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Investing in Stocks

The reason for investing in stocks is to attain financial security. While some people may make a spectacular investment decision by chance, the vast majority who succeed at investing in stocks save their money and invest over a long period of time. Success in investing starts with defining your goals. What do you want to get out of investing? Make a list with the most important goals like having enough money for retirement, putting your children through college, or saving up to start your own business at the top of the list. Then consider how many years are left for you to attain each of these goals. The point is that your choice of investments needs to fit the available time frame.

(U.S. Securities and Exchange Commission: Define Your Goals)

The best returns on investment over the years come from routine stock investments.

Investing in Stocks

Investing in stocks needs to be part of your total financial strategy. Before you start putting money into the stock market, pay off your credit card debt. A typical interest rate on credit card debt is 24% per year. You are not likely to get this rate of return as a novice investor, so pay off your credit cards before investing in stocks. And, put three months-worth of expenses in the bank so that you are not continually selling your stocks to cover routine living expenses! Now you are ready to consider how to invest.

Investing in Stocks vs Bonds

For those who have heard the horror stories of folks losing everything in the 2008 stock market crash and financial crisis, how to invest without losing any money is a major issue. As we note in our article about investing and not losing money, a portion of your investment portfolio should be conservative. A simple way to do this is to purchase certificates of deposit at your bank. These are protected against loss up to $250,000 per depositor per bank by the Federal Deposit Insurance Corporation, an agency of the U.S. government.

(FDIC: Deposit Insurance at a Glance)

Alternatively, U.S. Treasuries are backed by the “full faith and credit” of the U.S. government and will not result in any losses if held to maturity. The next conservative investment in line is an AAA corporate bond. The two U.S. corporations with this bond rating are Microsoft and Johnson & Johnson.

 

Besides investing in stocks, consider AAA corporate bonds like Microsoft of Johnson & Johnson

Microsoft Logo

 

But, in order to attain your goals you probably need to get a larger return on investment than with these conservative vehicles. Over the years, stocks have offered the most potential for growth.

(Fidelity: Three Reasons to Invest in Stocks)

This brings us to the mechanics of investing stocks. The best approach according to most experts is to allocate a set amount of money with each paycheck, every quarter or annually as money becomes available. Then, which is best, investing in stocks now or later, investing in stocks with dividends, letting a mutual fund do your investing for you, putting your money in index funds, or simply investing in stocks online by yourself.

Investing in Stocks Now

Once you have put your financial house in order it is time to invest in stocks. When you invest early in life you get to take advantage of the exponential growth of wise investments. The rationale is that a well-chosen investment in the stock market may appreciate as much as 12% a year on the average. When you leave this investment in place you benefit from the “rule of 72.” Divide the number 72 by your average yearly percent return on an investment. This gives you the number of years required to double that investment!

With a common stock whose appreciation plus dividends come to 12% on the average it will take six years to double your money. Start investing in stocks now when you are 25 years old and you will have seven x six = 42 years until you reach age 67. Double your investment seven times and you will get a 2x2x2x2x2x2x2=128 fold appreciation on your initial investment! The $100 that you invest in a well-chosen stock at age 25 could be worth 128 x $100 = $12,800 and that is just the $100 that you invested in one month.

The basic reason that investing in stocks builds wealth better over the long term is that with stocks you get more “doublings” over the years when you start early and continue over the years.

(Investopedia: Rule 72)

Investing in Stocks with Dividends

In our article about dividend stocks, we note that some companies have routinely paid dividends for more than a century. Not only is such an accomplishment an indication of the safety of such investments but when dividends are reinvested and added to the usual stock appreciation it makes “rule 72” work faster! Look for companies with dividend reinvestment plans when considering dividend stocks.

Investing in Stocks vs Index Funds

Although we would like to think we can pick the best investments, even experienced fund managers can have a hard time beating the S&P 500 over the years. As such, many investors choose a fund that tracks a major stock index like the S&P 500 or a sub-category of the S&P 500 such as consumer staples, consumer discretionary, energy, communication services, financials, health care, industrials, materials, information technology, real estate, and utilities. And, there are many sub-sectors within each of these categories as well. We commonly suggest that if you are picking your own investments that you should start with things that you know about as your knowledge and insights will give you an advantage over other investors.

(The Balance: Sectors and Industries of the S&P 500)

 

A good option when investing in stocks is to simply invest in an index that tracks the S&P 500

S&P 500 All Through January 2019

 

Investing in Stocks Short Term vs Long Term

Short term investing requires skill at market timing. Basically, you need to recognize an opportunity early in the game, make your investment, and then sell when the stock reaches a plateau or starts to fade. There are investors whose only method of investing in stocks is this approach. While some of these folks do very well, many routinely lose money chasing an elusive dream. When an investor repeatedly buys and sells stocks he or she incurs a cost with every transaction. Fees and commissions can eat up what would otherwise be moderate profits. This is the main reason why old, rich investing legends like Warren Buffett do not try to time the market. Rather they look for long term value and unique buying opportunities.

Long term investors know that the eventual price of a stock is determined by its intrinsic stock value. This is the value of the stock based on its projected future earnings. Successful long term investors only invest in stocks when they clearly understand how the company makes money and how their business plan will result in continued earnings into the distant future. Carrying this approach to success requires a bit of homework and patience. Imitating the investment portfolios of the most successful investors like Buffett is a place to start. Buffett himself has said that as he and his team look for clear indications of strong intrinsic stock value they end up throwing out 19 out of 20 possible investments.

 

When investing stocks a good way to start is to copy the investments of "old pros" like Warren Buffett and buy stocks like coca cola

Coca Cola

 

The best way to start with this method is by imitation of successful investors and then add more investments of your own as you gain experience. A key factor is to keep track of what you have in your portfolio and use the intrinsic value calculation contained in our article to not only decide what to buy when investing in stocks but what to unload when the company’s business plan is no longer working!

Investing in Stocks vs Mutual Funds

Many folks have the money and want to save and invest for retirement, sending the kids to college, or being able to afford to live the life they always dreamed. These same folks may well be too busy with their work and their lives to devote sufficient time and effort to making and following their investments with the degree of skill and attention that they deserve. Many of these folks will look for someone to invest for them. One approach is a mutual fund. Fidelity explains what a mutual fund is.

Mutual funds are investments that pool your money together with other investors to purchase shares of a collection of stocks, bonds, or other securities, referred to as a portfolio, that might be difficult to recreate on your own. Mutual funds are typically overseen by a portfolio manager.

(Fidelity: What Are Mutual Funds?)

There are several advantages to investing in a mutual fund instead of directly investing in stocks. First of all, stocks like Amazon.com sell for more than $1,700 a share and shares of Warren Buffett’s Berkshire Hathaway Class A stock sell for more than $300,000 a share! These are good investments and anyone who is routinely investing $100 a month cannot buy a single share. But, a mutual fund can and they do. A well-managed mutual fund invests in a range of stocks, bonds, and other investments to provide a good return on investment for the investors in the fund.

The “downsides” to investing in a mutual fund are two. The investor pays a fee to have his or her money “managed” by the fund. And, all too often, a mutual fund does not outperform an index fund that tracks the S&P 500! But, if you do not have the time and energy to do your own investing in stocks, consider a well-managed mutual fund with low fees or simply put your money into an index fund that tracks the S&P 500.

Investing in Stocks Online

For many investors, the old days of going through a traditional stockbroker for investing in stocks are gone. Today many if not most investors use an online stock broker. A good online broker offers research capabilities and often does not require an account minimum and does not charge annual fees like a mutual fund would. Popular online brokers include Vanguard, E-Trade, Fidelity, Charles Schwab, Ameritrade, and Merrill Edge. The same principles apply to investing in stocks online as to investing through a broker. On one hand, you will not be sold a “bill of goods” on a stock by a broker who is “pushing” it this week, which is a good thing. And, on the other hand, you will not have a wise old investment pro to guide you towards good investment choices and away from bad ones either.

Is Investing in Stocks Worth It?

Some folks will read this article and think that investing in stocks sounds like a lot of work. They will rightfully wonder if it is worth it to invest in stocks rather than simply putting their money in U.S. Treasuries or CDs in their bank. The truth of the matter is that if you are building an investment portfolio for retirement, to start your own business, to pay for college, and to live the life of your dreams, you need a balanced investment portfolio.

This means putting some money in the bank, building a ladder of CDs, purchasing US treasuries and AA corporate bonds, and investing in stocks. Always remember that you need to balance safety with the power to grow your investments. However, the “rule of 7” works best for well-chosen stocks. If you are not up to the challenge of picking your own individual stocks due to time constraints, go with index funds or swallow hard and pick a mutual fund.


How to Spot a Value Trap Investment

Over the years we have often cautioned investors to beware of penny stocks, especially those that have seen better days. While investing in a grand old name in hopes of a recovery it is important to learn how to spot a value trap investment. This issue came up recently when we wondered what was wrong at Kraft Heinz. As bargains become harder to find in an aging bull market there is a temptation to go bottom feeding in search of an investment miracle. Here is some advice about what to watch out for.

 

If you are going to invest in Kraft Heinz today you need to know how to spot a value trap investment.

Kraft Heinz Products

 

Spotting a Value Trap

A couple of years back Bloomberg published a useful article with 12 signs a cheap stock is a value trap.

The historically high price-to-earnings ratios being placed on equities today make cheap stocks even more alluring. That makes sense, but be advised that the market is littered with “value traps” or stocks that look cheap but never substantially rebound.

Any way you cut it, value is profoundly out of favor, and not just in 2017. Although proponents of these investments typically are patient people, the long-term differential is large enough to be worrisome. Over the last 10 years, growth has outperformed value by more than 100 percent in small caps and by 50 percent in large caps.

Thus, knowing how to spot a value trap is doubly important at this time. Here are dozen suggestions from Bloomberg. The ideas are theirs but rewritten by us for the sake of brevity.

Still Troubled at the Top of Its Operating Cycle

The U.S. economy and the vast majority of stocks have long recovered from the 2008 stock market crash and financial crisis. If the company you are looking at is performing poorly in the best of times it may well be a value trap. Something is wrong as is not being fixed or cannot be repaired.

Low Profits but High Management Compensation

When a company falls on hard times it typically puts the screws to management by cutting salaries and tying compensation benefits to performance. When this is not the case, management is milking the company for every last dollar before bailing out. This is a strong sign of the stock being a value trap.

Lack of Fresh Insights

When an industry like the U.S. auto industry is centered in one city or area like Detroit, everyone works with and socializes with like-minded people. But, when fresh ideas are needed this can be a real hindrance and create value traps of otherwise strong companies.

Market Share Continues to Slip

When someone else starts taking market share away from an old stalwart, you need to see them fighting with all that they have to regain that share and succeeding. Otherwise, they have become a value trap.

Too Many Fingers in the Pie

Many times a well-established company has many stakeholders such as labor unions, foundations, or old family control. The goals of these folks may not be consistent with a good return on investment by those who hold their stock. Consider such companies to be value traps until proven otherwise.

Not Managing Capital Effectively

A company that has historically been a cash cow may have gotten by for years by just putting money in the bank instead of reinvesting in R&D, acquisitions, and the like. When this company starts to slip it needs to shift gears or it is a value trap. And, the changes in how they manage capital need to be clearly articulated to investors and need to begin to show results.

Fat and Inefficient Management Structure

It is said that when Sears built the Sears Tower that they took up 22 floors for management, each floor a different level. No one was paying attention to how management was being carried out and no one was making changes. When a company does not upgrade and modernize how it operates on the day by day and decision by decision level, it becomes a value trap because its competitors will outperform it every day of the year.

Unrealistic and Fantasy Management Goals

When a company is in trouble it needs to regroup and it needs to explain those plans to both employees and investors. When management’s new goals are simply unrealistic no good will come of them. You can often see this by looking at old financial statements and the goals articulated in previous years and the fact that nothing useful has happened, ever! This situation is a clear sign that the company is a huge value trap. The better situation is when management promises a little but delivers a lot on a recurring basis.

Too Much Debt

The final nail in the coffin of most struggling companies is that they cannot pay their mounting debts with their dwindling cash flow. No matter how hard they try, how creative they are, and how much they economize, excessive debt is a killer and makes a stock a value trap.

Muddled Thinking and Poor Insight

The so-called strategic vision or the company is all muddled or simply lacking. When management’s plans for the coming years ramble on and repeat themselves, it is time to consider that stock a value trap, absorb your losses, and move on.

Split Attention between CEO and Board Chairman Responsibilities

When it is time to turn around a failing company it takes all of the time and attention that the CEO has. When he is spending a third of the time answering to the board of directors when he or she should be making changes from the ground up that is a sign of impending failure. Turnarounds need the full attention of the CEO or they become and remain value traps.

The Takeover Activists Are Nowhere in Sight

When a company has been mismanaged but has a lot of hidden value, there is always a Carl Icahn or his clone interested. When nobody shows up, that is a clear sign that the company really is a value trap and you should avoid it as well!

How to Spot a Value Trap Investment

The tips provided by Bloomberg are useful in spotting and avoiding a value trap. They all fall into the categories of fundamental analysis and evaluation of intrinsic stock value. While growth stocks have been leading the market in the last few years, there is a definite place for value in your portfolio. The trick is recognizing true and lasting value in an investment by understanding and appreciating how a company makes its money and how it will continue to do so well into the future.

 

How to spot a value trap is to consider the story of Eastman Kodak's rise to dominance and eventual decline.

Eastman Kodak


Is Your Investment Story Profitable?

Successful investors have a story that drives their investment decisions. A prime example is Warren Buffett who notes that the U.S. stock market prospers on the back of a growing U.S. economy. He looks for companies that reliably generate profits year after year and is a disciple of the intrinsic stock value approach to investing as he was, in fact, a student of Benjamin Graham who discovered that approach. So, the man who is perhaps the most successful investor of all time has a simple story that drives his investing. Is your investment story profitable?

Simple Investment Stories

The concept of investment stories came to mind after reading an article posted a couple of years ago by Motif. They noted that simple stories drive markets. The article is a good read as they look at investment themes that dominated investing during various periods and how those themes worked out over the longer haul.

You know that adage, “stocks are sold, not bought”? What often drives stocks are simple, plausible stories. In fact, Nobel-winning economist Robert Shiller has made the case for how both financial markets and economies are heavily influenced by stories.

Investors often call these stories their “investment thesis.”  We at Motif like to call them themes, ideas, trends, or motifs. We believe it is far more intuitive for investors to think this way rather than the traditional investment “style boxes” used by mutual funds or risk premium “factors” favored by academics. For example, “small cap value,” which combines academia’s two favorite factors into a mutual fund style box, doesn’t resonate with most investors.

We ask, is your investment story profitable? We might also ask if the current investment story will continue to be profitable or will collapse like a house of cards bringing on another stock market crash, financial crisis, and financial ruin for many. While the Buffett investment story is for long term, buy and hold investors, there are perfectly profitable investment stories for the short term. But, they require that you are able to get in at the right time and get out while the getting is still good.

An example they bring up in the Motif article is the stimulus to the market by ultra-low interest rates in the years following the financial crisis.

For example, the market’s belief in the power of the Fed’s experiments with ultra-low interest rates and quantitative easing (QE) helped drive the S&P 500 much higher from 2010 to 2014, though those policies may ultimately prove disastrous in the long run, as market bears believe.

Right now, no one, including the Fed, knows the long-term impact of these actions.  But much to the chagrin of market bears, until a bear market disaster finally hits, financial markets can and do move significantly higher than one may expect based on pure fundamentals, such as earnings growth, cash flows, price-earnings ratios, credit spreads, and yield curves.

The same to a lesser degree can be said for the Trump tax stimulus which put a lot of money in the hands or corporate America, allowed for repeated stock buybacks, and may well have keep the market up in the last year. A problem with stories is believing in them after they are no longer true or believing in a story when something else is what is driving the market. This is when investors overstay their welcome and not only see their dreams of profits go up in smoke but watch their investment capital go the same way as well!

Is Your Investment Story True?

There is a lot of hype in the markets, especially when a company wants to float an IPO. There are also stories offered by companies that have fallen on hard times and are hoping that they can attract new investors and keep their stock price from falling too drastically. We have written that dividend stocks can be perilous when an investor just looks at the size of the dividend and does not do any fundamental analysis of the company involved. If a company’s stock falls precipitously and they do not change their dividend, investors may be attracted by a 12% or 15% dividend which will disappear in a flash the next quarter as the company “regroups.”

 

When you see Kraft Heinz as a rebound opportunity, is your investment story profitable or are you falling into a value trap?

Kraft Heinz Products

 

An investment story that turns out not to have been as true as we might have liked is Kraft Heinz. This was considered a “widow and orphan” stock, solid with a good dividend. But, these folks have not keep up with changing food tastes and preferences of the American consumer. As such, any attempt at creating a story about this stock in preparation for a recovery are met with skepticism and the suspicious that this stock is now a value trap. Nevertheless, there may be smart enough investors out there who will be able to anticipate when Kraft Heinz has fallen enough to be a good buy again. Then the story needs to be the recovery of a grand old company. Time will tell on this one.

What Will the Boeing Story Be?

We just asked in a recent article, Why Invest in Boeing? We were pretty positive about this company as a long term investment based on their technological expertise and dominance across several areas of aerospace endeavors. But, now there have been two crashes of the new 737 Max 8 jet and both China and Indonesia have ordered these jets to be grounded until the problem can be figured out. It is especially worrisome that some experts are saying that new automated technology designed to make these jets safer may have malfunctioned and caused both planes to crash shortly after takeoff.
Boeing fell 11% on the news and could fall more if these events lead to a general discomfort with Boeing technology. Investors in Boeing will need to decide what they investment story is with the aviation giant and be ready to change that story as events unfold!

 

When you look at Boeing as the perfect investment is your investment story profitable to leading you into long term losses?

Boeing 787 Dreamliner

 

Constantly Re-evaluating Your Investment Story

If your investment story is the same as Warren Buffett’s, you have two tasks to perform. One is to simply keep track of the growth of the American economy and the other is to find and analyze prospective investments. But, if your investment story is the story of the day such as the growth of emerging markets, the migration industrial production out of China and into other Asian economies, or a miraculous resolution of the Brexit mess, this will require constant attention and a good hand at market timing.

A good investment story that lets you sleep at night may be less profitable but a red hot investment story that makes great short term profits may be the stuff of headaches and ulcers.


When Are Cheap Investments the Best Investments?

A couple of years ago we wrote to beware of penny stocks. The point being that cheap investments are not necessarily good investments. After all, there is probably a good reason why a stock is selling for a low price. On the other hand, companies that are just starting out and are not being watched by Wall Street analysts may be very promising but no one is watching. The bottom line for stock value (as opposed to price) is intrinsic stock value. When you have unique insights about the stock in question and the big guys are not watching, you can often make very profitable investments in this area. In this regard we got to thinking, when are cheap investments the best investments?

The Largest Valuation Gap in 70 Years

CNBC writes about the current gap between cheap and expensive stocks. This is called the valuation gap and it is historically large. The last time there was such a difference between the high flyers and the lowest echelons of the stock market was when Harry Truman was President, the world was ravaged from World War II, and the Korean War was brewing.

For investors struggling to find opportunities after a stellar rebound in the aging bull market, value stocks might be the best bet.

Case in point: Cheaply priced stocks are getting cheaper as expensive stocks have gotten extremely pricey, pushing the valuation gap to the widest in 70 years, according to AB Bernstein. The record dispersion puts cheap equities in a sweet spot as other pockets of the market start losing the appeal because of their high prices.

What the analyst emphasizes is that the best time for buying value stocks is the point at which valuations have been spread out the most. Many analysts have commented that this must recent upsurge in the stock market is certainly not being driven by value and fundamentals as earnings are getting worse and growth projections in the USA and abroad are not very positive.

 

When are cheap investments the best investments? It is when the valuation gap looks like it does today.

Stock Market Valuation Gap

 

What CNBC says is from a technical perspective as they look at value stocks as a technical factor. It turns out that when valuations surge to extreme levels, the value stocks whose prices have been left behind tend to outperform in the coming six to twelve months.

Of course, for long term value investors, when fundamental analysis of a stock shows value and the price is low, this becomes a historic buying opportunity.

Unique Investments in Industry “Disruptors”

In this case, we take a look back a couple of years at Trade Desk which was selling for $29 a share after its IPO in September of 2016 and was trading at $49 as recently as May of 2018. Since then the stock has taken off and is pushing $200 a share today. When are cheap investments the best investments in cases like Trade Desk? It is when they change how things are done in an industry or even create entirely new sectors. When this happens it often takes insight more so than analysis of fundamentals to get in when the valuation is still cheap. But, companies like Microsoft and Apple were similar stories back in the day and have routinely offered buying opportunities along the way.

Doing Your Homework on Cheap Investments

Yahoo Finance looks at cheap stocks as well and suggests 7 cheap stocks with potential for price appreciation. They also offer a note of caution about just looking at the cheap part!

Stocks under $5 usually aren’t the best stocks. After all, almost every company prices their initial public offering at $10 per share or more. Thus, if a stock is trading under $5, that means the stock has most likely been subject to a 50%-plus sell-off, which is a sign that the company is having major trouble.

For this reason alone, stocks under $5 should be classified as high-risk stocks by investors.

But, some of them should also be classified as high-reward stocks. Again, stocks under $5 got there because investors sold them in bunches. That means investor sentiment surrounding these stocks is depressed, and expectations are low. If the company can top those low expectations and sentiment dramatically improves, these same really beaten up stocks can become huge overnight winners.

They mention both Snap and Pandora with both doubled in stock price recently. The seven that they offer as buying opportunities are these.

Blue Apron: makes meal kits
Pier 1: Struggling but possibly recovering retailer
Big 5 Sporting Goods: sells sporting goods
Groupon: coupon and savings platform whose demise is not imminent
Francesca’s: woman’s clothing retailer up for acquisition
Blink: charges electronic vehicles
Sirius XM: broadcasting

The arguments for buying these stocks range from “all of the damage has already been done” to “putting their house in order” to “just wait until the need for their services catches up” which is the case for Blink as more and more electronic vehicles are sold.

In each case, investors should be wary and should realize that these stocks are risky propositions. And, in every case, these are not stocks to buy hold and forget about unless you have an investing “death wish!”

Recognizing the Right Value Story

There are times when the stock of a company is falling like a rock and everyone is bailing out, only to discover that the investment makes a huge comeback. One case in point was Sears several years ago. Yes, Sears was the leading retailer, fell behind the times and lost pretty much everything. Even today it is in trouble. But, in the early days of its demise the stock made a huge comeback. This was because investors finally realized how much property Sears owned!

Unencumbered property is generally considered part of a company’s margin of safety. However, in the case of Sears, they were unable to change how they did business, stay ahead of the issue of online sales, and only delayed the inevitable by selling their real estate arm to General Growth in 1995.

Nevertheless, for anyone who looked past Sears as a cheap and dying stock, recognized them as a real estate investment, and then purchased shares, it was a great investment. However, that factor only lasted while it lasted, making Sears a very good investment for a very short time.

 

When Are Cheap Investments the Best Investments? It is when nobody recognizes their hidden value.

Sears Was Briefly a Great Investment

 

When Are Cheap Investments the Best Investments?

The moral to this story is that cheap investments are the best investments when the market is looking elsewhere, when there is overlooked value, and when market enthusiasm drives up valuations into the stratosphere while leaving value stocks behind. Such may be the case today.

Why Invest in Boeing?

Not long ago we wrote about whether or not Boeing would need to outsource production in order to remain profitable. That question largely had to do with the threat of a long-term trade war and Boeing potentially losing markets as a result. The trade war may well be on its way to at least a temporary resolution so the question is why invest in Boeing over the long term? Essentially Boeing is a cash cow with a dominant position in an increasingly higher and higher cost of entry business. Its only real competitor is Airbus as the two of them control more than 85% of the commercial aviation market.

Boeing

Boeing was founded by William Boeing in 1916 as Pacific Aero Products Co. He changed the name to The Boeing Company two years later. In 1997 Boeing merged with McDonnell Douglas in 1997. Boeing is the largest US exporter by dollar amount. The company ranks number five in the world as a defense contractor. Boeing manufactures and sells airplanes, rockets, satellites, and helicopters of its own design. It also leases products and provides lifetime product support to everything that it sells.

High Cost of Entry Business

Why invest in Boeing? Our first reason is that they are in a high cost of entry business. They deal in state of the art, high technology, and produce very expensive products, which they are able to routinely sell at handsome, profits for years and even decades. The amounts money needed to compete in this arena are huge, the skill sets needed take decades to develop, and the base technologies are closely held.

State of the Art Jets

The most recent major addition to Boeing’s fleet of jets is the 787 Dreamliner. This wide-body, long haul, mid-sized jet is roughly a fifth more fuel-efficient than its predecessors and competitors. Built with composite materials, the plane is lighter and cheaper to operate than other jets of comparable size and range.

Its noise-reducing features are state of the art as are it mostly electrical flight systems. The jet entered testing in 2009 and finished testing in 2011. Boeing spent roughly $32 Billion developing this jet.

 

The Dreamliner is one of the main reason why to invest in Boeing.

Boeing 787 Dreamliner

 

Not only did Boeing spend $32 Billion in development, but also it took just over 10 years from concept to a flying and sellable jet. Now the 787 is a mainstay in the commercial aviation market and Boeing is looking to develop the next start-of-the-art commercial jet. The only other company with comparable resources is Airbus.

Missiles and Satellites

Going back to the Minuteman missiles in silos across the wheat fields of North Dakota and grasslands of Montana to the current partnership with Lockheed Martin in the United Launch Alliance, Boeing has been in the rocket business. They still maintain missiles for the US nuclear deterrent and run the United Launch Alliance with Lockheed Martin. They maintained the Space Shuttles when that program was still running. This is again, a high cost of entry business that takes huge amounts of resources, state of the art technological skills, and the capacity to guard what are essentially state secrets forever.

 

Because Boeing is part of the United Launch Alliance is Why Invest in Boeing

United Launch Alliance Orion

 

Boeing does this work and does it at a profit as part of its Defense, Space, and Security division. This company is one of the mainstays of US military readiness and able to make a steady profit year in and year out.

Why Invest in Boeing?

As we so often come back to on these pages, long term successful investing depends on the analysis of intrinsic stock value and Boeing has this is spades! The company routinely makes money. This ability starts with the ability to turn new technology into marketable products. But, it is more with Boeing because they have such a wide range of skills and virtually control the commercial jet business along with Airbus. When they have to, they share little and inconsequential parts of their knowledge base to do offshore fabrication to maintain customer bases. Then they do all design, critical manufacturing, and assembly in the USA.

Adding Boeing to Your Portfolio

The Motley Fool writes about 3 Stocks to Build Your Portfolio Around. The first on their list is Boeing.

If you’re looking for one stock to build your portfolio around, one great company you can count on to hold its value over time while paying you a steady dividend, I can’t think of a better place to start than Boeing.

In business for more than a century, Boeing clearly has staying power. This company isn’t going to disappear until someone invents a better way to move quickly over long distances across large bodies of land and water. And while Boeing doesn’t have a monopoly on building planes, it arguably has the next best thing: an oligopoly between it and its rival Airbus, which between them account for roughly 88% of all commercial aircraft revenue.

With $13.6 billion in annual free cash flow to back up its $10.5 billion in reported earnings, you know that Boeing’s earnings are of exceedingly high quality, and more than sufficient to cover the dividend. Boeing’s payout ratio, in fact, is a very low 38%, meaning that only 38% of earnings suffice to pay the entire dividend.

Boeing has been paying dividends for decades and has been steadily increasing their dividend for the last seven years.

Boeing is a major player in commercial aviation and in the defense industry. This allows it to use technologies and skill sets developed in one arena and apply them to another. They are also important to the US economy as the exporter who rivals all of US agriculture in how much money they bring back to the USA. Although Boeing has substantial cash reserves, they do not have a large hoard of cash offshore.

There are certainly companies that have grown faster, but as the folks at The Motley Fool note, until someone invents a new technology for moving people and cargo quickly from one continent to another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.

another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.

How Can You Invest in Artificial Intelligence?

Back in the day when Jobs and Wozniak invented the Apple computer they simply used existing technology to provide folks with their own personal computer. As computer technology has advanced over the last forty years it has been incorporated into PCs, laptops, tablets, and smart phones. Investors who profited were the ones who put their money in companies that made the best use of better and better technology. Today the “new wave” of technology is artificial intelligence. How can you invest in artificial intelligence? There are not very many companies that are pure AI investments. But, many of the tech giants and others are using AI for advanced products and services. The key to profits in this arena will be in the use to which AI is put and the profit potential of that application.

Artificial Intelligence

Computers can process information much faster than humans but can they think? The concept of artificial intelligence goes back to the 1950s and Alan Turing (inventor of the computer system that cracked the German Enigma Code). Turing wondered if we would ever create machine that could “reason at the level of a human being.” The “Turing test” is that “computers need to complete reasoning puzzles as well as humans in order to be considered thinking in an autonomous manner.”

A more current view is that in order to have artificial intelligence at computer system must display intentionality, intelligence, and adaptability.

Intentionality

A key feature of the algorithms that make up artificial intelligence is that they allow computers to make decisions. They do this by having access to vast amount of digital information, having remote sensors, and having incredibly fast processing power. Thus such a computer system can process huge amounts of information almost instantaneously to make real world decisions. The use of artificial intelligence in self-driving cars is a prime example.

Self-Learning (Intelligence)

Artificial intelligence systems learn from their mistakes and can correct their programming to avoid making the same errors again. Such systems can keep learning and improving their performance. They can spot relevant information within huge amounts of data and make predictions that even intelligent humans would find hard to make. Such systems require intelligent programming as well because the system needs useful input to make useful predictions.

Adaptability

A key feature of artificial intelligence is that the smart, decision-making, and self-learning system can adapt. They learn from their own experience and this takes them beyond what the programmer or database might have predicted.

(Brookings Institute, What Is Artificial Intelligence?)

 

Alan Turing was the first to envision artificial intelligence. How can you invest in artificial intelligence today?

Alan Turing

 

Self-Driving Vehicles

The reason why artificial intelligence can be applied to self-driving vehicles to day is because of the speed of data processing, size of databases, improved remote sensors, and programming that ties all of this together. The programming sets the parameters for the autonomous vehicle and then it learns “on the road.”

The Data Driven Investor writes about artificial intelligence and autonomous vehicles.

The automotive AI market reported that it is expected to be valued at $783 million in 2017 and expected to reach close to $11k million by 2025, at a CAGR of about 38.5%. IHS Markit predicted that the installation rate of AI-based systems of new vehicles would rise by 109% in 2025, compared to the adoption rate of 8% in 2015. AI-based systems will become a standard in new vehicles especially in these two categories:

  • Infotainment human-machine interface, including speech recognition and gesture recognition, eye tracking and driver monitoring, virtual assistance and natural language interfaces.
  • Advanced Driver Assistance Systems (ADAS) and autonomous vehicles, including camera-based machine vision systems, radar-based detection units, driver condition evaluation and sensor fusion engine control units (ECUs).

Deep learning technology, which is a technique for implementing machine learning (an approach to achieve AI), is expected to be the largest and the fastest-growing technology in the automotive AI market. It is currently being used in voice recognition, voice search, recommendation engines, sentiment analysis, image recognition and motion detection in autonomous vehicles.

So, how can you invest in artificial intelligence? We recently asked if it is time to buy GM based on their moving into electric and autonomous vehicles. We noted in that article that the self-driving car market could be worth as much as $7 Trillion by the middle of the century!

The Many Applications of Artificial Intelligence

Investor’s Business Daily writes about artificial intelligence stocks and notes, as we did, that although there are few companies that are strictly AI investments there are lots of companies applying the technology to their products and services.

It’s no secret that Alphabet (GOOGL), Microsoft (MSFT), Facebook (FB) and Amazon.com (AMZN) are all spending big bucks on AI technology. The tech giants are putting AI in consumer products and services, such as voice-activated smart home devices. Amazon, Google and Microsoft also are pushing AI technology into cloud computing.

Other companies highlighted in the article are IBM, Accenture, Epam Systems, Adobe Systems, Salesforce.com, Trade Desk, MTCH, IAC, Five9, Nvidia, Fortinet, Palo Alto Networks, VISA, and MasterCard.

The point is that artificial intelligence will have many possible applications. And, it will be how effectively a company applies the technology that will make the difference for the investor.

Selling Picks and Shovels Instead of Digging for Gold

A famous observation from the days of the 19th century California Gold Rush was that you were more likely to prosper selling picks and shovels to eager miners than by digging for gold yourself.

This thought may apply to the field of artificial intelligence as well. Applications of this advanced technology require lots and lots of advanced chips. The leader in this area so far is Nvidia but companies like Tesla are now starting to design and manufacture their own chips.

Forbes reported on why Tesla dropped Nvidia’s AI platform last year and replaced it with its own.

According to Musk, the Nvidia Drive PX2 computing platform – with one Pascal GPU and 2 Parker processors or CPUs – currently used in Tesla’s custom autonomous computerAutopilot Hardware 2.5 can process 200 frames a second, compared to “over 2,000 frames a second” with full redundancy and fail-over with Tesla’s designed computer.

Nvidia supplies chips for the likes of Mercedes and Honda. To the extent that a maker of self-driving cars wants to buy their chips instead of building that technology from the ground up, they will use someone like Nvidia, a leader in the field.

 

How can you invest in artificial intelligence? The Waymo Self-driving car uses AI!

Waymo Self-driving Car

What Was Wrong at Kraft Heinz?

Last week the stock of the packaged food giant, Kraft Heinz, took a nosedive. The stock fell by 28% on news of a SEC investigation of the company’s accounting practices but more so the nosedive was due to gigantic losses in the last year. The package food business is very competitive and companies need to balance quality, price, advertising, and new product lines in order to stay competitive as much so as to gain an advantage. What was wrong at Kraft Heinz was that they seem to have lost their way. Cost cutting became the order of the day in order to maintain healthy profit margins. But, consumer tastes are always evolving and old, tried and true products can easily lose ground, especially in an era when everyone wants “organic.”

Kraft Heinz

Kraft Heinz was formed just a few years ago in a merger of two companies with hundred-year histories, Kraft Foods and Heinz, the famous ketchup maker. The deal was pushed by none other than Warren Buffett and is a classic Buffett investment. The so-called “Oracle of Omaha” only invests in companies when he fully understands how they make money and how they will continue to do so for years on end. The company formed by two packaged food stalwarts was a typical Buffett investment and is company, Berkshire Hathaway, owns slightly more than a quarter of Kraft Heinz stock shares.

Management sought to make the company more profitable by cutting $1.7 Billion in “excess costs.” And, prior to the recent debacle, Kraft Heinz as returning more per shareholder dollar than competitors like General Mills. That is no longer the case!

The company traded for $80 a share after the merger and from early 2016 to the middle of 2017 rose to the $90 range. Since that time the cost cutting at Kraft Heinz was not working so well as the share price gradually fell to the upper $40 range. Then the bombshell exploded.

This graph shows us part of what was wrong at Kraft Heinz

Kraft Heinz Stock Price

 

CNN reported that Kraft Heinz posted a huge loss and revealed an SEC investigation.

Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15 billion, posted a $12.6 billion loss, cut its dividend by 36% and announced its accounting practices are under investigation by the Securities and Exchange Commission.

Some pundits have referred to an “existential crisis” for Kraft Heinz. On the other hand, Warren Buffett who holds a fourth of the stock and suffered a loss of more then $4 Billion, says he expects to be holding the stock five years from now. His comment was that management seems to have gotten confused about cost cutting and consumer tastes.

Millennials, Organic Foods, and Amazon.com

A strong “selling point” for Kraft Heinz, General Mills, Unilever, Mondelez International, Nestle, and the like is that they have products with strong brand name recognition. Kraft macaroni and cheese, Heinz ketchup, and Oscar Meyer processed meats have been around for a long, long time. But, does the generation of millennials want these products or something with the label “organic?” Now that Amazon.com is running Whole Foods, there is a huge marketing machine pushing organic foods and the convenience that Amazon.com has created with home delivery.

The take home point from what went wrong at Kraft Heinz was probably that they quit thinking about what the consumer wants and thought their product line was golden and would sell forever. So, they focused on cutting costs. It is amazing really how such a large company with so many bright people could have missed this at their stock faltered over the last couple of years.

 

What was wrong with Kraft Heinz was that management did not pay attention to their product line

Kraft Heinz Products

 

Beware of a Visit by the SEC

CNBC reported the SEC subpoena.

Kraft also disclosed the SEC subpoena is part of an investigation into its procurement and accounting policies. The company said it launched an internal investigation into the matter after receiving the subpoena. Following its investigation, Kraft Heinz said it posted a $25 million increase to the cost of products sold after determining it was “immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods.”

This may be a minor issue, blown out of proportion due to the huge stock loss and inventory write down. Or it might not be. Kraft Heinz has enough problems right now and does not need to have the SEC on their doorstep. But, that is how it is.

Is Kraft Heinz a Stock to Buy Right Now?

We write frequently about intrinsic stock value and long term investing. When a stock takes a hit but the company still has the ability to generate good profits over the long term, it is a good buy for a long term investor who is willing to wait and whose preferred length of holding a stock is forever. The issue with Kraft Heinz is if they can revitalize their old product line, add new items, spiff up the old ones and do so in such a manner as to bring back sales, profits, and their stock price.

It is of interest that Warren Buffett says that he believes he will holding that stock in five years. That is a good vote of confidence. On the other hand, he might be expected to say that in order to stock the decline of the Kraft Heinz stock price. In the case of Berkshire Hathaway’s investment in Kraft Heinz it will be instructive to see if they buy more of the stock, sell the stock, or simply hold their ground in the coming months.

The concern for long term value investors is that Buffett got it wrong this time around and that Kraft Heinz is now selling at its appropriate price considering the changes in the packed food industry and its aging product line. If that is the case, this is not a stock to buy and wait for bounce or recovery and not a stock to hold for the long term!

Panic Buying of Investments Is a Bad Sign

A friend of ours commented recently that panic buying of investments is a bad sign. He is old enough to remember when the three Hunt brothers tried to corner the silver market and failed.

Panic Buying of Silver in 1979 to 1980

The boom and bust of silver prices is remembered as Silver Thursday, March 27, 1980. Silver was trading at around $6 an ounce in early 1979 and as the brothers purchased increasingly larger amounts of silver on margin, the price rose to $49.45 by January 18, 1980. By that time the three Hunt brothers controlled a third of all silver on earth that was not in government hands!

Our friend commented on how people were taking money out of their bank accounts to buy silver as the price went up. Specifically, when the plumber came out to fix a leaky pipe at our friend’s home, the plumber confessed that he had “invested” his life savings of $30,000 in silver bullion so that he could retire soon.

The sad fact of the matter for our friend’s plumber is that the COMEX tightened margin requirements with Silver Rule 7 and when the price of silver fell ever so slightly, the Hunts did not have the cash to meet their margin call of $100,000,000. They had to sell at huge losses and the price of silver fell by half in just four days. Silver traded at $15 an ounce by June of 1982 and at $6.46 in January of 1993.

Needless to say the plumber lost a large portion of his life savings.

 

The story of the Hunt brothers trying to corner the silver market reminds us that panic buying of investments is a bad sign

Hunt Brothers Testifying before Congressional Committee

 

Panic Buying of Bitcoin

Our friend is now well into retirement and living in Latin America. He met a realtor in the coffee growing and mountainous region of Colombia when looking at property there. This was in December of 2017. While Bitcoin had started the year at $900, it was approaching $20,000 and everyone wanted to know how to join in the profits. The realtor admitted that she had emptied her bank account and bought Bitcoin at $15,000. She was so pleased that her investment had gone up right away and that her Bitcoins (3 of them) were worth $19,000 each! She, like the plumber two generations before, envisioned an early and comfortable retirement.

Our friend used his best Spanish in trying to relate the story of the plumber, the Hunt Brothers, and the boom and bust of silver. The lady kept talking about how anyone with any sense should be buying Bitcoin right now (¡Ahora Mismo!).

Bitcoin peaked on December 17, 2017 at $19,783.06 and by December 22 was selling for $13,800. By February 5, 2018 you could buy a Bitcoin for $6,300 and by Halloween the cryptocurrency had stabilized at $6,300.

Our friend has not had any further contact with the realtor but suspects that any plans for an early retirement have been put aside indefinitely.

 

Thinking about how panic buying of investments is a bad sign brings to mind the Bitcoin boom and bust of 2017-2018

Bitcoin Debacle

 

Panic Buying of Investments Is a Bad Sign

The twin demons of investing are fear and greed. Warren Buffett has often been quoted to the effect that the time to buy is when everyone is afraid and selling their investments and the time to sell is when everyone is buying in a panic. The point is that stocks, real estate, commodities, Bitcoin, and the rest all overshoot their fundamental or intrinsic value when investors imitate lemmings and march in large herds to their doom. This works both in bull and bear markets. And, because the memories of some investors are as short as those of the lemmings, it happens again and again and again.

Panic Buying of Investments Today

CNBC writes that panic buying is likely to drive up stock prices in the near term.

Stocks could get a short-term boost as fear of missing out on gains leads more investors to plow more money into the U.S. equity market, analysts said.

The S&P 500 rose more than 2 percent last week, posting its seventh weekly gain in the last eight. The surge in stocks comes as investors increasingly bet China and the U.S. will strike a trade deal in the near future. It also follows the Federal Reserve signaling it will be patient in tightening monetary policy.

The rationale of smart investors who are buying stocks today is probably that the trade war will averted at the last minute and that the stock market will resume its upward climb as the Fed backs off from its interest rate increases. Unfortunately, as we wrote recently, we could win the trade war and lose on investments.

What is important to note in the CNBC article is that they project a “short-term boost” and not necessarily a resumption of a strong and sustained bull market. In this regard panic buying of investments is a bad sign. Buying shares of companies like Apple, Amazon, or Microsoft today should not be compared to buying silver when the Hunts were cornering the market or when everyone went crazy about Bitcoin. Nevertheless, there are real concerns about the economy, both local and global, and particularly in over-grown and debt-heavy areas like China.

The Trump tax cut was, in the end, a bust for hiring and investment and will have added another trillion dollars to an already-huge US national debt. There may be hope for investment offshore in places like Brazil simply because they were hit so badly when commodity prices collapsed that they have room to recover and because they are still a developing nation with lots of infrastructure needs.

Take-Home Lesson about Panic Buying of Investments

The bottom line of this trip down memory lane is that panic is not a viable investment strategy. Whether you are scared that your investments will lose value or that you are missing out on an opportunity, jumping the gun and selling or buying in response to a moment of panic is a bad idea. Panic buying of investments is a bad sign for the markets because this usually leads to an overshoot in prices which will then correct, sometimes greatly. Then the latecomers to an investment will suffer all of the damage.

As we repeatedly advise our readers, doing routine fundamental analysis of your investments or investment opportunities is where to start. There are certainly times when investment opportunities arise and moving quickly is the only way to make a profit. But, smart investors limit their scope of investing to what they know and pass on getting into investments that they do not understand and where they cannot adequately assess the likelihood of future profits from increasing cash flow.

Panic Buying of Investments Is a Bad Sign PPT

Time to Invest in GM?

General Motors was once the largest corporation in the world and the king of U.S. auto makers. Foreign competition ate away at its customer base and profits and the financial crisis dealt the final blow. In 2009 the once-king of U.S. automakers filed for Chapter 11 bankruptcy protection with US$172.81 billion in debts and US$82.29 billion in assets. The company divested itself of numerous assets keeping the Chevrolet, Cadillac, GMC, and Buick brands as well as controlling interests in numerous foreign automobile operations. After reorganization, the new GM emerged in a $20.6 Billion IPO in November of 2010. Any money invested in the new GM at the time of its IPO has doubled, counting dividends and stock appreciation. All of this having been said, is it time to invest in GM for the long term?

Is It Time to Invest in GM?

Simply based on its dividend of 3.9% and a share price that is just 6.1 times its projected earnings, GM looks attractive. This may well be why Warren Buffett increased the Berkshire Hathaway stake in GM to 37% and now holds 5.1% of GM shares. However, projected earnings that are the big question for all automakers these days. The industry is undergoing fundamental changes and only those automakers that adapt, innovate, and work with maximum efficiency will survive and prosper. If you believe that GM will lead the group of survivors, then you believe that it is time to invest in GM.

The factors that we see affecting the auto industry all derive from new technologies and the effects of these technologies on how we live, communicate, work, buy services, own cars (or not), and drive (or not).

Electric Cars

The leader in the field of commercially producing and selling electric cars has been Tesla. Tesla was founded in 2003 and after ten years of making electric cars was the best-selling manufacturer of plug-in electric passenger cars by 2018. They have delivered almost a quarter of a million electric vehicles and have a market share of 12%. Many in the auto industry see the electric car or electric-gasoline hybrids as the future of the auto industry.

And GM has been selling electric cars as well and is catching up to Tesla. According to Investor’s Business Daily, as if January of 2019 GM joins Tesla in the top tier of electric car sales, having sold more than 200,000 electric vehicles at which level the Federal Electric Vehicle Tax Credit starts to reduce. (Tesla passed this milestone in July of 2018.)

 

Tesla in another consideration if you wonder if it is time to invest in GM

Tesla Electric Car

 

The issue with Tesla for years has been a huge amount of debt and not enough sales to show a profit. One of the factors that have supported Tesla has been the $7,500 tax credit for those who purchase electric cars. As the tax credit goes down, Tesla is having to sell their cars for less to make them competitive and this cuts into their attempts to make a profit.

In the electric car arena, GM needs to produce good cars to compete with and beat the likes of Tesla and do so at a profit. Those who believe that it is time to invest in GM also believe that GM can do this.

 

The Chevy Cruze is a good reason to think that it is time to buy GM.

Chevy Cruze Electric Car

 

Self-Driving Cars

This may be a much smaller niche in the near term, but as computer technology and artificial intelligence advance, we may come to a point where all cars offer the option of letting the car drive itself. Seeking Alpha looks at the self-driving unit at GM and says it could be valued at more than the rest of the company combined. The writer predicts a world-wide autonomous car market of $7 Trillion by the middle of the century!

More information and detail about the autonomous vehicle market can be found at Allied Market Research.

Autonomous Vehicle Market by Level of Automation (Level 3, Level 4, and Level 5) and Component (Hardware, Software, and Service) and Application (Civil, Robo Taxi, Self-driving Bus, Ride Share, Self-driving Truck, and Ride Hail) – Global Opportunity Analysis and Industry Forecast, 2019-2026

As the complicated introduction indicates, there are a lot of players involved and a lot of pieces to this puzzle from the level of automation of the vehicle to the type of vehicle and how it will be used.

An autonomous vehicle also known as a self-driving vehicle uses artificial intelligence (AI) software, light detection & ranging (LiDAR), and RADAR sensing technology, which is further used to monitor a 60-meter range around the car and to form an active 3D map of the current environment. The vehicle is designed to travel between destinations without a human operator.

To accomplish this goal, the auto used LiDAR, RADAR sensors, and sophisticated computer software. Developing each subsystem and integrating all of it is a complicated task and must be carried out with maximum efficiency in order for a company to make a profit!

A lot of major automakers are working on this technology as are auto suppliers, technology providers and even service providers.

Automakers include General Motors, Daimler AG, Ford Motor Company., Volkswagen Group, BMW AG, Renault-Nissan-Mitsubishi alliance, Volvo-Autoliv-Ericsson-Zenuity alliance, Groupe SA, AB Volvo, Toyota Motor Corporation, and Tesla Inc.

Technology companies include Waymo, NVDIA Corporation, Intel Corporation, Baidu, and Samsung.

Additional companies are Robert Bosch GMBH, Aptiv, Continental AG, Denso Corporation, Uber, Lyft and Didi Chuxing.

That is a lot of folks to keep track of. The consensus of experts is that Waymo is the technology leader in this field followed by GM. Waymo, by the way, is a subsidiary of Alphabet (Google)!
The short version is that GM is one of the two leaders in work to developing, market and sell self-driving autonomous vehicles.
If you see GM as successful in this quest, it is time to invest in GM!

 

The Waymo Self-driving car is a step ahead of the GM Cruise. Consider then when you wonder is it time to invest in GM?

Waymo Self-driving Car

 

Who Is Going to Own Cars in the Future?

A factor to consider when investing in any automaker is that more and more people cannot afford to buy or least a car. And many of these folks live in large cities where public transportation is an option. These folks can rent a car by the day or even by the hour when they really want or need an automobile.

This may well reduce the overall demand for vehicles and put more cars into the hands of rental agencies and the likes of Uber. The ability of downsize as needed and the ability to sell to a global sales network will be important for future auto industry success.

Who Will Sell Cars in Asia?

Access for foreign markets will also be important to the success of automakers of the future. Despite the threat of a trade war and bullying from the current U.S. president, GM is likely to stay in China where its profit margins are better than in North America and where it and its partner have a decent market share. If you believe that GM is wisely staying where the business is, then it is tie to invest in GM. The concern about GM in China is not GM but China. The Land of Managed Capitalism has a bunch of problems, not the least of which is the trade war with the USA. Nevertheless, Asia is a grown area while North America and Europe are mature markets. A company that is smart enough to reduce production capacity where it is selling fewer cars and beefing it up where sales are still healthy is a good bet. Maybe it is time to invest in GM.

Time to Invest in GM? PPT

Win the Trade War and Lose on Your Investments

The trade negotiations between the USA and China are coming to a head. Will there be genuine gains for the USA? We have written how both the USA and China have issues that they see as crucial to their national prosperity and security in our article about if the trade war becomes permanent. However, neither side wants to suffer the economic pain that could come out of a protracted trade war. China, especially, is seeing economic difficulties on the horizon and needs to do something sooner rather than later. So, there may well be a deal forthcoming. However, from the USA point of view, it is probably possible to win the trade war and lose on your investments. How is that possible?

Win the Trade War and Lose on Your Investments

An article in Market Watch caught our eye. They note that a trade-war win might not be a victory for the stock market!

Sometimes losing can pay dividends in unexpected ways, and that seems particularly true in the case of stocks and trade.

For the past five decades, the U.S. stock market has comparatively outperformed when the trade deficit widened and vice versa, suggesting that even if the U.S. emerges victorious from its trade war with China, investors may have few reasons to rejoice.

At face value, it may seem counterintuitive, but for the U.S., which relies on trade to fuel its economic juggernaut, a deficit can actually be a sign that all is well.

They provide a graph that demonstrates how this has worked since 1970.

 

If you want to know how you can win the trade war and lose on your investments, start by looking at this graph.

Trade Deficit versus U.S. Stock Price Index

 

(Market Watch)

How Will a Trade War Win Relate to the Stock Market?

We have no reason to dispute the figures provided by Market Watch. It would indeed appear that when the trade deficit goes up that the stock market rises too. And the opposite seems also to be true, at least for the last half of a century. But, a relationship does not prove cause and effect.

In the Market Watch article they note that when the rest of the world is doing well economically and the U.S.A. is not doing so well, US exports may rise but US imports will fall off because people have less money and buy less. So, the balance of trade is better but the stock market suffers. And, when the USA is doing well economically, people buy more foreign products and the balance of trade worsens. Thus the balance of trade worsens but the stock market goes up.

The point is that in the past both the stock market and the U.S.A. balance of payments have been driven by consumer spending in the U.S.A. albeit in different directions. Will this be the case with a new trade deal?

What Kind of Trade Deal Can We Expect?

Many believe that as pressure mounts on both sides to make a deal, that a deal will happen, but it will not be as comprehensive as the U.S.A. wants or needs. Both China and the U.S.A. see trade, intellectual property, and control of whole economic sectors as existential issues. Thus both sides want more than the other can give. This especially applies to the Chinese Communist Party which fears for its survival if it gives up its heavy-handed control of the Chinese economy and Chinese society. Thus, there will likely be a deal and continued wrangling over issues into the distant future. And, to the extent that a trade deal results in a better balance of payments for the U.S.A. that may not be a good thing for your investments. But, the reasons might be different than what Market Watch describes.

A bone of contention on the US side is that China makes promises regarding access to its markets and protection of intellectual property and does not follow through. The US negotiators want to build in automatic increases in tariffs that will kick in when the Chinese continue with their old tricks of promising and not delivering.

It could be that higher tariffs on Chinese goods may become a permanent part of the equation. Either Trump will raise tariffs because there is no deal or tariffs will be triggered by non-compliance on the Chinese side.

Tariffs and the Balance of Trade

Tariffs by themselves do not affect the balance of trade. Rather, the consumer’s choice to pick another product due to the high tariff-added cost of a foreign product my result in purchasing from a domestic producer. That is the ideal solution for the U.S.A. if it wants to bring more manufacturing back into the USA. However, the Chinese have taken over whole sections of industry. For example, 70% of electronic production capacity is now in China. The bad end result of high tariffs for US consumers is that they simply pay more for imports from China because nobody else is producing what the consumer wants! When that happens, it raises prices for consumers in the USA but does not help the balance of payments. And, because consumer dollars are now going to pay for tariffs, it hurts the economy as well. If that turns out to be the case, there will no longer be a better stock market when people are buying more foreign products.

What Can You Do?

One can always hope for the best, but smart investors will look for better opportunities. Those opportunities may lie offshore from the USA. Then the issue is how to find value investments offshore. We recently wrote about investing offshore in Brazil and in our most recent article about job cutbacks in China we mentioned using foreign direct investment data from the World Bank as a guide to where offshore to invest.

On the other hand, if the China give ground and really let US and other foreign companies into the Chinese market and if they really turn around and protect intellectual property, and if they finally loosen controls on private industry, there could be an economic boom in China that would benefit any number of US multinationals. But, while you are waiting for an outcome of trade talks, a little re-balancing of your portfolio to include a few offshore stocks might well be in order.

 

If you are concern that we will win the trade are and lose on your investments, take a look at Brazil as an investment opportunity.

Foreign Direct Investment in Brazil

Win the Trade War and Lose on Your Investments PPT


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