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When Investing Becomes Dangerous What Are Your Best Choices?

The long-term bull market is not only weakening; it is becoming a treacherous market according to Mad Money’s Jim Cramer. So, when investing becomes dangerous what are your best choices? Here is some of what Cramer says.

Between the mixed messages on U.S.-China trade and concerns about an economic slowdown, day-to-day stock-picking is becoming very challenging for the average investor, CNBC’s Jim Cramer acknowledged on Tuesday.

“We’ve got to call a spade a spade. This market isn’t just volatile, it’s treacherous,” he said after yet another turbulent trading session on Wall Street. “I don’t want the treachery, which is not going to go away, to get to you. Use it to your advantage.”

The best way for investors to take advantage of the swings is to ignore them altogether, said Cramer, host of “Mad Money.” Instead, he suggested focusing on long-term themes “that hold up through this madness” because they aren’t tied to China or the welfare of the broader economy.

Intrinsic Stock Value

This is the long term investing, value stock approach that uses intrinsic stock value as a guide. As we mentioned in the intrinsic value article, a key to making this approach work is knowing what a company does, how its business plan will make money, and how that business plan will remain viable into the future. In this regard, here are the approaches that Cramer recommends.

Cramer suggests a general approach of picking individual stocks that are not tied to trade with China, are not tied to the welfare of general economy, and have both high dividend yields and strong financial positions. His specific suggestions are cloud-based companies as this sector is growing, health care and pharmaceuticals because people will always need their products and services, and companies in cyber security which seems to be an ever-increasing need.

To his list we might add biotech companies to the degree that you can reliably pick the winners in this arena. And, of course, any company that stands out with more than one of the criteria will be worth a look.

When investing becomes dangerous what are your best choices? Look for stocks with strong intrinsic value.

Berkshire Hathaway, an Example of Intrinsic Value Investing

Investments That Will Not Lose Money

What are your other best choices when investing becomes dangerous? Recently we wrote about how to invest without losing any money. We looked at ways to preserve cash in return for foregoing growth opportunities. The four suggestions were these.

  • Put money in the bank where it is protected by Federal Deposit Insurance
  • Buy US Treasuries, Bonds, Notes, and Bills
  • Purchase Investment Grade Bonds, AAA or AA
  • Select investments with long term value using intrinsic value as a guide.

Essentially putting all of your assets into cash (bank deposits and government bonds) is a time-honored approach when markets look chancy. Famously, Warren Buffett held a strong cash position going into the dot com crash because he said the market made no sense and thus he was not going to invest until it did!

When investing becomes dangerous what are your best choices? Companies with AAA bond ratings or the bonds themselves are good choices.

AAA Bond Rating

In Regard to China-Related Investments

China has been the growth story for the last couple of decades. There are investments in China that have done well and investments in companies that do business with China which have also done well. However, all grow stories eventually correct and level off. In today’s China the phenomenal growth story is changing for more reasons that simply getting old or because of the risk of a protected trade war.

Bloomberg has an interesting and useful article about how damage to the Chinese economy from the trade war is already done.

The damage to China’s economy from the trade war with the U.S. can’t be immediately made good even in the case of a resolution with President Donald Trump, Citigroup economists say.
That’s because the tariff war is underlining China’s rising cost of labor at a time when the job market is under pressure, Citi economists led by Liu Li-Gang said in their 2019 economic outlook report. The trade war with the U.S. could cut China’s export growth by almost half next year, putting around 4.4 million jobs at risk, the economists wrote.

“It is a reality that China is losing some of its cost competitiveness, especially in labor-intensive and low-value-added sectors,” according to the report. “Although shifting the supply chains is not feasible in real time, manufacturers may seriously weigh the option of leaving China if punitive tariffs last longer than expected.”

China has become important to the global economy both as a supplier of inexpensive finished products and as a consumer of commodities. A more-expensive China makes products more expensive around the world and will tend to drive supply chains out of China. A substantial reduction in raw material use by China will hurt commodity-dependent economies around the world as we noted in our “resource curse” article some time back.

The bottom line for investors is that China is not the best choice right now for investing by foreigners and especially not by investors who are simply following the herd because the China-investing herd is about to “head south” in a big way.

Likewise, companies that have profited by selling to China, like Boeing, will be hurt in a prolonged trade war.

When Investing Becomes Dangerous What Are Your Best Choices?

All of this is great in theory but how do put these thoughts into practice? Cramer makes several specific suggestions.

Cloud-based businesses he suggests are Salesforce.com, Splunk, VMware and Workday. These stocks will be volatile like the rest in today’s trading but have strong potential for long term growth as computing requires more memory and processing power which will be found in networked computers (the cloud).

His suggestions for health care and pharmaceuticals are United Health Care, Merck, Centene, and Johnson & Johnson.

For cybersecurity he suggests Palo Alto Networks.

In the “strong balance sheet” and “high dividend” niche he suggests AT&T.

If you are going to choose any of these don’t just take Cramer’s advice or ours. Apply the intrinsic value approach to each possible investment along with ways to invest without losing money.

An interesting choice, also mentioned by Cramer, is Microsoft. This company has a strong balance sheet, a huge cloud presence, and is one of the two US companies along with Johnson & Johnson that has bonds with an AAA rating!


How Much Will Your Investments Be Worth in One, Five, and Ten Years?

Investors are concerned today as the market corrects, the trade war threatens to be long term, the Trump tax cut effects are wearing off, and earnings are taking a hit. But, one needs to put things in perspective when looking at long term investing. When making investment decisions, ask yourself how much will your investments be worth in one, five, and ten years.

Stock Market Investment Perspective

The New York Times has an interesting article in this respect. Despite recent losses, stocks are riding high when you look at the longer term.

Lately, the markets have been rattled about the prospect that a protracted trade war with China could begin to take an economic toll at a time when global growth is slowing.

Viewed over a longer period, however, corrections often begin to look less severe.

Even after the current sell-off, for instance, the S&P 500 through the end of last week was up more than 16 percent since President Trump’s inauguration and more than 23 percent higher since Election Day 2016.

And, if you look at the market since the depths of the financial crisis, the S&P 500 is up three hundred percent. The Times article gives us a bit of perspective.

 

This graph is useful when you are wondering how much will your investments be worth in one, five, and ten Years?

Three Stock Market Perspectives

 

Despite the recent losses, stocks as measured by the S&P 500 are still up handsomely since Trump’s election or since his inauguration.  But, for long term investors the better comparison is this graph.

 

This graph put investments in perspective. How will your investments be doing in one, five, or ten years compared to next week or month? Ask this question when assessing investment opportunities.

Market Comparison Recent Versus Ten Years

 

For anyone who invested in the market or stayed in the market in 2009, the chances are that they have experienced a 300% increase in value of their portfolio and the losses since the market’s peak amount to about a fifteenth of that!

Long Term Investing

Early last year we asked just how many years are required to make an investment long term. The answer was a least five years and ten is better. The value of the long term approach is that market timing is less important. You can certainly buy after you are certain that a big correction or crash has bottomed out but you do not have to be so worried about anticipating a correction, provided that you use the intrinsic stock value approach in your investment selections.

As Benjamin Graham taught us back in the 1930s and going forward, stocks are subject to mean reversion. This means that the current stock price may be higher or lower than the fundamental value of the company. But, over time in an efficient market the market price of a stock will trend towards the intrinsic value of the stock. Successful long term investments are those where you can safely estimate how much your investments will be worth in one, five, and ten years based on assessment of forward looking earnings and intrinsic stock value.

Should You Sell Your Stocks Based on the Risk of a Major Correction?

Despite all of the good investing advice that is available, the major drivers of the market are almost always greed and fear. It is certainly smart to invest and make money when you believe that the market or a given investment will be going up. And it is certainly wise to get out when things look bad. But, in both cases you may be making a mistake unless you have some sound basis aside from greed or fear. This is where the intrinsic value concept comes in. This indicator of stock value will tell you if the company will be making money into the distant future and thus will tell you whether or not to expect the stock price to go up over the next year, five years, or ten years. The market may get really enthusiastic or it may become fearful but a dispassionate appraisal of forward looking earnings will be your best guide to investment value over the coming years.

How Much Will Your Investments Be Worth in One, Five, and Ten Years? PPT


How Does Algorithmic Trading Affect Your Investments?

The US stock market just experienced one of its more impressive down days ever, with the S&P 500 losing 783 points out of 27,782. This was not the worst percentage drop ever but it vied for the most points of the S&P 500 lost in one day. There are lots of valid concerns about the longevity of the current bull market such as an uncertain trade war, rising interest rates, and tepid earnings. However, much of the blame for the one-day drop in the market is being placed on trading algorithms that control roughly 80% of daily stock trading. That being the case, how does algorithmic trading affect your investments?

Algorithmic Trading

CNBC writes about machines that control 80% of the US stock market.

“Eighty percent of daily volume in the U.S. is done by machines, so what you get is a lack of focus on earnings, a lack of focus on outlooks and you just get short-term movements based on very specific data that is released every day and that creates noise,” Guy De Blonay, fund manager at Jupiter Asset Management, told CNBC’s “Squawk Box Europe.”

The daily volume of algo trading can change according to volatility. But over the last few years its impact has become more visible. In 2017, J.P. Morgan said that “fundamental discretionary traders” accounted for only 10 percent of trading volume in stocks. This is when traders look at companies’ performance and outlook before deciding whether to buy or sell the shares.

This is the shape of the modern stock-investing world. So, you cannot change it but you can invest in such a way that algorithmic trading does not hurt your investments or even helps them!
Yesterday’s S&P 500 freefall was 782 points out of 27,782. That is a 2.8% decrease in value across the S&P 500. But, going back to 1929 there have been twenty days with larger percentage losses, including October 19, 1987, with a 22.61% loss in the Dow Jones Industrial Average.

Although there were typically good reasons for many of the down days of the Dow or S&P 500, the immediate market movements in recent times often came from computer programs that were designed to sniff out early cues and make trades before the market fell. And, as more programs sold, the other programs followed suit, and in a matter of hours, minutes, and even seconds, the market fell more than the fundamental or intrinsic value of any of these stocks would have predicted.

How does algorithmic trading affect your investments in these cases? It depends on how you react to the market changes.

Using Intrinsic Value as an Investment Guide

On this site we so often write about the use of intrinsic stock value as a guide to long term investing. How does that advice square with the seeming control of the stock market by machines that make 80% of daily trades? First of all, consider what CNBC writes about intrinsic stock value and how Warren Buffett uses it to choose investments.

Buffett’s long-term associate and the Vice-Chairman of Berkshire-Hathaway is Charlie Munger. He discussed how hard it can be to put the intrinsic value approach into practice and how exceedingly selective they are in making their choices.

Munger went on to deflate the hopes of any investor who is confident enough to think they have valuation mastered. When it comes to valuation of companies, even he and Buffett draw a blank most of the time. “We throw almost all decisions into the too hard pile, and we just sift for a few decisions that we can make that are easy. And that’s a comparative process. And if you’re looking for an ability to correctly value all investments at all times, we can’t help you.”

In short, much of the success of Berkshire-Hathaway comes from avoiding the vast majority of investments as “too difficult to call” and directing their attention to those investments where determining future cash flow is easier. This approach has proven successful in their hands and is the “gold standard” for how the intrinsic value approach should work.

Long-term Versus Short-term Investing

If you are going to compete with the trading algorithms that control most of the daily stock trading volume, you need to be very good and insightful or just plain lucky. On the short term basis, these programs are faster than you will ever be. However, they really do follow a herd mentality in both US and global investing. As such, there is always the possibility of picking up bargains the day after the algorithms take the market down. In fact, we often see an up day in the market immediately after a significant market downturn.  But, this approach means that you are always second guessing a bunch of computer trading programs and how they analyze stocks instead of analyzing the stocks yourself.

Buffett and Munger and many others have proven that a patiently-applied intrinsic value approach makes money over the long term.

How does algorithmic trading affect your investments? Start by looking at a down day for the stock market and the S&P 500.

S&P 500 Dec 4 2018

This certainly looks like, and is, a significant price decline in one day. However, what if we look at the last twelve months?

If you wonder how does algorithmic trading affect your investments, look at the S&P over a day, a year, and five years.

S&P 500 Dec 4 2018 Last Twelve Months

Now we can see that in the last year the S&P 500 is up about 70 points, after flirting with a much higher range before correcting. But, if we look at picking an investment to hold for five years, as we did recently, here is the S&P 500 going back to December of 2013.

When you want to know how does algorithmic trading affect your investments, look at both the short and long term.

SP 500 Dec 4 2018 Last 5 Years

Here we see that the S&P 500 has increased four-fold since five years ago despite a fair amount of up and down volatility. Anyone who was a passive investor and just put his or her money in an ETF that tracked the S&P 500 over this time would have done well and not experienced any pain from fighting the trading algorithms that control Wall Street daily trading. In fact, one could have routinely bought the day after an algorithm-driven downturn and picked up bargains along the way.

How Does Algorithmic Trading Affect Your Investments?

The “bottom line” is that day trading and short-term stock picking are different games than long term value investing. The other “bottom line” is that when investing for the long term is it wise to limit yourself to stocks and other investments where you understand the business plan and where you can be assured that the investment will generate reliable returns year after year. This is why a stock like Coca Cola is always a favorite of investors like Buffett and why many long-investors avoid tech stocks because of the risk of a new invention making a current technology obsolete and reducing a tech all-star to a penny stock in a matter of months.

How Does Algorithmic Trading Affect Your Investments? PPT


How Do You Choose an Investment to Hold for Five Years?

The stock market goes up and down and the business news reports every daily gain and loss as though it were a prediction for permanent success, or long term dismal failure. Pundits have likened the reporting of the stock market to an old-fashioned melodrama. Nellie is tied to the railway tracks. Will the hero get there on time? But, he is delayed. But, maybe she will get loose. Maybe the train will stop. However, agonizing over the daily fluctuations of the market is not really the best way to pick a longer term investment. Many successful investors only invest for the long term. This is typically at least five or ten years. With this in mind, how do you choose an investment to hold for five years?

Buy and Hold Investing

Investopedia defines buy and hold investing.

Buy and hold is a passive investment strategy for which an investor buys stocks and holds them for a long period regardless of fluctuations in the market. An investor who uses a buy-and-hold strategy actively selects stocks but has no concern for short-term price movements and technical indicators.

This approach need not be limited to stocks but can be used in real estate investing, the purchase of US treasuries or bonds, or in the running of your own business. This approach ignores short term static and focuses on longer term prospects. Investopedia says this in regard to the longer versus the shorter term focus.

Conventional investing wisdom shows that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, debate over whether a buy-and-hold strategy is superior to an active investing strategy. Both sides have valid arguments, but a buy-and-hold strategy has tax benefits because the investor can defer capital gains taxes on a long-term investments.

Long term investing reduces the “overhead” of investing as one is not continually buying, selling, and incurring fees and commissions. As, Investopedia notes, the investor is also not paying capital gains taxes every time he cashes out of a successful short term investment.

The fact of the matter is that most, if not all investors, are not all that successful all of the time at market timing. Thus, an investor may make lots of money by picking the right stock at the right time and then lose all of it when picking badly and not getting out in time.

How Do You Choose an Investment to Hold for Five Years?

Since the rule of thumb for long term investing is five years or even ten, how do you choose and ignore the static of “Nellie on the railroad tracks?” For the answer we need to go back to the days following the 1929 market crash and the Great Depression that followed. According to Investopedia, an American investor, Benjamin Graham, described a method for determining the long term value of a stock, comparing it to the current market value, and buying, selling, or holding the stock based on its intrinsic stock value. He first published a paper entitled Security Analysis and then a book entitled The Intelligent Investor. Investopedia says this.

Security Analysis was first published in 1934 at the start of the Great Depression, while Graham was a lecturer at Columbia Business School. The book laid out the fundamental groundwork of value investing, which involves buying undervalued stocks with the potential to grow over time. At a time where the stock market was known to be a speculative vehicle, the notion of intrinsic value and margin of safety, which were first introduced in Security Analysis, paved the way for a fundamental analysis of stocks void of speculation.

With his system, Graham looked at the P/E ratio of a “zero-growth” stock, the previous twelve months earnings per share of the company being analyzed, and the projected long term growth of the company. In a 1974 revision he included the yield of a high-grade corporate bond and the yield of a risk-free investment in bonds such as an AAA corporate bond like we mentioned in our article about how to invest without losing money.

Long Term Growth

A key part of this approach is the estimation of long term growth. In this regard an investor needs to have a clear idea about how the company makes its money and how its business will continue to make money over many years. Smart long term investors avoid companies and whole sectors where they cannot be sure how well the company’s business plan will work in five, ten, or more years. There are many examples of stocks in the tech sector that looked great for a couple of years until someone else developed a better technology and drove their profits down. Thus, many stocks that you would choose for investment for five years or longer are those with basic products and services, a strong consumer base, and a margin of safety. The margin of safety can be money in the bank, property such as factories that are unencumbered by debt, or a brand name (like Coca Cola) that is known throughout the world.

Investments That Prosper in Good Times and Bad

Years ago we wrote an article about Investing in Beer. Since that time there have been mergers that have changed the available stocks to buy but the basic rationale is still OK. Basically, people celebrate during the good times by drinking beer and people drown their sorrows in the bad times by drinking beer! Beer, like dish soap, shampoo, tooth paste, soft drinks, and other consumer items is consumed no matter how the economy, the stock market, investments in gold, real estate, or commodities are doing.

Utilities are a common choice for long term investment. These companies have reliable customer bases and their stocks are often considered proxies for bonds because of their high and reliable dividends.

So, when the stock market starts to correct, investors will pile out of their “growth” stocks and buy consumer stocks like Procter and Gamble, Coca Cola, and Anheuser Busch InBev or a utility stock like Southern Company.

Should All of Your Investments Be Long Term?

One of the best investments in modern times was when people bought Microsoft the day it went public. Its offering price at the March 13, 1986 IPO was $21.Today, adjusted for stock splits the stock is hundreds of times more valuable and the adjusted quarterly dividend is a healthy multiple of the original stock price. If you only chose “safe” long term investments with very predictable growth, you would have missed buying Microsoft at the IPO. The answer to this dilemma is diversification. Successful long term investors put the majority of their assets in investments chosen for the long haul using the intrinsic value approach. But, they apportion part of their portfolio, perhaps ten or twenty percent for stocks with growth potential with the hope that these stocks will mature and become long term reliable money-makers.

How Do You Choose an Investment to Hold for Five Years? PPT

What Investments Will Prosper When the Trade War is Resolved?

As the G-20 summit approaches, many are hopeful that a scheduled meeting between the leaders of the USA and China will result in at least a temporary truce in the evolving trade war. Our take on this is that there are long-term, core issues that the USA needs to have addressed and which China does not want to talk about. So, the question for investors is, what investments will prosper when the trade war is resolved for good or for ill? But, first here is a bit of background on the trade war.

Possible Truce in Trade War?

The New York Times writes about the possibility of a China trade truce.

President Trump is projecting a steely facade as he prepares for a critical meeting on trade this weekend with President Xi Jinping of China. But behind his tough talk and threats of higher tariffs is a creeping anxiety about the costs of a prolonged trade war on the financial markets and the broader economy.

That could set the stage for a truce between the United States and China, several American officials said, in the form of an agreement that would delay new tariffs for several months while the world’s two largest economies try to work out the issues dividing them.

While a short-term truce might happen in order for talks to go on between the two nations, there are core issues that need to be resolved before the USA makes a new set of agreements.

Such an outcome is not certain. Administration officials have expressed deep disappointment with China’s response to Mr. Trump’s pressure so far, characterizing it as a list of proposals, transmitted in Chinese, which they say would do little to curb China’s theft of American technology or address its other predatory trade practices.

Can China Make the Changes Necessary to End the Trade War?

Our sister site, Forex Conspiracy Report, asks, Can China Make the Changes Necessary to End the Trade War?

The bottom line with China is that the folks who control the Communist Party intend to stay in control. Every time there is a choice between more economic, social and political freedom and a threat to Party authority, the Party wins. The problem for China is that it has become too successful and over-leveraged in its ambitions. The country has a huge and growing debt load and many wealth Chinese are taking money out of the country.

For the trade war to come to an amicable end, China needs to let foreign firms compete on her own soil and its needs to let companies in its manufacturing sector rise or fall on their own merit. And, avoid antagonizing even more of the rest of the world.

Can China make the changes necessary to end the trade war? The issue is not China making those decisions but an increasingly centralized Chinese hierarchy digging in to protect their control and virtual ownership of China.

With view of an intractable trade war in mind, what will the resolution look like and what investments will prosper when the trade war is resolved?

How Many Jobs Has Apple Created in China?

More than a year ago 24/7 Wall Street reported that Apple supports 4.8 million jobs in China. This is twice the number of jobs it supports in the USA.

Apple Inc. (NASDAQ: AAPL) announced Friday morning that it will invest more than 3.5 billion yuan (about $506 million) to establish research and development centers in Shanghai and Suzhou, China. But the most interesting bit in the announcement comes in the boilerplate at the end of the press release: “Apple has created and supported 4.8 million jobs in China” (thanks to Google Translate). That’s about 2.5 times the number of jobs the company claims to have created and supported in the United States.

The article goes on to note that the majority of these jobs are through the Taiwanese company, Foxconn, which assembles iPhones in mainland China.

This is a core issue in the trade war between the USA and China. Foxconn adds $10 to the cost of an iPhone by assembling in China. They have discussed opening a US facility but that would add $40 to the cost of an iPhone. Now Trump has suggested a 10% tariff on iPhones assembled in China and Apple’s stock has gone down.

Can US Companies Export Jobs but Not Technology?

Well over a million US manufacturing jobs have disappeared since China entered the World Trade Organization and greatly increased it exports. This does not count many other related jobs that are not directly in the manufacturing sector but in supporting industries. The basic argument is that if and when a company can produce products more efficiently and cheaper in the USA than in China, they will, and the balance of trade between the USA and China will improve. But a deeper problem is that US tech companies operating in China typically need to have Chinese partners and these partners are prone to steal US technology and then turn around and compete with the US “partners.” This is an even greater core issue going forward. In all likelihood China will never quit stealing intellectual property when given the chance.

Thus, any resolution of the trade war will likely not be totally pleasing to either side and perhaps the “resolution” may turn out to be a long term change in the trade relationships between China and the USA as well as between China and the rest of the world.

What Investments Will Prosper when the Trade War Is Resolved (for good or for ill)?

For the time being the US tech darlings, the FAANG stocks are questionable because their steady earnings growth may be about to reverse. Investments that will not lose money are high quality bonds and US treasuries. And, consumer stocks that have prospered through good times and bad include Coca Cola, Procter and Gamble, and Johnson & Johnson. It is worthwhile to note and Johnson and Johnson and Microsoft are the only two US companies whose bonds are rated AAA.

Until the picture becomes clearer in regard to the trade war, US value stocks in the consumer niche may well be the best bet as US tech stocks may not have seen the end of the pain of an economic downturn caused by the trade war, not to mention tariffs and sanctions.

What Investments Will Prosper When the Trade War is Resolved? PPT

How to Find Value Investments Offshore

As the bull market in stocks ages, US investors are rolling over their investments from a focus on growth to a focus on value. They are also looking offshore for foreign investment opportunities. Some choose to combine the two approaches, but how do you find value investments offshore? CNBC reports that Morgan Stanley is looking offshore for value and where to put your money for the next year and they specifically suggest Brazil, Thailand, Indonesia, India, Peru, and Poland.

Underpinning the bank’s preference for stocks in emerging markets is an expected stabilization in growth in those economies in 2019, while expansion in the U.S. is expected to slow.

The projected turnaround for emerging markets is one reason why the investment bank prefers stocks in those economies over that of the U.S. next year. Morgan Stanley said it upgraded emerging market stocks from “underweight” to “overweight” for 2019, while U.S. equities were downgraded to “underweight.”

So, if you too think that the US bull market has largely run its course and that the emerging market bear market has likewise stopped going down, why aren’t you investing offshore?

How to Find Value Investments Offshore: American Depositary Receipts

Unless you have specific knowledge and experience in foreign markets and with foreign investments, you may not know where to start. And, for that matter, you may not have the time to evaluate specific investments in specific countries. You can follow the advice of folks like Morgan Stanley, but what stocks to you look for in Brazil, Thailand, Indonesia, India, Peru, and Poland?

Once you have decided that a certain country is socially, politically, and economically stable, how do you pick stocks or other investments? One useful approach is to look at American Depositary Receipts or ADRs from any of these nations. Investopedia defines ADR.

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.

ADR holders do not have to transact in foreign currencies, because ADRs trade in U.S. dollars and clear through U.S. settlement systems. The U.S. banks require that the foreign companies provide them with detailed financial information, making it easier for investors to assess the company’s financial health compared to a foreign company that only transacts on international exchanges.

Because ADRs come with financial reports similar to those for US stocks, it is possible to make an intelligent decision regarding the financial strength of the company. As such this is logical way to find value investments offshore.

How to Find Value Investments Offshore: International Stock ETFs

Exchange traded funds or ETFs that include foreign stocks are also a viable route to take if you do not have a specific stock or country in mind. And when you do not have the time or expertise to find and evaluate specific investment opportunities you can look at ETFs that fit your needs. US News offers International Stock ETF rankings.

U.S. News has identified exchange-traded funds best suited for long-term investors seeking low-cost, diversified portfolios. Our rankings compare the cost and structure of hundreds of ETFs using our comprehensive methodology.

They group the international ETFs as follows:

  • China Region
  • Diversified Emerging Markets
  • Diversified Pacific/Asia
  • Europe Stock
  • Foreign Large Blend
  • Foreign Large Growth
  • Foreign Large Value
  • Foreign Small/Mid Blend
  • Foreign Small/Mid Value
  • Global Real Estate
  • India Equity
  • Japan Stock
  • Latin America Stock
  • Miscellaneous Region
  • Pacific/Asia ex-Japan Stock
  • World Large Stock
  • World Small/Mid Stock

Each of the groupings has two or three options. You can look at their methodology to see how they make their picks.

Since all ETFs are intended to track an underlying index (for a variety of equities, or the price of a commodity, for example), we aim to identify large, liquid funds that perform reliably and could function well as part of an investor’s long-term asset allocation plan. We also compare funds’ costs, both those contained in commonly published expense ratios and implied by trading spreads, as well as a fund’s level of diversification and success in tracking its index.

In this case you are not so interested in evaluating specific stocks as you are in knowing how well the fund is run, how well it tracks its basket of equities, and how well they control costs so that profits are passed on to you and not sucked up by the fund’s management. This is a reasonable approach to finding value investments offshore.

How to Find Value Investments Offshore: Country Risk and other Issues

Although one can find spectacular profits in foreign investments, one can also invest offshore and lose everything when the government confiscates private assets, descends into civil strife, or otherwise damages your investment. How to evaluate a country for investment starts as simply as looking it up on Google Maps!

The World Bank is an excellent source of information for investing offshore. Whether you are thinking about  foreign direct investment or buying ADRs, the World Bank has lots of great information to help you evaluate a country for investments. The World Bank business project lookes at the ease of doing business index. This is a ranking from one to 189 of all nations for how easy or how hard it is to do business there listed by several factors.

If you go to the World Bank links make sure to navigate to the most recent reports. Another useful source of general information about any given country is the CIA Factbook. This source will not give you specific information for specific investments but it will give you a good sense of the country, its economy, and the safety or risk of investing there.

How to Find Value Investments Offshore: Short or Long Term?

A few years ago everyone wanted to invest in Brazil. The markets collapsed for commodities and Brazil’s economy went with it. Both in the USA and offshore there are investments that look great and then they don’t. We wrote some time back about the resource curse of boom and bust cycles. If you believe that you can time the markets, some of these investments can be very profitable. But, if you simply want offshore investments that will grow over time and allow you to sleep at night, look for stocks and ETFs with long and stable track records.

How to Find Value Investments Offshore PPT

How the Reverse Wealth Effect Will Change Your Investing and Your Investments

The US stock market is entering a correction mode. There is a lot of speculation about whether this is a short-term buying opportunity or a longer term meltdown that will wipe out years of gains. Ideally, investors should use fundamental analysis of intrinsic stock value and technical analysis trading signals as guides, to buying and selling stocks, bonds, real estate and other investment vehicles. But, human nature being what it is, we invest more aggressively when the market goes up and pull back faster when the market goes down. A part of what is going on today is a reverse wealth effect. Here are some thoughts about this phenomenon and how the reverse wealth effect will change your investing and your investments.

The (Reverse) Wealth Effect

Investopedia defines and explains the wealth effect.

The wealth effect is a theory suggesting that when the value of equity portfolios are on the rise because of accelerating stock prices, individuals feel more comfortable and confident about their wealth, which will cause them to spend more. In 1968, for instance, economists were mystified when a 10 percent tax hike failed to put the brakes on consumer spending. Later, the sustained spending was credited to the wealth effect. Even though disposable income declined because of the additional tax burden, wealth continued to grow because the stock market persistently climbed higher.

The wealth effect was especially pronounced in the years leading up to the financial crisis and Great Recession. Low interest rates encouraged people to buy more expensive homes than they could otherwise afford because mortgage payments were so low. Many purchased second and third homes, using equity taken out of their primary residence, because they were now “so well off.” This wealth effect also drove up stock prices past when fundamentals and technical indicators would support.

When this effect has gone on for a while, smart investors start to sell and take profits. Prices go down, and we have a reverse wealth effect. In a Forbes articles entitled, 4 Reasons to Sell Your Stocks Today, the author says the reverse wealth effect will drive stock and real estate prices down, and is already doing so.

Economic statistics reveal a critical connection between stocks, real estate and human psychology. When stock prices rise, those who own them feel confident in bidding up the price of real estate. What’s more, when interest rates are low, they don’t mind borrowing lots of money to buy the houses. Conversely, when stocks fall, it does not take long for people to suffer from a reverse wealth effect.

This effect is multiplicative. When stock prices go down, folks who feel less wealthy tend to panic and sell in order to preserve some of their wealth. The falling markets in stocks and real estate drive others to feel the reverse wealth effect and the downward price movements accelerate.

And, the reverse wealth effect reduced people’s spending by about cents for every dollar reduction in personal wealth. So, not only will stock and real estate prices go down but spending will reduce across the board which will slow the economy, further adding to the declines in property values and stock prices.

How Bad Could This Get?

According to Investopedia, Morgan Stanley says the worst is yet to come.

“Not only does the price action this year suggest we are in the midst of a bear market-more than 40% of the stocks in the S&P 500 are down at least 20% – but it also trades like a bear market,” wrote the bank’s analysts. Even companies with good news to report have seen their stocks sell off, a good indicator that the market is in bear territory. Overall, says Morgan Stanley, “The technical damage is irrefutable.”

It is our opinion that as investors feel less and less wealthy, they will sell and take the markets down for a protracted bear market both in stocks and real estate. The losses will probably not wipe out all of the gains of the last years, but may still be substantial.

What Should You Do?

The answer to dealing with a market correction has to do with your investment horizon. If you were looking for short term gains, this is probably a good time to take them. If you are in for the long term, consider adjusting your portfolio, looking for investments that do not lose money, and wait for the bottom of the market to pick up bargains.

How the Reverse Wealth Effect Will Change Your Investing and Your Investments PPT

How Should You Invest Your Retirement Accounts?

According to a recent article in Market Watch the folks who have buying up stocks faster than anyone else in the last thirty years are those making family incomes of $42,000 a year. Why is that?

What’s changed since 1989? Access did.

Specifically, access to workplace retirement savings plans, like 401(k)s, and personal investment accounts, like IRAs.

Individual retirement plans in the USA hold about $9 Trillion and 401(k)’s hold about $5 Trillion. The entire US stock market has a capitalization of about $30 Trillion. And, since so many of us now have these tax-deferred vehicles, how should you invest your retirement accounts?

Long Term and Smart Investing for Retirement

Invest for the Long Term

The key to investing your 401(k) or IRA is to remember that the money will be for retirement. By waiting until retirement to take any money out of these vehicles, you will likely pay less in taxes because your income will be less than during your working years. And, of course, any capital gains will be long term because many of your investments will be ones that you have held for years.

Use Intrinsic Value as a Guide for Investments

Since you will be picking investments that you may well stay with for decades, we suggest that you take a couple of clues from perhaps the best long term investor, Warren Buffett. Buffett invests in the US stock market because its growth is tied to the growth of the US economy. He only invests in stocks when he has a clear understanding of how they make money and how they are likely to continue to do so for years and years. He was also a pupil of Benjamin Graham, the father of value investing and originator of the concept of intrinsic stock value. Thus, all of his investments are limited to stocks with a substantial margin of safety and the potential for healthy long term growth. U.S. News writes about Buffett in an article about why Buffett is a better investor than the rest of us.

Take Advantage of Tax-Deferral

There are companies that have been paying dividends for decades or ever for a century. Many investors simply have their dividends automatically reinvested. But, outside of your IRA or 401(k) you have to pay taxes on the dividends. But, when you buy these stocks for your retirement accounts, those reinvested dividends are not taxed until you withdraw from the account.

The Street lists 16 stocks that have been paying steadily increasing dividends for 50 years.

  • Coca Cola
  • Johnson & Johnson
  • Colgate-Palmolive
  • Procter & Gamble
  • 3M
  • Lowe’s
  • Genuine Parts Company
  • Dover Corporation
  • Emerson Electric
  • Parker Hannifin
  • American States Water Company
  • Cincinnati Financial
  • Lancaster Colony
  • Nordson Corporation
  • Northwest Natural Gas
  • Vectren Corporation

How you should invest your retirement accounts in these stocks is to learn about the companies that interest you. Do they dominate a huge market niche like Coca Cola does or are they a somewhat protected business like a utility with reliable profits year after year? Buffett has been quoted as saying he avoids tech stocks because he does not know what they will be worth in five years. But, he says that as an example he has a pretty clear idea about what a Snickers bar will be worth and that people will be buying them. The point of looking at this list of dividend stocks is that it tells you the company has been successful over the long term, which probably indicates they will remain successful during the years that you own their stock.

How Should You Invest Your Retirement Accounts: Diversification

We all wish that we had purchased a few shares of Microsoft when it went public back in the 1980s. The stock today is hundreds of times more valuable, taking stock splits into consideration and the dividend is many times the original value of the stock. If you had just purchased reliable dividend stocks back thirty years ago, you would have missed out on Microsoft.

The fact of the matter is that nobody, including Buffett, is perfect at picking investments or timing the market. That is why smart investors diversify their investment portfolios. Investopedia writes about the importance of diversification.

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event.

Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.

The aim is to invest in various assets so that they will not all be affected the same way by market events.

In general, investors think about interest rates, the economy, and the like when diversifying. However, this approach guarantees that you will miss out on the next Microsoft! Somewhere among the many biotech startups there are a couple of companies who ideas and products will change the world. Today there are already treatments for cancer that were not even though of just a few years ago. When the cures for diabetes, Alzheimer’s, and other devastating diseases come down the pike, those who invested early will do very well. Picking the right stock is difficult, but there are index funds that allow investors to put a few dollars into sectors that may pay off a thousand fold due to the accelerating advance of science.

The point of diversification is to reduce your risk from any specific investment and open opportunities for a big winner from an unexpected source. How you should invest your retirement accounts is to follow the advice of pros like Buffett, stay in the market for the long term, learn and apply the concept of intrinsic value, and diversify.

How Should You Invest Your Retirement Accounts? PPT

Why Do Signals Help You Make Smart Investing Choices?

Making smart investing choices is the key to making a profit and avoiding losses. But, how do you make smart choices? What analysts do you listen to and when do you follow the herd versus being a contrarian? There are signals that seem to occur in every market situation. But, why do signals help you make smart investing choices?

Avoiding the Twin Demons of Fear and Greed

When the value of an investment, like a stock, is going up, it is easy to become greedy. And, when the value of that investment starts to fall, it is easier to become fearful. These traits are not limited to you, Ms. or Mr. Investor. They tend to be shared by the majority of investors. Successful long term investors have gone through many business cycles and have come to recognize some basic signals. None other than Warren Buffett has advised investors to be fearful when others are greedy as noted in an article by Investopedia.

Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” This statement is somewhat of a contrarian view on stock markets and relates directly to the price of an asset: when others are greedy, prices typically boil over, and one should be cautious lest they overpay for an asset that subsequently leads to anemic returns. When others are fearful, it may present a good value buying opportunity.

The problem with applying this adage is market timing. For example, stocks have been on their way up for years. It is true that the S&P 500 is down on the day, week, and month. And it is unchanged from its value at the beginning of the year. But it is nicely up over 5 years and hugely up over ten years. In this regard, why do signals help you make smart investing choices? One good reason is that they help you avoid letting fear and greed drive your investing decisions.

The Market Follow-through

The stock market seems to be correcting, driven by a too-strong dollar, what is shaping up to be a permanent trade war, and the Trump tax cut stimulus wearing off. As such, many investors are adjusting their portfolios as witnessed by a flight to quality investments.

Each investment niche goes through cycles whether it is agricultural commodities, stocks, gold, or real estate. Basically, many investors think that the stock cycle is turning and they are hedging their bets, based on fundamental factors such as the trade war, tax cuts wearing off, higher interest rates and the dollar, and the risk of a global slowdown. But, remember that all investors are subject to the twin risks of fear and greed!

In regard to make smart investing decisions before and after a correction, we looked at an article in Investor’s Business Daily and a signal called the stock market follow-through.

The follow-through is a simple concept. It involves a significant gain in higher volume in the Nasdaq or S&P 500. After a serious correction on Wall Street, most follow-through days occur at least four days into a new rally attempt. IBD’s The Big Picture column flags these critical market turns. When it takes place, investors should actively search for leading stocks that break out from sound bases.

What these folks are talking about are opportunities to profit after stocks correct and before another rally takes place. (They also note that the signal is not infallible.) Nevertheless, it is a useful tool, but with it and others, why do signals help you make smart investing choices?

History Repeats Itself

The use of predictive tools to guide buying and selling in markets goes back a long way. Japanese rice traders in the times of the Samurai were using a tool they called a “candlestick” as a visual guide to trading, and predicting price movement in the rice market. Interestingly, a “bearish reversal pattern” in Japanese Candlesticks requires a follow-up confirmation day, just like the stock market follow-through. Both of these happen as a downward trend (bear market) starts to reverse, and both, when used correctly, can lead to impressive gains as the market or an individual stock heads back up.

How is it that both a modern “trading signal” and one that dates back to when there were still Samurai running Japan seem to be picking up on the same market movements? Technical trading signals are developed by looking at repeated market events and identifying similar pricing patterns that evolve in similar circumstances. We can assume that human emotions were the same for rice traders back in the days of the Samurai as they are today for those investing in and trading stocks. It would appear that the sum total of human emotions and human actions tend to reliably generate similar patterns in similar market situations. If you believe that history can repeat itself, perhaps you can benefit from some of these signals when this market corrects and then recovers.

Why Do Signals Help You Make Smart Investing Choices? PPT

Why Is There a Flight to Quality Investments?

The US stock market is down a bit as investors are flocking to quality stocks, as reported by CNBC. What is going on? Why is there a flight to quality investments?

Both before the market’s October sell-off and in the two-week bounce, investors have shown a clear preference for “quality” stocks.

Not the same as cheap “value” stocks, these are companies with less debt, stable businesses and some defensive characteristics in a tougher market or economy.

A grouping of such companies by Citi surfaced the likes of Walmart, McDonald’s, Pfizer, Procter & Gamble, Amgen and Quest Diagnostics.

While not predictive in itself, this pattern is one seen in the run-up to a bear market.

So, what is a quality stock? CNBC notes this.

Quality has no single, strict definition. But the common traits are a sturdy business not reliant on a strong economy; high and resilient profitability; and a strong balance sheet unburdened by much debt.

The point is that many investors are hedging their investment risk as the bull market gets older and older, the trade war does not appear to be going away, and a House of Representatives controlled by Democrats may be a thorn in the side of the Trump administration.

Does a Quality Investment Need to Be a Stock?

An investment that is highly likely or even guaranteed to make a profit and is very unlikely to or guaranteed not to produce a loss should be considered a quality investment. When the risk of an economic downturn or market collapse rears its ugly head, you might just want to choose an investment that will not lose money no matter what happens. In our article we noted that bank deposits are protected by Federal Deposit Insurance. US Treasuries are protected by the credit of the US government. High grade corporate bonds are quite safe. And, long term investing in value (quality) stocks is a way to preserve capital during a downturn and a experience gains as the economy and market improve.

Why Is This Happening Now?

Every investment niche has a cycle. Gold, real estate, agricultural commodities, stocks and any others, all go up and then come down. A steadily growing economy, low interest rates, vibrant global trade, and stability in the social and political arenas lead to higher values in all of these investment niches. But, it would appear that many investors think that the cycle is running its course. As an example, the S&P 500 is up only 4% this year despite the Trump tax cuts, repatriation of billions in offshore cash, a twenty percent increase in earnings, and about a trillion in stock buybacks. What happens in the coming months when the Fed continues to raise rates and a trade war with China starts to damage US agriculture? Folks may not be leaving the stock market, but a lot of them are repositioning themselves with expectations of a different looking investment scene in the coming months and perhaps years.

Is This an Investment Sea Change or a Just a Bump in the Road?

If you are a passive investor and only put your money in index funds, you need only pay attention to the general health of the economy and the sector in which you are invested. But, if you are heavily invested in individual stocks, you need to understand how that company makes its money and how it will continue to do so into the future. Years ago Kodak was a secure investment. It had invented the personal camera and dominated the production of camera film and its processing for photos. Then digital came along and Kodak’s business plan did not work anymore.
Apple stock dropped a few percent just this morning. One of their suppliers, Lumentum, reported that a large customer was reducing orders. The “bump in the road” interpretation is that Apple is just adjusting for a slower part of their business cycle. The “sea change” interpretation is that there is not much more room for Apple to expand their market share and that technological innovation elsewhere in the tech world will start doing damage to their business plan.

Why Is There a Flight to Quality Investments? PPT


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