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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 749 posts from scratch.

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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.

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 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.

Reward and Risk in Alternative Investments

The point of investing is to make a profit. Some folks are happy to stay a percent or two ahead of inflation and simply not lose any of their hard-earned money. And others would prefer to multiply their holding every few years. How do you find success in making more money and not taking on more risk? One of the approaches that have worked is to pool assets and then invest in a broad range of more risky but better paying alternative investments. In regard to reward and risk in alternative investments, we would like to look back a few years to Michael Milken and junk bonds and then fast forward to today and a company that is selling alternative investments and wants sell them to masses.

Michael Milken and Junk Bonds

When he was only a 20-year-old student at the Wharton School of Business, Michael Milken read something written by a member of the Federal Reserve Board and over the years put the idea into action. Companies that were poor investment risks had to pay much higher rates of interest in order to sell their bonds. Investors demanded a higher return because of the increased risk that the company would default on its debt. But, if an investor purchases a wide range of these bonds, the rate of return was such that, even with defaults, the total investment made a better return than high grade bonds.

Business Insider wrote an article about Milken that included his conviction for securities fraud and time in prison followed by a life of philanthropy. They describe the invention of the modern junk bond as the best thing to come to the world of finance in recent memory.

To this day, high-yield bonds, as they are now more genteelly known, remain a brilliant innovation because they elegantly solve a simple yet ubiquitous problem: They give companies with less than stellar credit ratings access to capital.

These bonds created and grew entire industries, such as wireless communications and cable television, just as they created and grew immense pools of wealth. Their invention combined with the packaging of credit card receivables, mortgage payments, and car loans into securitized products that loosened lending for individuals has done nothing less than bring about the democratization of finance.

In the case of high yield bonds, it turned out that by packaging them in large and diverse groups that the risk was simply part of the cost of doing business and these investments were more profitable than bonds issued by healthy blue chip companies. This idea has reemerged and brings us to a look at reward and risk in alternative investments today.

Is It Investor Populism or a Con Job?

Bloomberg just published an article entitled Populism Comes to Wall Street. The article is about a company named YieldStreet, their investment products and how they would prefer that the SEC relaxed its definition of a “qualified investor.”

One of YieldStreet’s founder, Milind Mehere is quoted as saying this.

“If we don’t change fundamentally how we save, invest, and actually make money as a society, there will be anarchy in 20 or 30 years,” he says.

The company says that they will democratize high finance and bring investment opportunities usually reserved for billionaires and hedge funds to the average investor. One of the keys would be to use a crowdfunding approach.

How do this company and its investment ideas compare to Milken’s development of the junk (high yield) bond industry that revolutionized finance? We know from hindsight that the junk bond idea works. What YieldStreet wants to do is in its early years.

Founded in 2015 by Mehere and two other Wall Street entrepreneurs, YieldStreet has allowed investors to put more than half a billion dollars into exotic debt securities. More than 80,000 people have signed up to receive its offering notices. Since inception, the investments have an expected internal rate of return of almost 13 percent and to date haven’t lost any principal. In the same period, the S&P 500 appreciated an annualized 9.3 percent. With many individual investors eager to juice their returns, some YieldStreet offerings sell out in seconds.

The thing that is holding this company back from expanding is the Security and Exchange Commission or more specifically its accredited investor rule. Investopedia defines accredited investor.

An accredited investor is a person or a business entity who is allowed to deal in securities that may not be registered with financial authorities. They are entitled to such privileged access if they satisfy one (or more) requirements regarding income, net worth, asset size, governance status or professional experience.

The point of the law is to protect naïve investors from losing their money. A rich investor may be naïve but has the protection of abundant wealth. And, a professional investor will have knowledge and experience needed to sort out and avoid dangerous investments.

To the extent that this sort of investment parallels junk bond funds, then excluding regular investors seems undemocratic and exclusive. But to the extent that investors need to have more information and expertise to invest in such a vehicle, the accredited investor rule is protective.

What Kinds of Investments Does YieldStreet Offer?

This gets to the important part of the discussion of reward and risk in alternative investments. Can you package them in such a way that the sheer earning power of a bunch of them offset an occasional loss?

Mehere says YieldStreet has its legal team looking at a fund structure in which nonaccredited investors may participate.

This all makes some people nervous, because what YieldStreet sells is unusual. Many of its offerings involve litigation finance, in which investors front money to law firms or plaintiffs hoping for a big settlement. More recently the company has moved into marine finance, allowing investors to participate in loans for cargo vessels that transport dry-bulk goods such as coal or grain. Or they could jump into a deal in which vessels are acquired and sold for scrap. Each offering is backed by collateral, but sometimes that’s a litigant’s contractual obligation to pay investors back-if there is a settlement-or the scrap value of a ship.

A bit of investigation by Bloomberg reveals a concern. In at least one instance, the guarantee of a borrower paying on the debt is said to be backed by their substantial wealth. But, there is no proof of any wealth!

Another issue seems to be that the company’s owners are using this vehicle do business with separately owned businesses that they (the YieldStreet owners) own or control. There is an issue of how they track and control any conflict of interest.

Not everyone is excited about this opportunity.

“The percentage of accredited investors for whom they are appropriate is quite small,” says Barbara Roper, director of investor protection at the Consumer Federation of America. “They like to make it sound like it’s populist,” she adds, “but this doesn’t belong anywhere in the portfolio of the typical retail investor.”

It is our opinion that this may be a way for the average investor to make more money on his investment. The proof will be in how it does over the years and in how well the company avoids using itself as a cash cow for its individual owners and their business interests.

Trade War Damages Investments in Agriculture

Over the years much of American agriculture has become a highly leveraged and high cost of entry business. How the trade war damages investments in agriculture is compounded by these facts. A recent article in The New York Times focuses on the loss of soybean markets in China due to the trade war and the damage that is doing to North Dakota soybean growers. Many investors have never visited, much less worked on, a farm or have any idea about how US agriculture has changed over the recent decades.

Mechanization and Consolidation of US Farms

The Midwestern USA is one of the breadbaskets of the world. The climate and soil are ideal for growing things and the USA is a major producer of corn, soybeans, wheat, cattle, pork, and poultry. Over the decades, starting with farm implement inventions in the 19th century, farming has become increasingly mechanized. A farmer with more farmland and the equipment to cultivate, plant, fertilize, deal with weeds, and harvest more efficiently makes a better profit. Since a big tractor can just as easily be used to plow and plant 320 acres instead of 160 acres (half a square mile versus a quarter of a square mile), a farmer with more farmland can be more efficient and more profitable than a smaller farmer. This has led to bigger farms, more investment, and greater investment risk in American agriculture. Here are just a couple of examples.

Bigger Farms and More Investment Required

In Iowa the average farm size in 1950 was 169 acres. By 2002 the average farm size was 350 acres. (Iowa State University)

The average price per acre of medium quality farmland in Iowa in 1950 was $300 and by 2010 an acre sold for just over $8,000.

In North Dakota the number of farms was reduced by half between 1950 and the average farm size increased by 647 acres to 1241 acres. ( Infrastructure)
North Dakota farmland sold for less than $100 an acre in 1950 and now the price is around $1,900 an acre.

The cost of running a farm is demonstrated by this graph from Infrastructure.


To understand how the trade war damages investments in agriculture, look at the costs agricultural production.

Farm Costs by Year North Dakota


This is a composite of all farm expenses for the years 1949 to 2010. The “bottom line” is that total costs of operation across the state went from around $300 million in 1950 to the $6 billion to $7 billion range by 2010.

Crop Prices, Markets, and Farm Survival

When the price of corn, soybeans, or wheat goes up dramatically, farmers tend to plant more of that crop the next year. The law of supply and demand being what it is, when there is more corn, soybeans, or wheat produced the next year, the price does down. And, since other nations like Brazil, Argentina, Ukraine, China, Australia, and nations in Europe all grow these crops, their production has be taken into account as well.

The ideal situation is that you own your farmland, buildings, and equipment without any debt. So, you “only” need a crop price that is high enough to cover your production costs and then you have a profit. Unfortunately, crop prices go up and down and they can do so dramatically. A good many farmers have been ruined by a bad year with low prices and high production costs. Those with money or credit survive, buy more farmland, and thus farms get bigger while there are fewer farmers. But, how is it that the trade war damages investments in agriculture?

Will the Trade War End or Will the Soybeans Rot?

The New York Times published an informative article about the dilemma of North Dakota soybean farms and the associated businesses that support soybean production, storage, shipping, and sales. The bottom line is these farmers need to trade war to end before their soybeans rot because it has been a great production year that has outstripped storage capacity.

Farmers here in Cass County have prospered over the last two decades by growing more soybeans than any other county in the United States, and by shipping most of those beans across the Pacific Ocean to feed Chinese pigs and chickens.

But this year, the Chinese have all but stopped buying. The largest market for one of America’s largest exports has shut its doors. The Chinese government imposed a tariff on American soybeans in response to the Trump administration’s tariffs on Chinese goods. The latest federal data, through mid-October, shows American soybean sales to China have declined by 94 percent from last year’s harvest.

In the last 20 years North Dakota farmers have increased acreage devoted to planting soybeans from 450,000 to 6,400,000. Along with this increase in production has come the construction of millions of dollars-worth of grain elevators (huge buildings for storage), more loading facilities, more hundred-car-trains to carry the soybeans, and more farm implements used plant and harvest soybeans.

If you look at the graph from SoyTransportation.Org, you can appreciate how the total costs that go into modern agricultural production have led to a very high cost of entry and very leveraged business. A young farmer simply cannot afford to buy the land and equipment to start in a business like soybean farming. And, if he does have some capital, he runs the risk of two three bad years when he starts out and being ruined essentially before he starts. There is an old joke in farm country.

What would you go if you inherited a million dollars?
Well, I guess I would go into farming until the money was all gone.

It is a measure of the risk of investments in farming today that many that grew up on farms did not stay there. However, they kept the land. The ideal situation for these folks is that they receive a rent check in the mail every March 1 while the farmer working their works the land and either profits from a good year or sees losses when a trade war takes away markets that took decades to gain access to.

According to the Times, the trade war may do lasting damage to soybean growers.

“I’ve been to China 25 times in the last decade talking about the dependability of U.S. soybeans,” said Kirk Leeds, the chief executive of the Iowa Soybean Association. By undermining that reputation, he said, “We have done long-term damage to the industry.”

Although the last couple of years were very profitable, younger farmers with more debt are in trouble.

But the mood is souring quickly. Mr. Gebeke’s wife, Debra, a retired psychologist, has returned to work at North Dakota State University, to counsel distraught farmers. Public health officials in North Dakota, already confronting a recent rise in suicides, are concerned about the impact of falling prices, particularly on younger farmers with high levels of debt.

Investments in agriculture can be very profitable over the years but typically one needs to have sufficient capital to ride out down markets. And, American agriculture needs to be able to keep the markets that it has cultivated over time.

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