Trading and Investing Based on Market Sentiment

The usual clues to changes in market sentiment are to be found by following the VIX index, put to call ratios, the market aversion of or love for safe haven assets like the US dollar, and the breath stock prices. And, in a normal stock trading environment, investors and traders have time to consider their moves. That breathing space is getting shorter due to the emergence of a social media-driven feeding frenzy that has just pivoted from Gamestop to silver according to Reuters.

Silver broke above $30 an ounce for the first time since 2013 on Monday as an army of retail traders stormed into the metal after betting billions of dollars on stocks last week, triggering risks of a multi-asset melt-up in global markets.

The action in silver, following thousands of Reddit posts and hundreds of YouTube videos suggests that a rise in the physical price could hurt large investors with bearish bets, also marks a foray into a much bigger and more liquid market than individual stocks.

This new force in the investing world has the power to drive prices on chosen targets higher in a big hurry only to leave the chosen target in a precarious position once the herd of retail investors moves on to their next target. Because all of this happens outside of the world of fundamentals, traders are left with the analysis of very short term market sentiment as their only recourse, other than avoiding these trades completely.

Investing According to You Tube and Reddit

Reddit calls itself the front page of the internet and includes a group of online “communities.” Prevalent among them during the stock trading frenzy are Wall Street Bets, Robinhood, investing, stock market, and options forums. Retail investors who follow these forums, share their trades, and invest based on the most recent posts managed to drive Gamestop to stratospheric levels before moving to other targets. Some of the posts offer reasoned explanations and some simply are opinions. The sentiment that they produce drives markets and can have huge impacts as more and more readers pile on. Investors post videos on You Tube as well in which they explain their reasoning, hoot about their profits, and try to convince more people to get into the game.

How Much of This Is Pump and Dump?

We wrote about the bitcoin pump and dump at the end of 2019. To the extent that someone has the money to trade, can afford to lose it, and have a professional skill set, they are welcome to bet on this sort of trading. Our concern is that those who are simply betting on stock or silver price rises and basing their bets on a quick look at a You Tube video, are more likely to get hurt in the end than make money. FOMO (fear of missing out) seems to be a big motivator in this situation. If you are going to make money in the midst of a retail investor frenzy you will need to move quickly, accept a reasonable profit, and leave before the rest of the crowd. Otherwise, you will be like too many who put the second mortgage on their home in order to buy bitcoin at $19,000 before it fell back to $6,000 or bought at $40,000 before it fell back to $33,000. In regard to silver, some of us still remember when the Hunt brothers tried to corner the silver market and Silver Thursday when the precious metal fell from over $100 an ounce back to $10 and later back to $6.

Predicting the Next Retail Investment Frenzy – Slideshare Version

Predicting the Next Retail Investment Frenzy – DOC

Predicting the Next Retail Investment Frenzy – PDF

As Italy locked down 50,000 people in 10 towns to contain the first major coronavirus outbreak in Europe – and a fifth person there died from the virus – a growing nervousness pervaded the continent, with officials in nearby countries pledging to keep the outbreak from spreading further.

The virus is also affecting Milan, the country’s economic engine, though the city is not currently under quarantine. The stock market in Milan dropped more than 4 percent on Monday, and many tourist attractions, including the city’s famed cathedral, were closed.

Outbreaks in countries neighboring China have surprised no one but more cases and deaths in Iran and now in Europe threaten to drive the world into shutdown mode. Samsung has closed a factory in South Korea and many Chinese companies that are deep in debt are likely to collapse as the country remains largely in shutdown mode.

How Bad Will the Investment Scene Get?

Cramer of Mad Money thinks that the effects of the virus on companies will be more severe than thought.

“The virus is totally underrated,” Cramer said at the end of last week.

“What I think is a little too premature is they all presume that it is going to be solved within a foreseeable time frame,” he said Friday. “At what point do we say that many, many companies are going to be hurt by the virus [and] we’re paying too much for stocks?”

This is the sort of thinking that will lead to a big selloff.

Investments for When the Market Falls

Several months ago we wrote about Warren Buffet and his silent warning for investors. The Oracle of Omaha has been accumulating billions of dollars in cash as he and his crew do not see any investments with acceptable intrinsic stock value. In an interview on CNBC he reiterated his intention to invest in quality with time horizons of twenty and thirty years.

As the coronavirus outbreak sparks fears of a slowdown in global growth, Buffett closed the CNBC interview saying his long-term outlook remains unchanged.

“We’re buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in part and we think the 20 and 30 year outlook is not changed by the coronavirus.”

You can try shorting stocks in anticipation of a market crash and run the risk of getting burned like in the recent Tesla short squeeze, or use Buffet’s long term approach for investing in stocks and consider the staying and earnings power of companies like Apple, your favorite banks, or anyone else with the capacity to grow earnings over the years. One thing we would like to add is that considering the likelihood of trouble because of the coronavirus, companies without a lot of debt and other margin of safety positives will be good idea in the near term.

What Is Saudi Aramco?

Oil was first discovered on the Saudi Arabian Peninsula in Bahrain in 1932 and in Saudi Arabia in 1938. A succession of US oil companies explored and found oil, sold parts of their interests and found oil in Dubai as well. In 1949, the Saudi king threatened to nationalize oil facilities and gained a 50-50 share of profits. The company continued to find more oil and grow over the years.

In 1973 the USA supported Israel in the Yom Kippur War and Saudi Arabian government retaliated by “acquiring” a 25% “participation interest” in Aramco followed by 60% in 1974 and all of the rest in 1976. Aramco managed operations until the late 1980s at which time the entire operation became the Saudi Arabian Oil Company. This is the real name of the company today despite the IPO being referred to as Saudi Aramco.

This company became the world’s largest in 2005 when its estimated market value approached $800 billion. This month as the shares have risen in value to about $2 Trillion, the company is again the largest in the world, surpassing Apple by a factor of two.

How Can You Invest in Saudi Aramco?

Saudi Aramco trades on the Saudi Arabian stock exchange, the Tadawul. Unfortunately, to invest directly in Saudi Aramco, you need to buy it on the Tadawul exchange. And, according to U.S. News, individual foreign (non-Saudi) investors will not find Saudi Aramco available outside of that exchange.

Aramco decided in November that it would not list its IPO shares on a major U.S. exchange, making it difficult for the average U.S. investor to gain access to the stock. Tadawul has strict rules about foreign investment. Qualified institutional foreign investors must have at least $5 billion in assets and at least five years of investing experience to be eligible to trade on the Saudi exchange. Prior to 2015, foreign investors were prohibited from trading on the Tadawul exchange entirely.

For the time being, the only alternative for the normal investor is to buy shares of an ETF that tracks a basket of Saudi stocks (which will soon include Saudi Aramco). One example is the iShares MSCI Saudi Arabia ETF but there are others as well. This approach dilutes your exposure to Saudi Aramco but, for now, is the best alternative for most investors.

Is Saudi Aramco a Good Investment?

The Saudi Arabian Oil Company makes lots of money as the country sits on a vast pool of oil and natural gas. However, there is a long history dating back to 1949 of the Saudi government (king) finding reasons to increase the government’s share until foreigners are excluded.

Market Watch looks at investing in Saudi Aramco and mentions the ETF approach. They also note the risk of investing in Saudi Arabia by quoting from the IPO prospectus.

The interests of the Government, the Company’s controlling shareholder, may differ from the interests of the Company or the Company’s minority shareholders. The Government will continue to own a controlling interest in the Company after the Offering and will be able to control matters requiring shareholder approval. The Government will have veto power with respect to any shareholder action or approval requiring a majority vote, except where it is required by relevant rules for the government.

And, because Saudi Arabia is a monarchy, the rules for the government can be changed at any moment by the king.

This having been said, Saudi Aramco makes a lot of money and buying shares of an ETF that tracks the company as part of a basket of Saudi stocks is a reasonable way to diversify your portfolio. Just don’t put everything that you have into this investment and wake up some morning to find out that the Saudi Royal Family needed more money and “acquired” your investment!

As the bull market ages, investors are not only worried about their investments next year, many investors are scared to death, according to CNBC Trading Nation.

Stocks may be at highs, but investors could be acting overly cautious heading into 2020.

Even more than that, they are acting as though they are “scared to death,” says Jeff Saut, chief investment strategist at Capital Wealth Planning. He says most of the investors he talks to fear what may come in the New Year.

While the analyst goes on to reassure readers that this secular bull market is likely to last longer, this is not the opinion of many of today’s investors. When uncertainty looms, volatility increases. Here are some thoughts about how to invest in volatile markets.

How to Invest in Volatile Markets

The first part of investing during periods of volatility is to reassess what you are investing in and the timing of your investments. Forbes offers their 5 best investment strategies for volatile markets.

Building a Cash Reserve during Periods of Investment Volatility

In our article about a silent warning for investors, we noted that Warren Buffett is accumulating huge stockpiles of cash at Berkshire Hathaway. Buffett is not finding his usual mix of the best stocks to invest in based on intrinsic stock value (forward-looking cash flow and low market price). This situation with Buffett is similar to the period before the dot com crash when he pulled money out of the stock market because he said it did not make sense.

Forbes also notes that building a cash reserve is a good idea as it lets you take advantage of a market downturn by buying again at a discount!

Investing in High Dividend Stocks

Dividend stocks should be part of any investor’s portfolio as they provide income even when their share prices fall in a market correction. And, such stocks are likely to fall less in a bad market because investors are buying them for the income as much as their growth potential. Read our article about choosing the best dividend stocks for a few tips on how to avoid pitfalls in dividend stock investing.

Value Stock Investing When Markets Are Volatile

The problem right now with value stock investing is that the market and the leading performers are overpriced. This is why Buffett is building up such a hoard of cash. Nevertheless, if you are investing for the long haul (until retirement and beyond) you can dollar cost average your investments with true value stocks and expect to see long term profits. As an example, the S&P 500 peaked in August 2007 at 1552 and bottomed out in April of 2009 at 826. Anyone who bought this index at the low point has seen their investment quadruple to 3168. However, even investments made at the high point have doubled by now. The point is that if you are in the market for the long haul, in well-chosen stocks, you will make money. And, if you invest steadily with a fixed dollar amount, you will profit in the long term.

Out-performing Sectors and REITs When Investments Are Volatile

We added these two of Forbes’ suggestions as one category. In these cases, you are looking for broad market sectors that are protected from the trade war and areas like managed-real estate that tend to keep making money no matter what the stock market as a whole is doing. In each case, you need to do a bit of homework in order to pick and choose the best investment. For the majority of investors, building a cash reserve, buying and holding solid dividend stocks, and buying value stock using dollar cost averaging are probably your best bets for how to invest during periods of volatility.

Rare-earth miners toil in obscurity, operating a fancy-sounding but grungy business. They have hit pay dirt on the stock markets late this month, with it looking increasingly likely that China will restrict U.S. supply of the minerals they produce.

The Global Times, a mouthpiece for the Communist Party on foreign affairs, has run an article stating that it’s only a matter of time before China will “weaponize” its rare-earth exports in the trade war.
The shares of the listed miners operating in this space have surged. The CSI Rare Earth Industry Index (index code 930598) tracks 50 of these stocks, companies that mine, extract, process, trade or apply the minerals. The index is up 45.4% so far this year.

Real Money goes on to state this.

There are 17 rare-earth elements, metals used to make magnets for electric cars, earphones and computer hard drives. China accounts for 90% of global production and 80% of worldwide export shipments.

They go on to talk about a Chinese rare earth producer whose stock trades on the Hong Kong Exchange. We don’t think that Chinese producers will be a good investment choice in this situation because they stand to lose if 1) they cannot export to the U.S.A. and 2) if more and more companies follow the ABC (anywhere but China) course for outsourcing their manufacturing. We think that investing in non-Chinese rare earth producers may be a better idea in case Chinese exports get cut off. And, if the trade war becomes even uglier, we may see countries like the U.S.A. find ways to subsidize rare earth producers through tax incentives and more.

Investing in Rare Earth Mining Operations

There are rare earth mining operations scattered across the globe. Here are the companies in the U.S.A, Australia, and Canada that mine rare earth elements and produce rare earth metals.

Rare Earth Producers in the U.S.A.

The one active rare earth mining operation in the U.S.A. is Alkane Resources Limited. (Mining Feeds Rare Earth U.S.A.)

This company has been a penny stock for the last twenty years with the exception of 2011 and 2012 when it “surged” as high as $2.52 a share before falling back. Its mining operation was shut down for a while about a year ago but is open and producing again.

Rare Earth Producers in Australia

Australia has seventeen companies that do rare earth mining as part of their operations. (Mining Feeds Rare Earth Australia)

The list of Australian stocks is a better place to look for investing in non-Chinese rare earth producers because it includes mature and strong mining operations that are not totally dependent on profitable rare earth extraction and processing for their survival.

Rare Earth Producers in Canada

There are seventeen Canadian mining companies that extract and process rare earth elements as part of their operations. (Mining Feeds Rare Earth Canada)

As with the Australian companies, investing in non-Chinese rare earth producers will work better with Canadian companies that are large, have been in business for years, and have operations in numerous countries extracting numerous metals.

Rare Earth Elements Are Not Really Rare

Rare earth elements are not rare. They simply don’t occur in the kinds of concentrations seen for copper, gold, silver, and other minable metals. This makes them more expensive to mine because a lot more ore needs to be extracted and processed than with other metals.

For more insight into Australian rare earth elements and rare earth production, you can look at information about rare earths published by the Government of South Australia.

Rare earths were named by Johann Gadolin in 1974 for a group of chemically similar, metallic elements with atomic numbers 57 through to 71.

In order, these are lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), promethium (Pm), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), holmium (Ho), erbium (Er), thulium (Tm), ytterbium (Yb) and lutetium (Lu).

These elements are commonly known as the lanthanide series and are divided into light rare earths (lanthanum–gadolinium) and heavy rare earths (terbium–lutetium). Scandium (Sc, atomic number 21), yttrium (Y, atomic number 39) and thorium (Th, atomic number 90) are also generally included in the rare earth group because of their similar chemical properties.

The rare earths were originally thought to be rare in crustal abundance but this is now recognised not to be the case and they have a similar crustal abundance to elements such as nickel, copper, silver, lead and tin. However, mineable concentrations are less common than for most other ores.

And, the lack of easily minable concentrations is what has hindered mining operations outside of China. China still has a lower wage scale than countries like Australia, Canada, or the U.S.A. And, the government heavily subsidizes these operations in various ways, not all of them plainly visible from outside the country.

Investing in Non-Chinese Rare Earth Producers

Our considered belief is that threats of cutting off rare earth exports by China will at least temporarily drive up stock prices and make investing in non-Chinese rare earth producers more profitable. Over the longer term, governments in countries like the U.S.A., Australia, and Canada will be able to mine these elements because they are common and can be extracted from things like coal deposits. Higher prices will make these operations more profitable and to the extent that their production is seen as critical to national economies and national defense, governments will find ways to subsidize such operations to ensure their long term survival and success.

Where to Invest Money to Get Good Returns

Over the long term, the U.S. stock market has outperformed all other investment vehicles. When investing in stocks, the best approach is to start early, invest regularly, and choose a mix of safe stocks and growth stocks.

To get financial security is why people invest in stocks. Sometimes, people get lucky and pick just the right stock at the right time and get rich in a hurry. Much more commonly, people succeed by determining intrinsic stock value when purchasing and using dividend reinvestment plans to reduce the cost of buying new shares and to accelerate the growth of their investments.

To the extent that you need your money earlier, rather than later, you may choose stocks that have greater growth potential but these are commonly not good investments for beginners because it is all too easy to pick a stock that looks promising but fizzles out and takes your hard-earned money with it.

Safe Places to Invest Your Money

The first place that people should consider for an investment is their own home. Over the years, you will pay less on mortgage payments than for rent. And, the mortgage interest deduction on your taxes is a sweetheart deal that no investor should pass on. Then, the question is how to invest without losing any money. As we note in our article, there are four ways to invest and protect your investment capital.

• Bank deposits that have Federal Deposit Insurance
• US Treasury Bills, Notes, and Bonds held to maturity
• Investment Grade AAA and AA Bonds held to maturity
• Long term investing with a focus on intrinsic value

The first three best ways to invest your money, if you simply want to reduce risk to a minimum, are ones with lower rates of return than the stock market but the security of essentially holding cash. To make this work you need to hold your bank CDs, Treasuries, and corporate bonds to maturity or only sell when interest rates fall and you can make a profit on selling a bond or treasury. This is one of the best ways to invest your money if you want minimum risk and especially if you will need the money soon and don’t want to take the chance that the stock market will correct at the worst time for you.

The fourth of our best ways to invest your money is low-risk over the long term. You will invest in stocks that have been paying dividends for over a century and other very stable companies that provide a steady appreciation in value combined with maximum security. These are investments that let you sleep soundly at night

ETFs and Low Maintenance Investing

There are folks who have made millions and millions of dollars in the stock market by carefully researching their investments, precisely timing their purchases, and paying attention to the market every hour and every day. And, then there are the rest of us who have a regular job to go to and do not have all day to research stocks with fundamental analysis tools to find the best picks.

One of the best ways to invest your money in the stock market is to invest in an ETF (exchange traded fund) that tracks a broad range of the U.S. stock market such as a fund that tracks the S&P 500. Many of these funds have outperformed more closely managed investment funds in recent years. These are very good investments for beginners because they tend to do well and are diversified across the wide range of stocks. There is always a risk that the entire market will crash (and then return as it always does) but there is no risk that a single stock will tank and take down your investment with it such as happened recently with Kraft Heinz.

How to Invest Money to Make Money Fast

The best ways to invest your money are those that reliably offer the best return with the lowest risk. That having been said, there are times when a little research, a little foresight, and a bit of patience follow by prompt and well-timed action can pay off handsomely.

Beware of “investing tips.” All too often the person giving the tip wants you to invest in a penny stock to drive the price up so that they can sell at a profit before the stock falls again. If you think that a tip might be valid you need to analyze the fundamentals of the company and have a good sense of the technicals that drive day by day stock movement. This can be done, but requires attention to detail. Here is a personal example from years ago. It shows how an investor can pay attention to a stock, understand why it is going up or down, and profit by investing at just the right time.

Xerox Rise and Fall

Xerox developed the first plain paper copier in 1959. The Xerox 914 was the most successful single product ever sold at that time. Xerox dominated the photocopier market in the 1960s until the mid-1970s. They had essentially 100% of the photocopier market and were the subject of an anti-trust suit which they lost in 1975. They were forced to license all of their patents to competitors, mostly Japanese. By 1979 Xerox had 14% of the photocopier market and their Japanese competitors were selling copiers in the USA for less than it cost Xerox to produce them. At the same time, Xerox management decided to diversify into insurance. They took huge losses when a hurricane hit the Gulf Coast.

Xerox Recovery and the Take-over Bid

In the 1980s Xerox cut costs, reduced its insurance business profile, wrote off losses, and improved its product line. It started making money again and its stock price started to rise. At this time a group of “take-over” artists started buying up Xerox stock and buying options contracts on the stock. They drove the price up a bit and were close to being able to take over the company, which they would have broken up and walked away with a tidy profit.

But, the “take-over” guys were too highly leveraged. They ran out of money and had to start selling their shares. Xerox, had climbed to $60 a share with better management and paying off its hurricane losses. When the “take-over” guys ran out of money and started selling, the price of Xerox fell to $30 a share within just one trading session.

Best Ways to Invest Your Money when You Have Done Your Homework

Those who had been following the Xerox story and had invested in their recovery understood what had happened and that the stock would go back to its $60 range once the “take-over” guys were done selling and went away. So, some of us bought Xerox at $30 a share the first thing the next morning. By the next day, the price was back to $60 a share.

The point of this narrative is that you can make money in a hurry in the stock market but you typically need to do your homework first and then you need to stay in touch with the market in order to time your investment correctly in order to turn your research and insights into a profit. This really is one of the best ways to invest your money, providing that you have the time, energy, patience, and a knack for timing the market.

Best Way to Find Good Stocks

Finding good stocks to invest in can be broken down into three steps. What information sources do you use? What criteria do you look for? And, how do you verify what are the best stocks to buy right now and for the long term?

Useful Information when Searching for Good Stocks to Buy

There are lots and lots of business and stock investing-related websites. They provide lots and lots of information. But, they also have the tendency to promote individual stocks, investment management companies, and their own unique points of view.

Information about the Economy, Markets, and Stocks

A good place to start if you are looking for unbiased information about stocks, the markets, the economy, trade, and more is Bloomberg News. The best way to find good stocks is not to immediately start looking for hot stock tips but rather to educate yourself about the things that drive stock profits and stock prices. The business section of The New York Times is a good source of unbiased information as is The Wall Street Journal. To the extent that these sources of information try to sell anything, other than online subscriptions, is when they tend toward one side or the other of the political spectrum. But, each of them is an excellent base from which to start. Our first choice is Bloomberg.

Specific Stock Investing Information

If you have a stock in mind and want to know its price history, dividend, and a thumbnail sketch of the business, both Google Finance and Yahoo Finance are good sources of information. These are good news sources but not as in-depth as the Times, Journal, or Bloomberg. But you can look up information about specific stocks such as this graph of the Apple stock price going back to 1981.

The information that you find on a chart on Yahoo Finance or Google Finance is not colored by the opinions of someone who is pitching that stock. Rather it is basic and useful which is the best way to find good stocks.

Sources of Stock Tips

If you have followed our advice so far you have educated yourself about the economy, the markets, foreign trade, and other factors that drive profits and stock prices. And you know where to go (Yahoo Finance and Google Finance) to check out stock price history, P/E ratio, and dividends. But, where do you find information about good stocks for dividends, cheap stocks on the rise, or simply the best stocks to buy today. Here is where the stock commentators are useful. These folks follow the markets and have lots of useful information along with their own strong opinions. CNBC has good investing information as do Market Watch, Barron’s, Investor’s Business Daily, and The Motley Fool. Jim Cramer’s “Mad Money” is full of useful tips and entertaining as well.

For those who are not interested in doing a lot of research on their own, following these sources for stock investing tips can be profitable. They commonly write about good stocks for cheap, good stocks for day trading, and what they consider to be the best stocks to buy today. However, we strongly suggest that you use their tips as a starting point and not an endpoint in picking profitable stocks for the long term.

Criteria for Choosing Stocks

The basic things to consider before choosing stocks are these. What are your investing goals, horizon, and risk tolerance? And, what do you know personally that will give you solid insight into specific sectors of the stock market? In one of our core articles about investing in stocks, we note that time spent considering how long you will be investing before you need money for retirement, college for the kids, or money to start your own business will affect your choices. And, when your work, your hobbies, or your life experience give you an advantage over other investors in any given market sector, grab that advantage with both hands and hold on!

Risk versus Reward in Stock Selection

When investing, there should always be a balance between risk and reward. Part of your money should be in investments that are as secure as you can find. We dealt briefly with this in our article about how to invest without losing any money. Then, you will want to look at any prospective investment and consider how the company makes its money and how it can be expected to keep doing that over the long term. This is where having your own insights into a specific line of business are useful and those insights should always be used.

Specific Stock Selection Criteria

Some investors prefer to look for good stocks for cheap. But, these may or may not be the best stocks to invest in today. The best dividend-paying stocks should be part of your investment portfolio. But, when is a high dividend yield dangerous? Read the article for insight into how failing stocks sometimes sport high dividends before they fade away. As we noted, you should always look for stocks in sectors where your knowledge and experience give you an advantage. This is because you will have better insight into how a company makes a profit and if they are likely to continue to do so over time. And, this leads us to our last part of the best way to find good stocks.

How to Verify Good Stocks to Buy

So, now you have a few stock prospects that you picked up from following Bloomberg and The New York Times, listening to Jim Cramer’s Mad Money, and even a stock tip or two from family and friends. How do you verify that any or all of these are good stock picks for your time frame, risk tolerance, and area of expertise?

The Fundamental Value of a Stock Investment

When you buy a stock you are looking for it to reward you in two ways. You want its stock price to appreciate over time and you would be pleased with dividends that you can reinvest during your working years and collect during retirement. For these things to work out you need a stock that makes money over the years, increases its profits as it goes, and has a substantial margin of safety in terms of low debt, money in the bank, a famous and strong reputation and brand, and has a business model that you clearly understand.

Intrinsic stock value is what you are looking for. This is a calculation based on your assessment of forward-looking earnings. This approach evolved in the years after the 1929 stock market crash and in the years of the Great Depression. For those who paid attention, it replaced the idea that one would simply “play the market” in hopes of making a profit. Investors who follow this approach use fundamental analysis to determine if a company will continue to sell its products and services at a profit over the years, add more products and services, and manage the business wisely in order to most efficiently use those profits to reward shareholders.

Our best way to find good stocks may sound time-consuming but, if you are into investing for the long haul, what is your hurry? Experts like the famous investor Warren Buffett have said that they commonly throw out 19 out of 20 stocks that they consider in an intrinsic value calculation as “too difficult to call.” Here is where your own expertise comes into the picture. You are not trying to find investments for a multi-billion dollar portfolio. You are looking for three or four stocks whose businesses you understand, which have good track records, and are likely to keep making money for their shareholders for at least as long as you choose to stay invested.

General versus Specific Investment Advice

General investment advice, when it as some value, is based on past performance. For example, money invested in the US stock market and left there over time tends to out-perform other investments such as bonds, real estate or bank deposits. So, is it good general advice to invest in stocks? Yes, it is. But, in order to correctly follow this advice you need put money in an index fund that follows the S&P 500 or perhaps the Dow Jones Industrial Average. And, you need to leave it there through good years and bad. This is because individual investors are typically not very good at timing the market.

An interesting article in The Balance shows us 20 years of stock market returns by year.

Negative stock market returns occur, on average, about one out of every four years.

Historical data shows that the positive years far outweigh the negative years. The average annualized return of the S&P 500 Index was about 11.69 percent from 1973 to 2016. In any given year, the actual return you earn may be quite different than the average return, which averages out several years’ worth of performance.

To benefit from the long term growth of US stocks you need to stay in the market for at least five or ten years. This is how many years you need to stay with an investment to make it long term. So, what investments should you choose right now based on this advice? You should pick a broad-based index fund that follows the S&P 500 or Dow, add to your investment on a continuing basis and stay with the investment through thick and thin. Based on past experience, your investment will out-perform others over the years.

What Investments Should You Choose Right Now to Avoid Losing Money?

Maybe the thought of watching your investments fall in value by another twenty or thirty percent is a bit too much. And, maybe you are not so sure that the market will come back very fast once it gets done correcting. If this is the case, you are looking for ways to invest without losing any money. Bank deposits are protected by Federal Deposit Insurance. US Treasury bonds, notes, and bills when help to maturity will return you investment plus interest. Likewise, AAA and AA bonds are good ways to invest and protect your capital. However, none of these investment options compares in return over the years with the US stock market and well-chosen stocks.

Choosing Specific Investments Right Now

An ETF that tracks the S&P 500 will provide a good rate of return when held for five, ten, or more years. But, there are stocks that will outperform the rest. How to you choose them? The key is to apply the concept of intrinsic stock value. Successful investors who apply this approach are always looking for profitable stocks to invest in. They look for companies whose business models are clear and likely to provide good returns over the coming years. These investors do not necessarily buy those stocks right away. Rather they wait for a stock market correction. The company they have chosen already has an intrinsic value greater than the market price of the stock. Then, with the correction, the stock becomes more of a bargain.

A solid long term investor will typically have several promising stocks on his buy list. But, he or she will only purchase those stocks when the current price is substantially less than the intrinsic value price. Then the newly purchased stock provides a forward-looking income stream and profits for years and years.

Specific Stocks Suggested by “Experts”

Forbes has an article suggesting that you “hold your nose” and buy US stocks. They allude to the futility of trying to time the market and the value of long term investing.

If your investment horizon is over two years for investing your money, don’t sell! You will just set yourself up for the impossible task of winning a market timing contest, and realizing losses. History demonstrates that it’s better to stay in the game so you don’t miss the short periods when stocks sharply recover.

The specific stocks suggested in this article are not the high tech darlings that are household names. Rather they are companies that routinely make money and are somewhat undervalued compared to their current market price.

United Rentals: down 40% this year
People’s United Financial: Down 16% this year

These may be good suggestions but we strongly advise that rather than acting on these stock tips that you carry out your own fundamental analysis before buying and holding for the long term.

Are There Stocks You Should Sell Right Now?

This gets us back to intrinsic value as a guide to stock investing. There are stocks with great names and traditions that are no longer stellar long term investments. Kodak was a prime example. They invented the personal camera, camera film, and commercial film developing. For much of the 20th century dominated the market and then digital cameras came along and Kodak’s business model no longer worked. IBM was the king of big central computers and took a big hit from the invention of the PC and faster chips. IBM was able to transition into other parts of the computer world but they are no longer the company whose stock you should never sell. Whether the market is going up or going down, when you have a company whose business plan no longer works and whose stock value is being propped up b stock buybacks, you should probably sell and avoid future pain as the stock slides into oblivion.

What Investments Should You Choose Right Now? PPT

Infrastructure Stocks

Market Watch has specific suggestions for infrastructure stocks.

The American Society of Civil Engineers gave America’s overall infrastructure a D+ in its last annual infrastructure report card. That’s a nationwide grade, and includes a D+ for wastewater infrastructure and a D+ for energy infrastructure among other categories; rails were graded a B, the only grade above C+ across 16 categories, and zero A grades were awarded.

Assuming that funding goes through, here are five concrete investment suggestions.

Aecom: Construction and engineering focusing on design, financing, and related services, specializing in infrastructure projects

Caterpillar: This company is the world’s largest maker of construction equipment. It designs, manufactures, and sells its equipment through a global network and provides customers with financing and insurance to support sales. This stock is a bellwether of the American and global economy and a sure bet to prosper in an era of increased infrastructure spending.

Nucor: This steel maker is likely to benefit from any funding to rebuild bridges, rail links, or any project requiring steel.

Martin Marietta Materials: This company produces and sells construction aggregates (sand, gravel and crushed rock) and other building materials. All of these materials are essential for rebuilding or repairing roadways as well as bridges.

U.S. Infrastructure ETF: This infrastructure-related ETF is focused on the USA and about half of it is focused on electric utilities.

There are many other possibilities and each and every one needs to be considered  on its own merits depending on where funding is directed.

Is This Truly the Time to Invest in Infrastructure?

Now that you have a few suggestions for investing in infrastructure you need to look at intrinsic stock value. Will 2019 be the year of renewed infrastructure spending? And, will that truly result in profits for various companies and higher stock prices? JPMorgan questions if this is the infrastructure moment.

Institutional investors have been allocating a growing share of their portfolios to infrastructure assets-including regulated utilities, transportation and contracted power. The focus has been on core investment strategies, which can produce stable, forecastable cash flows through the use of prudent leverage and some combination of transparent and consistent regulatory environments, long-term contracts with credible counterparties, and mature demand profiles. Most core infrastructure assets have monopolistic positions in the markets they serve, so prices and usage are relatively insensitive to periods of economic weakness. Instead, core infrastructure investments are driven by a different-and uncorrelated-set of factors, including political and regulatory risk, development risk, operational risk and leverage. Also, each core infrastructure sector has unique risk factors, so core strategies include investments from multiple sectors to reduce volatility within the asset class.

They note three factors that make infrastructure investments attractive, diversification, protection from inflation, and stable and high yields. Of the pros and cons of infrastructure investing, these are the positives. Another positive for many of these investments is that they are easy to understand with basic and straightforward business models.

The Dark Side of Infrastructure Investing

The Brookings Institute writes that infrastructure investing requires careful evaluation. They provide a graph showing the dismal decline in US infrastructure spending.

There is no question that the USA needs to upgrade its infrastructure pretty much across the board. The fly in the ointment is what projects get funded and will they be “roads to nowhere” in the districts of powerful representatives and senators or “best bang for the buck” projects that provide the most benefit for the common good and the best rest return on investment for individual investors. This is the negative side of the pros and cons of infrastructure investing.

While the discussion of the administration’s infrastructure plan has revolved around a $1.5 trillion spending goal, only $200 billion would be in the form of federal spending. In addition, there are other places in the budget where spending on transportation is cut, making the net new federal investment possibly much smaller. Moreover, it is not clear that the leverage sought for the $100 billion of matching funds could realistically be achieved. State and local governments would have a strong incentive in their grant applications to create “new” revenues that would qualify for matching grants, and that would be offset by revenue reduction elsewhere in their budgets.

Much of this discussion is reminiscent of the early Obama administration during which funding projects were envisioned only to be drowned in red tape and political infighting on the federal, state, and local levels. A valid concern is that we end up with lots of “pork barrel” projects benefitting the districts and states of the powerful in Washington and of little value the public or to interested investors.

Another concern with the administration’s matching funds proposal is the minimal consideration it gives to cost-benefit analysis of new investments. Only 5 percent of federal evaluation criteria are allocated to “evidence supporting how the project would spur economic and social returns on investment.” Instead, the administration’s selection criteria focus on whether states generate new revenue sources for infrastructure, meaning that projects may be selected based on funding options in the states, not the overall national benefits. By giving preference to revenue sources-including private capital-over social benefits, the proposal may reallocate infrastructure spending away from socially important projects that are true public goods and are not attractive to private investors.

All told, 2019 may be the year that infrastructure spending comes to the fore. The chore for investors will be to do diligent fundamental analysis of specific investment opportunities based on their realistic chances of profit as spending works its way into real projects in the infrastructure sector.

Pros and Cons of Infrastructure Investing PPT

Confusing Risk and Volatility

Reuters writes that we should never confuse risk and volatility.

Of the many lazy and dangerous ways of thinking about investment these two rank near the top: that risk equates with volatility and that risk and rewards are a straight trade off.

Both are overly simplistic and both lie at the heart of some of the most colossal errors in recent finance. And while both contain large amounts of truth at their core, both concepts represent shorthand versions of reality rather than tools which always, or even usually, work.

Over the long term of an investment, the only reason to fear volatility is if it threatens to result in permanent loss. We have written about long term investing and how five to ten years is an appropriate time to put money into a promising investment. One of the reasons for this time frame is that investments can be volatile and market timing is always less than perfect.

Investors who choose the most risk-free investments always give away the potential for greater profits. When we wrote about how to invest without losing any money, we wrote about these investment vehicles, in order of lesser to greater risk:

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

Within any investment portfolio there should always be a place for these investments. Then, when a person needs money, they will not need to sell a stock, for example, when the market has just crashed. By in large, the closer one gets to retirement, the more conservative should be one’s portfolio. Nevertheless, there will always be a place for long term investment in stocks and others investment vehicles of which short term volatility is normal.

When Are You Willing to Accept the Risk?

Some of the most spectacular profits in real estate, bonds, or stocks come from buying in a depressed market and selling when prices return to normal. The problem is that many times there are extremely valid reasons why an investment has lost value. CNBC writes about bond investors buying risky high yield junk bonds. Many are betting that the mid-range volatility that has taken bond prices down will result in an upward swing in the reasonably near future and certainly before some of those bonds go into default.

This is a matter of market timing and is a valid reason to equate volatility with risk. Anyone who is an expert in buying and selling bonds is welcome to engage in the business of picking up junk bonds at the right time. But, anyone who does not have a clue about market timing in this sector needs to avoid investing in an area where they have not knowledge or expertise.

Is a Volatile Investment a Risky Investment? PPT