Confronting the Brutal Facts – Planning for Tomorrow
September 27, 2009 6 Comments
BECKLEY— I’ve been thinking a lot about investing and want to share some of my thoughts. I just rolled over a 401(k) to an IRA so it’s time to consider some investing strategies. How to allocate those funds? I pick individual investments and I leave the mutual funds up to the 401(k) or now my 403(b). I really only invest in those uncontrollable vehicles to get the company match and hopefully break even after that. To me I can manage my investment portfollio better than most mutual fund manager because I don’t have to diversify as much, I don’t charge exorbitant fees to myself nor suffer the stupid taxes mutual fund managers incure trying to lock in short-term gains. I might consider some EFTs out their or a SPDR fund maybe but I prefer to control my financial destiny a little bit more narrowly.
First, let’s define investing. Investing is placing money at low risk for future benefits and gains. As opposed to speculation which is risking money in unanalyzed or unknowable outcomes. Warren Buffet’s (the greatest investor of all times) rule for investing is don’t lose money. A pretty good rule as investing by definition is a low risk activity focused on NOT consuming resources today for use tomorrow.
So the question then becomes what areas of life or the world are the least risky to consume my resources. The obvious first answers are ones job (although it consumes the most precious resource – time). One must first secure their ability to work and insure that if they’d lose the ability to work it would not be an economic catastrophe for themselves or their families. Thankfully many top of the line life insurance and disability insurance take care of this. Choose a company that has the highest ratings with AM Best(A++) , Fitches (AAA), S&P (AAA), and Moodys (Aaa) to virtually eliminate this risk last time I checked I think there were four companies like this.
So that is rule #1 – Don’t lose the economic benefit of being able to work!
But what about employability! One could still be able to work but what keeps us working! Employability! In todays age, for example, a degree in accounting might not mean anything tomorrow, work on a MBA, CPA, PhD, other specialities (technology/engineering/etc.), attending professional seminars, reading books on my choosen careers, reading books on one’s industry, etc. These are all critical investments as they are defering consumption away from tomorrow and investing in ones ability to receive monies in the future. This really offers one of the highest returns on money. If one takes the time to run the math the ability to work is a high ROI.
Rule #2 – Invest in one’s future employability!
These two previous rules probably offer the absolute highest rates of return but are probably not thought of in terms of investing for some reason. The next part is investing in savings! Yes, odd as it may seem one can’t really get into investing unless they have savings first. If one is stressed about where the next dollar will come from how will one have the emotional security to really make tough investment choices! The same for employement if somebody is worried about the financial catastrophe of being laid off then way to much energy and stress will go into their work. One won’t be willing to pickup and take the risks to earn higher incomes if they have to depend on a day-to-day check (much less make tough investment decisions). If one has three to six months of living expenses in a savings account somewhere and they could just quit their job for a six month stretch then their is much less stress and they could have the flexibility to take more risks for higher returns in job based income.
Rule #3 – Savings is a function of investing don’t underestimate it.
Next comes investments in the future for retirement or survival that are based on a current lifestyle and earning level. This get’s more into the meat of what people think of when they think of investing instead of the often over looked areas of insurance, personal growth, and savings. As mentioned, I take an individual approach to my investment strategy. I seek a balanced portfolio of very targeted investments. This portfolio for me is ideally distributed across various industries with whatever industry I am employed in being a forced exclusion (i.e. as I work in health care; therefore, I won’t invest in health care) with ideally each investment holding around 10% of my portfolio’s value. This is less then the modern portfolio theory I understand but I think that is kind of bunk anyways as if one is wanting “true diversification” then the might as well be in the whole market. Anyways, with those general rules in place I’m set to move forward with my analysis.
There are five questions that I think need to be answered along with six corporate componets of criteria:
- What reasonably will happen in the long term future?
- How will this affect various industries?
- What are organizations within these industries posistioned to bare the brunt of these changes?
- Does that industry player meet my six criteria:
- Low to No Debt
- Understandable Financial Statement and Notes to the Financial Statements
- Free Cash Flow
- A Competitive Advantage
- Well Managed
- Undervalued Stock
Rule #4 – Ask the right questions.
First, what reasonably will happen in the long-term future. This is probably the biggest guess in the whole strategy. However, it’s also the easiest to change. For example, I believe China will continue to grow in power and dominance on the world stage. They will dramatically dwarf the U.S. in the consumption of commodities and materials. Therefore, I could conclude that various commodities well rise in value, materials manufacturers could rise in value, etc. This could change over time maybe China begins to slip from the world stage. This could happen but it won’t happen quickly and the stock markets daily fluctuations don’t carry any “value” into this calculation on a day to day basis. Also, a change in how one sees the future long-term won’t damage one’s portfolio as long as one is invested in well understood, financial strong, with decent competitive advantage corporations. This is to say just because China doesn’t become a superpower doesn’t mean my company should go bankrupt as this would mean I ignored the six criteria.
So, what do I believe are the brutal facts that must be confronted.
- Morality will continue to decline in the U.S.
- Education and access to qualified employees will continue to decline (1 trillion dollars each year since 1990 and SAT scores remain basically flat)
- The dollar will continue to weaken in the U.S..
- China will continue to grow and strengthen.
- Islam will continue to grow and strengthen particularly in Europe.
- Technology will continue to play a roll in the future and drive productivity and efficiency.
- U.S. Government will continue to raise taxes on business and wealth.
- In the future a great economic, social and government upheaval is increasingly likely.
So, what do these brutal facts imply; or how do they affect industry which is my second question. From point one about what I believe be careful who you trust – look at companies management. Also, companies associated with Hollywood or cigarettes or alcohol perhaps may be investment options as they sell into this decline. Additionally, as the dollar will weaken it also means it will weaken against other currencies this means there are potential long-term currency plays here. The fourth point I’ve previously discussed but as for other affects I’d expect to see something in treasuries triggered by China’s action in the coming years. The fifth point threatens war, death and strife – military suppliers and arms dealers look like potential investments in this scenario. The sixth brutal fact is obvious as various technology companies may in the long-term be able to outperform service, manufacturing, or financial type businesses. Taxes means to me tax sheltered products primarily maxing out Roth IRAs and keeping my eye on legislation to protect myself if need be. The final point means stability gold as an investment or hedge against future collapse.
It then becomes a matter of working within these industries to pick and choose investments. Each person could see things through a different lens or different perspective I’m sure that many of you could add a thing or to to this analysis. The key for me is thinking long-term and then picking companies that are posistioned to take advantage of these long-term changes. I like to start with a few companies in a category that I know or like and begin comparing or breaking them down. If they break one of my rules (debt/confusing financials/bad cash flow/no competitive advantage/bad management) then I go on to another. In this way I break down from the large macro perspective to a micro perspective on an individual stock.
Once the investments are chosen dollar cost average into them. When they go down place more when they go up hold off. One should keep their eye on their portfolio make sure there aren’t any financial surprises. Read quarterly reports and annual reports. Make sure to look at research on the industry and competition. Read press releases to get a feel of management. Call and talk to management or take a tour of the facility on vacation. These are just a few of the things to do to actively manage one’s own portfolio. As with the golden rule of hiring and firing people; take a lot of time in choosing each investment. If something changes that you don’t like be quick to fire the company and move on but make sure not to do it emotionally (i.e. just because it loses stock value doesn’t mean anything changed inside).
By confronting the brutal facts we can profit. However, by ignoring them we are sure to be victims. I hope for a country with a strong currancy and economy, lots of jobs, highly educated and moral people, in a posistion of power and influence, and if that happens great I’ll be delighted. But the brutal facts just don’t point in that direction and I’ve got a future to plan!