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How to Invest without Losing Any Money

No investment is a sure thing, guaranteed to succeed and never lose money. But, there are ways to improve your chances of success and reduce your risk of loss. In this article we look at how to invest without losing any money.

How to Invest without Losing Any Money

  • Bank deposits with Federal Deposit Insurance
  • US Treasury Bills, Notes, and Bonds
  • Investment Grade AAA and AA Bonds
  • Long term value investing, intrinsic value

How to Invest without Losing Any Money: Federal Deposit Insurance

The ultimate in investment safety is a bank deposit insured by the FDIC (Federal Deposit Insurance Corporation).

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

In a period of low interest rates, such as now, bank deposits do not look all that attractive. However, within the $250,000 limit, per depositor, per bank, per account ownership category, this is how to invest without losing any money.

How to Invest without Losing Any Money: US Treasury Bills, Notes, and Bonds

US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.

How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit. Investors lose money in treasuries if they buy when interest rates are low and sell when rates are high. If you buy treasuries when rates are really high you have the choice of holding to maturity and enjoying the return on investment or selling for a short term profit.

How to Invest without Losing Any Money: Investment Grade AAA and AA Bonds

Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings are credit rating agencies. Their ratings on bonds are a good guide to how safe an investment is. How to invest without losing any money in non-government bonds is to limit your purchases to investment grade AAA and AA bonds. In each case these are bonds issued by companies with exceptionally good finances and negligible risk of default.

The only two US companies with AAA bond ratings today are Johnson & Johnson and Microsoft.

How to Invest without Losing Any Money: Long Term Investing and Intrinsic Value

There is a drawback to very secure investments like bank deposits, treasuries, and high grade bonds. They do not produce a very high rate of return. When you think about this fact, remember what Warren Buffett said about rules one and two of investing. Rule number one is never to lose money and rule two is to never forget rule number one!
Having said that, how can you get a better return on investment and still have a low risk of loss? An approach that has worked well for many investors is first to learn how to assess the intrinsic value of an investment. The second part of this approach is to invest for the long term.

Intrinsic Value

Years back we wrote about intrinsic value analysis for stocks.

Successful long term investors consider the intrinsic value of stock before buying and when deciding to sell. This approach to stock investing goes back to the black days following the 1929 stock market crash which ushered in the Great Depression. Benjamin Graham taught investors that they did not need to play the market as though they were picking numbers on the roulette wheel. Rather he taught investors to do fundamental analysis of stocks in search of forward looking earnings. At the same time investors learned to consider what features of a stock provided a safety net in times of trouble. This was the margin of safety that some stocks have in the form of money in the bank, unencumbered property, or products that are unassailable in their market niche.

Read the article for the details, but the idea is that you should have a clear idea of how a company makes its money. And you should be assured that their business model will continue to generate profits for the long term.

Then the issue is how long to invest to increase the likelihood of profits and to reduce the risk of loss. The point of long term investing is that you do not need to time the market. Rather, you invest money every month, quarter, or year in investments likely to grow over time. Just last year we asked a question. How many years are required to make an investment long term?

The long term for investing is longer than you might think. You need to stay in the market for longer than 5 years and perhaps even longer than 10 years to reliably see the benefits of long term investing.

The other part of how to invest without losing any money was noted in that same article. You need to pay attention to your portfolio. And you need to recognize when a company’s business model no longer makes any sense. In our article we noted that Kodak had a great business plan until digital photography came along and then their plan did not work.


How to Choose an Investment Advisor

It is one thing to invest your first $10,000 and another to successfully invest and manage more substantial amounts of money. First of all, when you first start out investing it is often more important to get you financial house in order than pick the right stocks! But, now what do you do with an inheritance of a quarter of a million or more. Or what if you have sold a successful business for tens of millions of dollars? At this point you are thinking that you need some sound advice about how to invest your money. This brings us to how to choose an investment advisor.

How to Choose an Investment Advisor: What Do You Really Need?

Families with huge fortunes are concerned about preserving their wealth from one generation to another. There are various financial strategies to help avoid losing money to estate taxes with each generation. But regarding year by year investments, the point is to first stay ahead of the corrosive effects of inflation and then generate a predictable yearly return.

Above all the goal is to avoid losing everything that great grandpa built and passed on! And a big part of any long term strategy is to avoid having the cost of managing your funds eat away at your return on investment!

How to choose an investment advisor starts with deciding, in general terms, what you need. Are you are happy with an absolutely guaranteed return year after year? If that is the case you may simply want to buy US Treasuries and then ladders of CD’s at several banks. If that sort of absolute security is your goal you do not need to pay someone a fee to manage your money!

How to Choose an Investment Advisor: Brokers, Mutual Funds and Fiduciary Responsibility

In medium.com Richard Reis offers advice about this issue and says to be skeptical of financial advisors.

There are over 200 (!!) designations for financial advisors (e.g.: “wealth managers”, “investment consultants”, “financial consultants”, etc.)

According to Tricia O. Rothschild (Morningstar’s CPO), there are something like 310,000 financial advisors in the U.S. now!

He makes the point that if you are going to hand over control of your investments to someone you need to trust them. He uses the Bernie Madoff pyramid scam as an example.

But, avoiding a crook is not the only issue. Fees and commissions can kill you. Mr. Reis notes that Mutual Funds commonly do not beat the market even before they charge you money to manage your funds. The big issue with investment advisors is that all too often they are stock brokers in disguise. They take your funds and charge a small fee. Then they churn your account. This means they repeatedly trade stocks. And every transaction makes money for them and reduces your account.

How to Choose an Investment Advisor: Put Your Money in an ETF and Don’t Pay for Advice

The sad fact is that many money managers fail to beat the S&P 500 year after year. How to choose an investment advisor for many is get some onetime advice and then invest on your own. A viable approach to investing large sums money and not having the fees kill you is to invest in exchange traded funds.

Excellent reasons to use exchange traded funds include low expense ratios, tax efficiency, automatic diversification, and ease of entry and exit equal to stock investing. Investors may choose investing with exchange traded funds and avoid mutual funds. ETFs often outperform mutual funds and they are cheaper to enter and leave. Additionally, investors can pick ETFs that track various sectors instead of the broader market or international indexes specific to countries or regions.

Interestingly, Warren Buffett often suggests exchange traded funds as an investment choice for long term investors.

If you do choose an investment advisor ask for references, demand to see long term positive results, and demand to see each and every fee and commission.


Should You Use Earnings or Growth as a Guide When Picking Investments?

Growth stocks are popular because, you guessed it; they grow and become more valuable. Investors ignore their high price to earnings ratios (P/E ratio) and just keep buying. But how about using earnings and other factors as a guide? The question is, should you use earnings or growth as a guide when picking investments?

Should You Use Earnings or Growth as a Guide When Picking Investments: Overpriced growth stocks

The Toronto Globe and Mail has an interesting article about this subject. They point out a long term problem with growth stocks.

There is plenty and unequivocal evidence from academic research in Canada and around the world that, on average, value stocks (defined as stocks with low price-to-earnings or price-to-book ratios) beat growth stocks (those with a high P/E or P/B). For example, in recent research I carried out using U.S. data, I found that, on average, value stocks beat growth stocks by about 6 per cent over the 1982-2013 period.

The problem with popular growth stocks is that they become too popular and their prices get bid up beyond what fundamentals would support. We repeatedly suggest the use of intrinsic stock value as a guide to investing. In our article we pointed out that understanding how a company earns money and will continue to do so is basic to using intrinsic value as a guide to investing.

The ability to see into the future to see how well a company will manage its assets, products, costs, R&D, and marketing is of utmost importance in calculating intrinsic stock value as a means of deciding whether or not to purchase a stock.

The often repeated quote from Warren Buffett is useful in this case. He has tended to avoid tech stocks and focus on consumer stocks with strong brand names. This is because he does not know what a given tech stock will be worth or if it will even have a market in five years. But he has a pretty good idea that a product like Coca Cola or Snickers will be selling for five and ten years hence.

Should You Use Earnings or Growth as a Guide When Picking Investments: Underpriced value stocks

When investors look at the market they see certain stocks going up in price and other stocks languishing on the sidelines. There is a natural tendency to buy the stocks that are going up in price and ignore those that are on a flat price line. The fact of the matter is that when lots of investors pick growth over value they distort the market. Smart long term investors use this fact to pick up bargains for the long term.

Should You Use Earnings or Growth as a Guide When Picking Investments: Short Term Investing

The place for the majority of growth stocks is with short term investment. Good examples would be Microsoft from its IPO until just before the dot com bubble burst or at the depths of the Great Recession until now.

Should You Use Earnings or Growth as a Guide When Picking Investments? PPT


Three Safe Ways to Start Investing with Small Amounts of Money

You are not an investor yet but you would like to start. You are probably young and do not have a lot of money. But you are watching the stock market go up and up and would like to stake your claim to part of the American dream. How do you start out investing and how do you avoid losing your money right away? We suggest three safe ways to start investing with small amounts of money. You do not necessarily need to start out investing in the stock market! However, that is where you probably want to put your money eventually and for the long term.

Three Safe Ways to Start Investing with Small Amounts of Money

  • Money market accounts and certificates of deposit at the bank
  • Pay off your credit cards
  • Buy your home instead of renting

From these three safe ways to start investing with small amounts of money you can build an investment portfolio over the years.

Money in the Bank

The first of our three safe ways to start investing with small amounts of money is to stay safe and liquid. The first step in investing in the stock market is not to buy stocks.

The first step is to take a look at your finances and your expenses. In fact how to start investing in stocks is to get your financial house in order first and then start picking stocks.

If you want to be a successful investor, discipline yourself. Put $50, $100 or whatever you can in the bank every payday. As your bank account grows create a ladder of certificates of deposit. These will pay better interest than your savings account and if you set them up so that every month or so one of them comes due you will always have some cash on hand for emergencies.

Stop Paying Credit Card Interest!

The interest rate on the outstanding balance on your credit cards can be as low as 13% and as high as 22%. If you are a really successful investor you will still have trouble making 13% a year on your portfolio year in and year out. And certainly you will find it difficult to make 22%. So when you start investing with small amounts of money pay off your credit cards first and foremost.

Your Home Is Still Your Best Investment

A major cost of investing in a business is interest paid on money that your borrow. The great part about buying a home is that the mortgage interest is tax deductible. Bank Rate has a tax deduction calculator that will show you how much you can save each year via state and federal mortgage interest deductions. For a $200,000 mortgage you can save around $1,700 the first year alone. Commonly you will pay less for your mortgage for the same size home than you would pay to rent. And then it gets better because the mortgage interest is deductible. The last of our three safe ways to start investing with small amounts of money is to buy your home instead of renting.

And What Is the Next Step?

The US stock market is the best bet for long term profits. While you are putting money in the bank, paying off credit cards, and buying a home instead of renting, start learning about common stocks, ETFs and other ways to invest in the stock market.

Three Safe Ways to Start Investing with Small Amounts of Money PPT

How to Choose Profitable Investments

The stock market is going up and the real estate market has largely recovered from the crash a decade ago. If you have not already started investing again you are probably thinking about it. If you are new to the game you are wondering how to choose profitable investments.

How to Choose Profitable Investments 1: First steps

Years ago we wrote about how to invest $10,000. Here are some basics about how to choose profitable investments and get on the road to profits.

In deciding how to invest 10,000 dollars let’s look at investment horizon, risk tolerance, growth versus income, and diversification as the first considerations on the way to deciding what is a good investment for our first stock.

How we envision our investments will help us focus on the stocks that fit our needs. If we are looking to save money for retirement we may choose different investments than if we are saving for a down payment for a house and hope to have built up a substantial amount of capital in, lets’ say, five years.

Our risk tolerance should be built upon our ability to absorb the loss of our investments in their entirety. Someone close to retirement may want to look at dividend stocks more closely than growth stocks and a younger investor will certainly want to cash in on the exponential growth of a strong growing company.

Diversification is always important as it lets us benefit from growth in different market sectors and commonly cushions losses in one stock/sector with gains in another.

In this article we will focus on investing for the long term, building wealth over the years, and having a healthy nest egg for a rainy day. In this case how to choose profitable investments depends on intrinsic value analysis.

How to Choose Profitable Investments 2: Intrinsic value and value investing

We may seem to have written a lot about intrinsic stock value but it is a subject that bears repeating. When you look for a profitable investment you do not necessarily look for a stock that has just gone up in price. What you want is an investment that will appreciate in the future. But, how can you know that? There are lots and lots of mathematical formulas which you can apply to the calculation of intrinsic stock value.

For example, you can look at expected dividends and pick a stock which has paid dividends for decades and invest with the expectation of continued dividends.

Or, you can look at the margin of safety of a stock which is cash in the bank, assets unencumbered by debt, and the strength of its products and services within its market niche.

This last approach is basic to how to choose profitable investments.

How to Choose Profitable Investments 3: Tech products versus a Snickers bar

Which companies will be profitable investments in the future depends on their ability to make money year in and year out. There are two ways this happens. First, the company has a product, like Clorox bleach, Coca Cola or a Snickers bar. These are established products that have strong brand names and are very unlikely to be replaced by competitors. The second way is that the company is able to continue to invent new and better products and services.

We like to refer to Warren Buffett on these pages because he is the epitome of the successful long term investor. He once said that he avoided tech stocks because he did not have a clear idea of how many of their products would be viable in five years and therefore how much they would be worth. On the other hand he noted that he was pretty sure how much folks would pay for a Snickers bar five years in the future.

For the beginner, how to choose profitable investments is to stick with what you know or educate yourself to know more. Having a basic idea of how the company makes its money and how it will continue to do so is the first, best and eternal approach to profitable investing.

How to Choose Profitable Investments PPT

Treat Your Investments Like a Cash Machine and Not a Slot Machine

How do you make money with your investments? There are two basic strategies. One is to pick a solid investment based on strong intrinsic value and hold for the long term. The other is always to follow the old adage to buy low and sell high. The first approach assumes that timing the market is difficult and not worth the risk. The second approach uses a lot of technical analysis in an attempt to time the market. Our suggestion is that for the long haul you should follow the first approach for the majority of your investments. You should treat your investments like a cash machine and not a slot machine. That is to say, stick with what you know, repeat what is profitable, and do not gamble.

Treat Your Investments Like a Cash Machine and Not a Slot Machine: Long Term Value Investing

On the average, money invested in the US stock market has accumulated value decade after decade for more than a century. Individual stocks rise and fall but the overall market goes up. Successful long term investors pick stocks and stay with them. We wrote about how many years are required to make an investment long term? The answer is that to take advantage of the long term appreciation of the US stock market you need to stay with your investments for 5 and 10 years or longer.

The point is that well-chosen stocks represent well-run companies with strong products. These companies will make money year after year. And they typically have a margin of safety in the form of property and cash in the bank instead of excessive debt.

When you pick solid stocks for the long term you treat your investments like a cash machine and not a slot machine.

Treat Your Investments Like a Cash Machine and Not a Slot Machine: Market Timing and Best Approaches

The short term approach to making money in the stock market assumes that you can time the market. And it assumes that you will enter and leave the market instead of staying for years. Short term investment requires more work in the short term but offers potentially bigger profits.

There are two things a person may be looking for in a short term investment. One is a place to park their money that is safe and pays better than a bank savings account. The other is a way to profit from the ups and downs of the stock market. The first just has to do with checking out interest rates on T Bills, CD’s, and other short term debt instruments. The second is where technical analysis tools such as Candlestick pattern formations can help a person to trade stocks and make a substantially better profit than the bank offers or even what one can gain from long term investing.

The point here is that stocks do not grow in value on a smooth upward course. Their prices go up and down even while the long term trend may be upward. So, there are profits to be made in shorting a stock or in buying put options. But to make money in this realm you need to pay attention, stick with what you know and treat your investments like a cash machine and not a slot machine.

Treat Your Investments Like a Cash Machine and Not a Slot Machine PPT

Should You Invest in US Steel Companies?

It started with Trump threatening to start a trade war with China. And now it has come around to a trade war with our North American neighbors and the European Union. Today the president announced that there will be tariffs on steel and aluminum imports from Canada, Mexico and the European Union. While economists and free-traders wring their hands in anguish we wonder this, should you invest in US steel companies?

United States Steel Producers

There are only two steel producers in the USA, Nucor and United States Steel Corporation.

US Steel was once the largest corporation in the world and a century ago it was the source of two-thirds of all steel produced in the USA. Today the company is responsible for 8% of all steel used in the USA. US Steel today is the world’s 24th largest steel producer and second in the USA behind Nucor.

Nucor is the 12th largest steel producer in the world. It is the largest operator of “mini mills” in the world. They use electric arc furnaces to melt scrap steel instead of the blast furnaces used to melt iron.

Taken together, production by the two United States steel producers falls far short of the amount of steel needed by the US economy. So, who is the USA getting its steel from?

CNN looked at the global steel industry and who exports to the USA.

When it comes to steel production, one country is miles ahead of the pack: China.

It accounted for a whopping 49% of the 1.7 billion metric tonnes of steel produced globally last year, according to industry group Worldsteel.

The European Union, Japan, India and the United States round out the top five producers.

When it comes to who the USA gets its steel from, China ranks number 5 behind Canada, South Korea, Mexico and Brazil. The USA produces 5% of the steel in the world while China produces 49%, the EU produces 10%, and Japan and India each produce 6%.

Trade War Era Investments

We already looked at what you can invest in and not get hurt by a trade war.

In that article we looked at stocks that would not be hurt by a trade war with China. Now, however the USA is picking a fight with its North American neighbors and the European Union, which despite all the hype about China, is the other super economy in the world beside North America. Perhaps rather than looking away from steel and aluminum which will be the focus of a trade war, we should look at them.

United States Steel

Here is what the market thinks about US Steel in light of the news about tariffs on foreign steel. The chart is from Google Finance, United States Steel Corporation.

 

Should you invest in US steel companies because of new tariffs on imports? Probably not...

US Steel Stock Price

 

The news of tariffs made the stock jump up in the first hours of trading but then it settled back down. The problem for US Steel is that they are not the corporation of old with lots of steel mills. They have had to close mills and streamline their operation to remain profitable and in business. They do not have the capacity in the short term to ramp up production. However, they should profit from high steel prices. The market is not impressed.

Nucor

The market response with Nucor was similar to that of US Steel. The price popped up with the news of tariffs and then settled back down again. Here is the Google Finance, Nucor chart.

 

The Nucor price response to new tariffs on foreign imports answers the question of should you invest in US steel companies.

Nucor Stock Price

 

The issue with Nucor is the same as with US Steel. They are an efficient operation without much extra capacity. As such they may benefit from higher steel prices but are unlikely to expand their operations to any great degree.

So, should you invest in US steel companies considering the tariff situation? The answer is that you probably should wait and see.

Is It Possible to Reproduce the Microsoft Investment Experience?

The point of profitable investing tips is that they result in investment profits and help you avoid investment losses. One of the ways to make money investing is to study successful investments and investing strategies. And then you try to copy them. One of the all-time greatest investments was buying Microsoft when it went public in 1986. Is it possible to reproduce the Microsoft investment experience? The stock opened at $21 a share and ended the day at $35.50 a share. In their article about three stocks that feel like Microsoft in 1986, The Motley Fool notes how those who invest in Microsoft on the first day and reinvested dividends have seen a more than thousand fold return on their investment.

Eleven years after the company’s 1975 founding, Bill Gates and the team at Microsoft (NASDAQ:MSFT) took the company public. If you had invested $1,000 in Microsoft on the day of its March 13, 1986 initial public offering, settled in for the long haul, and reinvested your dividends, your stock would be worth roughly $1.5 million today.

The Motley Fool provides three examples of stocks that could mimic the Microsoft experience. These are Albermarle (NYSE:ALB), Control4 (NASDAQ:CTRL), and iQiyi (NASDAQ:IQ). We suggest that you read their article and make up your own mind. In the meantime we will consider if it possible to reproduce and Microsoft experience and how you would go about doing just that.

To Reproduce the Microsoft Investment Experience Size Does Not Matter but Market Niche Dominance Does

Microsoft is a dominant force in the computer industry. They invented the Windows operating system and have a huge presence in cloud computing and information storage. With their huge size growth has become more difficult. However, their presence in so many parts of the computer world helps guarantee their success for years to come. Is it possible to reproduce the Microsoft investment experience without it growing to be one of the largest corporations on earth? The answer is yes. So long as a company is dominant in its market niche it will always be able to sell its products and do so at a very profitable price. The trick is to learn to use intrinsic value analysis to pick such stocks before their price skyrockets. The problem with tech stocks, especially biotechnology stocks is that it can be hard to see the future.

Long Term Success Is Necessary to Reproduce the Microsoft Investment Experience

Microsoft was not a flash in the pan. It grew rapidly through the 1990s and after the dot com bubble it went flat for a decade and then grew again. To pick the next Microsoft you need to find a company ready to create a new market with new technology or take advantage of an expanding market with superior products, services and management.

The Motley Fool choice of iQiyi makes some sense as the Netflix of China in the years to come and taking advantage of market expansion.

Albermarle scares us. The company is a lithium producer. Read our article about the resource curse. This may be an OK stock if you are really great at market timing of commodities but this is not the next Microsoft.

Control4 makes sense for the long term as smart homes are one of the waves of the future. The price of energy is likely to go up and everything that homeowners can do to make their homes more energy efficient will be rewarded. The problem for this stock is that they do not really have any exclusive technology. Thus they will always have to price their products and services low enough to get business.

You Will Need a Consumer Stock Component to Reproduce the Microsoft Investment Experience

Years ago we wrote about investing in beer. When times are good people celebrate by drinking beer. And when times are bad they drown their sorrows with beer. This is one of the products that is protected from down markets because of its wide and pervasive use. That is also where companies like Microsoft, Apple, and Amazon have gotten to. They have become the sources of products and services basic to our lives. It is our belief that to reproduce the Microsoft investment experience you will need to pick a stock that has this attribute.

How Do You Pick an Investment to Short?

The popular movie, The Big Short, dramatized how hedge fund manager Michael Burry made a profit of $2.69 billion by anticipating the collapse of the US housing market in 2007. Burry created a credit default swap market when he realized that the vast number of high risk subprime loans made the housing market unstable. There is a lot of detail in the movie but the point which interests us here is how do you pick an investment to short? This thought came to mind as we consider and re-consider the aging bull market, the risk of a trade war with China, and the ever-mounting US debt burden.

Predicting Investment Success or Failure

Some investments require unique knowledge to succeed in. And for others you simply need to understand intrinsic value and invest for the long term. Patience is a virtue in this case. Picking an investment to short requires that you recognize when that investment no longer is likely to grow with the economy and the rest of the market or when there are unique factors that will lead to its demise. We wrote about what are the most profitable investments.

The general consensus is that you need to stay in an investment at least five years and probably ten to see the benefits of long term investing. The S&P 500 peaked at 1509 in November of 2007 and bottomed out at 683 in March of 2009. Ideally you would have purchased shares in an ETF that tracks the S&P 500 and done so in March of 2009. But a long term investor would have purchased in 2007 as well. Today the S&P 500 is at 2600 after peaking above 2800 in January of this year. Successful market timing can help but it is difficult to carry off time and time again. The point is that if you had bought the S&P 500 at its high point before the crash and held on you would be up around 80% today. If you had added to your portfolio as the market went down in 2007 and 2008 you would have done even better.

In that article we noted that Kodak which was a great stock for decades became a loser when digital photos came into being and Kodak’s business plan no longer worked. A way to pick an investment to short is to pick the next Kodak. However, the demise of Kodak worked out over a couple of decades and was affected by the company dipping into its cash reserves to buy back stock and prop up the price.

Best Time to Short an Investment

The couple of years preceding the housing market and stock market crashes a decade ago were exuberant. People bought stocks as well as second and third homes with the belief that prices would only go up. Warren Buffett famously said that the best time to buy is when everyone is getting out of the market and the best time to sell is when everyone is getting in. The key for picking investments to short is to calculate intrinsic value. The key to timing the market and making the most profit when shorting an investment is technical analysis. This is the statistically based analysis of market price patterns. Technical traders say that the past predicts the future and that when you can recognize an emerging price pattern you can trade accordingly to make a profit as the pattern plays out. Using statistical analysis to predict a peak in the value of an investment helps you choose when to short an investment and when to buy back at a lower price as the pattern plays out. As a bull market ages it tends to become volatile. That volatility can be an asset when you pick an investment to short.

Are Commodities a Good Investment?

The looming US China trade war has been put “on hold” according to US Treasury Secretary Mnuchin. Trump tweeted that

China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products – would be one of the best things to happen to our farmers in many years!

However, many are skeptical and you can include Profitable Investing Tips among the skeptics. Our eventual question for our readers will be, are commodities a good investment? But, first a little background.

CNBC quotes Moody’s chief economist as saying that the proposed trade agreements are face-saving and lose-lose.

China consented to continue discussing measures under which it would purchase more U.S. products in order to reduce the $335 billion annual trade deficit between the two, but no specific dollar number was put forward. Zandi pointed to this as evidence that neither Washington nor Beijing had a plan, nor did either know what it specifically was they wanted from the ongoing talks.

“When you get right down to it, what exactly are they going to do? Are they going lower the Chinese-U.S. bilateral trade deficit? It’s just not going to happen. They’re kicking it down the road because they really don’t know what they want,” Zandi said.

The two biggest US exporters for years have been Boeing and all of US agriculture. But, will China buy another $200 billion in US Boeing jets when it really wants to develop its own aviation industry? We wrote about this in our article about whether the new Chinese passenger jet would hurt Boeing. And, if Boeing gets a substantial increase in its business with China that will probably come with agreements for technology sharing which would hurt Boeing and US exports in the long run.

Regarding US agricultural exports there is concern about being simply a commodity supplier to China. A couple of years back we wrote to beware the resource curse of boom and bust cycles.

Brazil rode high during its commodity boom and has been licking its wounds ever since. Venezuela bought friends in the Caribbean with discounted oil and now its citizens cannot find milk, diapers or toilet paper in the stores. Beware of the resource curse of boom and bust cycles in commodity dependent economies.

The issue with China is that the USA and Europe have exported much of their manufacturing supply chains to China and other nations in Asia. This was initially a good idea because it cut down on production costs. However, the result has been a worsening trade deficit in the USA, loss of jobs, and loss of the skill sets that make manufacturing work. Fixing that situation will take more than getting China to import more jets, corn, soybeans, beef, chicken, and pork products.

Are Commodities a Good Investment?

Fidelity has a good explanation of investing in commodities.

Commodity investing is investing in raw materials that are either consumed directly, such as food, or used as building blocks to create other products. These materials include energy sources like oil and gas, natural resources like timber and agricultural products, or precious metals like gold and platinum.

In the case of US exports to China these commodities would be agricultural. The up side to commodity investment is that helps you diversify your portfolio and there is always the potential for substantial profits. Also, commodities over time tend to hold their value making them a hedge against inflation.
The down side of commodity investment according to Fidelity is this.

Commodity prices can be extremely volatile and the commodities industry can be significantly affected by world events, import controls, worldwide competition, government regulations, and economic conditions, all of which can have an impact on commodity prices. There is a chance your investment could lose value.

If commodities can be a good investment, how do you invest? There are ETFs that track precious metals and there are agricultural companies and related companies that will prosper with increased production and increased exports. Monsanto, CF Industries, Mosaic, John Deere, Agrium, ADM, and ADCO are a few of the larger and more substantial choices.


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