Crypto Mania

     There is something going on in the world of Finance that just cannot be ignored. It's very confusing and most experts admit that they don't understand it either. I'm talking about cryptocurrencies like Bitcoin. I have to admit that I know almost nothing about the technology and the currency but I would feel remiss if I didn't at least address it in this blog. First of all, Bitcoin is just one of many cryptocurrencies out there. Another popular "token" is called Ethereum. I called it a token because that is the technology that allows them to be bought, sold, and traded. There are currently about 1200 cryptocurrencies out there in cyberspace with more offered everyday. They are being introduced by what is called an "initial coin offering". According to the current issue of Barron's magazine (Dec 4,2017), investors have bought 3.6 billion dollars worth of these tokens just in 2017 alone. That's why it shouldn't be ignored. I would highly recommend anyone who is interested in this "mania" to buy a copy of this weeks Barron's to get educated on what is happening. Just to be clear, I do not recommend putting any money into crypto's yet. However, some money managers who I know and respect have considerable amounts of their clients money in Bitcoin. The sheer rocket-like appreciation of Bitcoin is staggering-1000% since the start of the year. Just because there is no basis for this asset to appreciate does not mean that it will stop anytime soon. Sometimes these manias can carry on for years. Some pyramid schemes have been around for many years and are actually listed stocks on the NYSE. Cryptos have been the most popular in some third world countries where there is little confidence in the official currency of the government. But now the mania has overtaken Wall Street and the Chicago Board of Exchange has committed to offer futures trading in Bitcoin in the near future. This gives Bitcoin a small amount of legitimacy, but in no way lessens the risk. According to the Barron's article, $300 billion have poured into crypto market so far. With so many tokens available, no one really knows which cryptocurrency will emerge as the dominate player in this asset class, but Bitcoin looks to have the early lead. It is my belief that the world is heading toward a cashless society sometime in the future so it makes sense that a cryptocurrency will fill most peoples virtual wallet.but I doubt that will happen in my lifetime. In the near future there will be many ETF's, mutual funds, closed ended funds, and other products offered that will mitigate the risks of cryptos. Only then will I be willing to consider an investment in cryptos.

Growth vrs Value

     As a young man I took up the game of handball. We played outside at Wesselman Park almost every day. When I was first learning the game, I was practicing by myself when the best player in town showed up. He proceeded to teach me the finer points of the game. It seemed to him that I was playing the ball too close to him so we could volley longer. His advice was "hit it where I'm not". In other words, make him run for the ball. What's this got to do with investing in stocks? It seems that in today's stock market, everybody throws their money at just a few easy targets such as Amazon, Micron Technology, Alphabet, and so on. This is known as growth investing. The hope is that these stocks will just keep on going higher and higher and that the valuation doesn't matter. This trend has been going on for several years and lots of money has been made by doing what others do. But, some experts suggest that this style of investing is soon to go out of favor and that value investing is soon to be the rage. I believe in value investing for the most part. It's like hitting the ball where other investors aren't. The hope is that others will also discover these companies that successfully carry out their business plan every day and buy the stock which drives up the price. To be a value stock, the company must trade at a reasonable valuation as expressed by the P/E ratio, P/B ratio, PEG ratio and other measures of valuation. What really ices the cake is a good story about why the business is about to take off. Examples of this would be 1. Changing government regulation, 2. Changing consumer behavior, or 3. An exciting new product launch. Famous investors like Benjamin Graham and Warren Buffet are champions of the value style of investing. In today's schitzo market, what gets punished today is loved tomorrow and vise versa. This tells me that too much money is chasing too few stocks so the money makes quick circles around the growth stock names like a dog chasing his tail. Instead of focusing on the most recent quarter's earnings, value investors tend to have a longer view. When researching for my next value play I also look for a nice dividend that appears sustainable. The dividend payout ratio will tell you if the dividend is starving the company of necessary internal capital. In today's low interest environment, a 3% dividend will keep me interested until value investors wake-up.

You Can Do It

     In our society, self-help is becoming increasingly rare. Most people don't believe that they can do auto or home repairs themselves. Calling a repairman for everything can get very expensive pretty quickly. The pros who perform the work can often go right to the source of the problem and get it fixed because they see the same problems every day. It would be bad for business if they told their clients just how easily and cheaply the washer, dryer, stove or air conditioner can be fixed. Some things are better left for the pros, but many things are doable with a little education. Recently, my daughter was having trouble with her washing machine. She told me how it wasn't pumping all the water out of the tub and leaving her clothes with a funky smell. I have repaired many washers with the same problem and knew with a 90% certainty just what the problem was. It usually takes me about 30 minutes and a $10.00 part to fix the condition. For my daughter, who hasn't ever done this repair before, this was a huge job. With limited tools and limited mechanical knowledge, she overcame her fear of failure and tackled the job, saving her family $175 in the process. Such tenacity can and should be applied toward your investing activity. Why should you pay for the services of  a financial advisor to manage a modest retirement account when a little knowledge can save hundreds or thousands in fees? The fact is that about 80% of professional money managers cannot beat the unmanaged index of stocks that they compete against. That makes a case for just buying an unmanaged index fund that tracks the market, like the S&P 500 index. Most mutual fund companies like Vanguard and Fidelity have such funds. The fees are low and you aren't paying someone to underperform with your hard earned money. Investing is not rocket science. I have laid-out some commonsense rules to guide you toward financial independence. As you become more comfortable with investing, try your hand at buying individual stocks to complement your mutual fund portfolio. I personally get bored with mutual funds and enjoy buying and following stocks. Just like fixing the washer, the hardest part is to get started.

Mistaken Profits

     Years ago, when I had a job, I would often have free time to do some Internet research of  potential investments. I would also keep a close eye on my current portfolio in case something was happening to a position. By using yahoo finance or my discount broker's website, I could type in symbols of any company that I owned or had read about. One day I made a mistake when typing-in the symbol of Intel which is INTC , instead, I typed-in INT, which is a company called World Fuel Services. Instead of backing out  and correcting my error, I read about this company to find out what they were about. Turns out that I was fascinated by their business. They would provide any kind of fuel to any company or government anywhere in the world-for a hefty price. This means that if a government was waging a war somewhere in the world and needed aviation fuel, diesel fuel, gasoline or anything else, WFS was johnny on the spot. If an ocean-going freighter needed fuel on the high seas, WFS was there also. This company had been in business for many years and even paid a dividend. I was looking for potential investments and I found one entirely by accident. I pulled the trigger on ITC because it fit my criteria for a new addition to the portfolio: Stable management, reasonable valuation (PE ratio), good business model, regular dividends, reasonable debt ratio, WTH I'm in. I had a good run with INT for about 2 years, then I sold it for a nice gain which was long term to ease my tax burden. The reason I sold it was that fuel prices were starting to decline because new supplies of crude were coming on line due to hydraulic fracking in the USA. Fuel prices alone should not have hurt their business because they were basically a service business but investors don't always see it that way. Sometimes stocks fall because they are too close to a declining commodity. Anyway, I made a profit from a mistake. Why am I telling you this? Good things happen when you do your research-even if you make a mistake.

It's Different This Time

     Have you ever heard that before? How about "There's nothing new under the sun" or "The check's in the mail". Here's another one "Buy in May and go away". My point here is that cliche's have no place in investing. Every period in the investing timeline is unique. The "dotcom" era ended in 2000 with a severe correction in the new technology companies, most of whom had no earnings and little revenue. They were cash rich from selling stock to investors who bought the IPO (initial public offering). These companies were often analyzed by such measures as their "burn rate" which measured when they would run out of money. Another measure of a dotcom company was "eyeballs". This was a measure of how many people simply looked at the web site of the company. The theory was that eventually, those visits would produce revenue for the company, but it usually never happened. Just before all this nonsense came to a screeching halt in 2000, people were saying "It's different this time". Fact is that eventually investors came to their senses and stopped feeding money to these scammers. There is no substitute for a thorough analysis of an investment, which includes an examination of the balance sheet, income statement, and ratio analysis, including price to earnings, price to sales, price earnings to growth, and an understanding of the business you are about to fund.
     As I write this post, the average P/E of a stock in the S&P 500 stock average stands at about 20X earnings, historically, 15X is the norm. This means that stocks are expensive on a relative basis. Why is this? Well, interest rates are at a historically low level. That means that CD's, bonds, and other fixed income investments have really low yields. Investors are finding the best returns in the stock market. Many blue chip stocks have a dividend yield of over 3%. This beats a 5 year CD that yields 2% at best. The stock also has capital gain potential and is very liquid, meaning it can be sold at any time without incurring a penalty. Is it different this time? Is is safe to pay-up for a company to get a reasonable return? The answer is maybe. There are a few game changers in the universe of stocks such as Amazon, Facebook, Alibaba, Netflix, and Google (now called Alphabet). I just listed what is commonly called FANG stocks, they have rewarded investors for having the foresight of recognizing game changers. I would also include Tesla in this group. Do I currently have any of these stocks? No. My bad. I just own stocks that produce gas for your car, produce blockbuster drugs for disease, manufacture vehicles, write security software code, and manage the financial system of our country. Is it different this time? Not for me.

Debt

     I have always considered debt to be a four letter word. It is something that I avoided at all costs. My philosophy has always been that debt was the bane of the working class. Getting out of debt is the single most financially liberating experience of my life. I am proud to say that I have never financed a car and made my last mortgage payment in 1986. Just these two things have saved me many thousands of dollars over the years. These are dollars that I have and can invest, or use to fund my retirement or other cash purchases. Taking out a mortgage on a home that fits your lifestyle and is within your budget is something that is reasonable and often necessary. The difference between a mortgage and financing a new car is that the house you buy is usually going to hold its value or increase in value over the years. Financing a car is an automatic money loser. The value of that car, boat , ATV, camper, or any other toy is going to start depreciating as soon as it is driven or pulled off the lot. This means that you are making payments on the full value of an asset but you actually own something of lesser value. Not my idea of a good investment! Even banks that make a lot of auto loans are suffering now. Why? Every time large purchase incentives are offered for a model or make of a new car, the value of recently sold cars of the same model declines. Those cars are often held as collateral on the loans and the bank has less collateral in case of a default. When the default occurs and the bank has to repossess the vehicle and sell it at auction, there is usually a capital loss. Unlike a house, which often times holds its value, cars are usually an automatic loss. Housing is not always in a bull market but autos never are. If I could buy a new truck every year and drive it for 12 months, then sell it for a profit, I probably would. This is why I drive a 15 year old Chevy truck. A program of  "deferred gratification" will keep a person out of hoc and allow any new purchases to be made in cash. Make payments to yourself and earn interest on the money until you spend it, instead of paying interest on a loan for an asset that declines in value. You will find it harder to justify that new purchase if your hard earned cash is on the line.

Mid Year Report Card

     I would rather take the SAT test than back test my picks for 2017, There is little to crow about here. I wish I would have stuck with my conviction to not recommend any specific stocks and just stuck with the basics. Anyway, here I go:
     The Trump agenda has been a bust. The promised infrastructure build-out has been nonexistent. Last December, I mentioned four companies that could benefit from the increased spending on our infrastructure.
  1. ASTEC Industries- down 30% YTD
  2. JACOBS Engineering- down 10% YTD
  3. VULCAN Materials-flat YTD
  4. AECOM-down 15% YTD
The only bright spot in government spending has been in the defense issues which I will cover later in this post.
     I predicted that interest rates would go up this year and I was right about that. The FOMC raised rates twice this year for a total of 50 basis points (half of one percent). As predicted, bonds did poorly in this increasing rate environment. I had recommended a couple of financial stocks that benefit from rising rates. I will use an ETF as a benchmark for the financial sector-XLF- which holds many bank stocks and financial companies. XLF returned 6.9% so far this year. I expect the good performance to continue for the second half of the year.
     Energy did poorly for the first half of this year but I mentioned in December that I did not expect any large gains. I did mention that I thought crude would stay in the $50 range but instead, it has struggled to get there. I still believe it will end the year higher than it is now, and I still believe in the midstream MLP's which are not as dependent on crude pricing. The XLE which is a proxy for energy prices is down 12 3/4% this year.
     The Pot trade has been a bust too. The only stock I liked in the space was Scotts Miracle Grow, which is an indirect bet on marijuana, was flat on the year.
     The defense sector has remained hot this year for many reasons: Our military is overdue for increased spending on weapons, tensions from North Korea's missile testing, and Trump's campaign promise for increased defense spending . So far this year, Boeing is up 50% and Lockheed Martin is up 15%. Buying stocks with high multiples (P.E. ratios) makes me nervous, so I still don't hold these.
     In summary, I don't see the Trump agenda working for investors this year given the turmoil in the White House and both houses of Congress. However, even in this pricey market, I have bought a few value stocks that have been taken to the woodshed for missing their earnings call. Most recently I bought Goodyear Tire, symbol (GT). My reasoning is that no matter what the car of the future runs on, it will probably have wheels. I also liked the fact that it was trading at 7 times earnings-a huge discount to the market. I also bought McKesson because I thought this medical supply company was just too cheap. I don't know what my next post will be about but I hope that I don't have to mention the Donald.