Beginning Investing

7 hard earned lessons to use

There are all sorts of people who want to give you investment advice, aka sell you something. Why? So they can earn a commission or profit from you investing with them.

Experienced in life and a former business owner/appraiser. Have nothing to sell you and not giving hot stock tips. Frankly happy to be a full time employee now, but would like to start a second business.

Do Not consider myself a great investor, definitely am Not a day trader and my predictions are average. Have learned from hard knocks.

These are good advice and rules I have learned over the years:

1) Spend Much Less than You Make

Wealthy people often lived for free or on 10% of earnings to save enough to start a business. They did this for years to get started. The wealthiest people I know often drive old cars and wear clothes too long. They only owe on their business assets, and their home may even be paid off.

2) Have a Rainy Day Fund

You don’t know when you or family will be ill, have a major repair to your home or car, be laid off, fired or the business shuts down. Have paid 6 months of bills from savings to get through. Have enough for 1 year’s worth of bills outside my retirement accounts.

3) Start Investing Small

Put money in the company 401K, especially if offered matching funds. I started at 8% on my current job and increased the percentage with every raise. If had more income would save more.

Second don’t buy one investment with all your money. Only invest some on each idea. Often start with a third and see if it is working.

4) Learn Value before You Buy

My best investment has been my house. Being a real estate professional identified good neighborhoods first, then found houses to look at. Originally wanted a 2 - 4 family house to live in, but prices were much higher than the cash flow justified.  Was cheaper to buy a single family house.

Bought at the bottom of the real estate market when few would consider buying, and bought a working short sale 10% under market value. Yes it took 6 months to close. But bought for 2/3 of original owner’s price.

My house is worth 60% more 4 years later.

5) Diversify Investments

Have good savings in cash at bank. Much more in 401K, and equity in my home. Have paid off 30% of the mortgage in 4 years. Goal is to pay off mortgage before retirement.

Am not adverse to holding cash. Especially when stocks, bonds and real estate seem over priced. Can be patient until a new opportunity shows up.

Cash is a safe refuge when the market is going down for an extended period. There will always be recessions in normal economies.

Am willing to sell and sit out the drop until the market starts rising again. Just don’t stay out forever. Look for the opportunity to get back in.

6) Do Not Pile in Late to a Trend

There have been good ideas I have missed. However did not compound the problem by buying at a high prices hoping some fool comes along to pay more. Would wait for a pullback and buy at a better price. Or would just wait for the next opportunity.

The secret to successful investing is buying at the right price. Not necessarily when everyone else thinks it is a good idea.

Beware the phases “This time it is different” (it is not) and “_____ always goes up” (no, they drop too). One investment made by my advisor is a non-dividend stock that is actually losing money. The commodity is way under trend and the company is doing a good job improving productivity. The market is too busy overpaying for dividend stocks to see the value. My advisor wants to be positioned for the future recovery and is looking for the opposite of the late trend.

7) Educate Yourself

Best investment is good books and classes. Pay to take classes out of my pocket to further my career and knowledge. Does not have to be for a degree either.

Find people or groups who invest in what you are interested in. You can learn a lot from like minded people.

These tips are not all you need to know. In fact am still learning, and hope you can teach me something too. However they will make the rough seas of investing smoother if you are humble enough to apply them.

Business Predictions for 2010

It is time for the annual predictions of what the year will bring. So let’s look at my past predictions first.

• In 2009 I predicted the recession would continue, but not be a worldwide disaster.
[Partially Correct, not a worldwide disaster, but now is expanding worldwide]
• Jobs would be very hard to find, and would start recovering near the end of 2009.
[Correct, but the jobs recovery is barely starting]
• The stock market would bottom and start back up within 6 months.
[Correct bottoming in March]
• Housing predicted no bottom and prices would fall another 5% – 15%.
[Correct]
• Oil prices, thought we may have a correction where prices hit the $30’s per barrel, the stabilize around the $40’s to $60’s range.
[Partially Correct, did drop into the thirties, and spend most of the year in range. Then the dollar devaluation and worldwide usage pushed oil into the $70’s - $80’s range.]

Yes, I had good years predicting in 2008 and 2009, but there are no crystal ball that work all the time. This is based on experience, observation, and reading other peoples predictions. With all predictions, your results are affected by location, driving habits, weather and your mileage will vary…

Recession: We are seeing worldwide signs of recovery. Is it enough? There are other signs that are weaker. The US is not going to lead the recovery. The world has to pull the recovery. My major expectation is for slow growth of about 1% - 2%. There is also a significant chance for a double recession like the Great Depression. I put this at about 20% - 25%. If this happens it will be a tough year.

Interest Rates: Expect bond and borrowing rates to be raised. Creditors are going to demand more money to lend the Federal Government for spending. This is going to slow the economy toward the end of the year.

Stock Market: I suspect we are getting closer to a market top in the first quarter or mid year. We gain significantly since March 2009, and are possibly bubbly. The Fed may try to engineer a break in the rising market to keep interest rates low. Have my stop losses set and am monitoring.

Dollar: The slow down trend of the dollar has ended. There are so many concerns about the Euro and other currencies, believe the dollar will do well early in the year. Later in the year we may see Gold and Silver rising again despite the improvement of the dollar.

China: I expect the China boom to end late this year. They have a real estate bubble forming, and their leadership wants to slow down lending. They are trying to stimulate internal markets and keep their people employed.

Jobs: If you have a job, hang on to it until you find another. Unemployment is not improving, and may have bottomed. But the recovery for the job market will be slow.

Housing: Suspect the bottom to the real estate market to be closer, in 2011 or 2012. The over supply of home still has to be worked off the market. I expect prices to fall another 5% - 10% in 2010. Commercial real estate is falling and I don’t see the bottom yet.

Oil prices: There are a lot of possible scenarios for trouble this year, including a good possibly of needing to stop Iran from building nuclear bombs. If that happens or Iran grabs Iraqi oil fields, expect a short term spike. My major expectation is prices to stay in the $70’s - $80’s early in the year, and then increase into the $80 - $100 range by the end of the year.

Remember, we have lived through recessions before, and will survive. My prediction may be no more accurate than yours. But if these predictions happen, how will it affect your business?
Steve

Energy prices have resumed rising

The price of oil is going up and there are several questions why.Oil storage are full and full tankers are sitting outside our harbors. Due to supply, prices should be falling.

In the back of everyone mind should be the situation in Iraq. The nuts running Iraq want to dominate the middle east, and really believe they can bring their mullah back from the 13th century by destroying infidels (Israel) and spreading their religion throughout the world. Russia is not supporting sanctions against Iraq, and may force Israel to attack. If that happens Iraq will mine the waterways and trap 25% of oil tankers from reaching the West. Needless to say prices should spike if this happens.

Add to that US government spending tripling our debt without any job creation. The value of the dollar is falling by design which also drives up prices of commodities. They believe it will make us able to export more, but they have not eased regulations on small businesses. Add to that small businesses are afraid what will happen with the health care bill. No wonder the economy is slow. This does not even include banks and businesses deleveraging, nor consumers reducing spending over job fears and increasing savings.

No wonder oil went from $65 to $80 in the last eight weeks. Gold has crossed $1,000 per ounce and is still rising. The dollar is still easing. Do not see anything stopping these trends in the next six months, or until the Iraq situation and health care is resolved. I bought ETF's in Gold at $950 and Oil at $65 because I expected the dollar to fall.
Steve

PS - see current MarketWatch article below about oil prices.
http://www.marketwatch.com/story/oil-falls-as-api-reports-rise-in-crude-supplies-2009-10-21

Invest in Productivity and Innovation

The economy is in a mild recession. The housing bubble has burst and is reverting to mean (normal) values. The super leverage of the 2000’s is being unwound as the investors who took the risk are paying the price of risk. There is a lot of speculation about how bad the economy will be.

We will not have a great depression. This is just a normal business cycle, unless political protectionism makes the situation worse. This cycle is predictable and expected by mature investors. There are challenges coming, but nothing to panic over.

Consumers will not be able to use their homes to use like an ATM to keep spending. Increased energy and food costs further will reduce consumer spending power. Consumers will change their spending towards different priorities for the next few years until incomes increase again. Job outsourcing globally will keep salaries low.

Consumer spending is the driver of two thirds of spending. Fortunately the world is now more successful everywhere, and increased demand is now coming from Eastern Europe, Asia, India and the Middle East. So consumer spending will recover internationally first.

So how will the economy recover? Productivity and innovation has always driven economic growth.

Invest in businesses, products or services that increase productivity. Can you lower shipping costs, use energy more efficiently, use less material in products, service clients quicker at less cost, or reduce overheads? These are the drivers of productivity. And the companies that do this are the ones to own.

Innovation and market changers are the companies that will thrive in the future. Look at Apple’s success in changing the music market. There are kids who have never bought a CDs nor albums. They buy music through iTunes. Television and movies are the next to be changed. Low cost hardware and better software has made an explosion of producing content available. With so many choices for customers, how can major studios or networks hold on to viewers? Look for distribution over the web to grow.

Computer grow exponentially more powerful, and programs now do the leg work of thousands of technicians or clerks. CAD changed how we design products, test ideas, and do research. Better quality and lower prices have come with these innovations. In fact, as the price gets lower more people have access to the power of software. Look at the success of new medical products that are improving medical care. CAD has speed up development tremendously. Furthermore the web will be replaced by cloud computing which will increase the amount of data available faster.

Invest in energy businesses that increase productivity of creating energy or conserving energy. One caveat, they must be profitable at a much lower oil prices. Energy will be the next bubble to break. $100 to 120 per barrel is not sustainable.

Oil was stuck in the $15 to $20 per barrel range for two decades. A price of $30 dollars per barrel would be reasonable today with normal inflation. The value of the dollar fell about 30% over the last two years, so $20 to $30 per barrel is now $30 to $45 per barrel. Demand will fall at the current high prices, and alternative production methods are cost effective above $30 per barrel. Both will reduce future demand for oil and lower prices. Invest only in energy processes that are cost effective at $30 - $45 per barrel. I expect oil to fall to $60 – $70 per barrel in 2009.

In summary, the future economic growth will be from productivity and innovation. Productivity and Innovation will overcome a few years of low growth or recession. This is where we need to invest for future profits.