Category Archives: Investing

Monthly Passive Income Crosses $2,000 Mark!

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I’ve finally broken the $2,000/month in passive income! Passive income for February 2008 was $2,383.55. Not bad considering I wasn’t even in the country!

Here’s the breakdown:

  • Online Income: $$1399.29
  • Savings Accounts: $138.43
  • Real Estate Trust Deed: $0
  • Direct Oil Drilling Investment: $277
  • Dividends from Canroys: $509.11
  • Other Dividends: $59.72

As usual, I ignored any income from Prosper loans. I did however include the $100 in referrals fees. If you’ve been thinking of lending or borrowing money on Prosper, now is a good time to do it. They’re still offering a $25 incentive to new members.

Canadian government takes its 15% tax on the dividends from Canroys, so the income is after-tax. You get a tax credit for this amount in the US so there’s no double taxation.

I’m also getting affiliate referral income from Linkworth.com. For every person that signs up, they give 5% of the income they earn for life! The $200 that I got in February was actually the income I earned in January. For February, I’ve actually earned $410.98, of which most of it is referrral income. But since I won’t get paid until March, I’m going to count that next month. Linkworth will probably be the largest income stream next month. Its a great way to boost your site’s revenue.

The Kontera income dropped 44% from last month. I haven’t spent much time analyzing that so I’m not sure what happend. Overall traffic is up so I’d expect the kontera revenue to also increase, but the opposite occurred. I guess it is correlated with the type of posts. I’ve seen that posts related to gold do very well for PayPerClick advertising.

As I mentioned last month, my real estate trust deed has defaulted. Luckily, the oil drilling programs have started to kick-in and have almost replaced that income.

Overall, I’m quite pleased with the results. Hopefully, I’ll be able to break the $3,000/month barrier pretty soon.

Buffet: On Life And Investing

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Here’s some great Buffett philosophy from a recent meeting with college students.

Question: How do you define happiness and what about your life makes you most happy? When you make good on an investment, do you allow yourself to enjoy that success by getting excited – and on the flip-side, when an investment turns down, do you find yourself equally disappointed – or do you try to remove emotion from your work, as much as possible?

Buffett:

I enjoy what I do, I tap dance to work every day. I work with people I love, doing what I love. The only thing I would pay to get rid of is firing people. I spend my time thinking about the future, not the past. The future is exciting. As Bertrand Russell says, “Success is getting what you want, happiness is wanting what you get.” I won the ovarian lottery the day I was born and so did all of you. We’re all successful, intelligent, educated. To focus on what you don’t have is a terrible mistake. With the gifts all of us have, if you are unhappy, it’s your own fault.

I know a woman in her 80’s, a Polish Jew woman forced into a concentration camp with her family but not all of them came out. She says, “I am slow to make friends because when I look at people, I have one question in mind; would they hide me?” If you get to be my age, or younger for that matter, and have a lot of people that would hide you, then you can feel pretty good about how you’ve lived your life. I know people on the Forbes 400 list whose children would not hide them. “He’s in the attic, he’s in the attic.” Some of them keep compensating by joining board seats or getting honorary degrees, but it doesn’t change the fact that no one will give a damn when they are gone. The most powerful force in the world is unconditional love. To horde it is a terrible mistake in life. The more you try to give it away, the more you get it back. At an individual level, it’s important to make sure that for the people that count to you, you count to them.

What if you could buy 10% of one of your classmates and their future earnings? You wouldn’t buy the ones with the highest IQ, the best grades, etc, but the most effective. You like people who are generous, go out of their way, straight shooters. Now imagine that you could short 10% of one of your classmates. This part is usually more fun as you start looking around the room. You wouldn’t choose the ones with the poorest grades. Look for people nobody wants to be around, that are obnoxious or like to take all the credit. If you have a 500 HP engine and only get 50 HP out of it, you’ll be beat by someone else that has a 300 HP engine but gets 250 HP output. The difference between potential and output comes from human qualities. You can make a list of the qualities you admire and those you despise. To turn the tables, think if this is the way I react to the qualities on the list, which is the way the world will react to me. You can learn to turn on those qualities you want and turn off those qualities you wish to avoid. The chains of habit are too light to be felt until they are too heavy to be broken. You can’t change at 60; the time to look at that list is now.

Question: Why do you think that despite making your methods publicly available, that relatively few people have been able to emulate your success?

Buffett:

I asked Graham the same question. Everyone took his class at Columbia Business School. He used current examples, and by the end of the semester you would have a portfolio that would’ve made you money. Graham lived a life of sharing. He may have had more money hoarding, but lived happier because of it. The money’s just a figure in the paper, perhaps he would’ve died with 86 million instead of 42 million, but it doesn’t really matter. 90% of the people that took his class ended up doing something else.

At age 11 I started investing, purchasing three shares of Cities Service Preferred. I had read every book on investing in the Omaha library. I was really into charting and technical analysis. I loved it, but didn’t make any money from it. At 19 I read Graham’s “The Intelligent Investor” and it changed my world. Did Ben lose because I read his book? Maybe we competed and he made less money, but it didn’t matter to Graham.

The philosophy either takes immediately or it doesn’t at all. The reason gets down to temperament. People want to make money fast, but it doesn’t happen that way. Graham’s philosophy doesn’t promise enough for many people. You don’t know when it will happen, but you just wait for the fat pitches within your circle of competence. It’s not as exciting as guessing whether the stock price will go up the next day. Most investors in internet companies didn’t know the market cap. They were buying because they thought the stock would move, but if you asked them to write “I would buy XYZ company for $6 billion because”, they wouldn’t get halfway through the sentence. It’s the classic tortoise versus hare, bound to work over time. Charlie and I have educated competitors. Most don’t compete with us, though. It’s fine, we have more than enough money.

As always, Buffett has some very useful advice. I’m currently reading a book by Buffett’s mentor, Benjamin Graham called “The Intelligent Investor“. It’s a very dry and somewhat boring book, but it really is a masterpiece. I strongly recommend reading it if you’re serious about investing. You can also check out some of my other favorite books here.

Is Gold A Bargain At $950/Oz!

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I’m finally back in the US! Last week, I heard Dr. Marc Faber, of GloomBoomDoom
fame, on CNBC India. While gold is currently at a whopping $973/Oz, on that day gold had briefly touched $950/Oz for the first time ever.

Dr. Faber said two things that were very interesting:

1. Gold is a bargain at $950/Oz

2. Fed Chairman, Ben Bernanke doesn’t understand how the economy works

Seems like he agrees with Jim Rogers!

I’ve been advising everyone to invest in gold since it was $500/Oz. Of all the people I know, maybe 3 or 4 actually followed my advice and bought some gold. Most people thought I was stupid and vehemently disagreed with me. Most of their arguments consisted of the following points:

1. Gold has been a terrible investment for most of history and in fact had declined from its peak in the early 80’s for 17 years.

2. Gold doesn’t pay interest and you’re blocking your money.

3. Gold has no real use. It’s just some rich people who are propping up the prices.

While, these are all valid points, they didn’t touch the main point of gold being a store of value. In times of uncertainty and times of hyperinflation, gold always does well. Whenever there is a lack of confidence in the banking system, gold prices tend to shoot up.

John Lee, portfolio manager at Macau Capital Management, has a good explanation:

Banks create dollars out of thin air and loan them to people. Even though money is created out of thin air, once the borrower pays back the loan, the transaction is complete and those borrowed dollars perish in bank’s books. In this scenario, the dollar’s purchasing power is preserved through non-dilution.

However, as we have witnessed through the recent subprime fiasco, many parties are getting away without fulfilling their obligation to repay a loan. Institutions were bailed out as the Fed bought their mortgage positions at face value with new money. Consumers were bailed out as lenders were elbowed to freeze foreclosures, freeze rate resets, forgive loans, and make lower payments.

Such compromises erode confidence in the system. If one person can get dollars through borrowing without paying back, and yet another had to work to obtain and save dollars, it is surely not an incentive to earn and keep dollars. Rather, it is a no brainer to borrow dollars and spend unabashedly. Savers are the most risk averse bunch of people, and when the monetary rules are muddied, they will opt out. This is how a run on the dollar starts.

Interestingly, unlike Faber or Rogers, Lee maintains that Bernanke does know what he’s doing and that its the correct course of action for the Federal Reserve.

Today, the USA is the world’s largest debtor nation. Regardless of how high oil is, there is no room to raise rates with tens of trillions of dollars in debts to be serviced.

Don’t blame Bernanke for our problems; even if Volcker were to be the chairman today, he would have acted in exact same way as Bernanke did.

The ideal dream for debtors is inflation, which is precisely what the Fed is advocating – expanding money supply through lowering interest rates and direct handouts. The Fed’s action is entirely logical acting on behalf of the average American, which is heavily in debt.

While I would contend that debasing a currency just because you can’t afford the interest payments is a wrong thing to do, Lee does at least agree that fiat money always results in hyperinflation.

The deflation camp has been on the wrong side throughout EVERY fiat money experiment thus far. The bear camp contends that the debt burden will eventually become so large that eventually the debt bubble will blow and the prices of everything stocks to real estate to copper and zinc will collapse.

Fiat money systems have always resorted to hyperinflation and destruction of the currency without fail. If hyperinflation could be avoided in a fiat system by the creation of the Fed, the Argentines in 2002 surely would have figured it out and avoided their hyperinflationary disaster.

He also thinks that the Federal bailout will lead to a further weakening in confidence which will cause the dollar to drop further.

The idea that the Fed and the government will allow debt cleansing lasses faire style is patently absurd in my opinion. Central bank action has spoken louder than words in the past six months as record $1 trillion+ has being printed to rescue banks. For instance, England’s largest mortgage lender, Northern Rock, has been nationalized. And as for the consumers, loan amounts are reduced without penalty or conditions, mortgage rate resets are postponed, federal guarantee limits are set to increase.

Here we go back to psychology. It is not so much about the amount of bail out money being printed, but rather that the smart money took issue with the way the handouts were given unconditionally across the spectrum. Confidence in the dollar was further eroded.

Ok, so what’s his point? Lee thinks that gold is heading much higher.

Gold is money and a refuge of capital when a defective fiat money system shows its ugly head. Gold is universally recognized, portable, divisible, liquid, and limited in supply which makes it the only real viable option as store of wealth. Today’s gold price has not fully priced in dollar’s deep and terminal issues and there is nothing that can be done to stop the further rise in gold. The Fed can talk tame CPI to try stabilizing commodity prices but the effect will be limited. Mind you, gold’s rising popularity should be seen as positive; the fall of the dollar system levels the playing fields for global consumers and producers.

The markets can easily handle $3,000 – $5,000 oz. gold in the near term horizon with minimal disturbance. It is when gold rises too much over $5,000 too fast that we might start to worry about global inflation panic.

Wow, gold at $5,000/Oz! That’s a bold prediction. I’m not sure if I agree with him, but I’m still sticking to my belief that gold will reach somewhere between $2,500 and $3,000 in this cycle. Look for gold to break $1000/Oz around the middle of March when Bernanke drops the federal funds rate another 50 basis points.

And whether or not Bernanke knows anything about the economy is still up for discussion. The popular consensus seems to be that he doesn’t!

After Sub-prime, Is Commercial Property Next?

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Based on my own experiences of being allowed to borrow 40 times my annual income to purchase investment property, I knew the real estate party was going to end badly for many borrowers, banks and eventually tax-payers. I had tried  shorting Countrywide, which was the largest lender of mortgages, last year when the stock was trading at around $36. Unfortunately, I was a little early and closing my position at $39 incurring a substantial loss. If I had held on to my position, with Countrywide currently trading in $6-$7 range, I would’ve have been handsomely rewarded.

Hopefully, I’ll have the fortitude to hold onto my positions next time. Right now I think the Commercial real estate is the next bubble to burst.

Easy liquidity and the willingness of investors to settle for low rates of return have squeezed the margins on commercial properties over the past few years. Commercial construction has been on  tear and new malls have sprung up all over the place. There’s also been a contraction in commercial liquidity owing to the sub-prime fiasco. Added to that is the slow-down in consumer spending which will affect the bottom line of retailers and the amount their willing to spend on employees and rent.

I’m currently short Simon Properties (SPG), which gets 25% of its income from retail malls in California and Florida and the Dow Jones Real Estate Index (IYR). Lets see if I can hold on to these positions during the coming few months which will probably be quite volatile.

Global Markets Crash: All Non-Correlated Markets Converge In A Downturn

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Following the decline in the US markets and a show of no-confidence in Bush’s Economic Recovery Plan, global markets crashed in unison.

According to Yahoo! Finance:

Britain’s benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France’s CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany’s blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India’s benchmark stock index tumbled 7.4 percent, while Hong Kong’s blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange down 4 percent in early afternoon trading. In Brazil, stocks plunged 6.9 percent on the main index of Sao Paulo’s Bovespa exchange.

In Tokyo trading, exporters got hit hard, partly because of the yen’s recent strength against the dollar. Toyota Motor Corp. lost 3.3 percent and Honda Motor Co. sank 3.4 percent.

Shares of Bank of China dropped 6.4 percent in Hong Kong after the South China Morning Post newspaper reported that the bank is expected to announce a “significant write-down” in U.S. subprime mortgage securities, citing unidentified sources. In Shanghai, the bank’s stock declined 4.1 percent.

India’s the benchmark Sensex index fell 1,353 points, or 7.4 percent – its second-biggest percentage drop ever – to 17,605.35 points. At one point, it was down nearly 11 percent.

Since the start of the year, Japan’s Nikkei index has declined 13 percent, while Hong Kong’s blue-chip index is down more than 14 percent. Even China’s Shanghai index — which nearly doubled last year — has fallen 6.6 percent over the same period and nearly 20 percent from its all-time closing high on Oct. 16.

The world is definitely getting smaller and the smart thing to do is invest internationally for global exposure. However, don’t expect these different stock markets to be non-correlated. In the event of an economic downturn, all non-correlated markets converge as selling pressures force the liquidation of all assets.

This was how Long Term Capital Management (LTCM), which was led by Nobel-prize-winning professors, went bankrupt. When the Russian government defaulted on their bonds, all emerging market bonds tanked. Because LTCM was leveraged to the tune of nearly a trillion dollars and couldn’t meet its margin calls, Federal Reserve Chairman, Alan Greenspan, had to step in to prevent a meltdown in the US financial system. For a fascinating and very informative history behind this, check out When Genius Failed: The Rise and Fall of Long Term Capital Management. Its one of my favorite books. Readers of the book would have realized that the fancy-schmancy Residential Mortgage Backed Securities and Collateralized Debt Obligations that hedge funds were leveraging 5-to-1 and 20-to-1 would come crashing down and they did in the form of the subprime meltdown.

The reason all these global markets are correlated is because of excessive leverage employed by financial institutions. When you lose 10% on an investment and you’re leveraged 5 times, you face a 50% loss of principle. In this case you have to liquidate your winners to meet your margin call. Unfortunately, this sometimes precipitates in a global panic to bail on investments as the selling causes further losses, which initiates further selling.

The lesson to learn is that its extremely difficult to beat the market and rather than be over-leveraged, its better to have 20% of your assets in cash (like Warren Buffett) so you can take advantage of over-sold conditions and undervalued investments.

Don’t believe that you can achieve risk-diversification by investing in non-correlated assets.

Top Performing Funds of 2007

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According to Morningstar, here’s the top ten performing mutual funds of 2007

1. Direxion Commodity Bull  2X Inv (DXCLX) : 87.6%

2. Direxion Latin America Bull 2X Inv (DXZLX): 83.7%

3. CGM Focus (CGMFX):  79.9%

4. AIM China A (AACFX): 74.9%

5. Nationwide China Opportunities A (GOPAX): 74%

6. Matthews China (MCHFX): 70.1%

7. Profunds Ultra Emerging Markets (UUPIX): 70.1%

8. T. Rowe Price New Asia (PRASX): 66.4%

9. Guinness Atkinson China & Hong Kong (ICHKX): 65.1%

10. Matthews India (MINDX): 64.1%

Unfortunately I didn’t own any of them. Recently, I did jump in CGMFX though, and hopefully it’ll keep up its momentum. A large part of its returns came from shorting Countrywide CFC. I hope they exited the position. Today Bank of America (BAC) announced they would be acquiring CFC. The stock was 50%+ on the news!

Byron Wien’s 2008 Annual Top Ten Surprizes List

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Byron Wien, chief investment strategist for Pequot Capital, has once again published his annual list of economic, market and political surprises. Last year, he got about half of his predictions right. He predicted gold bullion at $800, oil at $80, surging grain prices, and the rise in Latin America’s economies.

Wien believes that his ten surprises have at least a 50% chance of success in 2008. Although not a very high probability, they still make for interesting reading. Here’s his list for 2008, courtesy of Portfolio.com.

  1. In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lackluster.

    2. I think this is highly likely to come true. I’ve been saying there’s a chance of recession for a while, so maybe I’m biased, but I think there’s a 90% likelihood of this prediction coming true.

  2. Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.

    3. Again, I agree with most of this. If the economy does go into recession, S&P500 stocks will see their earnings shrink. I’m heavily weighted in energy and commodity and I think they’ll do well. Don’t know about the summer prediction though. I thought the market usually went through summer doldrums as everyone goes on vacation! Maybe due to the weak dollar, inflationary climate and recession people might not go on vacations this summer!!!!

  3. The dollar strengthens in the first half reaching US$1.35 against the euro and weakens in the second exceeding US$1.50. The European Central Bank begins an accommodative monetary policy. Foreign investors flock in to buy cheap assets in the US early in the year but the dollar declines later as several countries holding large reserves diversify into other assets.

    4. Not sure if the dollar will strengthen that much, but at the end of the year, I’m definitely expecting it to be weaker than it is today. It seems that me that most countries are in a race to weaken their currencies and so-far the US is “winning”. I think that foreign investors and sovereign wealth funds will definitely start to pick up US assets as their currencies become stronger. Not that its necessarily a wise thing to do, but it’ll probably happen anyway.

  4. Inflation rises above 5% on the Consumer Price Index as higher commodity prices and oil finally begin to have an impact in spite of modest wage increases. The 10-year US Treasury yield rises to 5%. Stagflation becomes a frequent presidential campaign and Op-Ed discussion topic.

    5. I agree with the inflation part. I think that the 10 year US Treasury yield will drop a little bit. Its currently at 3.9%. I think it’ll go to 3% rather than 5%. Stagflation is definitely on the cards.

  5. The price of oil goes down early in the year and up later, sinking to US$80 a barrel in the first half as western economies slow and inventories are drawn down, and rising to US$115 in the second. Established wells continue to decline in production while China, India and the Middle East increase their consumption.

    6. Very likely scenario. That’s why I’ve been buying Canroys on dips.

  6. Agricultural commodities remain strong. Corn rises to US$6 a bushel and cotton to US$0.85 a pound. Gold reaches US$1,000 an ounce as disillusionment with paper currencies spreads across Asia.

    7. Bush’s great ethanol idea will cause Corn prices spike. As more crops are replaced to plant Corn, they’ll start rising too. Since corn is used as animal-feed, milk prices might also increase along with meat prices. I definitely agree with Gold rising further. I’ve been bullish since it was $505/oz and I think it’ll eventually exceed $3,000/oz.

  7. The recession in the United States slows the Chinese economy modestly but its stock market declines sharply. Investors recognize that paying biotechnology stock multiples for highly cyclical companies doesn’t make sense. The Chinese revalue the renminbi by another 10% to control inflation and as a gesture to foreign governments participating in the Olympic Games who complain that Chinese terms of trade are unfair. Several long distance runners refuse to compete in certain Olympic events because of continuing air pollution problems.

    8. The Chinese market correcting definitely sounds plausible. Not too sure about the Olympic runners though. I think the Chinese Government will ban all polluting vehicles and industries 2 months before the games!!! Heck, they might even enforce a ban on cooking!

  8. The new Russian President Dmitry Medvedev, under the tutelage of Vladimir Putin, becomes more assertive in world affairs. He insists that Russian oil and gas be paid for in rubles and demands a Russian seat at major world conferences. Russia and Brazil stock markets lead the BRICs. The Gulf Cooperation Council markets begin to attract interest among emerging market investors.

    9. The Petro-Rubble? Well, why not? Seems like the smart thing to do!

  9. Infrastructure improvement becomes an important election theme for both parties and construction and engineering stocks rally in anticipation of huge programs beginning after the new President’s inauguration. Water becomes a critical problem world-wide and desalination stocks soar.

    10. After the bridge that collapsed in Mississippi, I hope infrastructure development does become more important. Water is probably the next “oil”.

  10. Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds. They want to make sure that gridlock ends and Congress gets something done for a change. The Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.

    11. I hope not! I’m keen on Ron Paul winning.

All Intelligent Investing Is Value Investing

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Today’s post is courtesy of Wealth Building Lessons.

This past year, the stock market has seen incredibly volatile swings. My non-retirement portfolio has been up 20% and then down to 0%. Twice. Of course, my portfolio doesn’t have a direct correlation with any of the indices but it just as vulnerable to the moods of the market.

Most people have a tendency to bail at the bottom of the market and buy at tops. They let their emotions take control of their investment strategies. The main reason for this is their lack of investing intelligence. They either do not have strong fundamental reasons to buy a stock. They usually buy it because its gone up in price and looks like it might go higher. That’s often a poor reason to buy a stock (as a long-term investment strategy. Although for short-term trading it might work).

According to Berkshire Hathaway’s (NYSE:BRK-A) (NYSE:BRK-B) Vice Chairman Charlie Munger:

If you are not investing based on fundamental valuation principles, you are not investing. You may think you are, but Ben Graham had another term for it: speculation.

So what is intelligent investing?

As Benjamin Graham stated in the book Security Analysis: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” Graham’s definition implies that a true investment is made only when you have the right data and reasoning, followed by a suitable price that ensures a margin of safety. Putting capital to work any other way is, by its nature, speculative.

Value investors don’t focus on their performance in a bull market, but on their perseverance during a bear market. In his 1961 partnership letter, Warren Buffett expressed this crucial point when he told his partners, “I would consider a year in which we decline 15% and the [Dow Jones] average 30% to be much superior to a year when both we and the average advanced 20%.” Most investors don’t fully grasp this investing approach, and the result is inferior long-term performance relative to the benchmarks.

Speaking of bear markets, in the 1960s, Warren Buffett invested more than 30% of his assets in one company, American Express (NYSE:AXP), during that company’s worst scandal. While everyone else was bailing, Buffett stood still, because he was confident in his data and reasoning.

Always remember that price is what you pay and value is what you get. According Fool.com, a fantastic business like Google (Nasdaq:GOOG ) is undervalued at one price, fairly valued at another, and overvalued at
yet another. At the current price, investors in Google are sacrificing a margin of safety and betting on the continuance of very high growth rates, which we know simply cannot go on forever. It’s one thing for a company like Google to double profits from $2 billion to $4 billion, but it’s much more difficult to go from $20 billion to $40 billion.

According to silver analyst Jerome Smith, who wrote in his book “Silver Profits in the Seventies”, more than 30 years ago “Truly outstanding investment opportunities occur only occasionally. In general, the better they are, the rarer they are. Such opportunities are normally long-term in their maturation and by careful study can be foreseen long before they come to the attention of most investors. … The very highest profit potentials occur whenever there is a convergence of two or more primary causes.”

Smith was referring to silver, but his words also characterize the qualities of superior investments that true value investors seek to exploit. Smith is right: Really good investment ideas are rare. So when you find one, bet big. If your thorough analysis is correct and the price is right, you should have no hesitation in investing heavily.

Consider Mohnish Pabrai of Pabrai Investment Funds. Pabrai currently manages about $600 million or so, up from $1 million in 1999. About 80% of that total is parked in just eight to 10 of Pabrai’s best investment ideas. The result is a 29% net annualized return since inception, meaning that a $100,000 investment back in 1999 is worth almost $800,000 today.

If your convictions won’t allow you to put 10% of your assets in one investment, you probably don’t need to have even 1% of your assets invested. But that’s why such obvious investments are so rare, and when your data and reasoning are correct, be sure to take advantage of the opportunity.

Buying good businesses at bargain prices allows the investor to ride out a storm relatively unscathed. But sound investing is not easy. The key is to train yourself to be unemotional about the market and maintain an unwavering level of discipline. History has shown that there will always be periods of prosperity followed by periods of economic contraction. That will never change. If you invest with the aim of keeping your capital, the upside will take care of itself.

Are Stocks Better Than Other Investments?

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There’s always someone at a party who’s claiming their investment asset of choices is the best. In 1999, it was stocks. In 2005, it was real estate. Right now, I’m claiming its Canadian Income Funds and commodities like gold. But is there an investment that’s actually better than something else?

Many proponents of the stock market have claimed that it is better than real estate. It’s more liquid and there’s never been a 10 year cycle where the S&P 500 had a down year. Of course, that’s rubbish. Ever try selling your stocks when the market is tanking? You’ll get taken to the cleaners. According to CNN Money, stocks follow a 16 year cycle. They go up for 16 years and then they’re roughly flat for the next 16 or so years.



Right now the Dow Jones Index is almost where it was back in early 2000. Adjusting for inflation, you’re still underwater. There’s also an often quoted comment about the stock market returning 11.5% a year over the long run. According to Ben Stein, this is factually incorrect. Over a rolling 20 year period since 1900, the stock market has on average returned just under 8%. Real estate also has had similar cycles. In Southern California, where I live, the market was down from 1991 to 1996, after booming for several years. Then in 1997 until 2005 it boomed again. Right now its falling again. Similarly in Salt Lake City, another market I follow and invest in, real estate boomed from 1991 until 1997 and then was stagnant until the end of 2004. Since 2005, its been in on the upswing again.NAR, the National Association of Real Estate, often cite the fact that nationwide, real estate has never gone down. That’s a useless fact unless you’re going to be buying a house in every major city in every state. Locally, real estate does follow periodic and somewhat predictable cycles. Between 2000 and 2005, when the stock market was tanking, real estate performed wonderfully.

And like stocks and real estate, commodities also have their own cycles. Chuck Butler , President of Everbank.com just sent me this email, “… the current Bull Market for commodities is at about 7 years and running… History shows us that (going back 200 years) that Bull Markets in Commodities have trends that last 17-22 years”. If you had bought gold in 1971 for $35/oz, you would’ve done extremely well by selling it in 1980-81 for nearly $800/oz. However, between 1982 and 2000 it languished and you might have given up and sold everything in 1999 after seeing the tremendous returns of the stock market. After all, nothing beats the stock market, right!

But $800/oz gold is here again. I’ve been investing since 2005 when it was around $500/oz. Gold has tripled since its lows of 2000 and is probably set to rally even further as the US Dollar continues its slide.

Even businesses are not free from cycles. There are times when businesses are cheap to buy (if you have the money) and are great money makers, and there are times when they are expensive (although easy with cheap money and easy liquidity) and tough to sustain at a profit.

So essentially there is no ideal investment. No single investment will yield substantial returns, year after year, for extended periods of time. Either you have to be on top of the economic factors that affect the various cycles, and keep switching in and out every few years or decades, or you need to diversify your assets so you have equal exposure to various different asset classes.

So unless you have exposure you US & foreign stocks and bonds, global real estate, currencies, commodities like oil & gas, precious metals, building materials like steel, lumber and copper, and even your own businesses, your investment portfolio is incomplete.

Claiming that one investment is better than another is just the result of ignorance. (Unless you decide to get a job as a day-trader, in which case trading indexed futures is probably the best vehicle, although the toughest to succeed at. But thats not an investment, its more like a job!)

The Rule of 72, 114, and 144

Posted on by Nirav
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This is a guest post by Dax Desai. I write at a self-named blog about daytrading, financial planning, and small business issues, and whatever invades my mind at the moment.

I was interested in doing a guest post at this blog and when I saw he was going on vacation I jumped at the opportunity. This blog discusses many ideas that I totally agree with. Recent posts about the falling dollar and investing in foreign currency are right up my ally. I have definitely had a few inspirations from the posts. I’m actually thinking of buying a Canadian Income Fund that was mentioned on this blog. These are quality posts and I’m glad to be a guest blogger.

I am very aggressive with my investments since I day trade in addition to investing in alternative investments. I’ve either been lucky over the past 10 years or I’m very good. Either way my broker is happy for it.

As an aggressive trader, I always plug away at numbers in my head. I’m almost ashamed to say I have a calculator by my bed. One of the things I always keep my eye on is how fast my money is growing. Also I estimate from time to time how long some of my risk capital will double, triple, or even quadruple. To do so, you don’t have to have 99.99% accuracy. That’s where the “Rules” come in.

The Rule of 72

You may be familiar with the Rule of 72. This formula can be used to estimate how long it will take to double your money based on an interest rate.
Example:

You expect to get an 8% return on your money. How long would it take to double your money base on that interest rate? To estimate, simply divide 72 by 8 and you will get 9 years.

The formula is fairly accurate for estimating.

Interest Rate Period to Double
4% 18.0 years
5% 14.4 years
6% 12.0 years
7% 10.3 years
8% 9.0 years
9% 8.0 years
10% 7.2 years

The formula is most accurate between 5 and 9 percent. Above and below it is less accurate, but still useful for estimation.

The Rule of 114

The Rule of 72 is great for estimating how long it takes to double your money, but what if you are more ambitious and want to triple it? That’s when the Rule of 114 comes in. Divide 114 by your expected interest rate. Using the 8% return figure from the first example, we would calculate it as 114 / 8 = 14.25 years.

Interest Rate Period to Triple
6% 19.0 years
8% 14.3 years
10% 11.4 years
12% 9.5 years

The Rule of 144

To estimate how long it will take to quadruple your money, you can use the Rule of 144.

Interest Rate Period to Quadruple
6% 24.0 years
8% 18.0 years
10% 14.4 years
12% 12.0 years

Time Value of Money
These 3 rules underscore the concept of the Time Value of Money. Time value of money simply states that money received today is worth more than the same amount received in the future. The core principle of finance holds that if money can earn interest, an amount of money is worth more the sooner it is received. The current value is called Present Value or Present Discounted Value.

Time Value of Money is useful for financial planning for things such as retirement and college financing. If you remember anything remember, a dollar today is worth more than a dollar tomorrow.