Monday, September 30, 2013

The Case for Gold

The Case for Gold

The farmers I know, and this is coming from an avowed city slicker, are hearty, resolute, and self-reliant. As a financial farmer, I think we can all learn a lot from that temperament. I particularly wanted to focus on self-reliance today because all this talk of a government shutdown got me thinking; what if, on this the potential 18th time of a government shutdown since 1976, we didn’t reopen? Although I peg the possibility of a sustained government shutdown at 0%, just for a mental exercise, a la Lumosity, let’s play this out along a possible outcome.

Depending on the severity and length, I suspect there would be a gradual worsening of the overall societal situation. Initially, I think there would be little to no effect, a small crack in the social order. There even may be a short-term boost in productivity, but as more and more governmental organizations cease to function, in particular those that support infrastructure and the rule of law, I can’t help but believe our society is adversely impacted. That small initial crack now spiders. 

Many elements that we take for granted; from defense, social programs, and medical services begin to fracture. Over time, logistics like food supply, fuel, and delivery of basic services like water degrade. By definition of the law of supply and demand, the demand for these services remains constant or may even increase while the supply falls, making them more and more scare (and expensive in real dollar terms.) On a sliding scale, I would argue there would be a noticeable and sustained movement towards a “gold, ammunition, and canned goods” portfolio and away from one of equities, bonds, real estate, art, and paper currency. Gradually, then all of a sudden, portable wealth and power become more important. The last two elements of the “crisis portfolio,” namely ammunition and canned goods, I don’t know too much about to make educated comments. But gold on the other hand, I think I know enough to build a plausible theory of what could happen next.

If you haven’t had a chance yet to read the Crisis of 1837, please do. It is a very real example of what happened when our economy collapsed and the ensuing rush to obtain gold coins, then termed “specie,” occurred. Although over 175 years have passed, I think the game plan remains the same, as gold would replace paper currency for many transactions and “Pay at time of service” becomes the norm. Rather than the 1 oz. Gold Eagles we typically see for sale, I suspect smaller denominations like 1/10 oz. Gold Eagles become the most common unit of currency because they can purchase basically a portable amount of food, fuel, and basic supplies. The $5 face value U.S. Gold Eagle represent a value that is understandable and quick to trade on; and gold’s timeless value has been built on the simple fact that gold equals toil. Toil in mines, toil in processing, toil in manufacturing, toil in storage, and toil in safety; gold equals portable, almost impossible to replicate toil. 

The $5 face value 1/10 oz. U.S. Gold Eagle become the true “bit” coin; I find it hard to believe that our entire computer system will be functioning perfectly, that merchants will accept electronic money over physical gold. Bitcoins? I don’t think so. Diamonds? Possible, but too few people know how to adequately value them, and there is just too much value in some to purchase small quantities of necessities. Art? Maybe, but at what value and to whom? The end game is physical goods for physical goods. I think nothing captures that trade-off better than gold.

Could the U.S. Government close down for a week? Two weeks? A month? Maybe, but as mentioned above, I think there is a 0% chance of a sustained U.S. government shutdown in the foreseeable future. Too many indicators point to continued prosperity; from the housing recovery, decrease in unemployment, and most importantly the loose monetary policy.  In my view, the bullish case is just too strong. What we’re seeing now is political posturing at its worst, with U.S. citizens held captive to this Washington drama. Nonetheless, I think it behooves the financial farmer, indeed any investor, to think about a worse case scenario that may occur some time in the future. 

A prudent farmer has a grain silo and is rarely without capital in its many forms; I think $5 face value, 1/10th ounce U.S. Gold Eagles are a good choice. The closer you can obtain them to the true spot price of gold the better. They’re portable, useful in small bulk purchases, and challenging to replicate. They don’t rust and aren’t vulnerable electronic corruption. There’s a reason why gold has been so dear over thousands of years; new “currencies” may emerge, but until alchemy finds a way to turn lead to gold, it still has the best luster.
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Sunday, September 29, 2013

A Tip of the Hat to Breaking Bad

A Tip of the Hat to Breaking Bad (and International Coffee Day!)

With our government on the verge of its 18th potential shutdown since 1976, I thought our time today would be better spent discussing something, anything, rather than the precarious position our political leaders have put this country in once again.

So with a tip of my hat to Breaking Bad, arguably the best drama series ever, I wanted to talk today about one of the greatest products ever successfully “farmed” out of the field; caffeine.

Invest Like A Farmer likes to take a unique approach to looking at macro-economic trends. What we often see, is that great wealth often comes from the soil. Let me repeat that, great wealth often comes from the soil. More than virtually anything else, land seems to drive the creation of wealth from farming, to manufacturing, to the location of educational hubs. But in the case of caffeine, many great empires (think of your leading coffee retailers and carbonated beverage manufacturers) have been built around what is commonly found in the coffee bean and kola nut; that’s right, the “cola” nut!

Take a look at the S&P 500 members and just make a mental note how many are really, in at least some form, caffeine delivery companies; like Walter White from Breaking Bad says, “I want to be in the empire business.” These companies, worth billions, are all in the empire business.

How does this relate to investing like a farmer? Almost perfectly in fact, as one of the core portfolio construction strategies of Invest Like A Farmer is security selection. Indeed, the very first general guideline is:

  1. Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.

While you’re enjoying a “FREE” cup of coffee today from one of the retailers participating in International Coffee Day, think about the process of wealth being created simply by harvesting beans and nuts; and specifically how transformative that process has been over the years on our collective appetites and ultimately society. Pretty powerful!

Saturday, September 28, 2013

DJIA: 15,258.24   S&P 500: 1691.75   NASDAQ: 3781.59   OIL: $102.87   GOLD: $1,339.20  10-YR: 2.63%

Yikes! Well after a week of getting trounced in the markets over concerns over a possible government shutdown, it is always valuable to take a step back and look at the big picture. Continuing the theme of investing like a farmer, I wanted to provide some historical reference so today’s investor can take a meaningful look back at current events and put them into an accurate context (a financial farmer's almanac!)

For me, a lot of my investing experience has been influenced by Warren Buffet’s annual Berkshire Hathaway shareholder letters, Edwin Lefevre’s “Reminiscences of a Stock Operator” chronicling the life of trading legend Jesse Lauriston Livermore, and finally the Crisis of 1837.

As Livermore famously said, “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street.” To that end, I think it is vital to read arguably the best account of the Crisis of 1837 by Edward M. Shepard. This literary gem reads like it could have been published just yesterday, but recounts events over 175 years ago. I think you'll find we could substitute out many of the names and dates of the Crisis of 1837 with nearly EVERY other crisis, panic, crash, or recession. The similarities are too numerous to be taken for granted. If you don't have time to read it all today, print it out and bring it with you to read over the coming week (consider it a homework assignment.)

The combination of the above influences, along with personal trading experience, has led me to form the Invest Like A Farmer theory. This theory is loosely based on a “Buy and Hold” concept, but I refer to it more as a “Buy and Grow” approach to investing in which an individual investor’s core portfolio is built along the following general guidelines:

1. Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.

2. I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.

3. Of the four possible outcomes; high margin, high volume is best.

4. A steadily moving higher and higher left to right stock chart is a good thing. The inverse is not.

5. Inevitably, and by definition, more time is spent holding a losing position than is necessary. Don't be afraid to cut your losses; the financial farmer has a healthy understanding and respect for the risk of ruin.

In summary, I look for boring, dividend paying companies that have a high margin, high volume business with steadily increasing left to right stock charts. I’m not afraid to cut my losses early to help avoid the risk of ruin.

Don't let the word "boring" fool you; boring is the new "sexy" in terms of potential portfolio earnings power. Spectacular earning results come from "boring" companies all the time.  In regards to dividends, I'm a big believer in getting "paid out" on your investments on a consistent basis; this is a big part of investing like a farmer. These dividends are literally your crop yields and a large part over time of your total return.

High margin, high volume revenues typically translate into what a financial farmer is looking for; profits! The combination of these two elements is generally a healthy sign for your financial farm (portfolio.) The high margin and high volume company usually transforms its profits into a higher and higher left to right stock chart, which is an indication of both success and momentum. I'm a strong believer in historical chart growth and expansion, it visually helps us recognize success.

Finally, cutting, trimming, and slashing losses from a portfolio can be hard to do, especially if we have an emotional tie to the respective company; the financial farmer needs to value his or her farm, however, over any one particular crop. There is a reason for crop rotation and also for letting fields stay fallow on occasion. The guideline I typically like to use is a short-term drop of a pre-established percentage would trigger either an outright sale or partial reduction. There is nothing to say you can't buy back a position in the future; time, winds and weather are always changing. With that said, however, the financial farmer who indeed wants to Invest Like A Farmer has a healthy understanding and respect for the risk of ruin. The risk of ruin, simply defined, is the point of no return. It the point where your financial farm (portfolio) ceases to exist because it is bust. It is paramount to avoid the risk of ruin.

All of these themes are going to be discussed much further in the blog in the future, but I wanted to provide a general overview today to help the reader navigate further posts with the help of a little historical background and context of the Invest Like A Farmer theory.

I hope you've enjoyed today's post and that it helped add to your understanding of the Invest Like A Farmer theory that I espouse.

Enjoy your weekend!

Friday, September 27, 2013

DJIA: 15,328.30   NASDAQ: 3878.43   OIL: $103.03   GOLD: $1,323.60  10-YR: 2.64%

Welcome to my first blog post! I’m hoping this will be an effective medium to help share my thoughts and some of the insights I’ve picked up over the years investing personally and on behalf of clients.

Let’s lay the foundation today prior to providing any market commentary just yet. The first question is probably what exactly does “Invest Like A Farmer” mean? 

Investing like a farmer is more than just a methodology or a strategy; I believe it is a thought process that when enacted can make great things happen today, tomorrow, and well into the future.  At its core, investing like a farmer involves a thoughtful portfolio selection process, a pre-defined holding time, and an understanding of macroeconomics.  All of these factors come to bear for the financial farmer.

Over the course of the next couple weeks, months, and years I’ll delve deeper into this theory of investing.  I look forward to sharing my investment process with you and also systematically improving the format, content, and overall delivery experience with each successive post.