Fortune Watch

Periodically, the stock markets go through a mid-cap and small-cap excitement. We are in such a stage currently. Over the last one year, the small- and mid-cap indices have outstripped the large cap indices by wide margins. This performance is also reflected in the typical mutual fund as well. The average large-cap focused funds are up while mid and small cap funds are up much more. There’s also no shortage of analysts proclaiming that the smaller companies is where the action is.

However, as always, investors need to be extremely wary of this space. Volatility and liquidity have always scuppered investors’ gains in this space, mostly because by the time the mass of investors notice the action, things are already over the hill. You can make money in these stocks, but you need to be careful.

So let me give you a different perspective on small and mid-cap performance. The Small Cap Index may have risen 200 per cent from the bottom in March 2009, but to reach that bottom, it had fallen to one fifth its value. It takes a lot more than a 200 per cent gain to wipe out that kind of a fall.

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How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve our very own greed, fear, and unrealistic expectations?

Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a realistic investment methodology — an ongoing security selection and monitoring process that is guided by realistic expectations, selection rules, and management guidelines.

If you are thinking of trying a strategy for a year or so to see if it works, you’re due for a smack up alongside the head. Viable strategies transcend cycles, not years, and viable equity strategies consider three or four disciplined activities, the first of which is selection.

Most strategies ignore one or more of the others.

How should an investor determine what stocks to buy, and when to buy them? Will Rogers summed it up: “Only buy stocks that go up. If they aren’t going to go up, don’t buy them.” Many have misread this tongue-in-cheek observation and joined the “buy anything that is rising” club. I’ve found that the “buy investment grade value stocks lower” approach works better.

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At least ten hands shoot into the air as the discussion turns to stock selection. The speaker smiles, responds to each, and observes: “You really need to know the depth of the water, its temperature, tides, and currents before you dive into the river — and then, what kind of predators are in there?”

Flying low over coastal South Carolina, I’m probably the only person on the plane who sees the meandering rivers and tidal creeks as a history of stock market cycles. How does one navigate these complex connections without getting lost, running aground, or being attacked by alligators?

How does one select equity securities in a manner that consistently avoids the risks of volatile markets, fickle investors, abusive regulators, regressive tax codes, and brainwashed investment gurus? Along with self-confidence and experience, it takes some management skills that most investors fail to sharpen before they launch their boat — planning, organizing, and controlling.
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If you have recently found yourself needing to make more money, and found a job that seems to pay too much to be true, think twice! Some of the world’s best paying jobs are also the most dangerous, and the risks can easily outweigh the money, and be the cause of hefty income protection insurance premiums!

About a year ago this week, just before the one-year anniversary of this market rally, there were about 45 IGVSs priced 15% or more below their 52-week highs. The market seemed to be entering a corrective phase, but it just never happened.

A year later, the market statistics, all of them, are shouting at the top of their lungs — the correction is coming! The correction is coming!

Portfolio “smart cash” is at pocket-hole-burning levels; less than 3% of all IGVSI stocks are even close to “bargain” prices; new 52-week highs have more than quintupled new lows; and issue breadth has been exceptionally positive.

Those of you who are “in the know” will recognize “smart cash” as the type that is created by targeted profit taking plus dividend and interest income. It reflects an Investment Grade Value Stock Index (IGVSI) that has surpassed its pre-financial crisis record high — in spite of the fact that all the other averages remain below theirs.

Most (equity heavy) Market Cycle Investment Management (MCIM) program portfolios are at all time high profit levels; income heavy allocations have fallen victim to the buying panic of stock market speculators, higher interest rate expectations, and overblown concerns about state and municipal treasuries.

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Suppose that every day, ten men go out for beer and the bill for all ten comes to $100…

If they paid their bill the way we pay our taxes, it would go something like this…

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7..

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that’s what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? The paying customers? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).

The sixth now paid $2 instead of $3 (33% saving).

The seventh now paid $5 instead of $7 (28% saving).

The eighth now paid $9 instead of $12 (25% saving).

The ninth now paid $14 instead of $18 (22% saving).

The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

Wouldn’t it be great to get out of credit card debt once and for all? To put an end to the ever increasing tensions that worsen insomnia and inspire fights between family members? To cut away the burdens that enslave your household budget? To be able to answer the phone without worrying that it’ll be another bill collector interrupting dinner? It honestly might be easier than you think.

1 – Make Sure You Earn More Money Than You Pay Out

Sounds simple? You’d think so – without a strict budget that ensures you won’t increase your burdens each week, how could you ever expect to get out of credit card debt – but you’d be surprised how many American heads of household start out attempting a vaguely formulated program of debt relief without ever marking down just what the family could spend.

2 – Discern Which Financial Burdens Are Acceptable And Which Are Not

This determination, too, generally seems easier said than done because of a few different issues. To take one instance that often bedevils folks trying to get out of credit card debt, it’s so ingrained among many families that the very first thing that they should do is get rid of their mortgage debt. Obviously, for home owners that have the capacity, protecting the sanctity of the family residence should be of paramount importance. At the same point, though, overly prioritizing the home loan – which will almost always have the lowest fixed Annual Percentage Rate imaginable as well as allowing tax deductions for qualified citizens – just because of the way in which you were raised does avoid the sad but unfortunate truth that your mother and father didn’t have to worry about thousands of dollars of high interest unsecured lines of credit. Auto loans are a smaller (in every way) version of the same scenario.

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Investing in eco-friendly investments has come of age, as the Green Revolution recasts the playing field for future energy production. Solar, wind, geothermal and biofuels are the wave of the future. All derive their source of energy from the Sun in some fashion, but none offer as much promise of replacing fossil fuels effectively as does algae cultivation. Companies as large as Exxon-Mobil, Dow Chemical, and most recently, Unilever, have committed hundreds of millions of dollars for algae research in the race to find the most profitable path to producing material amounts of transportation fuels.

Eco-investments have been with us for some time. The term actually refers to any product that is grown and harvested directly from the earth. There is an obvious overlap when the new breed of alternative energy sources is viewed in that context. Micro-algae and its cultivation have been researched for over fifty years, but most efforts have been devoted to developing pharmaceutical and nutraceutical product offerings. Current research has focused more on which strains have the highest propensity for creating oil compounds and on what processes can extract these valuable byproducts from the tiny organisms themselves.

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What are eco-investments?

There are many misconceptions about what an eco-investment is and a bewildering array of products have appeared on the market. Many of these make extravagant claims that cannot easily be verified. Some are more closely associated with ‘green’ rhetoric than serious investment. So what are eco-investments? Why should they be part of your portfolio? What characteristics should you look out for to distinguish a good one from an inferior product? And what is the relationship between eco-investments and property?

An eco-investment is a commodity that comes from a natural source, which is grown and harvested rather than mined or manufactured. Usually, eco-investments are staple products used for food, building or new sources of energy. Wheat, Bamboo and Millettia (used for biofuels) are examples of each of these three types of eco-investment. However an eco-investment can also be a luxury item, such as Sandalwood or Agarwood. Often, they are rare products for which there is great demand both in the West and new economic powers such as India and China.

The crucial green element in an eco-investment is contained in the product’s relationship with its local environment and local economy. The sources for many of the commodities we promote are either very scarce or threatened with extinction. A good example is the Aquilaria tree, used for the production of Agarwood resin, which is under serious threat in South-East Asia.

Agarwood is used for the production of some of the top range perfumes, as well as soaps and incense used by some of the world’s great faiths. In the Arab world, it is known as Oud and is a byword for wealth and status. The Gulf States market alone is worth $3.2 billion dollars. Still somewhat mysterious in the West, it has recently been discovered by companies like Yves St Laurent, who now insist on Agar for some of their most prestigious products.

The commercial harvesting of Agarwood ensures the survival of the trees in a safe environment and creates a product of high value at the same time. Our investment packages have another green component: they help create lasting local employment so that communities are able to remain viable and preserve their traditional ways of life.

Eco-investments respond well to new market conditions, as well as reflecting the concerns of a growing number of investors, summarised above. Very popular with institutions, they have recently become more widely available to individual investors. They enable investors to diversify their portfolios – whether geographically and over many distinctive products and sources. Eco-investments are independent of stock market fluctuations: this means that they will provide a reliable and steady source of income, capital or both combined.

A good eco-investment

The eco-investment market is expanding rapidly and so it is important for you to choose your product with care. In particular, you should be sure that it has security of tenure and that the commodity has lasting value. In other words, it should be something that consumers are going to need or want, rather than merely following the latest green fad.

Hardwoods and staple crops are likely to be more reliable investments than the various forms of ‘carbon trading’ currently on offer – whatever they claim! We select our products carefully and with an eye to the discerning investor. Here are five characteristics to look out for when choosing a good eco-investment:

• Land and leases or title in your name
• Realistically calculated returns
• Good exit strategy
• Experienced grower and manager of product
• Commodity with proven and lasting value

Why eco-investments should be part of your portfolio

Eco-investment commodities are not subject to the fluctuations of the stock market. This means that they offer you a good opportunity to build up reserves safely in an uncertain economic climate. At a time when pensions are falling in value, eco-investments offer a positive alternative or supplement. Many eco-investment products can also form part of a Self-Investment Pension Plan (SIPP) – and there is a marked swing towards SIPPs because they give you greater control over your personal pension plan.

In short, eco-investments offer an alternative approach to commodity markets that combines diversity with reliability.

Eco-investments and property investors

Superficially, these two investment types might seem to have little in common. But closer examination reveals that both are solid, tangible assets in times of economic uncertainty and flux. Both yield more reliable and consistent returns than other commodities. And both, if well-chosen, combine flexibility with a good exit strategy.

Eco-investments are affordable and so they are within reach of first-time investors. For example, with Agarwood, our most recent product, you can invest from as little as $8,310 and gain a return of $25,088 in 7 years: an Internal Rate of Return of 19.5%. Obviously, the more you invest, the higher your returns will be!

If you are a new investor, you can therefore use eco-investments to build up a varied and interesting portfolio in a relatively short time, with good returns. Such a portfolio could be a useful springboard to property investment. In turn, if you are an experienced investor, you can use eco-investments as a way of diversifying or spreading your assets and the returns can help you maintain a property portfolio.

There is therefore a good complementary relationship between eco-investment and property relationship. They balance and reinforce each other.

Author:-
Aidan Rankin is Economic Analyst at Property Frontiers.
Can be contacted on arankin AT propertyfrontiers DOT com