On Vacation

     I recently returned from a vacation to Canada where I spent the week fishing and relaxing. I rarely worry about my investments while I am away from TVs and computers because summertime is also when money managers also are on vacation. Institutional money managers often trade in millions of shares of stock, sometimes moving markets. Between Memorial Day and Labor Day, the top brass of the big mutual funds turn over management of the funds to their subordinates  who have limited authority to make any large changes to the portfolio. This is why summer seems a little subdued for the stock market. The movers and shakers of the financial world are chilling out in Martha's Vineyard, enjoying the perks their incomes affords them. A major news story about politics or an individual stock can still roil the market, but generally, things are quiet. Summer is a good time to do some reading in financial publications for ideas that will help you build a list of investments to buy when the time is right. Some articles that I have read recently were about the emerging autonomous auto transformation. The implications of this technology are enormous. All these vehicles will also be electric powered and recharged by plugging into household current. I have heard it said that our existing electric grid is currently unable to handle the extra power demands of a large scale conversion to electric vehicles. If this is true, then the purchase of Solar City by Elon Musk was a stroke of genius. Elon is the CEO of Tesla motors, which plans to produce 1 million electric cars a year within 5 years. I don't know for sure if he can pull-off this feat but I wouldn't bet against a guy who routinely launches rockets into space and supplies the International Space Station. I have already been in Tesla stock and sold it for a quick profit but now I am looking for an entry point again. The transformation of the auto industry could be the biggest story of the last 100 years. Another point I would make about this is the technology required to make it happen. Computer chips that help the driverless cars navigate are being manufactured now by Micron Technology (MU). Lam Research makes the equipment which manufactures the memory needed by autonomous cars. Lam has been on a tear lately so buy it on a dip.

Acrophobia

     Acrophobia is a big word meaning "fear of heights".  I am beginning to suffer from this disease. It usually affects me when I research stocks that I might be interested in adding to my portfolio. The PE ratios of many stocks are at unsustainable levels currently. What is driving this unusual level of interest in common stocks? Several factors have contributed to these high valuations. First, extremely low interest rates for fixed income investments like bonds and CD's have steered investors to the equity (stock) market for dividend yield and capital appreciation. The second factor is simply supply and demand. There are too many dollars chasing too few stocks, creating an imbalance and causing stock prices to rise.When interest rates start to normalize (return to historic levels) , stock valuations should moderate. Currently, the Federal Open Market Committee (FOMC) is expected to raise rates again this June. Any weakness in the stock market or economy in general may delay this move. I recently looked at a chart of the Dow Industrial Average from 1980 to present. The upward slope is staggering. The only real deviation occurred in 2008-2009 during a severe recession. Interest rates were slashed during the recession to stimulate the economy which was on the brink of collapse In addition to already low interest rates, the FOMC began a program of Quantitative Easing. This flooded the capital markets with liquidity so loans could continue to be made and businesses would stay open. Now the Feds would like to unwind all this stimulus and return to normal. My fear is that stock valuations have been propped-up by all this artificial stimulus and may react badly to any attempt to normalize interest rates. Hopefully the transition will be gradual enough to avoid any severe repricing of stocks in general.. Therapy for my Acrophobia includes raising cash by selling some positions that appear to be richly valued and making a list of potential buys in case the market corrects in a meaningful way. I also am watching local CD rates and buying into a laddered CD strategy which is what a retired guy my age should do. I still hold plenty of stocks and a few bonds,  which I will hold to maturity, but my cash and fixed assets will help insulate me in a market downturn.

Panic Mode

     Today the Dow Industrial Index is down over 370 points. There are three things an investor can do in this situation: 1 Sell in a panic, 2 Buy more stocks at a discount, 3 Relax and have a glass of your favorite beverage. I chose option #3. My preference is Wild Turkey bourbon on the rocks with a slice of lemon garnish. Institutional investors and market makers on Wall Street would like for you to choose option #1. Why? Because panic selling by retail investors cause prices to fall on good stocks, giving the Pros a bargain price. The Pros on Wall Street are always looking for a way to generate short term gains for their clients. It's the client who is responsible for the tax on these gains. To sell into a panic means that I have lost control of my long term strategy and that I am willing to sell at any price just to exit a position. Readers of my last post will remember that I was selling (with limit orders) some of my big pharma (drug) stocks last month. All of those orders were filled at the price I specified. I wish I could say that I knew The Donald was going to do something stupid and cause a panic, but the truth is that the drug stocks just got pricey as expressed by the PE ratio. I like to sell into strength while the market is going up instead of weakness (when people are panic selling). Since this blog is about finance and not politics, I only have one thing to say about the events this week at the White House: Trump's outrageous behavior is not accepted in government like it was in the business world. End of political analysis. Now about option #2-buy more stocks at a discount. Let's put today's action into perspective- the Dow only fell 1.78% today, hardly a huge discount to previous levels. I don't know if there is more pain to come or not so I am not willing to catch a "falling knife" by buying a stock on its way to lower levels. When Richard Nixon was caught breaking the law and lying about it in 1973, the Dow fell 50% in about a year. Funny thing is this country, the economy, and the stock market all survived the resignation of Nixon. If this is what happens to Trump, I suspect my long term strategy to survive also.

Handyman Investing

     I recently went for a walk in my neighborhood and found an antique table discarded on the side of the road. The table had one leg broken-off and another leg shattered. I could not resist bringing it home to repair and refinish it. A few days later, the table looks worthy of my living room. What someone else saw as trash, I saw as treasure (with a little work). Stock investing can work the same way. For each purchase of a stock I make, someone is selling those shares to me. Beauty is in the eye of the beholder in women, goods, and stocks. I like to acquire broken things and either fix them myself or let someone else fix them (like the CEO in the case of stocks). Just like my antique table was very cheap (free), good stocks sometimes get cheap and deserve a second look. Even with the stock market at record highs, there are some stocks that are unloved right now. I recently ran a stock screen for stocks with a PE ratio below 10X and a PEG ratio of 1 or less. There were over 40 such stocks listed. There will always be a reason for a stock to be that cheap, the key is to decide whether the reason is temporary and fixable. One company that I am willing to take a chance on is Gilead Sciences. It is trading at 6 times earnings and has many sell recommendations on it, however, I am confident that they can develop new therapies for some of mans worst diseases. Gilead is guilty of selling drugs that actually cure hepatitis C, losing a customer every time. As usual, I placed a limit order for Gilead because tomorrow they report earnings. If earnings disappoint and the stock falls, I will get it even cheaper. If earnings are above expectations, my order will not be executed. I recently sold some big pharma stocks because their PE's were at nosebleed levels. I am more comfortable with a stock with a very low valuation for several reasons: if there is a market correction, value stocks will probably fall less than growth stocks, and any good news for Gilead could generate a nice pop for the stock. Exploiting the PE ratio would reveal the potential for Gilead. I am not recommending Gilead as an investment for most people because of the risk, I am just using it as an example of how I choose my investments. I need to be patient with this one because new drugs take a long time to develop and become accepted therapies but there is a 3% dividend in it for me while I wait.

Invest Like You Dress

     About a year ago my wife dragged me to Macy's to get outfitted for some new clothes. We were attended by a well groomed salesman who did a great job of selling me some new threads. I asked him what was currently in style and he gave me some timeless advice: "Buy clothes that are age appropriate for you".  Why should I care what the latest style is? I'll let the millennials worry about that. I just don't want to look like a rag-tag bum and be laughed at. As long as I am comfortable and look decent, I am happy. An investment portfolio should also be "Age Appropriate" and as individual as the owner. There is no "one size fits all" in investing. A person needs to be comfortable with their investments and not worry about them at night.  In general, as a person ages, the risk in their investments should be gradually eliminated so they won't be wiped-out by any market corrections. If you were to look at a graph of age vrs risk, where age is the horizontal axis and risk is the vertical axis, the slope would look like a toboggan run with the bottom of the hill in retirement age. Again, this is highly personalized. An example would be the funds that I manage for my mother who is 92 years old. I have lots of stocks, fixed investments like municipal bonds and CD's, and even some Master Limited Partnerships in her portfolio. Why should I take so much risk with my mothers savings? Two reasons: diversification and liquidity. I keep lots of cash on hand to pay her huge monthly costs at the nursing home and her holdings are diverse enough to insulate against any stock market shocks. I wish I could get a good return in federally insured bank accounts so Mom could get some safe income but that is not the case right now. That is why I have her invested in stocks that produce dividends and potential capital gains. The important thing is that I am comfortable with the investments for her situation. Just like wearing the latest fashions, chasing after the hottest stocks at this point in my life for me or my Mom would just not be age appropriate for either of us. We like steady businesses with a record of increasing dividends and below market valuations.

I Hate Rules

     Some rules are necessary in civilized society. You shouldn't steal, you shouldn't kill anyone (in most cases), and you should pay your taxes. However, when it comes to my nest egg, I believe that the fewer rules that I have to follow, the better. Most people have a qualified retirement account of some kind, like an IRA, 401k, 403b and so on, but in my last post I stressed the importance of saving for the future with after-tax money too. Those qualified retirement accounts are constrained by reams of rules about how much you can contribute, when and how much you can withdraw, what you can invest in, and on and on. In exchange for following all the rules, you get to allow your money to accumulate tax deferred until age 59.5, at which time the rules tell you how much you have to pay tax on. At age 70.5 the rules tell you how much you have to withdraw every year as a required minimum distribution (RMD) and pay taxes on.  I don't have a problem following these rules because if there is one thing I hate more than rules, its paying taxes. In my opinion, any time I can defer or eliminate paying taxes, its a good thing.Why am I bringing this up? Well I recently read an article in the local paper by a well known financial guru who thinks any after tax savings should be put in a Roth IRA. I beg to differ. First off, full disclosure: I own a Roth IRA. It's relatively small and accumulates tax free. It also will not be taxed when I decide to withdraw the money. A Roth is a good idea for someone who follows the rules. There is a 5 year rule, order rules for distributions, rollover rules, contribution rules, and even more rules. The older I get, the fewer rules I want to follow. Hell, I might even forget some rules. I could order publication 590a from the IRS to remind me about all the rules for the Roth IRA. It would make great reading before I fall asleep. I could even order publication 590b if I am still awake and need more reading material. Maybe it's just me but I just want to follow enough rules to keep my ass out of jail. That is why I like to have some investments that are not restricted by IRS rules. With my stock portfolio, I buy what I want, when I want, sell what I want when I want and settle with the government at the end of the year. I try to offset my gains with losses to mitigate my tax liability. The dividends are taxed at preferable rates (if qualified dividends).  What really scares me about the rules for the Roth IRA is that the brainiacs in Washington D.C. could change the rules at some point during my lifetime. Then I would have to order more IRS publications to help me fall asleep.

A Note to GenXers

     I just read a chart that identifies the generational differences between GenX, Millennials and Baby Boomers. It stated that the GenX generation is the first generation in US history to be less well-off than their parents. I have written about the reasons for this in past posts, but it doesn't have to be this way. I agree that the work environment is more difficult now that it was 25 years ago, but a little education about finance and proper preparation for the future can mitigate the changing climate. First, about saving for retirement, there are many retirement plans available to workers: 401k, IRA, SEP, HSA, and so on. A google search will reveal all of them. HSA's also can be used like a IRA, you just have to read the rules in an IRS publication like Pub 17. At age 65, (almost) I have a few things to share with the younger generation about retirement: Take advantage of the matching funds that your employer offers you, its free money. Don't fall for the regular (weekly) investments in your company's stock,( I lost my ass in this one). Have an investment or savings program outside of a Qualified Retirement plan. Money saved or invested outside of any retirement plan has already been taxed and does not produce a tax liability during retirement. Only the earnings on these funds are taxed, remember that dividends are taxed at a lower rate than other income. Any redemptions or distributions from a retirement plan are taxed as ordinary income. By owning after tax assets, you can avoid the 1099R that comes from any distributions from retirement accounts. Just like Millennials hate to pay taxes while working, they will really hate the tax burden in retirement. Most of the retirees that I worked with in the past still do not need the money in their 401k's at age 80 because they have other funds to live on. At age 70.5, retirees are required to start taking funds out of retirement accounts, this is callled a RMD (required minimum distribution) and is taxed at ordinary income rates. Many seniors resent this requirement because they don't need the money and don't want the tax burden. The funds in the retirement accounts are used as a safety net in old age. I don't know what will happen to social security or medicare in the future, but that is why saving in a retirement account can produce peace of mind. Bottom line, millennials will only be less well off than their parents if they don't prepare for the future. Not all Boomers are enjoying a comfortable retirement either, just the people who planned for the future can live out their lives on their savings.