DEFLATION, OIL PANIC, AND THE SKIDS #1

Ever aware that Dollar$ primary mission is to educate and only occasionally pontificate, let’s talk about prosperity, gloom, and deflation.

Economic activity is based on expectations. You buy your new car because you expect you will need it before the old jalopy breaks down completely; you buy health insurance because you expect you will someday, somehow, need it; you buy baseball tickets in January because you expect to go to  the game in April.

Balance means stable prices.

Prosperity

Shared expectations influence supply and demand, and therefore influence prices. If International Widget (IW) expects to sell many widgets in the forthcoming year, it will hasten to make more widgets, perhaps borrowing money to increase productivity. Under the expectation of prosperity, IW may hire more workers, and if long-term expectations are high, IW may even build a brand new, more efficient widget plant.  If widget demand increases even beyond IW’s ability to create supply, the widget shortage will drive the price of widgets higher. IW will respond by increasing volume and price, reap profits, pay dividends, employ yet more people, give key employees wage increases, and the Buccaneers who direct IW may pay themselves  bonuses that look like telephone numbers, including area codes. They will buy Caribbean islands or condos in Manhattan.  The spiral upward is called an inflationary spiral; rising prices are not terrifying if wages and employment keep pace.

Gloom

But suppose IW’s best leadership expects the market for widgets is spiraling downward. Perhaps there are insurmountable problems in the supply chain. Perhaps bankers are unwilling to part with loan money for fear of never getting paid back. Rather than pay people for playing pinochle while their widget machines stand idle, 10 percent of the IW workforce is fired. The Manhattan condo market freezes, and the IW private jet makes fewer flights to the Caribbean. The price of widgets will plunge because the people who use widgets know that to meet the slowdown, IW will cut prices and hope to make up in volume what they are losing in price. The spiral down is called deflation; falling prices are not terrifying if they are gradual and do not continue for any great length of time.

The gloom and prosperity scenarios are the ordinary stuff of economic life, but Dollar$ readers only need to bear in mind that in both cases today’s economic decisions are made based on expectations of tomorrow’s conditions.

The Past

The general tone of American economic life for more than 20 years has been cautious optimism because the range of change in economic life has been modest, sure, and steady. Sure, there have been bubbles and crashes, but there is a reason that in 20 years the Dow Jones Industrial Average has risen 400 percent, from roughly 4,000 to today’s levels well above 16,000. Call it the Goldilocks Economy—it’s neither too hot nor too cold, but is just right.

Home invader and thief, but she knows what she likes.

But America has suffered an extended deflationary spiral, a decade’s worth in the 1930s called The Great Depression. Despite interest rates at virtual zero for most of a decade, from 1992 to 2000, Japan has been in a deflationary spiral.

Playing the expectations game, in an inflationary spiral you spend or invest your money as fast as you can. After all, everything will probably be more expensive tomorrow. It’s best to buy your house, car, 100 shares of IW, or personal jet today.

But in a deflationary spiral, the expectations game makes cash King. What fool would spend a dollar today when the cost of the item tomorrow will be $.90?  But wait… suppose it will drop to $.75? Or $.60?

Where’s my Magic 8-Ball when I need it?

What Now?

Does the slide in the price of oil herald of worldwide deflation?

Dollar$ will weigh in soon.

FINANCE FOR THE CLUELESS: INVESTING –THE EIGHT DO’s

If you are unsure you should dip your trembling toe into investment waters, reread FINANCE FOR THE CLUELESS: INVESTING – THE DON’TS right here at Dollar$.

 CAUTION TO THE HARDHEADED 

If you are persuaded that the game is rigged and that age hates youth, deliberately having made money management and life-planning a cruel losing joke, consider that the bad guys will someday kick the bucket.  When they do, will you be among ageing schmucks still claiming injustice or do you want to position yourself to take your place as a leader?

The choice is yours.

If you are a twenty-something ready to grow up, or a thirty-something ready to take your share of the American Dream, you have  come to the right place.

Dollar$ will not equivocate. Here is what you must do to GET RICH SLOWLY.

Should you discover you need to get rich quickly, Dollar$ urges you to bet on race horses. At any racetrack, you will breathe fresh air, find friendly company, free parking, and can probably purchase a half-decent meal. You will quickly go broke, of course, but during the 1:12 it takes for a decent thoroughbred to run 6 furlongs you can scream yourself silly and dream of riches. Quarter horse racing is even faster!

OPEN AN ACCOUNT

Choose a brokerage like Schwab or Ameritrade, any organization that fits your digital lifestyle. Investigate apps or web sites; choose the brokerage that seems most navigable to you for research, purchasing, and tracking your holdings. You will want more as you learn more, but you need to be comfortable with an interface.

The Internet has leveled the cost of doing business, about $7.95 for any online stock trade, so in terms of costs brokerage firms are interchangeable.  At issue for you is service and minimums.

Most brokerages require a minimum amount to open an account: as this is written, Schwab is asking for a measly $500—perfect for the Clueless.

FEATURES

1. Options. If you can get approved for Options trading, get it.  You will not use this until you have considerable wealth, but it costs nothing to check a box.
2.  Margin.  Again, check it off and leave it the hell alone until you know what the hell you are doing, and even then think very, very, carefully about borrowing money from your broker to make an asset purchase—which is what Margin trading is about. Remember, your broker is not your partner. Your gains are your gains alone (W00t W00t!), but your losses are your losses alone. If you owe a margin debt, you will owe what you owe no matter what happens.

Margin accounts may have uses, but can be dangerous.

You know Tony down at the docks? The guy who lends money to people with no collateral? He is happiest when you pay him, but he does not care if your team lost, the deal went south, or your honey made off with your boodle—he only wants his money and interest back. When he does not get it, he becomes surly. He makes you sell your car, cash in in your kid’s college fund, and if necessary persuade you to these measures by realigning your knee caps with a baseball bat he keeps handy for just that purpose.

Think of your Margin account as Tony. Don’t let anyone get medieval on you.

3. Check Writing. Take it.  Add a measure of liquidity to your assets. You can write an emergency check if you need to—which you should not, but shit happens.

4. Reinvest Dividends. Absolutely. Dividends are how companies share profits with shareholders. Dividends are not interest, but in effect, reinvesting dividends is how your account will draw compound interest.

“He who understands compound interest , earns it … he who doesn’t … pays it.”
Einstein

 

THE EIGHT DO’S AND WHY

1. Buy stock in at least 3 companies traded on either the New York Stock exchange or the OTC (Over the Counter) markets. Be sure these companies are in very different economic sectors. In other words, do not buy 3 media companies, or 3 retail companies, or 3 technology companies, but perhaps buy 1 of each.

You require a measure of diversity. You can buy diversity in a mutual fund, of course, a basket of stocks managed by professionals, but then you pay fees for professional management. Dollar$ cautions the clueless, who by definition are starting small, that the fees will bleed you white. Why start your financial life with a tapeworm?

Diversity is insurance against misfortune. While one sector of the economy may take a hit from unexpected circumstances—such as a change in a government regulatory posture or a political event in a faraway country— the only circumstance that will affect all 3 of your sectors are changes in the overall economic picture, such as a change in interest rates.  For the investor who wants to GET RICH SLOWLY, those dips can be shrugged off because unlike you and me, companies that sell goods and services can within limits raise their prices to recoup what was lost. The price of lumber goes up, the furniture business takes a hit, but next year the price of furniture rises. It’s not as though people will start sitting on the floor.

What constitutes a sector is very subjective. Is Walt Disney a service company or a media company?  Different online research will yield different sector guides. Here is one website that will allow you to bore down to Market Cap leaders by sector.

The final arbiter of what is what is you, Binky, so give special considerations to companies that are conglomerates. General Electric, the oldest company in the Dow Jones Industrial Average, founded by Thomas Edison, makes washing machines, jet engines, and runs an insurance business.  What sector is that?

2. Buy stock in companies that are at least 20 years old.

Ten-year-old companies have a modest track record of survival; twenty-year-olds are even better.

Yes, Dollar$ is aware that young companies are set to grow quickly, but they frequently are headed by untried management and are closer to going broke. Most corporations live little more than a person’s lifetime though the exceptions are remarkablebecause they embrace a culture of change and innovation. 3M Corporation was founded in 1902 to make sandpaper; now they make Post-It notes and Scotch Tape.

Young companies will also gather imitators, which mean ever-increasing competition will drive revenues, but not costs, downward. Someone is bound to improve on the original idea.  If the good Lord in 1985 had whispered in your ear, “Computers,” you may have chuckled at the Divine Wisdom that loaded your portfolio with Kaypro, Atari, Commodore, and Wang. Like last winter’s snow, those companies are now gone.

Avoid the bleeding edge.

3. Buy stock in at least two companies that are multinationals.

Doing business in places where general economic growth is not dependent on the value of US currency is simply prudent. Dollar$ would never bet against the financial muscle of the United States, but Dollar$ is aware that infrastructure build-out in the 3^rd world is inevitably followed by consumer demand for a higher standard of living. You do not have to buy stock in a Chinese company to participate in the Chinese economy; you do not need to need to buy stock in a Chilean company to participate in the Chilean economy.  Logos and trademarks Americans see every day are all over the world: UPS, Disney, Starbucks, Pizza Hut… the list is endless.

If you have qualms about such things and think they are imperialistic, ask the folks in Red Square how they like burgers at McDonald’s, or ask Chinese citizens if the prefer iPhones to ‘Droids.

4. Buy stock in companies that pay dividends or, even better, have a history of raising regularly dividends.

Many companies do not share their profits with shareholders via dividends because managers hoard cash for future business investment. While Dollar$ respects the managerial strategy, Dollar$ notes such companies do not suit a strategy to get rich slowly. The Clueless want an opportunity to have their dividends accrue ever more stock.

Better yet, companies that pay dividends suffer less in a downturn because their dividends offer investors a yield, a cushion against losses.

5. Buy and Hold—even if it means going white-knuckled.

On September 16, 2008 the general stock market as measured by the Dow Jones Industrial Average crashed 10 percent in a single day. The Buccaneers who ran major financial institutions were competing to take greater risks for greater profits than any responsible bank should, fudging on what “banking” meant. On Sept 12, 2008 the DJIA was at 11,421.99.  By November 21, it was down to 8046.42 a breathtaking loss of 29 percent in 6 weeks.

Iceland went broke, Lehman Brothers went out of business, and for the first time ever, US citizens heard the phrase, “Too big to fail.”

Anyone who sold to defend his or her assets for fear of total ruin took themselves out of the game. They may have felt safer, but by doing so, they gave up any chance of recovery.

As Dollar$ writes, the DJIA stands above 16,000—which means sellers in 2008 have missed 100 percent gains measured from then, only six years. By selling into a panic, they gave up every opportunity to gain back all they lost and more.

True, if you owned stock in Lehman Brothers you took it in the neck, but if you had a diversified portfolio, over all, you survived and may have even made money.

A wise man once said, “You can’t go broke on a small profit.”

6. Buy shares and add to your portfolio regularly.

Ideally, you may be able to invest with a check-off system from your salary, an arrangement that will allow even those of us lacking personal discipline to take advantage of the maxim: Pay Yourself First.

Regular investing will allow you to take advantage of “dollar-cost averaging.” When stocks are up, you’ll buy fewer shares: when stocks are down, you’ll buy more shares. On average your cost will be somewhere in between. Free yourself from trying to guess if today or tomorrow are better days to buy; let time be your friend.

If your companies thrive and move steadily upwards, your average cost will always be below their current price level.  Over the long haul, stocks historically have gained 7-9 percent annually. Never try to time the market—just be a steady buyer and Get Rich Slowly.

7. Buy Mid and Large Cap companies.

“Cap” refers to capitalization, the sum total of the value of all the shares issued by a company.  Every company issues a different number of shares, so a company floating a million shares priced at $100 per share is worth $100 million dollars, but a company with 5 million shares priced at $50 per share is worth $250 million.  That’s right, the company trading at the lower price is worth more.

Large Cap companies are slow as battleships, but not likely to sink quickly; Mid Cap companies are more nimble and want nothing more than to grow to be Large Cap. They will take more risk, but have a record for taking risks and winning because they really were once Small Caps.

There are plenty of Small Cap companies, and investing in them is a respectable strategy, but Dollar$ does not recommend that to the Clueless: one needs a larger portfolio to overcome the inevitable losses small companies encounter. While a few Small Caps will experience spectacular growth, more will fail or stay stagnant. On average, an investor might do well, but only if the investor has a sufficiently diverse portfolio, unavailable to the Clueless without professional management—which must be paid for.

8. Sell when the reasons you bought a company change or the fundamentals of the business change.

You selected  XYZ company for your portfolio for reasons. Maybe you personally liked the product or the service; maybe liked the company’s competitive position; maybe you liked the company’s record for paying dividends; maybe you read and were persuaded by  the company’s strategic plans; ideally, you liked some combination of all of those.

But if those any of those change, why are you still holding the company? Never fall in love with a stock; review your portfolio regularly, at least every 3 years. Save your loyalty for a lover.

NOW WHAT

Discovering companies that fit the Dollar$ profile from the universe of thousands of companies is, in fact, easy.  You chose your broker because it offered digital tools for Research. Try the “screening” or “filtering” system—pick an economic sector, indicate your requirements in terms of dividends, choose from Large Cap or Mid Cap, etc.

• Read about the company’s businesses. If you do not understand what they do, go no further. Invest only in what you understand.
• Invest only in companies that sell services or products you would buy whether you were a business or a consumer.
• Buy shares in companies that are ranked first or second in their industries.  
• Be disciplined. Avoid trendy and hot stock tips, whether from your Uncle Fred or a TV pundit who is obliged to scream “news” at an audience every evening. Near term, they may be right: let someone else make that money while you sleep soundly.
• Invest and relax—let your money work while you sleep and pay no attention to daily, monthly, or even annual trends. You are going for the long haul, and the long haul is steadily upward and has been for hundreds of years.

FINANCE FOR THE CLUELESS: INVESTING – THE DON’TS

OK, Binky, let’s check.

• You have:
• Paid off your consumer debt;
• Are paying off your leveraged debt, such as student loans;
• Measured and understand risk tolerance as a function of age and psychology;
• Have wrestled the Beast of Consumer-Celebrity Culture to a stand-off and so are able to resist its psychological hold on you to impulse-buy consumer goods you neither want nor need,
• Have for emergencies banked at least 3 months of expenses in a purely liquid account (6 months is better);
• Insured against catastrophe—possibly through your employer; and
• A reliable flow of revenue.
• Accepted the Dollars$ plan to GET RICH SLOWLY.

Should you lack any of the above, Dollar$ wishes you well, but advises you to take control of your financial life before attempting to aggregate wealth by investing.

SHOULD NEVER HAVE SET SAIL

You do not want to attempt to sail across a stormy ocean in a vessel that leaks. If you are sailing with a partner, you may also risk thinking you need to jettison the love of your life—but that won’t plug the leaks in your boat.

Dollar$ is well aware of the gazillion investment gurus offering all manner of “free” advice designed to give the Clueless investor an illusion of control by suggesting investment strategies that invite Wizards into their lives. Wizards cast arcane spells that universally reduce to one spell.

Binky, since you are too stupid to be a Wizard, give us your money and for a modest fee we will take care of your investments for you.

Dollar$ maintains that  the basics of money management are simple enough for a carrot; he is also certain that Wizards blow smoke the better to separate the Clueless from their money. Further, he does not doubt for a moment that their pals, the Weasels, elected officials, structure American education so that Citizens remain ignorant of how they are getting screwed by Buccaneers.

Dollar$ fights the Power.

Expensive Necromancy

Wizards who take what seems like a pittance: 1.5 percent each year for money management are parasites sucking your lifeblood.

But they are not stupid. If they bleed you to death, they will require a new host. It is far better from the Wizard’s perspective to keep you walking around in a weakened state. That way, they feast forever.  They have this philosophy in common with tapeworms.

If the stock market goes up 7 percent in a year, but a Wizard takes 1.5 percent of that, the Wizard is skimming more than 20 percent of your gains. By the way, if the stock market goes down, the Wizard will mumble apologies, and still take his percentage, accelerating your losses. Your Wizard partner wins even when you lose.

Avoid Wizardry!

It’s your LIFE we are talking about!  If you are unwilling to take control of it, someone surely will!

DON’T hand your money over to someone or some institution, not even a mutual fund manager. If the benchmark of a mutual fund performance is, say, the S&P 500, or the Dow Jones Industrial Average, it stands to reason that managed funds MUST do worse almost every year because no manager is taking a percentage. In fact, 70 percent of all managed mutual funds under-perform their unmanaged benchmarks.

The Exceptions

Nothing beats an employer-sponsored retirement plan—a 401k for example. 401ks have rules that require professional money-management, so accept that.

Nothing beats an enforced, pre-tax investment vehicle for wealth accrual. Pony-up every dime you can up to the employer sponsored maximum. Tattoo on your leg the Dollar$ maxim: LEAVE NO MONEY ON THE TABLE. If your employer is matching even as little as $.25 on the dollar, why would you leave it in your employer’s pocket?

Even better, since a 401k is pre-tax money, it reduces your Federal taxes. Look, Binky, if you are in a 20 percent tax bracket, you have no other investment that pays a guaranteed 20 percent the moment you make the investment.

So let professional money management manage your 401k. If you are young, this is no time to be timid. Create a mix of aggressive mutual funds. When you get to 45-ish, you can become more defensive. But there will only be one time in your life when you can sustain and endure bad luck–NOW.

The other exception to resisting professional Wizard management is after you accrue $100,000 in investable money. Dollar$ would then reconsider your portfolio, as life will get complicated and you do not want to be worrying about finance while you are sipping rum drinks from coconuts on your vacation.

Then again, if you accrued $100,000, you are no longer among Clueless, are you?

DON’Ts

DON’T shake with envy over someone making a killing on a hot stock—your goal is to get rich slowly. Congratulate them; take solace in your slower but surer path to a comfortable old age or to aggregating the down payment for that first house.

DON’T pay attention to TV personalities who nightly scream about investments: they are under compulsion to say something new 5 nights each week. Surely, the investment landscape does not change so radically every 24 hours that yesterday’s strategy should be thrown out today.

DON’T pay attention to annual columns in magazines, online, or newspapers in which a bevy of Wizards name their top 3 or top 5 picks for the coming year. How is it that no two Wizards name the same list? Are they throwing darts or do they have a strategy? Could it be the publications want to annually run a second column about how they offer great advice because one of their professional touts will pick winners?

DON’T churn your portfolio. Make strategic plans and review them every 3 years. Markets will go up and down. Hold for the long haul.

DON’T sell in a sharp downturn: they call such moments “Panic” for a reason. Once you sell, you cannot recover. Investors who panicked in 2008 when the markets dropped and the Dow Jones Industrial Average left investors gasping after a plunge from above 14,000 to about 6,500 saw losses of 55 percent! Aaaagh!  Barf!  Rats! If they sold to defend what was left, they missed the subsequent rise that a mere 6 years later has the DJIA over 16,000.  What might have happened if they’d stayed the course and at deep discounts bought more?

If you are among the Clueless but setting out in a secure rowboat, pull at the oars and do not let the occasional storm swamp you.

There will be storms.

You will survive them.

 Coming Soon: The Dollar$ The Dos!

Market Drops: Buccaneers Retake the Helm

It’s been more than a year since I’ve been here, Internet, but I am back, if not by popular demand than by compulsion of circumstances.
Yesterday, May 6, the Dow dropped 1,000 points in seconds—literally— and rebounded 70 percent of that drop in a few minutes. Mr. Toad’s Wild Ride, powered by derivatives, was on!
Today’s financial press is filled with the usual crap explanations prepared by nitwits who ought to know better, but they can’t get viewers or advertisers if they try anything like truth, so they delude themselves and try to delude us. Call them the Handmaidens.
My favorite Handmaid’s Tale is that some fool made a fat-fingered typo that precipitated the drop. Gee, you think the world economy will collapse because of a typo?
The pabulum Handmaid Tales “stories” is mostly about sentiment—fear of default in Greece, worries about terrorists in Times Square, panic, woe. They are soothing, nice little myths designed to make children believe the world is rational and the bad, nasty things will go back under the bed.
The idea is for us to visualize thousands of sellers lunging for their telephones shouting “Sell!” This makes us believe the markets respond to people, and since we all know people can be wrong, there is nothing to worry about.
Puhleaze.
In 1929 and 1932, human sentiment moved markets, but the Handmaidens should by now have noticed that markets now are made and operated by mathematical algorithms being run on networks of computers that at the speed of light buy and sell—mostly derivatives. Why screw with stocks and bonds when you can mess with serious leverage at 100:1. If ten cents can buy you $10,00 worth of anything, why would you screw around with the thing itself?
What does a million dollars worth of derivatives buy?
Control of Haiti, Guatemala, and maybe Greece, too.
When the action between machines is so rapid and so huge that a difference of .0001% on a few billion dollars is a very comfortable day’s pay (a half day if you work for Goldman Sachs), then the machines are going to deal. Buy a billion in New York, sell two billion in Tokyo, settle in Berlin. And all in less time than it takes to read the italics.
If you are in the market—and everyone is, unless their kid’s education money or their 401k is buried in a pillowcase in the backyard—then remember:

SENTIMENT HAS NOTHING TO DO WITH IT!
COMPUTERS DO NOT EXPERIENCE PANIC!
ALGORITHMS DO NOT GIVE A RAT’S ASS ABOUT GREECE!

Reread and memorize.
And know this:  No individual can play or time the markets when the “traders” are soulless machines. You can read analysis and blogs until your eyes bleed–ain’t gonna do you a bit of good. You can’t react that fast. And if you are a day-trader–why not bet on horses? At least you get two whole minutes of action.

Barron’s Gets a Wizard Award!

With great fanfare and a full page house ad in all Dow Jones & Company publications, Barron’s, a DJ pub, for a mere $795 annually will now email any Citizen Barron’s Daily Stock Alert. The newsletter promises a “clear and compelling …smart investing idea each trading day so you can achieve impressive long-term gains.”
That’s a promise of 200 good ideas per year. Four bucks each. What a deal!
This service is aimed at Citizens; big players have their own research arms.

But don’t reach for your wallet quite yet: Dollar$ points out that the role of tout sheets is to induce participation, to bring new Citizen money in, to seduce the unwise, not to assist with investment choices.

If the White Queen could believe in six impossible things before breakfast. then The Daily Stock Market Alert seems tame — if compared to Carroll’s character Alice in Wonderland .

Headed by Wizard-in-Charge, Fleming Meeks, former editor of SmartMoney, the ad features their March 27 newsletter headline “NVR: A $1,000 Stock?” and shows it was selling in that date for $577.25 per share.
Yesterday’s close on NVR was 510.60. Not terribly imporessive. And by Nov 30 — $434.

Maybe it was too late to call the typesetter?

Bet that Meeks and Company dismiss that 17 percent loss explaining that “long-term” cannot mean “six months.”  After all, the newsletter is “focused on opportunistic stock ideas with long-term growth potential.”

But potential for growth describes every stock traded on every market. In infinite time, every investment has the potential to grow. Barron’s and other touts will eagerly tell you is that in the long term, stocks outperform every other asset class.

They are not lying.

They are also failing to point out the reality.

Unlike the stock market, you and I are mortal. Our time is finite. We don’t decide when to turn 65; we cannot decide to delay ageing; we cannot choose a market peak to coincide with the moment our kids turn college age; we cannot choose to be ill only at market peaks. Furthermore, as even a cursory glance will reveal, the march upward is gradual. The downturn is a sudden crater. Gains of a decade are lost in 30 minutes of computerized selling. The markets often move sideways for a decade at a time.

Nothing in the Barron’s ad promises recommendations to Sell. Not ever. Just 200 good ideas each year. Buy, hold, and wait. Ahhhhh… but taking money off the table…that’s up to you. For readers of Barron’s Daily Stock Alert, there will be no days when there are no good ideas.

So

A Dollar$ Wizard Award to Dow Jones & Company for perpetuating a destructive myth designed to fleece the unwary!

• Markets do not grow to the sky.
• Good ideas cost more than $4.00.
• The moment you read a “good” idea in a newsletter–everyone else knows it, too — which means it is no longer quite as good.