Fortune Watch

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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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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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

This is a fairly long read, most of you will leave before you reach halfway and say “I know the ropes, I know the game and I know the rules, what the heck is this guy talking about?” If you think this is a load of crap and you are a master, get off my site and go invest all your money, I know jolly well that you know nothing. Oh yeah! before you go make sure to bookmark this page, you will need to read it when the damage is done. Ask 8 out of 10 people why they invested in a particular stock, the answers will be like “Its a great stock and besides most of my friends have invested too.” The truth is they don’t have a clue. If you do happen to read till the end, I’d love to hear from you.  Assuming I have your attention and interest, please read on.

It is important to be independent in our decisions to invest, and be able to evaluate and understand the companies that we are considering for potential investment. In this article, I want to share with you some of the things that I look at when deciding if a stock is a good investment or not.

Revenue
To pick out a stock that will create good long-term value for its shareholders, investors need to look at the sales figure to see if it is growing at a healthy rate long-term.

Investors should, however, make sure that the company is not over-aggressive in its expansion and taking on too much debt; spreading itself too thin. Investors should also make sure that the company is not in the habit of regularly issuing new stock to fund its growth, as this kind of activities will dilute the holdings of shareholders. The best companies are usually the ones that can mostly or fully fund their expansion from internally generated funds.

Investors also shouldn’t overpay for stocks with high growth rates, as this will put investors in a situation where they find themselves with big losses because a high-growth company they bought shares in missed earnings estimates by 0.1% or something.

It is important to figure out if the growth rate of the company is sustainable by reading the annual report for information on growth and looking at the industry the company is in, as well as the size of the company in relation to the size of its largest competitors. A company doing $8 billion dollars in sales in a mature industry where its biggest competitor is only doing $10 billion dollars in sales generally can’t grow much and shouldn’t have too high a rate of growth.
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Most people enter the investment arena thinking that “Risk” is a board game they played in college. Today, I would guess that the majority of investors have never owned an individual share of common stock or a Municipal Bond.

The popularity of investment products has heightened the risk for all investors and has indirectly led to many of the policy errors that threaten both capitalism and the economic fabric of America. Market prices are increasingly and inappropriately influenced by decision-making based only on the derivatives that contain them.

Few people consider the investment risk associated with public policy decisions. Product investors and derivative speculators participate in less personal markets, where it is more difficult to connect the dots between their personal financial interests and their political alignments.

So in a very real sense, investors have to deal with public policy risk every bit as much as they need to analyze the risks associated with the securities and other financial products they hold in their portfolios — complicated, but it is doable.

Apart from these important peripheral considerations, the risk of loss in any equity investment is generally greater than the risk of loss in any debt related instrument. The potential reward from each type is just the opposite, and that’s where all the excitement begins.

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Boaters run aground by not paying attention to tides, charts, navigation tools and their GPSes. Investors get swamped with information, media noise, breaking news, politicians, gurus, and derivatives — so much so that they can’t see the oncoming fog banks and tsunamis of cyclical change.

Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. Losing money on an investment may not be the result of an investment sandbar and not all mistakes in judgment result in broken propellers.

Errors occur most frequently when judgment is rocked out of the boat by emotion, hindsight, and misconceptions about how securities react to waves of varying economic, political, and hysterical circumstances. You are the commander of your investment fleet. Use these ten risk-minimizers as lifeboats:

1. Identify realistic goals that include time, risk-tolerance, and future income requirements — chart your course before you leave the pier. A well thought out plan will minimize tacking maneuvers. A well-captained plan will not need trendy hardware or exotic rigging.

2. Learn to distinguish between asset allocation and diversification. Asset allocation divides the portfolio between equity and income securities. Diversification limits the size of individual holdings in several ways. Both hedge against the risk of loss. Both are done best using a cost based approach.

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Fascinating, isn’t it, this stock market of ours, with its unpredictability, promise, and unscripted daily drama. But individual investors are even more interesting. We’ve become the product of a media driven culture that must have reasons, predictability, blame, scapegoats, and even that four-letter word, certainty.

We are a culture of investors where hindsight is rapidly replacing the reality-based foresight that once was flowing in our now real-time veins — just like in basketball, golf, and football.

The Stock Market is a dynamic place where investors can consistently make reasonable returns on their working capital if they comply with the basic principles of the endeavor AND if they don’t measure their progress too frequently with irrelevant measuring devices.

The classic investment strategy is so simple and so trite that most investors dismiss it routinely and move on in their search for the holy investment grail(s): a stock market that only rises and a bond market capable of paying higher interest rates at stable or higher prices — just not going to happen.

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A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if this brief little hiccup becomes considerably more serious, new investment opportunities will be abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:
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