower tax consequences (managers don’t have to redeem shares to let investors out of the fund).

However, they are still tennis rackets when we want fly swatters. ETF’s are massive funds purchasing large blocks of diverse holdings in a given industry, sector, or asset class (for example treasuries). That means they are pouring money into companies that may be over-paying management, chasing short-term results, or generally mismanaging their capital. As an ETF owner you don’t have discretion over which energy company you are buying, when you buy the sector expect to see Exxon (good) and Duke (not so good) both in the mix.

What does that mean? Basically, by buying ETF’s you are making broad bets about macro economic trends and hoping that the individual companies (or governments) are wisely using their capital. If instead you want to look for a margin of safety, buying shares of great companies at good prices that may be currently over-looked, then you still need to do some homework and buy selectively.

What will win out in the long run? I don’t know, but giving everyone in the class the same grade (capital) just because I think the whole class will do well this year seems like a bad policy for teaching and probably a bad way to invest your hard-earned money.


Remember, investing is a highly moral activity, whereby you delay gratification today (saving versus consumption) in return for more authority (capital) for choices in the future. You must decide whom to trust with your savings. You must decide if they are using your money wisely.

Next time, Bonds versus Stocks, have we been sold a bill of goods?

30 Year Bond offering stronger than expected...

"I feel a great disturbance in the Force, as if millions of voices suddenly cried out in terror, and were suddenly silenced."
―Obi-Wan

At 1:30 PM today I saved a fortune. How?? Well, this morning I did not buy TBT (Ultra Short 20+ Year Treasury ProShares). You may be thinking to yourself, "Well, why would you? You are an income investor not a day trader." You would be exactly correct. But, like all people I am not entirely rational and can be tempted to play the market when I think that I "know" something.

The US Government has been on a spending spree and investors are getting nervous about inflation. So nervous in fact that they recently demanded a higher yield on the 10 year treasuries issued earlier this week. The reasoning is obvious, if investors are worried about inflation and demand a higher return on the 10 year, then the auction today on the 30 year should be even worse and require a higher than expected yield...

The Exchange Traded Fund (ETF) I named above, TBT, is set up to return the inverse of treasuries. Treasuries go up (meaning their yield goes down) and TBT goes down. If treasuries go down (yield goes up) then TBT stands to see a substantial gain. So, late last night (using a limit order) or early this morning (at the open of the market) I could have placed a short term bet that the treasury auction today at 1:30 went badly by buying shares of TBT. Had I decided to use my margin account the bet could have been substantial and the subsequent good auction resulted a gloomy afternoon. (It did for some people in my Investment Management course which is the inspiration for the Jedi quote above.)

Instead reason prevailed. I reminded myself about who we are here, Income Investors, and stayed the course. Now I am watching as TBT drops and the dividends from KO (Coca-cola), LRY (Liberty Property Trust), ED (Con-Edison) etc. keep rolling in.

I can wait for their slow capital appreciation.

The goal here is not to get rich quick. The goal is to preserve and grow the capital that provides an income for your family.

Feel free to drop me a question...

Questions - Screening for Stocks

Friends,

I've been receiving quite a few questions regarding income producing stocks. For some time now I've been recommending DRIPs, Dividend Reinvestment Plans. They are a powerful savings tool and often provide a way for small investors to capture good companies at reasonable prices. I've discussed them in detail before, so I'll skip the lecture and just answer any questions you have on DRIP's by email. However, I will say that my position is shifting. Based on changes in fee structures, I do not think that DRIP's are as strong an option as they were even a year or two ago.

So, instead I am using a service called ShareBuilder (a subsidiary of ING) to purchase companies I plan to hold for the long term. I have the dividends put into an attached money market account. So far, I like their service and pricing.

But, how do I find good stocks like PCU, LRY, etc. before they appreciate and make the news?
I use a stock screener. Here is a link to Yahoo Finance/ Stock Screener Stock Screener. This is a nice starting point for looking for investments. I am only interested in low cost (low P/E), high yield (dividend / share price) stocks with excellent balance sheets. YOU CAN NOT PICK GUARANTEED WINNERS. All that you can do is tilt the odds in your favor. A company's expected future earnings are usually priced in to the current share price by the market. I have found that economic strength in the present is undervalued. So, I buy strength at a value price and wait for the dividends to come in and the price to go up. On any individual stock I might get unlucky, but at least the odds are in my favor.

Enjoy,
Joe

PS I recently acquired more LRY Liberty Property Trust. They had a P/E under 15 and a yield above 8%. Their balance sheet is strong, so it was an easy buy.

What am I buying?

The market is getting hit. That is bad news if you've been waiting to sell your positions all at once, but it's great news if you are still buying for income. I continue to look for value priced companies with strong dividend records. The goal is to generate a significant portion of our annual income from our dividend stream.

If I were a betting man I'd expect the market to end up about 100 points today...

(If I were a betting man)

Questions

Friends,

Over the holidays I began receiving quite a few questions about investing. I sat down with one family to talk about retirement, investing for income, downsizing, etc. It was a wonderful visit and conversation and I enjoyed the time immensely. It occurs to me that many readers of this column might have similar questions.

It would be time and cost prohibitive for me to sit and visit with even a plurality of our readers. I can however offer to answer question posted or sent to me. By posting my answers here and keeping your identity anonymous we can all benefit from the valuable comments left by other readers of this blog.

Sincerely,
Joseph Sweeney