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Investing Metrics You Should Pay Attention To

Shortsightedness is never a virtue in investing. Time and time again over the years too many investors jump into bull markets too late, stay too long, and lose their shirts. Along with the assessment of intrinsic stock value, what are the investing metrics you should pay attention to when investing in stocks today? Here are a few thoughts on the subject. Our treatment of this is in no way complete but rather intended to point investors in the right direction during a time of market uncertainty.

What Are Investing Metrics and Why Should You Care?

As noted by Investopedia, investing metrics are quantitative measures used to assess current performance and predict future performance. The key to using metrics is choosing the right ones to watch and then learning how to read them. For example, the P/E ratio is generally considered one of the best ways for value investors to assess the value of one stock compared to others. Unfortunately, stock prices can be manipulated on a short term basis with stock buybacks. And, financial statements can be manipulated to make earnings appear greater than they really are. This does not mean that you should throw out the P/E ratio as a useful metric. Rather, it means that you should use more than one metric to assess your investments.

Investing Metrics You Should Pay Attention To

We write again and again on this site about using intrinsic value as a guide. This approach seeks to determine the forward-looking income stream of a company. Smart long term investors only invest in companies that have products and services they understand and a clear way that their business plan will make money for years to come. Success depends on the company, its products and services, and management. And, it depends on the economy. No matter how great a widget a company makes, it won’t make any profits if no one has the money to buy those widgets.

The Global Macro Monitor blog has some interesting comments in this regard in their post, How Far Can the Stock Market Run?

Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate.  That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages.

Micro measures, such as Price-to-Earnings are way too distorted by buybacks and can be easily manipulated by CFOs, who play around with variables such as depreciation or loss reserves.

Our two favorite are 1) market cap-to-GDP, which, according to Warren Buffet is, “the best single measure of where valuations stand at any given moment.”   Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash,  2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well.  The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.

This is the first chart he refers to.

Investing metrics you should pay attention to include market cap to GDP

(Global Macro Monitor)

The commonly used micro investing metrics are these.

  • Price to Earnings Ratio
  • Price to Book Ratio
  • Debt to Equity
  • PEG Ratio
  • Free Cash Flow

The commonly used macro investing metrics are these.

  • GDP
  • Market Cap to GDP Ratio
  • Average Number of Work Hours Needed to Buy the S&P 500
  • Bonds yields (e.g. inverted yield curve)

Using Investment Metrics

Micro metrics are useful in evaluating individual stocks. Macro metrics are useful when deciding when it is time to pull your investments out of the stock market and hold cash. Depending on the status of your macro investing metrics, you will choose to stay with your current investments or consider how to invest without losing any money by sticking with investments that will not crash when the market does.

Will There Be a Trade War Peace Dividend?

The president stated recently that there is a partial deal in the works to advance talks in the trade war between the USA and China. Part of our speculation as this story has played out is about what investments will do well when the trade war is resolved. In that regard, Apple rose to an all-time high on the news. Will there be a trade war peace dividend? If so, this is the time to jump in with both feet. Or, is this just more posturing with a permanent trade war the more likely course?

Will There Be a Trade War Peace Dividend?

Bloomberg notes that a potential trade thaw sent stocks up.

Signs of progress in U.S.-China trade talks sent stocks to the biggest gain in a week and had Wall Street handicappers making odds on a bigger rally to come.

The S&P 500 Index climbed to within 1.8% of a record after President Donald Trump said the two sides agreed to the outlines of a deal that could be signed as early as next month. The equity benchmark rose 1.1% Friday, closing off its session highs since several of the thorniest trade problems remain unresolved. Equities also got a boost from signs of progress in Brexit negotiations.

At JPMorgan Chase & Co., strategists led by John Normand estimated there is 10% upside or more in the stock market under a “blue sky” scenario where agreements are reached in both cases, based on the way past geopolitical crises played out.

Is There Likely to Be a Trade Thaw?

We have been writing about this issue ever since Trump started the trade wars with China and everyone else. And, we have noted that the issues go a lot deeper than the balance of trade. The USA does not want to lose global technological and economic leadership and China wants to displace the USA at the top. A core issue is the intent of the Chinese Communist Party to stay in control and direct the economy instead of letting a true market-driven economy develop. The demands of Chinese companies for technology transfers as the price of access to their markets are a key issue.

To the extent that a partial trade deal addresses these key issues, it is possible that a trade thaw will happen. Trump needs some sort of deal going into the 2020 election. And, the deal will need to benefit his supporters! The Chinese are watching their economy slow down and trade suffer. They need help before they replicate the collapse of the Japanese economic miracle of the 1980s.

How Will a Trade Thaw Help Your Investments?

Investors do not like uncertainty. When Iran hijacks tankers in the Persian Gulf, Great Britain does not manage a clean break with the EU; and China is in a trade war with its biggest customer, nobody is happy. The prospect of a trade war truce sends stocks like Apple upward. Apple sells millions of iPhones to the Chinese. Boeing should prosper as well as this growing market is not shut off to them.

Looking into the future, more important aspects of a trade war deal emerge. If more foreign investment in China is allowed, forced technology transfers go away, and China buys more from the USA, all of these will drive investments and send stock prices up. However, we will need to see the details of any deal before it will be clear what investment opportunities will arise.

Is Microsoft a Buy and Hold Investment?

High tech stocks have been the drivers of the longest bull market in U.S. history. But, how long will the rally last and are any of the tech darlings buy and hold material? From the depths of the U.S. financial crisis and stock market collapse until now, stocks like Apple, Amazon, Microsoft, Alphabet (Google), and Facebook have been big winners. However, no market rally lasts forever. Fears of a permanent trade war with China, a 2020 recession, and FANG investment risks, are causing analysts to downgrade many of these companies. One venerable tech stock that still looks good and has recently been upgraded is Microsoft.

Is Microsoft a Buy and Hold Investment?

One stock that looks good to analysts of tech stocks is Microsoft. According Market Watch, Microsoft looks like the safest bet among the software giants.

Sky-high valuations for software stocks necessitate a more defensive view of the industry, according to Jefferies analyst Brent Thill, and Microsoft Corp. shares look like the “safest” bet.

He assumed coverage of the software industry late on Monday, upgrading Microsoft’s stock to buy from hold while moving to the sidelines on several other names, including Oracle Corp. ORCL, -0.22% 
Microsoft MSFT, +0.36%  seems like a smart way to play software due to its diversified business makeup and clear visibility into double-digit revenue growth going forward, Thill wrote. He sees numerous growth drivers for Microsoft, including its Azure, Office, and LinkedIn businesses, which give the company the “greatest exposure to [software-as-a-service] revenue among any of the major public cloud players.”

Computer chips are getting faster and faster and artificial intelligence is already in play. But, in order to make money from these technologies, you need to invest in a company that finds real-world uses. Microsoft got started by developing the operating system for the IBM PC and all other compatible computers. And, over the years they have moved into gaming hardware and software, touch-screen computers, cloud-based computing and an ever-wider range of applications. It is this ability to read the needs of the market and both develop and market more and more useful applications that will provide Microsoft’s income stream into the future. Their intrinsic stock value is such that they are a “buy” right now and will likely remain so into the indefinite future.

Investing in Stocks in the Computer Technology Sector

Warren Buffett has famously avoided investing in advanced tech. His concern is that you cannot predict who the winners will be five years from now because technology changes so rapidly. And, investors should note Buffett’s silent warning for investors which we described in an article about how he is holding cash right now.

In this regard, in Microsoft a buy and hold investment? However, Microsoft makes money by finding applications for technologies, making businesses run better, and making communication more efficient. These are services that people will pay for now and for a long time to come. The company is not necessarily where you want to put all of your money, but can easily be part of anyone’s portfolio of buy and hold stocks. And, if you like the idea of investing and not losing any money, Microsoft (along with Johnson & Johnson) has the only American AAA corporate bonds.

Best Investment Opportunity

An overlooked investment sector is outshining all of the rest this year. While everyone is in love with the FAANG stocks and buying real estate, utility stocks have been having an exceptional year. Utilities are not just the best investment opportunity and best stocks to invest in right not. They are traditionally excellent long term investments with strong intrinsic stock value.

Why Are Utility Stocks Good Investments Today?

Market Watch writes about the hottest stock-market sector. And, guess what? It is the utilities!

It may not surprise you that utility stocks have fared well as interest rates have declined, but a closer look at the sector may genuinely shock you.

As discussed when we reviewed the best-performing stocks of 2019, the utilities sector of the S&P 500 SPX, +0.57%  was the benchmark index’s top performer in the third quarter. But a closer look at 12-month total returns for the sectors, the full index and the Dow Jones Industrial Average DJIA, +0.61% is enlightening, and so are the longer-term figures.

As Market Watch notes, the return for the year on Utilities beats the rest at 27.1% ahead of real estate at 24.5% and consumer staples at 16.6%. Information technology is lagging at 7.1%.

Then if you look at returns over 20 years, consumer staples returned 427% to 357% for utilities and 339% for health care. The 20-year return on information technology is 187%.

The prospect demonstrated by the inverted yield curve is that interest rates will go down and stay down for a long time. This is always beneficial to utility stocks whose dividends will outshine bond yields in a low-interest-rate environment. Here is a list of the top utility dividend stocks.

Utilities are the best investment opportunities today.

Market Watch

Investors should take note that the utility industry is going through a period of mergers and acquisitions. As such, you need to look out for share dilutions and other factors that will affect the short term price of any utility purchases. But, over the long term, these are generally solid investments that fit well into our idea of how to invest without losing any money. While utilities belong in any long term investor’s portfolio, we can see that utilities can provide excellent short term gains and are, in fact, the best investment opportunity today.

How to Buy Utilities as Investments

The first part of investing in stocks is to understand what a company does to make money and how their business plan will continue to generate income into the future. Utilities are unique in that they deliver essential services and will not go away. People will always need gas, electricity, and water. The risks when investing in utilities have to do with management of the utility, changes in regulations, or mergers and acquisitions that are badly done.

When you are looking at utilities to buy, look at their dividend and price. And, look at what their plans were five years ago and how that worked out. Look at their plans for the next five and ten years and make sure that you are comfortable with what they are doing. A profitable utility that is paying a top dividend may be tempted to buy out a neighboring utility in an attempt to benefit from economies of scale. But, if they are going to be spending a lot of money upgrading dated facilities or paying off punitive damages from a nuclear power plant accident, it is time to pass on that investment.

Make sure that you will continue to receive the high dividend that the company is paying. How long have they been paying dividends? When a solid utility has been paying and increasing dividends for fifty or a hundred years, you can generally trust that they will continue to do so.

Risks of Investing in China

Another brick in the trade war wall between the USA and China was laid last week when the White House suggested that Chinese stocks might be delisted from U.S. stock exchanges. Stocks fell briefly before a White House spokesperson denies the “rumor.” We have written for years about the risks of investing in China. A few years back we discussed the flight of capital from China. Wealthy Chinese were taking the money they made during China’s economic rise and using it to start businesses, buy property, and simply move their money out of China. One of our questions on that subject was whether or not more capital would be invested in the USA. The “delisting” issue could work the same way while, at the same time, hurting China’s ability to raise capital from foreign sources. Add this issue to the risks of investing in China.

Will Trump Delist Chinese Stocks?

Reuters reported the possibility of delisting and the fact that U.S. investors have billions at risk in Chinese stocks.

U.S. fund managers, especially, are heavily invested in Chinese stocks, which is what worries the folks at Reuters. But regular investors may hold ADR shares of Alibaba or Will these companies end up listing on other exchanges and will U.S. investors follow them? The suggestion of delisting may be just a game of “chicken” as part of the trade war.

Risks of Investing in China

But, other risks are real. China’s economy is slowing down and the Chinese Communist Party is not taking the steps needed to liberalize, give up central control, and move away from its export-dominated model. Their level of debt is high and is growing rapidly. The collapse of the 1980s Japanese economic miracle comes to mind. There is evidence that Chinese policymakers are studying what happened when Japanese debt situation made their economy implode and go into thirty years of stagnation.

If China ceases to grow at its former pace or has an economic hard landing, which stocks in China will be hurt and how should you adjust your investments in that market? Alibaba may have had the benefit of a lot of hype when it got started but it seems to be well-diversified and active in the growing internet-sales niche. This may be your safest bet if you stay with a Chinese stock. But, what happens to your ADR shares if delisting occurs?

What Is Really Happening in China and How Does It Affect Your Investments?

For years the baseline concern about investing in China has been the concern that economic numbers have been fudged and that the government publishes data that it wants investors to see and not data that could help investors direct their investing. That will probably not change in the near future.

For the time being, the threat to “delist” is probably just a threat. But, if the trade war really does become permanent, you can expect to see delisting of Chinese stocks and a lot more. But, at that point, you will invest a greater portion of your portfolio in US stocks, as will Chinese investors who have pulled their assets out of China.

Why Buy and Hold Disney?

Disney is a name that everyone recognizes. Their theme parks are famous for the attractions as well as the long lines. Watching Snow White and Mickey Mouse cartoons has been part of childhood for generations. But, can Disney survive on the revenue from their theme parks and old movies? Aside from the famous name, why buy and hold Disney? The answer lies in one word, content! If you have not been paying attention, here is an update on the venerable and also forward-looking company.

Investing in Walt Disney Company

Walt Disney Company (DIS) has been a part of the Dow Jones Industrial Average since 1991. It was founded in 1923 by Walt and Roy Disney and was called the Disney Brothers Cartoon Studio. After several name changes, the company settled on Walt Disney Company by 1986. Disney “wrote the book” as the dominant figure in the animation industry in the USA and then went on to produce live-action films and television shows. And, they opened their theme parks.

Today, Disney is a mass media and entertainment producer, still headquartered in Burbank, California after nearly a century. Today its stock sells for $130 versus less than $1 forty years ago. Their dividend yield is 1.3% and DIS has a 15 P/E ratio. This is a venerable old entertainment company. But, why buy and hold Disney? After all, Kodak was old and venerable and virtually died when new technology made their business plan obsolete. The difference lies in an analysis of the intrinsic stock value of this company. The acquisitions and changes that they have made over the years ensure a continuing flow of valuable content that will generate profits well into the future.

Investing in Disney for Its Unique Content and Steaming Assets

Although many of us grew up watching the old Disney “family” movies and cartoons, the Disney of today has developed and bought a lot more content with a much broader appeal. Disney now has divisions to manage each of its content sources.

  • Walt Disney Pictures
  • Pixar
  • Marvel Studios
  • Lucasfilm
  • Walt Disney Animation Studios
  • 20th Century Fox
  • Fox 2000 Pictures
  • Fox Searchlight Pictures
  • Blue Sky Studios
  • Disney Media Networks
  • Disney Parks, Experiences and Products
  • Disney Direct-to-Consumer & International
  • ABC Broadcast Network
  • Disney Channel
  • ESPN
  • National Geographic Channel
  • FX
  • Freeform

While the timeless Mickey Mouse character is still the “mascot” of Disney, you are watching Disney content when you watch sports on ESPN, the news on ABC, and any of the Star Wars, Avengers, or old 20th Century Fox movies!

In fact, Disney is the majority owner of major streaming services in countries like India.

We are not the only one to think that Disney is well-positioned for the future.

Disney Is an Investment to Hold for 20 Years or Longer

The Motley Fool includes Disney in an article about three stocks to hold for 20 years.

Over the past few years, Disney has been positioning itself to become an even bigger and more dominant force in the media landscape than it already was. One of the first big moves came back in 2009 when the company purchased Marvel Entertainment, giving it ownership of one of the most successful superhero franchises of all time, and access to a seemingly unending list of characters and stories.

Then, Disney made another huge investment in 2012 when it purchased Lucasfilm for about $4.05 billion, giving Disney the massively popular Star Wars franchise and ownership of its characters.

They go on to detail the many acquisitions that Disney has made in order to dominate the world of content. And, they note that Disney has also developed Disney+ which is a video streaming service that will challenge Netflix and Amazon. Not only does Disney have a lock on mountains of old content and the rights to develop new content. They are also positioned to take advantage of the movement of viewers away from standard TV programming and cable to internet streaming.

The bottom line is that Disney is definitely a long term buy and hold investment that belongs in virtually any investment portfolio.

What Are Your Investment Alternatives?

As noted in a recent CNN business article, investors are “holding their noses” and buying stocks because “there is no alternative.”

TINA (There Is No Alternative) has become a popular mantra on Wall Street. It explains why stocks are near record highs despite concerns about trade tensions with China and what’s expected to be another round of lackluster corporate earnings next month.

Not even a huge surge in crude prices Monday following an attack on Saudi oil facilities over the weekend was enough to dampen investor enthusiasm all that much. The Dow fell a little more than 150 points, or about 0.6%, Monday. That’s a pretty tame drop, especially when you consider that the blue chip average had gained for the prior eight trading days.

It appears that investors are holding their noses and buying stocks because of the TINA trade. With the Federal Reserve expected to cut short-term interest rates again at its meeting this week, stocks could get another boost.

We recently wrote about investment risks related to the inverted yield curve. While an inverted yield curve is a reliable predictor of a coming recession and market correction or crash, it also tells bond investors that interest rates on bonds will remain low for years to come. While the prospect of lower interest rates for years to come makes bond investing seem less attractive to many investors it also makes stocks more attractive to others. For those who see stocks and bonds as their only investment choices, the TINA (There Is No Alternative) view to investing makes sense. However, from our viewpoint, this is a short-sighted defensive posture that is full of risk.

What Are Your Investment Alternatives?

When many folks think of investing, they think of stocks, bonds, and cash. There are alternatives. Some are so-called alternative investments like real estate, commodities, derivatives contracts, managed futures, hedge funds, and arts/antiquities. When choosing alternative investments, the same principles of intrinsic value should be applied to make your choices as to investing in stocks. Other “investments” that make a lot of sense are paying down your credit card balance or paying ahead on your mortgage if you have a locked-in high rate.

Real Estate Investments

Your first real estate investment should be your home. The mortgage interest rate deduction makes this an attractive investment for anyone. And, over the years, you will not only pay less on your mortgage than if you are paying rent but will also have a home to live in free and clear of debt in the end. For most Americans, their home is their greatest financial asset when they reach retirement.

Second homes can be a good real estate investment as well. However, recent changes in the tax law have taken away the mortgage interest deduction on second homes. Thus, any investment in a second home, vacation home, other property will need to stand on its own merits.

Alternative Investments in REITs

According to Investopedia, REITs (Real Estate Investment Trusts) allow investors to “buy shares in commercial real estate portfolios.” They then receive income from a collection of properties such as apartment complexes, health care facilities, hotels, data centers, energy pipelines, cell towers, warehouses, and even timberland. There are equity REITs, mortgage REITs, and hybrid REITs. The Investopedia article has useful descriptions of each of these alternative investments.

Commodity Investing: Gold

Unless you have the background and expertise to predict changes in the live cattle, pork belly, wheat, corn, or soybean markets, these investments are best left to the folks with the skills, experience, and resources to do this sort of trading. However, many investors choose to invest in gold as a hedge against inflation or as a bet on the market taking a downturn. Some investors choose to purchase gold bullion as bars or coins and store the gold themselves in a safe deposit box. Those who choose to purchase substantial quantities can find insured gold deposit facilities. Gold mining stocks often go up in value faster than gold in a bull market and Gold ETFs allow one to participate in an upward swing of gold and get out in a timely manner. We have written at length about the benefits and risks of long term gold investing.

Hedge Funds as Alternative Investments

Hedge funds attempt to multiply the profits of normal market movements through “hedging” strategies like holding both long and short positions in markets. These alternative investments are commonly in stocks. When you invest in a hedge fund you trust the skill and timing of the fund operators to make you a profit in excess of what your own market investing would provide.

Practical Investment Alternatives to Today’s Stock and Bond Markets

There are basic and safe ways to invest outside of the stock market and bond market and there are risky ways. Paying down your credit cards, paying ahead on your home mortgage, or investing in a well-managed REIT are practical ways to invest outside of the stock market. If you have money that you want to invest for the long term and are willing to wait, practical alternatives include US farmland and offshore investments in developing economies.

And, many smart long term investors are perfectly happy with investments that do not lose any money, such as long term bonds, Treasuries, and CDs at your local bank. This may not be a bad approach when you are unsure where the stock market is headed and if another Financial Crisis is around the corner!

Will Inverted Bond Yields Cause Your Investments to Crash?

At the beginning of last year, we asked if you should be concerned about the inverted yield curve. The fact is that many previous market crashes and recessions have been preceded by “inversion” of rates on long term versus short term bonds. The timing of this “predictor” is such that it may be a year or two after bond rates change that the market crashes or the economy suffers. There are two questions here for investors. One is whether or not this episode of interest rate inversion will be followed by a collapse of the longest bull stock market in modern history. The other question is this: Will inverted bond yields cause your investments to crash. The uncertainty of the protracted Trump trade war with China and everyone else makes it difficult to predict where the economy and the market are going. And, already-low interest rates may make it difficult for the Federal Reserve to respond to a downturn in the economy.

What Is an Inverted Yield Curve?

Investopedia discusses the inverted yield curve.

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in late 2005, 2006, and again in 2007 before U.S. equity markets collapsed.

Normally, bond investors demand a higher interest rate for locking up their money in a fixed-rate instrument for longer periods of time. Right now they are willing to purchase five, ten, and even thirty-year Treasuries at lower rates of interest. This means that these folks believe that interest rates will be lower in the future and will stay low for a long time. If the economy tanks along with the US stock market, the Federal Reserve will most-likely lower interest rates.

Japan: An Example of Long-Term Low Interest Rates

Normally, we would not think that rates in a major economy would remain low for years or even decades. But, one only needs to look at Japan. In the 1970s and 1980s, during Japan’s boom times, rates ran between 4% and 9%. By the late 1990s, their rates ran between 1% and 0% with brief periods of negative interest rates. (Trading Economics)

If you doubt that inverted yields can predict low term low interest rates, look at historical Japanese interest rates

Will Inverted Bond Yields Cause Your Investments to Crash?

The first part of this question has to do with how often inverted yields have preceded a market crash and/or recession and by how many years. Is this really a reliable indicator?

Accuracy of Inverted Yields as an Indicator of Recession and Market Correction

Reuters writes that this is a countdown to recession.

The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time.

So, this is a pretty reliable indicator that economic troubles are ahead. But, how long will it take after yields invert before the economy and stock market tank? The yield curve inverted in 2005 and again in 2007. Although the 2007 yield curve inversion immediately preceded the Financial Crisis, the 2005 inversion preceded it by slightly more than two years. The thing to avoid here is to believe that the 2005 inversion was a “false alarm.” Long term bond investors are a cautious group. As such, they may sniff out economic trouble and make smart decisions with their bond purchases while everyone else is happy buying into a market that is ready to correct or crash. These folks are using the same sort of approach as with applying intrinsic stock value to their stock purchases. Is should be noted that before the dot com crash that Warren Buffet pulled lots of money out of the stock market because he said did not make sense. And today, he is doing the same as we noted in our article, Silent Warning for Investors.

Will Your Investments Survive a Recession and Stock Market Crash?

This is really what the inverted yield curve issue is all about. Last year we wrote about how to invest without losing any money. The argument we made in that article is that part of your investment portfolio should be in vehicles like US Treasuries, AAA corporate bonds, and bank CDS that are protected by Federal Deposit Insurance. In this part of your portfolio, you will forego growth in favor of safety. And, if today’s inverted yields are an accurate indicator of a coming recession and crash, this part of your investments will be protected against devastating loss.

That having been said, are there ways to keep a foot in the market and protect your investments?

Using Stock Options to Protect Your Stock Investments

Last year we wrote about how to use options to protect your investment portfolio. Our suggestion was to consider buying put options on stocks that you believe are in danger of a correction but still have some room to run.

Market Watch also mentioned buying puts in an article about four ways to protect your stock portfolio using options.

When you buy puts, you will profit when a stock drops in value. For example, before the 2008 crash, your puts would have gone up in value as your stocks went down. Put options grant their owners the right to sell 100 shares of stock at the strike price. Although puts don’t necessarily provide 100 percent protection, they can reduce loss. It’s similar to buying an insurance policy with a deductible. Unlike shorting stocks, where losses can be unlimited, with puts the most you can lose is what you paid for the put.

This can be a very effective strategy for those who know how to use it. That includes picking the right strike prices and options expiration dates. Successful use of this approach also includes knowing when to use it and when to avoid the repeated expense of buying new put options when the old ones expire.

Bitcoin Pump and Dump Again?

And a bitcoin security warning

Remember the 2017 Bitcoin pump and dump? It seemed like an epic bull run for the cryptocurrency but ended in a crash. Bitcoin started 2017 just below $1,000 and rose during the year. Bitcoin “enthusiasts” hyped the cryptocurrency as the “investment “of the future while long term successful investors called it a scam. After Bitcoin fell from the $20,000 range to the $3,000 range at the end of 2017, all of the Bitcoin hype went away, for a couple of years. However, it appears that we are seeing a Bitcoin pump and dump again. This writer was watching the morning CNN business show and an interview with the “head investment analyst” of an outfit I had never heard of. The storyline was that central banks are all competing to devalue their currencies and that only gold and Bitcoin are safe stores of value. Then, we saw a security warning about Bitcoin in Forbes as well. What is going on?

Bitcoin and Pump and Dump Scams

Investopedia explains pump and dump scams.

A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement.

As Investopedia explains, the pump consists of an “information campaign” or series of “hot tips” suggesting that the stock, or in this case the cryptocurrency, is about to skyrocket. And, to the degree that the first efforts are successful, the “pumpers” can point to recent price increases as “proof” of the validity of their “predictions.” Usually, this approach is limited to OTC micro-cap stocks or penny stocks and is intended to corral a handful of unsuspecting (and greedy) investors. However, in the internet and mass information age, the approach can work with things like Bitcoin as well.

The old advice is that when you start hearing an investment being promoted by your taxi driver, it is time to avoid the investment or get out if you have already invested. This writer was looking at vacation and retirement property in Colombia in late 2017 as Bitcoin was passing the $12,000 mark. The realtor I was using was more interested in explaining how she had taken all of her savings out of the bank to buy Bitcoins and was thinking of putting a mortgage on her home. I never did hear how it worked out for her but two months later Bitcoin had peaked at $20,000 and was down to the $5,000 range on its way to $3,000.

Are Gold and Bitcoin Stores of Value?

Your home is a store of value as someone can always live there. Your farmland in Iowa is a store of value because people will always need food. A multinational company with a huge range of products, like 3M, is generally a store of value because they make things that people use all over the world. Investing in gold is being hyped right now along with Bitcoin as a way to protect your wealth as central banks rush to devalue currencies. The argument of gold is that it has held its value in relation to things like food and clothing for centuries. However, that is not really true. Gold goes up and down as investors worry about the stock market, their nation’s currency, war, and social unrest. Gold started the 1970s at $32 an ounce and hit $800 in the early 1980s before it crashed. It sat in the $200 range for nearly 20 years until the next bull market. Gold always has uses in industry and for jewelry. That is not the case with Bitcoin.

The Fiat Cryptocurrency

The current “pump” for Bitcoin is that paper currencies have no intrinsic value. And, central banks are working actively to devalue them all across the globe. But, currencies like the US dollar, Euro, Yen, and Yuan all have substantial economies to fall back on. Bitcoin, the other hand, has no backing, no economy on which it is based, and no “use” such as for jewelry or in industry. Nevertheless, the current “pump” for Bitcoin plays on the fear few or predicted economic collapse.

Can You Make Money Trading Bitcoin?

Anyone who had the good fortune to buy Bitcoin years ago for pennies each or even at the start of 2017 when it sold for less than $1,000 has done well by simply holding on to their Bitcoins. And, anyone who had the good luck to sell at the end of 2017 when Bitcoin sold for nearly $20,000 made out like a bandit. But, aside from listening to the “pump” arguments, there is no good rational way to buy and sell Bitcoin. If you believe that currencies across the world will lose their value, there are always precious metals like gold. Real estate in growing areas will tend to hold its value as well. These and other investments have two things in common. They have a bottom price that is not zero and they have a way to assess intrinsic value. The same cannot be said for Bitcoin and other cryptocurrencies. And, then there is the risk of having your Bitcoins stolen or being scammed in some other way.

Bitcoin Security Alert

Forbes published a report about a Bitcoin security warning.

Researchers have warned a staggering four out of the first five results returned when asking Google for a “bitcoin qr generator” led to scam websites.

If a user of one of these scam sites tries to generate a QR code for their own bitcoin address, it will create a QR code for the scammer’s wallet, researchers from ZenGo, a bitcoin and cryptocurrency wallet provider, found.

The amount of money that has been stolen this way is not clear.

Last month, it was found bitcoin and cryptocurrency fraudsters stole over $4 billion of digital currency from investors and users in the first six months of 2019, a significant increase on the $1.7bn stolen in 2018.

These stolen funds were a result of “outright thefts” from cryptocurrency exchanges, but also scams, according to U.S. cyber security research company Ciphertrace.

Money that you put in a US bank is insured by the Federal Deposit Insurance Corporation. US Treasuries are good unless the government collapses. Put your money into Bitcoins and no one is going to insure your losses when a hacker breaks the code and transfers a few million from your wallet to theirs.

Is This the Bitcoin Pump and Dump Again?

When we write about “stock tips,” we always recommend that you use some sort of fundamental analysis to make sure that the investment makes sense. Unfortunately, there is no way to examine fundamentals of Bitcoin and other cryptocurrencies as they have not basic or intrinsic value. Thus, all of the talk in support of investing in Bitcoin amounts to hype and a return to the pump and dump of 2017.

Why Invest in Berkshire Hathaway?

Warren Buffett has become one of the richest men in the world by using intrinsic stock value as a guide to investing for Berkshire Hathaway. But, Berkshire Hathaway is now a huge company with multiple holdings. There is a temptation to say that it has reached a mature state where there is not much more room to grow. Is that true? We don’t think so. So, why invest in Berkshire Hathaway today? The first reason is that the stock is undervalued.

Is Berkshire Hathaway Undervalued?

The Motley Fool says to in their article about three reasons to buy Berkshire Hathaway.

Over the last decade, Berkshire Hathaway has become a certified cash cow of the first order.

The gap between the stock price and the long-term value of the company has been widening lately.

They cite the profits that his whole owned companies generate and the fact that if they were to go public again, their values would be a lot higher than the book value at which they are now valued.

In addition, Buffett has been buying back shares. He has always been hesitant to do this, but as he sees his own stock as a bargain, he is buying his own shares at the rate of about $2 billion a year!

Why Invest in Berkshire Hathaway for the Long Term?

Many of us equate Berkshire Hathaway with Warren Buffett. As such, many might be tempted to get out of this stock when Buffet is no longer active in the business. However, the “Oracle of Omaha” has also been the planner and teacher of Omaha as well. Each of Berkshire Hathaway’s sixty business segments is run by someone who was trained by Buffett and follows his approach to fundamental analysis and working with the long view in mind. We can fully expect the company to follow the same approach to investing and business management when Buffett is no longer in the picture as now when he is still running the show.

Why Does Buffett’s Approach to Investment Work?

Buffett’s approach to investment, which he learned directly from non-other than Benjamin Graham, is simply to analyze an investment for its projected profit potential, determine an “intrinsic” value based on that assessment, and compare the intrinsic value to the current stock price. He has admitted that he and his team toss out 95% of stocks they analyze as being too difficult to make an informed judgement on. But, when they do pick a stock this way, they typically hold it for years. Buffett has been quoted as saying that his favorite holding period for an investment if forever. And, he and his team pick investments with that in mind. Thus, Berkshire Hathaway is comprised of companies selling products and services that are not likely to become obsolete with changes in technology and are likely to grow and produce more profits year after year after year.

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