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Monthly Archives: December 2010

Right where I want to be in 2010 & my 2011 Investing Goals

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With the last day of the year happening tomorrow, I’ll take a moment to tell you where I’m at with my investment situation at the end of 2010 and where I want to be by the end of 2011.

As the title of this post says, I’m “right where I want to be.”  I’m a hair or two over the point I set for myself to be at by the end of 2010.  My 2011 goal is to double my portfolio’s value by the end of the year.

Doubling my portfolio’s value will not be an easy task, but it is not as challenging as it might seem.  Why?  First, I estimate that 70% of this gain will be covered from additional funds I deposit in my account.  If my investments do not appreciate and I receive no dividends throughout 2011, I will be able to reach 70% of my total goal from deposits I foresee coming into the account.

Secondly, based on the information I just divulged, I need to realize an average annual return of 60% from my current portfolio value to bring me to my 2011 investment goal.  Though this is quite a high annual return, I will have some help.  I assume that the funds I regularly deposit into my portfolio will not sit idle throughout the year.  If they are invested into stocks or funds that appreciate that will help me meet my goal.

My 2011 investing goal is going to be a challenge.  If you have not already, take some time to sit down and set a few investment goals for yourself.

I encourage you to share what you hope to achieve in 2011 via the comment section below.

Letter to an Investor as a Young Man

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Jim Fink from InvestingDaily.com has done a wonderful job highlighting some common pitfalls people find themselves in when investing in securities or themselves throughout life.  This is vital reading for those young and seasoned investors.

Letter to an Investor as a Young Man

The 13 topics he discusses are as follows:

1. Ignore the Advice of Your Elders
2. Get More Than One Graduate Degree
3. Wait Until Your 40s to Invest
4. Put All of Your Eggs in One Basket
5. Bet Too Large Going for the “Big Score”
6. Don’t Learn About Stock Options
7. Focus on Fundamentals Only
8. Avoid Dividend-Paying Stocks Because They’re “Boring”
9. Buy 52-Week Lows
10. Listen to Hot Stock Tips
11. Trade During Your Vacation
12. Overtrade
13. Forget About Tax-Advantaged Retirement Accounts Like 401ks and IRAs

Thomas Sowell & Opportunity Cost

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From Investors Business Daily, Thomas Sowell on “‘Free’ Lunches Are Killing Us With The Cost”…”We are currently seeing what happens, in fierce riots raging in various countries in Europe, when the money runs out and the brutal truth is finally revealed, that there is no free lunch…READ MORE

My Take:  I frequently talk about opportunity costs in my video blogs.  In the article linked above, Sowell looks at the idea of a ‘free lunch’ and dismantles the plausibility of the notion.   The bottom line is that almost always when you’re given something you have an cost associated with that activity.  When the cost is not apparent, you can probably find it by considering the opportunity cost.  For instance, you take me out to lunch in which you pay the bill.  I did not incur a monetary cost, but I did give up something to go to lunch with you.  Maybe I could have done some work or maybe I could have enjoyed myself in some other manner.

I have an upcoming video blog about young investors and the trend of that group to place an added emphasis on the idea of avoiding risk with their investments.  The main take away from that should be that though their funds are more secure than if they were in stocks, they are loosing the opportunity to see much higher returns on their investment.

The sooner any investor incorporates the idea of opportunity cost into their method of investment evaluation, the better prepared they will be to properly understand what they are giving up to take the path they see fit.  Thus, they will be in a position to make a better determination about the best suited path for their investment needs.

Want to beat the market? Invest in what you know best.

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If you’re bound and determined to beat the market, you need to have an edge.  The pertinent question then becomes, “Where do I have an edge?” rather than “How can I beat the market?”  If you answer the former correctly the latter is likely to follow.

Beating the market is not easy.  Many professional fund managers attempt the feat each year and fail.  To consistently beat the market you need to have knowledge and an understanding that sets you apart from the crowd.  This does not mean that you must be a market guru or have inside knowledge, but it does mean you need to have some uncommon knowledge.

If you’re serious about beating the market and willing to take on a substantial amount of additional risk, here is my advice:

  • Reflect on what industries, products, services, new technology you know better than most people.  (By most people I mean most informed/knowledgeable people in society; people in jail, on drugs, drunk, in mental institutions, or simply out of touch do not count.)
  • Look for what knowledgeable people within a certain industries or sectors are saying about the companies you think are going to grow substantially in the future.  How do these opinions compare with your opinions?
  • Research.  Find good sources of information and use them to help determine where good investments reside.  Look at the source overtime to see if he/she has a good track record of accurately predicting the future (I wouldn’t consult a palm reader in this situation, but that’s just me.)
  • If you’re hearing that X trend is picking up momentum and X, Y and Z major companies stand to benefit from the trend, look for smaller companies that will benefit as well.
    • Smaller companies sometimes are not monitored as well as larger companies, which means they have a greater chance of being not fully understood.  This leads to valuations being out-of-line, which can serve as your window of investing opportunity.
  • Do not over-diversify.  Diversification is about safety in numbers.  If you’re going to steal the show (significantly outperform the market), you need to select your few all-stars and let them ride.
  • Do not be overly trigger-happy.  This goes for both buying and selling.  If a stock moves up quickly that you want to buy, do not feel that you must buy now or you will miss your opportunity forever.  If you own a stock and it moves up significantly, do not be overly anxious to sell the stock.

Again, if you want to beat the market you need an edge.  Without an edge you should strive to match whatever it is that your market consists of (S&P 500, Dow, BRIC Index, a small cap index…).  Taking on additional risk without additional information is a dangerous game.

Demographics – A Framework For Your Investing Strategy

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Demographic trends have financial implications and thus can be used to develop an investing strategy.  Using demographics can help you to reduce your portfolio’s risk and guide you when you’re determining what investments are right for your portfolio.

The beautiful thing about many demographic trends are that they’re inconceivable to the current societal mind-set.  Take for instance Europe.  The indigenous populate is failing to reproduce and in 20-30 years a major shift in influence and power will be seen in the Muslim populations.  Democracy is a number game.

What demographic trends are at play right now that might be a way leverage your investment plans?  Look at the Latin (Mexico, Central America, Caribbean) populations in the U.S.  They’re growing rapidly and will change many of the compositions of states within 10-20 years.  Right now I live in a city that has a majority population of Mexicans.  How does this impact businesses?  If you can determine a business or sector that can thrive based on this trend, then you’ve potentially found a good investment.

Using a demographic framework for investing forces you to look forward, rather than backward when evaluating investments.  This is particularly helpful, since “past history is not indicative of future success.”

IPO Boom in 2011?

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If you go to any investment or financial site you’re bound to be clobbered with 2011 predictions.  I guess I should join in too?

Below you’ll find a number of images that list potential IPOs upcoming in 2011.  I’m particularly interested in the Social Media IPOs, since they may help boost QuePasa (QPSA), which I own.

I’ve said it before, IPOs are risky business.  Sometimes they can be wonderful, but that’s far from certain.  It’s not hard for them to become over-hyped and over-priced.  In such cases, you’ve got a disaster on your hands if you’ve invested.

Check out the IPOs below and start planning your 2011 investing strategy!
(Click to Enlarge)

Best & Worst Master Limited Partnerships of 2010

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For master limited partnerships (MLPs), 2010 will mark the second consecutive year that these high-yield and tax-deferred investments have outperformed the overall stock market by a substantial margin. Take a look at the table below to see how much MLP investors have to be thankful for:

Total Return

Year Alerian MLP Index S&P 500 MLP Outperformance
2009 76.5% 26.5% 50.0%
2010

(through Dec. 20th)

 31.2% 14.0% 17.2%

Source: Bloomberg

Read More…

My Take:  I do not plan to add to my positions in MLPs for the near term.  That means around 3 months.  I like MLPs as an investment because they have some outstanding yields and they are often a more stable approach to investing than other strategies.  Yet, this does not mean that they don’t bring home the bank.   Look at the chart below to see that point.

If you click “Read More” you will see that I’m holding the best performing MLP of 2010.  I’ll admit it…I got lucky.

I am of the opinion that you don’t need to be near retirement age to look toward MLPs as an investing mix/strategy.  Take a look at the piece linked above.  If you’re new to MLPs it’s a good way to get a sense of their potential as an investment.

Did an ETF Trigger the Current Gold Boom?

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So what caused this steep price rise? The key hasn’t been any inherent increase in gold’s value to society. Instead, gold rose because a South African mine owner — with help from consulting firm Bain & Co. — invented a way to sell it to the masses without the hassle of physically delivering the shiny metal, explains a Bloomberg BusinessWeek article published Sunday…Read More

My Take:  This article hits home with me.  I’ve been of the opinion for a couple of years now that gold is overbought and due for a correction.  As an investor, when I hear ads on the radio, television and other forms of media pushing people to buy gold, something doesn’t smell right.

Cohan, through his observations of the Business Week article, is claiming that the significant growth in the price of gold has been triggered by the ability of people to easily purchase gold (via Exchange Traded Funds – ETF) and a good marketing campaign.

While I’ve been aware of the marketing campaign for some years now (Honestly, who hasn’t?), I never took into consideration the ‘innovation’ that is gold-based ETFs.  I’m certain the concept is not exactly new, taking hold of a tangible good through deed only, but the access and accessibility are certainly areas that have grown rapidly within recent history.

If you don’t remember anything about the article, remember the following: “According to Wharton professor Jeremy Siegel, gold has total annual real returns of just 0.6% since 1802 — stocks, at 6.6% are much better investment performers, as are bonds at 3.6% and bills at 2.8%.”