Situation: In the U.S., capital-intensive industries with strategic importance are tightly regulated (see Week 230). Electric power grids and railroad networks are expensive to install, maintain and upgrade but those chores are absorbed by shareholders in private companies. Regulatory bodies grant these companies monopoly-like pricing power, oversee safety practices, and set rates high enough to pay for maintenance and upgrades.
Since the Great Recession, international Money Center banks have also come under intense regulation to meet Basel III requirements for sustainability and reduce systemic risks. A more specific definition now replaces Money Center Bank, which is Systemically Important Financial Institution (SIFI).
Looked at from the shareholder’s point of view, companies in these three industries have enough government regulation (and monopoly-like pricing power) that bankruptcy is no longer a material risk. One downside risk is that the US market for their goods and services is largely saturated. So, significant growth in the “bottom line” requires innovation and international outreach that will be overseen by government regulators.
Mission: Use our Standard Spreadsheet to highlight members of “The 2 and 8 Club” that are in the Electric Utilities, SIFI banking, and Railroad industries.
Execution: see Table.
Bottom Line: The safest tactic in gambling is to “bet with the house” whenever you can. Politicians are now in effective control of three industries: Electric utilities, railroads, and international Money Center banks (now called Systemically Important Financial Institutions or SIFIs). These industries are not in danger of being “nationalized” because politicians would much prefer that shareholders (as opposed to taxpayers) put up the large amounts of capital needed to keep these industries safe and effective.
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index =5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE and JPM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label gamble. Show all posts
Showing posts with label gamble. Show all posts
Sunday, September 2
Sunday, January 21
Week 342 - Industrial Companies in “The 2 and 8 Club” (Extended Version)
Situation: There are many industrial companies that enjoy good earnings over long time intervals. But these earnings are yoked to the economic cycle and tend to be volatile. This unsettles investors. Companies in the Financial Services, Consumer Discretionary, and Information Technology industries face the same problem. However, those 4 industries are also responsible for most of the growth in the US stock market. Stockpickers have to either stare at ugly “paper losses” from time to time, or behave like retail investors and “buy high, sell low.” For the former group, which has absorbed losses, studies show that they’ll spend 4% less money on consumer goods than customary. But when the stock market is up a lot, they’ll spend 4% more. The mechanics of maintaining what you’ve obtained may be difficult to explain to your life partner, but your heirs will understand. The harder part (for your life partner) is to understand why you allocate more money to the stock market when its down but less when its up!
The takeaway message from this is that money needs to be taken “off the table” when the market is frothy, and spent. With the current market, now would be a good time to start doing that. At every one of Berkshire Hathaway’s annual meetings that I’ve attended, Warren Buffett reprises his famous quote: “Be fearful when others are greedy and greedy when others are fearful”. In other words, allocate more of your income to the stock market when the economy is in a slump. Baron Rothschild put a fine point on it 202 years ago, when he profited mightily from the defeat of Napoleon at the Battle of Waterloo: “Buy when there’s blood in the streets, even if the blood is your own”. Caveat Emptor: The opposing argument, that “timing the market” never works, is widely respected.
Mission: If you want to at least keep up with the S&P 500 Index, you’ll have to focus much of your research on industrial stocks. So, here are 6 industrial stocks that 1) pay good & growing dividends, and 2) are highly rated by S&P and Morningstar. See our Week 329 blog for a detailed explanation of how we pick stocks from the Barron’s 500 List that have at least a 2% dividend yield and an 8%/yr dividend growth rate (over the previous 5 years).
Execution: see Table.
Bottom Line: Industrial companies take advantage of a growing economy. However, their stock prices fluctuate more widely than most investors can tolerate. You have to be a bit of a gambler to become an enthusiast. Over the long term, you’ll grow to be happy with the rewards. Just don’t expect your risk-adjusted total returns to be any better than you’d realize from owning shares in an S&P 500 Index fund, unless your hobby is to analyze industrial companies. To do so, it helps if you decide that only a few companies are likely to reward the time you spend on their study. We think the 6 industrial companies in “The 2 and 8 Club” are worth your time (see Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MMM, and also own shares of CMI and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
The takeaway message from this is that money needs to be taken “off the table” when the market is frothy, and spent. With the current market, now would be a good time to start doing that. At every one of Berkshire Hathaway’s annual meetings that I’ve attended, Warren Buffett reprises his famous quote: “Be fearful when others are greedy and greedy when others are fearful”. In other words, allocate more of your income to the stock market when the economy is in a slump. Baron Rothschild put a fine point on it 202 years ago, when he profited mightily from the defeat of Napoleon at the Battle of Waterloo: “Buy when there’s blood in the streets, even if the blood is your own”. Caveat Emptor: The opposing argument, that “timing the market” never works, is widely respected.
Mission: If you want to at least keep up with the S&P 500 Index, you’ll have to focus much of your research on industrial stocks. So, here are 6 industrial stocks that 1) pay good & growing dividends, and 2) are highly rated by S&P and Morningstar. See our Week 329 blog for a detailed explanation of how we pick stocks from the Barron’s 500 List that have at least a 2% dividend yield and an 8%/yr dividend growth rate (over the previous 5 years).
Execution: see Table.
Bottom Line: Industrial companies take advantage of a growing economy. However, their stock prices fluctuate more widely than most investors can tolerate. You have to be a bit of a gambler to become an enthusiast. Over the long term, you’ll grow to be happy with the rewards. Just don’t expect your risk-adjusted total returns to be any better than you’d realize from owning shares in an S&P 500 Index fund, unless your hobby is to analyze industrial companies. To do so, it helps if you decide that only a few companies are likely to reward the time you spend on their study. We think the 6 industrial companies in “The 2 and 8 Club” are worth your time (see Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MMM, and also own shares of CMI and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, September 24
Week 325 - Sans Artifice Is The Preferred Look
Situation: Objective reality is mercenary. Business deals are largely about “transferring risk to a less knowledgeable party.” We know better than to take these things personally, but we tire of the rat race and look forward to drinking with friends on the weekend.
We often take risks ourselves, to recover from our mistakes (divorce, buying a “fixer-upper” in a changing neighborhood, not kicking adult children out to face the world, etc.).
To avoid becoming alcoholics or gamblers, we must tend better to our personal relationships and try not to be an avatar of money. How does one do that? Three ways: One is about the way we invest, making wise choices. That would include having a large cash position, and a nest egg of stocks and bonds that aren’t gambles. Another is in the messages we give off, the optics and emojis we emanate. Finally, we must place a high value on family life, loyalty.
We all know how to give the impression that we’re about money, which is to “dress for the job you want”. At the opposite end of the spectrum, you’ll find people who are sans artifice but steady and reliable. They don’t armor themselves in upscale clothing, makeup, or scents. Men would then find themselves leaving the suit jacket, the sport coat, the tie, the permanent-press shirt, and the shiny shoes in the closet. And maybe think about replacing that expensive ride with a Prius Two or small Tesla.
For women, it would mean falling out of bed in the morning to compose her ensemble, which may include clothing that doesn’t cover up tattoos, no makeup, and Skechers as the default choice in footwear. Once so-attired, openness toward whomever comes naturally, without giving a thought to talking up or down to that person.
Let’s look at the money side. What does “having a large cash position” mean? It means you either hold Treasury Bills at www.treasurydirect.gov (and dollar-average into 2-Yr Treasury Notes as well as Savings Bonds), or you hold a large cash balance at an FDIC-insured bank.
Why is cash important? A recent Wall Street Journal article titled “Longer CFO Tenure is Good for Companies” has a good explanation. When faced with the Lehman Panic in 2008, the CFOs who kept their jobs used good people skills to hold on with successive CEOs but also went into the crisis with large cash positions on the company ledger. Not surprisingly, the companies that have these long-tenured CFOs tend to have unusually good stock performance. Simple message, isn’t it? Good people skills combined with a propensity to hold large cash positions. And, it doesn't depend on a lot of experience. Some of those CFOs were barely 30 years old when the Lehman Panic hit. It's a matter of values.
Mission: Assemble a list of A-rated Dividend Achievers that have Tangible Book Value and also have shown less volatility than the S&P 500 Index over the past 20 years.
Execution: see Table.
Bottom Line: This is a “tortoise and hare” blog, the Central Thought being to “live long and prosper.” Use little debt and maintain a large cash position, that’s the easy part. You just need to say “no” a few times, and walk the talk (meaning no artifice or excess in your habits). The hard part is hewing to family life. Believe it or not, that’s the best way to prevent high blood pressure. I know. I’m a doctor. (Try getting through a divorce without high blood pressure.)
For equities, the 10 stocks in the Table have returned almost 12%/yr since the S&P 500 peak on 7/19/07 vs. ~7%/yr for the S&P 500 Index ETF (SPY). For cash, the iShares 1-3 Year Treasury Bond Index ETN (SHY) has returned 2.0%/yr (vs. inflation of 1.7%/yr).
Risk Rating: 4 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: For equities, I dollar-average into JNJ, PG and NEE, and also own shares of HRL, TRV, MMM, and WMT. For cash, I dollar-average into ISBs (Inflation-Protected Savings Bonds).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
We often take risks ourselves, to recover from our mistakes (divorce, buying a “fixer-upper” in a changing neighborhood, not kicking adult children out to face the world, etc.).
To avoid becoming alcoholics or gamblers, we must tend better to our personal relationships and try not to be an avatar of money. How does one do that? Three ways: One is about the way we invest, making wise choices. That would include having a large cash position, and a nest egg of stocks and bonds that aren’t gambles. Another is in the messages we give off, the optics and emojis we emanate. Finally, we must place a high value on family life, loyalty.
We all know how to give the impression that we’re about money, which is to “dress for the job you want”. At the opposite end of the spectrum, you’ll find people who are sans artifice but steady and reliable. They don’t armor themselves in upscale clothing, makeup, or scents. Men would then find themselves leaving the suit jacket, the sport coat, the tie, the permanent-press shirt, and the shiny shoes in the closet. And maybe think about replacing that expensive ride with a Prius Two or small Tesla.
For women, it would mean falling out of bed in the morning to compose her ensemble, which may include clothing that doesn’t cover up tattoos, no makeup, and Skechers as the default choice in footwear. Once so-attired, openness toward whomever comes naturally, without giving a thought to talking up or down to that person.
Let’s look at the money side. What does “having a large cash position” mean? It means you either hold Treasury Bills at www.treasurydirect.gov (and dollar-average into 2-Yr Treasury Notes as well as Savings Bonds), or you hold a large cash balance at an FDIC-insured bank.
Why is cash important? A recent Wall Street Journal article titled “Longer CFO Tenure is Good for Companies” has a good explanation. When faced with the Lehman Panic in 2008, the CFOs who kept their jobs used good people skills to hold on with successive CEOs but also went into the crisis with large cash positions on the company ledger. Not surprisingly, the companies that have these long-tenured CFOs tend to have unusually good stock performance. Simple message, isn’t it? Good people skills combined with a propensity to hold large cash positions. And, it doesn't depend on a lot of experience. Some of those CFOs were barely 30 years old when the Lehman Panic hit. It's a matter of values.
Mission: Assemble a list of A-rated Dividend Achievers that have Tangible Book Value and also have shown less volatility than the S&P 500 Index over the past 20 years.
Execution: see Table.
Bottom Line: This is a “tortoise and hare” blog, the Central Thought being to “live long and prosper.” Use little debt and maintain a large cash position, that’s the easy part. You just need to say “no” a few times, and walk the talk (meaning no artifice or excess in your habits). The hard part is hewing to family life. Believe it or not, that’s the best way to prevent high blood pressure. I know. I’m a doctor. (Try getting through a divorce without high blood pressure.)
For equities, the 10 stocks in the Table have returned almost 12%/yr since the S&P 500 peak on 7/19/07 vs. ~7%/yr for the S&P 500 Index ETF (SPY). For cash, the iShares 1-3 Year Treasury Bond Index ETN (SHY) has returned 2.0%/yr (vs. inflation of 1.7%/yr).
Risk Rating: 4 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: For equities, I dollar-average into JNJ, PG and NEE, and also own shares of HRL, TRV, MMM, and WMT. For cash, I dollar-average into ISBs (Inflation-Protected Savings Bonds).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 11
Week 310 - The 9 Largest Equity REITs In The US
Situation: Our ITR blog encourages investors to plan for retirement by favoring stocks that have low price volatility because of being issued by high-quality companies with low debt. To measure quality, we look for Dividend Achievers having an S&P bond rating of BBB+ or better. To document “low debt”, we require that Long-term Debt be no greater than 1/3rd of Total Assets, Tangible Book Value be a positive number, and dividends be paid out of Free Cash Flow. For added safety, we focus on companies with sufficiently high revenue to be on the Barron’s 500 List, and are well enough established to have their 16-yr trading record analyzed by the BMW Method. Yes, our approach has technical details but only enough to put Warren Buffett’s principles of stock-picking into practice.
Now we’ll try to use this introduction to show that there is some value to be found by investing in the leading “alternative” asset class: equity real estate investment trusts or REITs. These capture the benefits and risks of owning real estate, but trade like stocks.
Mission: Examine the 9 largest US Equity REITs by market capitalization. Introduce the unique features of equity REITs, and carry out our standard spreadsheet analysis.
Execution: see Table.
Administration: Read no further if you’re paying down a home mortgage. Why? Because you’re already more heavily invested in Real Estate than you should be, i.e., approximately 15% of your Net Worth. Real Estate is a gamble. Most of us want to own our own home but there is less risk in owning an REIT (or an REIT index fund) than owning a home. If you’re still reading, I assume that you live in a rental and need to own shares of an REIT to diversify your portfolio. In other words, you’re looking to add an income-producing asset that tracks neither the bond market nor the stock market. In terms of investment jargon, you’re seeking alpha: “alpha is the return on an investment that is not a result of general movement in the greater market.”
A popular way to attempt this feat is to own gold but gold has storage costs and produces no income. There are other “alternative investments” but, like gold, they’re all riskier to own than either a stock index fund like the Vanguard Total Stock Market Index Fund (VTSMX at Line 23 in the Table) or an investment-grade bond market index fund like the Vanguard Bond Market Index Fund (VBMFX at Line 17), or even an REIT index fund like the Vanguard REIT Index Fund (VGSIX at Line 21), which of course lost more than VFINX during the 4.5 year Housing Crisis (see Column D in the Table).
REITs are structured to have investors pay at least 90% of the taxes, in return for receiving at least 90% of the rental payments. REITs have considerable property value and borrow heavily against that Tangible Asset. They also have different accounting conventions:
“When evaluating REITs, you will get a clearer picture by looking at funds from operations (FFO) rather than looking at net income. If you are seriously considering the investment, try to calculate adjusted funds from operations (AFFO), which deducts the likely expenditures necessary to maintain the real estate portfolio. AFFO is also a good measure of the REIT's dividend-paying capacity. Finally, the ratio price-to-AFFO and the AFFO yield (AFFO/price) are tools for analyzing an REIT: look for a reasonable multiple combined with good prospects for growth in the underlying AFFO.”
For comparison purposes, we’ll examine McDonald’s Corporation (MCD). Most of its income is derived from rents that are paid on the 82% of its properties leased to franchisees.
Bottom Line: Whenever you venture into owning an “Alternative Asset”, you’re likely to feel some symptom of stress. That’s because you’re gambling with hard-earned cash. While REITs are the safest of alternative assets, you should carefully pick one or two because simply owning an index fund of REITs does not offer enough reward to make up for the risk. In this week’s Table, we drill down on the 9 largest REITs and find that all but these two are unacceptably risky: Public Storage (PSA) and Simon Property Group (SPG), at Lines 3 and 5 in the Table. Otherwise, you’re better off investing in McDonald’s (MCD), which gains the lion’s share of its income from rents and has a risk/reward profile similar to REITs.
Risk Rating: 7 (where 10-Yr US Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own stock in SPG, TIREX and MCD.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 20 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 28 in the Table. The ETF for that index is MDY at Line 19. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Now we’ll try to use this introduction to show that there is some value to be found by investing in the leading “alternative” asset class: equity real estate investment trusts or REITs. These capture the benefits and risks of owning real estate, but trade like stocks.
Mission: Examine the 9 largest US Equity REITs by market capitalization. Introduce the unique features of equity REITs, and carry out our standard spreadsheet analysis.
Execution: see Table.
Administration: Read no further if you’re paying down a home mortgage. Why? Because you’re already more heavily invested in Real Estate than you should be, i.e., approximately 15% of your Net Worth. Real Estate is a gamble. Most of us want to own our own home but there is less risk in owning an REIT (or an REIT index fund) than owning a home. If you’re still reading, I assume that you live in a rental and need to own shares of an REIT to diversify your portfolio. In other words, you’re looking to add an income-producing asset that tracks neither the bond market nor the stock market. In terms of investment jargon, you’re seeking alpha: “alpha is the return on an investment that is not a result of general movement in the greater market.”
A popular way to attempt this feat is to own gold but gold has storage costs and produces no income. There are other “alternative investments” but, like gold, they’re all riskier to own than either a stock index fund like the Vanguard Total Stock Market Index Fund (VTSMX at Line 23 in the Table) or an investment-grade bond market index fund like the Vanguard Bond Market Index Fund (VBMFX at Line 17), or even an REIT index fund like the Vanguard REIT Index Fund (VGSIX at Line 21), which of course lost more than VFINX during the 4.5 year Housing Crisis (see Column D in the Table).
REITs are structured to have investors pay at least 90% of the taxes, in return for receiving at least 90% of the rental payments. REITs have considerable property value and borrow heavily against that Tangible Asset. They also have different accounting conventions:
“When evaluating REITs, you will get a clearer picture by looking at funds from operations (FFO) rather than looking at net income. If you are seriously considering the investment, try to calculate adjusted funds from operations (AFFO), which deducts the likely expenditures necessary to maintain the real estate portfolio. AFFO is also a good measure of the REIT's dividend-paying capacity. Finally, the ratio price-to-AFFO and the AFFO yield (AFFO/price) are tools for analyzing an REIT: look for a reasonable multiple combined with good prospects for growth in the underlying AFFO.”
For comparison purposes, we’ll examine McDonald’s Corporation (MCD). Most of its income is derived from rents that are paid on the 82% of its properties leased to franchisees.
Bottom Line: Whenever you venture into owning an “Alternative Asset”, you’re likely to feel some symptom of stress. That’s because you’re gambling with hard-earned cash. While REITs are the safest of alternative assets, you should carefully pick one or two because simply owning an index fund of REITs does not offer enough reward to make up for the risk. In this week’s Table, we drill down on the 9 largest REITs and find that all but these two are unacceptably risky: Public Storage (PSA) and Simon Property Group (SPG), at Lines 3 and 5 in the Table. Otherwise, you’re better off investing in McDonald’s (MCD), which gains the lion’s share of its income from rents and has a risk/reward profile similar to REITs.
Risk Rating: 7 (where 10-Yr US Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own stock in SPG, TIREX and MCD.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 20 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 28 in the Table. The ETF for that index is MDY at Line 19. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 21
Week 307 - Silver Is Perhaps The Most Interesting Alternative Asset
Situation: Stocks and bonds have been at or near the tops of their historic valuations for over 5 years. No corner of those markets has been overlooked; “crowded trades” are everywhere. In such circumstances, investors will reach for value by looking at alternative asset classes. Real Estate Investment Trusts (REITs) are my favorite (see Week 274). The goal is to find assets that are a) “non-correlated”, i.e, have low Beta because price-action is often out-of-sync with the market, and b) have enough economic utility to occasionally generate Alpha, which is a high “return on investment that is not a result of general movement in the greater market.”
Why is silver interesting, given that it has only gained 3.9%/yr in value over the past 30 years? For comparison, the lowest-cost S&P 500 Index fund (VFINX) has gained 9.4%/yr and the lowest-cost investment-grade bond index fund (VBMFX) has gained 6.0%/yr. Reason #1: A key use for silver is growing exponentially, which is the build-out of solar power toward a United Nations goal of generating 30% of the planet’s electricity by 2030. Copper and aluminum can be used in solar panels instead of silver, but those substitutes are less efficient and have not proven to be commercially viable, partly because the amount of silver needed per solar panel continues to decrease.
Silver has a fascinating history. For example, in 1979 the Hunt brothers attempted to “corner” the silver market and were able to borrow enough money to buy 1/3rd of the world’s supply outside government hands. This resulted in more than a 700% price increase but brought attention to the high leverage used in purchasing commodities. After the commodity exchange (COMEX) adopted “Silver Rule 7” on January 7, 1980 (to restrict the ability of speculators to purchase commodities on margin), the price of silver promptly fell 50% and the Hunt brothers were unable to meet their bank’s margin call for $100 million. They ultimately declared bankruptcy.
Could this happen again? Yes. Silver prices fluctuate more dramatically than gold prices, since silver has greater industrial demand and lower market liquidity. The rapid proliferation of solar panels will no doubt aggravate that problem; sovereign wealth fund managers will be tempted to hoard silver. Let’s do the math. World silver reserves are just under 600,000 tons. Solar panels in currently contain ~2/3rds of an ounce of silver: A ton of silver is consumed to make ~44,000 solar panels, and 4 panels are needed to make a kilowatt-hour (kWh) of electricity. So, a ton of silver generates 11,000 kWh. A billion kWh = 1 TWh (terawatt-hour). Currently, ~21,000 TW are used every hour on our planet (https://yearbook.enerdata.net/electricity-domestic-consumption-data-by-region.html). A goal of producing 30% of electricity from solar panels by 2030 implies that those panels would need to generate ~11,000 TW per hour (after allowing for population growth). A ton of silver generates 11,000 KW per hour, so a billion tons of silver is needed to generate 11,000 TW per hour. Assuming that an ~10-fold increase in efficiency will be achieved by then, only 100 million tons of silver will be required. World silver production in 2015 was ~31,000 tons. Multiply that by 13 yrs and you get ~400,000 tons. Adding that to the current reserve of 600,000 tons, you’d have one million tons available for all industrial uses on the planet through 2030. Where are the remaining 99 million tons going to come from?
Mission: Examine ways to invest in silver, using our standard spreadsheet analysis.
Execution: (see Table).
Administration: There are 4 ways to invest in silver:
1) Purchase ingots, coins, or shares in a silver ETF (SLV).
2) Purchase stock in a silver mining company, the largest and most successful being First Majestic Silver (AG).
3) Purchase stock in a financial company that loans money to silver miners in return for claims on the “stream” of the silver produced. The main silver-streaming company is Silver Wheaton (SLV) but the dominant company for financing both gold and silver mines (in return for gold royalties or a stream of silver production) is Franco-Nevada (FNV).
4) Purchase shares of a gold mining company that produces large amounts of silver as a by-product. Both companies having the largest reserves are based in Canada: Goldcorp (GG) and Barrick Gold (ABX).
Bottom Line: This is gambling, on steroids. To be successful, you’d need to have infinite patience and have enough time to update information on silver inventories every week, as well as work-in-progress for solar panels relative to demand. You can probably do well by gradually building a position in silver or the silver ETF (SLV). Professional stock pickers who focus on natural resources like to stick with the companies that a) have the largest reserves and b) develop new reserves at least as fast as they consume reserves. Barrick Gold (ABX) wins on both counts.
Risk Rating: 10 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I have no silver-related holdings.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Why is silver interesting, given that it has only gained 3.9%/yr in value over the past 30 years? For comparison, the lowest-cost S&P 500 Index fund (VFINX) has gained 9.4%/yr and the lowest-cost investment-grade bond index fund (VBMFX) has gained 6.0%/yr. Reason #1: A key use for silver is growing exponentially, which is the build-out of solar power toward a United Nations goal of generating 30% of the planet’s electricity by 2030. Copper and aluminum can be used in solar panels instead of silver, but those substitutes are less efficient and have not proven to be commercially viable, partly because the amount of silver needed per solar panel continues to decrease.
Silver has a fascinating history. For example, in 1979 the Hunt brothers attempted to “corner” the silver market and were able to borrow enough money to buy 1/3rd of the world’s supply outside government hands. This resulted in more than a 700% price increase but brought attention to the high leverage used in purchasing commodities. After the commodity exchange (COMEX) adopted “Silver Rule 7” on January 7, 1980 (to restrict the ability of speculators to purchase commodities on margin), the price of silver promptly fell 50% and the Hunt brothers were unable to meet their bank’s margin call for $100 million. They ultimately declared bankruptcy.
Could this happen again? Yes. Silver prices fluctuate more dramatically than gold prices, since silver has greater industrial demand and lower market liquidity. The rapid proliferation of solar panels will no doubt aggravate that problem; sovereign wealth fund managers will be tempted to hoard silver. Let’s do the math. World silver reserves are just under 600,000 tons. Solar panels in currently contain ~2/3rds of an ounce of silver: A ton of silver is consumed to make ~44,000 solar panels, and 4 panels are needed to make a kilowatt-hour (kWh) of electricity. So, a ton of silver generates 11,000 kWh. A billion kWh = 1 TWh (terawatt-hour). Currently, ~21,000 TW are used every hour on our planet (https://yearbook.enerdata.net/electricity-domestic-consumption-data-by-region.html). A goal of producing 30% of electricity from solar panels by 2030 implies that those panels would need to generate ~11,000 TW per hour (after allowing for population growth). A ton of silver generates 11,000 KW per hour, so a billion tons of silver is needed to generate 11,000 TW per hour. Assuming that an ~10-fold increase in efficiency will be achieved by then, only 100 million tons of silver will be required. World silver production in 2015 was ~31,000 tons. Multiply that by 13 yrs and you get ~400,000 tons. Adding that to the current reserve of 600,000 tons, you’d have one million tons available for all industrial uses on the planet through 2030. Where are the remaining 99 million tons going to come from?
Mission: Examine ways to invest in silver, using our standard spreadsheet analysis.
Execution: (see Table).
Administration: There are 4 ways to invest in silver:
1) Purchase ingots, coins, or shares in a silver ETF (SLV).
2) Purchase stock in a silver mining company, the largest and most successful being First Majestic Silver (AG).
3) Purchase stock in a financial company that loans money to silver miners in return for claims on the “stream” of the silver produced. The main silver-streaming company is Silver Wheaton (SLV) but the dominant company for financing both gold and silver mines (in return for gold royalties or a stream of silver production) is Franco-Nevada (FNV).
4) Purchase shares of a gold mining company that produces large amounts of silver as a by-product. Both companies having the largest reserves are based in Canada: Goldcorp (GG) and Barrick Gold (ABX).
Bottom Line: This is gambling, on steroids. To be successful, you’d need to have infinite patience and have enough time to update information on silver inventories every week, as well as work-in-progress for solar panels relative to demand. You can probably do well by gradually building a position in silver or the silver ETF (SLV). Professional stock pickers who focus on natural resources like to stick with the companies that a) have the largest reserves and b) develop new reserves at least as fast as they consume reserves. Barrick Gold (ABX) wins on both counts.
Risk Rating: 10 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I have no silver-related holdings.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 14
Week 306 - A-rated Dividend Achievers That Have Outperformed The S&P 500 For 25 Years At Lower Risk
Situation: Some companies have served investors well over the past 25 yrs, compared to an investment in the Vanguard 500 Index Fund (VFINX). If we define “gambling in the stock market” as a statistical probability of losing more than you would from VFINX in any given market calamity, we find that 10 of those outperforming companies aren’t gambles. As long as those companies retain their management culture, as well as their competitive advantages, they’ll continue to outperform at less risk vs. the S&P 500 Index.
Mission: Subject those 10 companies to our standard spreadsheet analysis, except that in calculating Net Present Value we’ll use the rate of price appreciation over the past 25 yrs instead of 16 yrs, i.e., the BMW Method.
Execution: see Table.
Administration: Our conditions for inclusion are that companies must meet a high standard of quality. S&P ratings for both their stock and bond issues cannot be lower than A-. Balance Sheets must be clean, meaning that Long-Term Debt cannot constitute more than a 1/3rd of total assets, Tangible Book Value cannot be negative (we grant a little leeway in the event of a recent acquisition), and dividends have to be paid from Free Cash Flow (FCF). Companies must have annual revenues that are high enough to warrant inclusion in the Barron’s 500 List of large US and Canadian companies.
Bottom Line: These 10 companies represent 6 of the 10 S&P Industries (see Column Z in the Table). Each stock’s predicted risk of loss (at 2 Standard Deviations below trendline price appreciation per the BMW Method) is less than the S&P 500 Index’s projected loss (see Column M in the Table). All 10 have positive NPVs at a 9% Discount Rate, suggesting that you’re likely to realize at least a 9%/yr total return over a 10 year Holding Period, whereas VFINX has a negative NPV (see Column Y in the Table). Hormel Foods (HRL) and NextEra Energy (NEE) have the highest NPVs.
Risk Rating: 5 (10-yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into NEE, and own shares of TRV, ABT, MMM, and HRL.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 23 in the Table. The ETF for that index is MDY at Line 17. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Subject those 10 companies to our standard spreadsheet analysis, except that in calculating Net Present Value we’ll use the rate of price appreciation over the past 25 yrs instead of 16 yrs, i.e., the BMW Method.
Execution: see Table.
Administration: Our conditions for inclusion are that companies must meet a high standard of quality. S&P ratings for both their stock and bond issues cannot be lower than A-. Balance Sheets must be clean, meaning that Long-Term Debt cannot constitute more than a 1/3rd of total assets, Tangible Book Value cannot be negative (we grant a little leeway in the event of a recent acquisition), and dividends have to be paid from Free Cash Flow (FCF). Companies must have annual revenues that are high enough to warrant inclusion in the Barron’s 500 List of large US and Canadian companies.
Bottom Line: These 10 companies represent 6 of the 10 S&P Industries (see Column Z in the Table). Each stock’s predicted risk of loss (at 2 Standard Deviations below trendline price appreciation per the BMW Method) is less than the S&P 500 Index’s projected loss (see Column M in the Table). All 10 have positive NPVs at a 9% Discount Rate, suggesting that you’re likely to realize at least a 9%/yr total return over a 10 year Holding Period, whereas VFINX has a negative NPV (see Column Y in the Table). Hormel Foods (HRL) and NextEra Energy (NEE) have the highest NPVs.
Risk Rating: 5 (10-yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into NEE, and own shares of TRV, ABT, MMM, and HRL.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 23 in the Table. The ETF for that index is MDY at Line 17. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 29
Week 292 - Want To Gamble? Start With High-risk Growth Stocks That Are Dividend Achievers With Clean Balance Sheets
Situation: Most of us are of two minds when we invest. Sometimes we might speculate with “pin money” but mostly we make prudent decisions. Seasoned investors know when they’ve crossed that border (“here be dragons”). In the 19th century, the designation of “capitalist” was a synonym for “gambler”, and that idea still has a following.
Here we need to be more specific, since it is clearly imprudent to gamble with retirement savings. That is why we start most of our blogs by focusing on Dividend Achievers, companies that have increased their dividend annually for at least the past 10 yrs. Those “shareholder friendly” companies are constrained by having to always pay a good and growing dividend. (Any company run by someone as astute as Warren Buffett wouldn’t want to liquidate itself a little at a time.) But the shareholder is better served by having her capital returned piecemeal, rather than in a lump sum 10 yrs later when she sells her stock. For an explanation of why it is better to record 20-30% of your gains early on, read up on Net Present Value.
So, our definition of gambling is to invest in a company whose stock shows greater volatility than the S&P 500 Index over at least 16 yrs. Those stocks are denoted by a red highlight in Column M of our tables.
Mission: Develop a spreadsheet of growth companies that are high-quality Dividend Achievers with clean Balance Sheets, yet their stock has been more volatile than the S&P 500 Index over the past 16 yrs, as determined by a “least squares” distribution of their weekly price points (see Table).
Execution: Column M denotes the statistically predicted loss that would occur if prices fall 2 Standard Deviations below trendline. If the predicted loss for a particular company’s stock is more than the predicted loss for the S&P 500 Index (currently 30%), we highlight that number in red. Most of the Dividend Achievers from the 4 S&P Defensive Industries are not highlighted in red, whereas, most Dividend Achievers in the 6 S&P Growth Industries are, indicating that a greater loss is likely in the next Bear Market. Those industries are: Financial Services, Information Technology, Consumer Discretionary, Industrials, Basic Materials, and Energy.
Bottom Line: You don’t want to “get in over your head” when investing for retirement. So, you need a clear marker of when that is likely to happen. But if you’re like most investors, you want to gamble with a small fraction of your investments, i.e., those outside your retirement plan. Why? Because greater volatility is the source of high returns as well as deep losses. So, you don’t want to “buy and hold” these stocks. Instead, you’ll want to close out your position at some point. When would that be? There are no rules. You just have to decide when the market in that stock is becoming a “crowded trade." Then you should sell, or make a trade that offsets your risk. If you conclude that the company will prevail over competitors in the long run, you can offset the risk of a 50% collapse in the stock’s price by dollar-cost averaging, which is to invest a fixed amount each month online regardless of market fluctuations. That way, you get twice as many shares per dollar invested whenever the price falls by 50%. I learned that lesson the hard way, after I stopped dollar-averaging $200/mo into McDonald’s stock (MCD) in 2003 when the price fell below $10/sh.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MSFT and hold shares in ROST, TJX, and CAT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 20 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 10-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 30 in the Table. The ETF for that index is MDY at Line 19.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Here we need to be more specific, since it is clearly imprudent to gamble with retirement savings. That is why we start most of our blogs by focusing on Dividend Achievers, companies that have increased their dividend annually for at least the past 10 yrs. Those “shareholder friendly” companies are constrained by having to always pay a good and growing dividend. (Any company run by someone as astute as Warren Buffett wouldn’t want to liquidate itself a little at a time.) But the shareholder is better served by having her capital returned piecemeal, rather than in a lump sum 10 yrs later when she sells her stock. For an explanation of why it is better to record 20-30% of your gains early on, read up on Net Present Value.
So, our definition of gambling is to invest in a company whose stock shows greater volatility than the S&P 500 Index over at least 16 yrs. Those stocks are denoted by a red highlight in Column M of our tables.
Mission: Develop a spreadsheet of growth companies that are high-quality Dividend Achievers with clean Balance Sheets, yet their stock has been more volatile than the S&P 500 Index over the past 16 yrs, as determined by a “least squares” distribution of their weekly price points (see Table).
Execution: Column M denotes the statistically predicted loss that would occur if prices fall 2 Standard Deviations below trendline. If the predicted loss for a particular company’s stock is more than the predicted loss for the S&P 500 Index (currently 30%), we highlight that number in red. Most of the Dividend Achievers from the 4 S&P Defensive Industries are not highlighted in red, whereas, most Dividend Achievers in the 6 S&P Growth Industries are, indicating that a greater loss is likely in the next Bear Market. Those industries are: Financial Services, Information Technology, Consumer Discretionary, Industrials, Basic Materials, and Energy.
Bottom Line: You don’t want to “get in over your head” when investing for retirement. So, you need a clear marker of when that is likely to happen. But if you’re like most investors, you want to gamble with a small fraction of your investments, i.e., those outside your retirement plan. Why? Because greater volatility is the source of high returns as well as deep losses. So, you don’t want to “buy and hold” these stocks. Instead, you’ll want to close out your position at some point. When would that be? There are no rules. You just have to decide when the market in that stock is becoming a “crowded trade." Then you should sell, or make a trade that offsets your risk. If you conclude that the company will prevail over competitors in the long run, you can offset the risk of a 50% collapse in the stock’s price by dollar-cost averaging, which is to invest a fixed amount each month online regardless of market fluctuations. That way, you get twice as many shares per dollar invested whenever the price falls by 50%. I learned that lesson the hard way, after I stopped dollar-averaging $200/mo into McDonald’s stock (MCD) in 2003 when the price fell below $10/sh.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MSFT and hold shares in ROST, TJX, and CAT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 20 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 10-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 30 in the Table. The ETF for that index is MDY at Line 19.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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