How to Apportion a Larger Portfolio

My brother called a couple of days ago. His wife has $100,000 to invest and he wanted to know where I thought I should put it. I’ve made recommendations in the past and they’ve always made money; which I feel puts a bit of pressure on me because each time I feel I’ve got to live up to my own record.

It’s also tough because the investment market is so screwed up with the recent actions of the Federal Reserve. In the 1800s, investing was pretty simple, you just put your money in bonds and forgot about it. Since consumer prices went down for most of the 1800s (with the notable exception being the war-time inflation of the Greenback fueled Civil War) the return you received on bonds would be in addition to the additional purchasing power the money itself possessed. Few people invested in the stock market in those days; it was seen as a shady place where individuals like Jay Gould, Cornelius Vanderbilt, and Nathan Rothschild could use their deep pockets and insider information to force a stock price to be whatever suited them at the time. A stock exchange was more casino than sober investment house. Bonds were where the common man should put his money.

Of course, the advent of the Federal Reserve changed all that. Continue reading How to Apportion a Larger Portfolio

Gold Breaks the $1300 Mark

Well the COMEX price of gold per ounce has been flirting with $1300 for almost the whole month now. Today it finally crossed over. The greatly boosted the price of my Barrick Gold stock (ticker symbol ABX). Gold stocks have strangely not done quite as well over the same 30 day period. Market pundits would say that this reflects market sentiment that Gold is going to fall back once it hits the $1300 mark. So people bought gold stocks in anticipation of gold hitting $1300 and sold them off as the price of gold got closer- a classic case of buy the rumor, sell the news.

From my experience watching this market, gold will in all likelihood retreat from it’s new high, but I’m thinking it’s new high might be a bit higher than $1300. $1325 to $1350 seems like where it might stop and fall back. Of course, when that happens, people will say that gold is finally starting to collapse and return to where it was ten years ago. These people will be proven wrong when gold hits yet another high another six months down the road. Gold is in a long term bull market and will continue to be for some time. It’s hard to say when, but I don’t see the price of gold coming down anytime soon with the US government running trillion dollar a year deficits and the Federal Reserve undertaking quantitative easing (AKA printing money) in order to stimulate the economy.

Taking Stock of the Stock Market

With the major indexes down so this year, it seems a good time to talk about the stock market. I’ve mentioned previously, that I do expect there to be a major stock market decline this year. My predictions doing pretty good so far, but it’s still early in the game.

The question in raised then, where is a good place to put your money. I’ve long been a fan of Barrick, but today it’s trading in the $35 range which I consider an absolute screaming by for this stock. How much of a buy you ask? Well, let’s just say that my brother (who’s profited from my stock advice in prior years) and I are taking investing in some call options on the stock. To best explain why, let’s look at a chart of Barrick versus the price of gold.

See how the share price of Barrick gold has been sharply declining despite the continued strength in the price of gold? Continue reading Taking Stock of the Stock Market

Reviewing my Predictions from Last Year

So here it is, another year. “Another year over, and a new one just begun,” as John Lennon said before Yoko added her cacophonic voice. I just it’s time to look over last year and see look at some of the predictions I made. Specifically at the start of the year and in May, I said:

  • That we would see the end of all of this deflation talk. In terms of the major media, we more or less have. It don’t see anyone talking about deflation in the mainstream media today, but I expect that to change. I think we’ll see a resurgence of deflationary talk as the stock market loses ground. Deflationary talk seems to follow stock market collapses the way flies swarm to carrion, and this stock market seems prone for another leg down. When it does, get ready for more talk of deflation.
  • I also said that long-term government bonds were not a good place to park your money last year. Well, let’s look at the benchmark of Hoisington Long Term US Treasury fund. It opened last year at around $19.50 and went straight down the whole year to end at around $14. OUCH. Of course, this hasn’t stopped Dr. Lacy Hunt from yammering about what a great investment government bonds are, but it’s not everyday you can lose a third of your investment on government bonds. Way to go, Van Hoisongton investors.
  • I said that Barrick Gold was a good place to put your money, and I made a good a good 30% or so off of trading that stock on the way up. Look ma, no doctorate in Ecnomics!

Well, I’m feeling pretty smug about last year. As for this year, I’m thinking Barrick should hit $50 a share or so on the next 90 days, which will make me a fair amount of money. I’m also thinking that we’ll see another significant stock market decline, so hold onto your hats stock investors. This years going to be really hairy.

Hats off to Barrick

I don’t believe in the health of the stock market at large. It has further to fall in my opinion. Nationally it seems we are being feed the idea that the worst is behind us in terms of this financial crisis, and that reassuring message seems to have gotten people back into the stock market. It’s a classic suckers rally that is only going to end badly for investors. Paradoxically, the modern investment mantra of “stocks for the long haul” and using diversity as a means of protection is just going to guarantee that the average investor will feel the full weight of this next leg downward. Gold, on the other hand, has a bright future.

I’ve made a great deal of money trading shares of Barrick Gold (ticker symbol ABX) over the past twelve months. It’s a company I follow quite closely. I feel its one of the few great investments available in the stock market as it allows for you to gain leveraged exposure to the rising gold price while at the same time holding a stock that is paying you dividends. While the oblivious investors of the world are foolishly plowing their money into stock market index funds without the slightest clue as to the fundamentals of their underlying investment, I believe, as Henry Ford did (and Warren Buffet does) that its perfectly alright to put all your eggs in one basket provided that you “watch that basket.” Barrick is my egg basket and I watch it quite closely.

Earlier in the year, I took apart their financial projections and put it into an Excel spreadsheet. My own estimate as to what the company would earn was Continue reading Hats off to Barrick

Checking My Scorecard

Every now and then, I make predictions in this blog. Today seemed as good a day as any to take a look at my prior predictions and see how they faired. As a life long Cassandra, I can’t really say that I hate to say I told you so. Honestly, I love saying I told you so.

Specifically, I told you:

  • In November I told my readers that the bonds of Genworth Financial seemed like a good buy. I took my own advice and bought some. They paid over the weekend, realizing me an annualized 20% or so.
  • In January, and many times since, I have repeatedly warned that Dr. Lacy Hunt’s advice to plow money into long term US Treasury obligations was a recipe for disaster. So far this year, the 30-year US Treasury bond is down 20.9%. Ouch!
  • That Barrick Gold was a screaming buy in October of 2008. I loaded up on Barrick at $20.85 a share in November. Last week I sold my Barrick stock for $35.50 a share and took the money and put it straight into GLD. Extra credit: Since that date, GLD (gold bullion) has appreciated and ABX has fallen. Sometimes I just get lucky!
    • That we had witnessed the end of deflation and that this year would see the start of a rampant inflation that would last for years.

    Now, for the longterm prediction that’s the real clincher. Continue reading Checking My Scorecard

Barrick v. Bullion

I sold off all of my Barrick shares today. I got a price of $35.50, which is far above the $20 and change that I bought them for. They have served me well. Given how passionate I am about gold investing, some readers may take this as a bit of a surprise. It’s not that I don’t expect the price of Barrick shares to rise longterm, because I do. I expect that all of the money bring forced into the system by its would-be saviors, the Federal Government and the Fed, are going to cause run away inflation that will force the price of many things higher, particularly gold shares.

However, since this inflationary scenario has not yet unfolded, I have to make the most profitable decision I can given the information I have at hand. Currently, analysts expect Barrick to be $1.75 a share for 2009 and $1.80 a share for 2010. With the company trading at $35.50, that works out to a Price-to-Earnings ratio of 20 or so. That’s a PE ratio that’s not as bad as the stock market at large (the Dow Jones Industrials are currently trading at a PE of 43.1 and the S&P at a PE of 62!) Of course, for Barrick, a lot is going to depend on the price of gold itself. Today, gold closed at $925 an ounce. Continue reading Barrick v. Bullion

Gold Mining or Gold Bullion for 2009?

Given the massive amount of money being pumped into the global economic system, higher prices down the road are a given. It’s possible that prices may fall in the short term, but no currency can withstand a determined onslaught by its own central bank and national government for long. I consider gold a no brainer in this environment. It’s a store of value that does well both in inflationary times and, as we saw last year, in deflationary times.   

But I’m not content just to park my money in physical gold and leave it at that. The trader in me wants to make a leveraged play to make the most off of gold’s bright future. Gold mining shares would seem an excellent play then. Not only do you get exposure to the gold market, but you get the benefits of stock ownership. In the past, whenever I would introduce the idea of owning gold as a form of investment, people would laugh my suggestion off because they just couldn’t imagine how anything would be better than owning “stocks for the long run.” Of course, they aren’t saying that anymore. 

Gold mining shares are a nice compromise in terms of investment philosophy. If the American dollar does fall from grace as we goldbugs suggest then owning shares of a gold mining company will be a tremendous boon. If the dollar continues to stubbornly hang on, and we somehow manage to resume normal economic growth, then I still own equities and should get the traditional benefits of equity appreciation. Continue reading Gold Mining or Gold Bullion for 2009?

Barrick Gold Down Heavily After Bernanke Comments

Helicopter Ben testified before both houses of Congress today and that the recession might end this year. It appears that these comments sent the stock market up over three percent. Citigroup, which has been circling the drain over fears that the bank would require nationalization that would wipe out share holder value gained over 21% because Ben said that the US Government would not need to take such action. Gold fell to around $950 an ounce and, most mystifying of all to me, Barrick Gold (ticker symbol=ABX) and fell over 11%.

Wow. That must have been some speech. It’s hard for me to imagine Barrick falling 11% because Ben said the recession “might” end in 2009. After all, even at $950, gold is still close to its all time high. I guess people were figuring that, if the recession ends, gold will no longer be in demand. Therefore, the price of gold should fall, and Barrick will not make as much money. 

Here’s the thing they are missing. Continue reading Barrick Gold Down Heavily After Bernanke Comments

Why Diversification is a One-Way Ticket to Poverty

I got another client for my investment advisory services today; an old friend of mine meet me for breakfast. We always had good conversations, and this was no exception. I thought my readers here would benefit from a condensed version of what we discussed. As we were meeting to discuss investment strategies, the specific focus of our conversation was how to position yourself to survive a crash in the dollar- a topic which I know something about.

My friend brought up the topic of the Weimar Republic. He is quite a history buff and I know that he recently completed reading a book on the rise of the Nazis. Today he was wondering how stocks did during that period. The answer was that the broad stock market took quite a hit during that period, but, as a wealth preserving measure, the stock market certainly did far better than say bonds or cash did (although the calculation are a little complicated because of the currency switching). But if we were to place ourselves in that situation, would we place ourselves into the equivalent of a broad based stock mutual fund.

The answer was an obvious no. Not only would we need to survive hyperinflation and the collapse of the Weimar Republic, but also the ensuring World War that saw the devastation of the country. Who would want to own the German stock market over that time? But, if you owned shared in a company that did survive, such as BMW, you would have an investment that would have preserved at least a portion of the wealth you had put into it. If your investment horizon was even longer, BMW would, I’m sure, show quite a return on your investment- even if you had invested on the eve of the hyper-inflationary affair.

Of course, we are acting here with the gift of hindsight. We have knowledge now that BMW is a good car company in 2009, so if we are picking German companies to have owned in 1920, BMW seems a good one. That brings us to the topic that is on everyone’s mind today: where should I put my money in order to best preserve and perhaps grow it in the future. Many people will tell you that the answer to that question is unknowable without the future knowledge that we possessed in our hypothetical Weimar example. They’re wrong. The future really isn’t as hard to predict if you know where to look.

It should have been fairly obvious to anyone who lived in the Weimar Republic that their currency was in trouble. They had lost a war and been saddled with a war debt that they could not possibly pay. Sure, they may have maintained the debt for a time, but how could anyone have thought that such a debt would eventually get paid off? As it turned out, it didn’t survive the first serious post-war economic downturn.

We are not in such a different situation today. It should be obvious to most anyone that the United States is never going to pay off its debt. It would be far too onerous. Instead, there will come a time when the debt will be rendered worthless either because of default of hyperinflation of the currency. We know that day will come eventually, so it’s not as if our own future is so hard to foretell. Given that knowledge of future events, how should we preserve our wealth?

Gold is the obvious choice. Not only does it become more desirable in times of crisis, it can help you bribe officials when you flee the country… if it comes to that. Try doing that with a mutual fund. But if we wanted to step away from the goldbug position for a bit and recommend broker sold securities so we can be respectable at dinner parties, which ones present themselves as tempting targets?

I talked about two different investment options that I found attractive: foreign Real Estate Investment Trusts (aka REITs) and, my personal favorite, Barrick Gold. Each presents an attractive option; foreign REITs are yielding in the neighborhood of 15% in foreign currencies and Barrick gives you exposure to gold while being a dividend paying stock. Ultimately, it seems he seems to be favoring Barrick. That took me by surprise a bit given that he works closely with real estate projects. I though the foreign REITs would have been a natural choice, but it seems he’s taking the political upheaval possibilities pretty seriously. 

We also reviewed his tax situation. I told him about a maneuver he could use to make his kids private school tuition tax deductible. It’s perfectly legal and it should save him a fair amount of money. I took real pride in knowing the difference I can make in people’s lives. When the whole world’s going down the tubes, the smallest victories have meanings. I vaguely remember the closing lines of the movie City of Joy with Patrick Swayze. The movie was brutal in its depiction of life in India, and, at the end, Om Puri says something like “The odds are stacked against being human.”

Swayze’s character replied, “That’s why it feels so good to beat the odds.”