Investing 301

“Be sure you know the condition of your flocks, give careful attention to your herds” Proverbs 27:23 (If you have stocks and bonds, think of them as your flocks and herds)

investing basics including risk management, and because of the dynamic changes since the election, a few of my own thoughts on how investments will be affected under the new administration, what to invest in now, (very cautiously), including a few specific picks, and a summary recap of my Nov. 5th post of 7 predictions, in case you missed it

My original idea of writing Investing 101, 201, and 301 was simply to help folks get started investing and to let them know about how many more doors have opened up because of applications like crowdfunding. People who don’t invest will be forever living paycheck to paycheck, because of today’s world of paper money inflation which is an invisible tax. But for many, they might still be thinking they don’t have enough money to even get started. Wrong. If you have the discipline to first give 10% to church or charity, and save another 10% to have enough for most emergencies, (I know, this might seem impossible at first - you’ll have to cut out a lot of things to live on the remaining 80%) that same discipline can then be extended to investing. After you’ve reached your goal for emergencies (some suggest 3-6 months living expenses) then don’t stop - start putting that 10% into investments.

“Put your outdoor work in order and get your fields ready; after that, build your house.” Proverbs 24:27 (In other words, get your priorities right.)

Did you know you can invest in real estate for $10? You will just own a little slice of it along with thousands of other small investors, but at least you’ll be getting started. Read on, or listen to the audio version while you’re taking a look at your bank statement and your budget…

INVESTING 301

I forget who said this, but I like it:

“I invest to support our families and provide for them when our mortality lies six feet underground. We also invest because it’s an absolute blast. Investing is an outlet for constant curiosity, an excuse for limitless learning, and an arena to match one’s psychological fitness against the crowds”

Investing 101 see previous post for more detail, but here’s part of it:

 Give 10% to the Lord first, right off the top of your income. Then save 10%.

Study and learn basic principles of investing and risk management. Set a goal and a plan to become debt-free. Start with an online brokerage account (see link with instructions below) and small purchases of ultra conservative ETFs (exchange traded funds).

A reminder: “This is not investment advice; If you follow my ideas and lose your shirt, don’t even think about suing me, because you wouldn’t get anything, because I would have lost my shirt too. This is just what I would do and what I recommend to my children, based on my own personal experience, unprofessional opinions and philosophy.”

Investing 201

There are several good online brokerages. Mine happens to be with Schwab. Here’s a link with step-by-step instructions for how to set up an account and get started:

Setting up an online brokerage account

After getting started with a basic and modest stock portfolio, real estate has been one of the traditional best investments, but it seems way too expensive for beginners. But there is an answer. Here is a description by one of the investment funds that can get you started in real estate for $10.00!

“For almost a century, regulatory barriers made it difficult for individuals to invest in private markets, giving billion-dollar institutions preferred access. The result has been that most investors have been limited to public markets and excluded from private investments—ranging from real estate to venture capital. Technology is finally disrupting this status quo. Enter: Fundrise, America’s largest direct-to-consumer private markets manager. We built our technology platform to bridge the barrier. Software allows us to achieve the scale of institutions without the bureaucracy. Combining our technology and investment expertise, we are pioneering a new model to build you a better portfolio.” I’ve personally invested in one of their funds and haven’t made a profit on the total yet, but have been receiving a portion of the rents on a regular basis.

Another type of real estate is where you’re the banker and you lend money to private borrowers. The advantage is that in exchange for the risk, you’ll receive a much higher interest rate than what a bank will give you on a savings account. An example is Groundfloor.com, which like Fundrise spreads out the risk among many small investors. Here again, you can start with as little as $10. Most of these offerings are short term, and secured by Groundfloor’s holding of the 1st mortgage. I’ve done several of these, investing small amounts, and averaged about 8% return. Here’s their own promo:

“Once your account is set up, you’ll have access to a platform that empowers you to explore and invest in fractional real estate investments to help you grow your wealth. Take the first step toward financial freedom by creating your Groundfloor account today.”

Investing 301

After you’ve made a few very conservative, small investments to gain experience, what’s next? Allocation, position sizing, and risk management become important. The first rule is “Don’t put all your eggs in one basket.” I had a friend who worked for PGE (Portland General Electric). PGE got involved with Enron, and offered Enron stock for their employees to invest in. His whole retirement plan was in Enron stock. When Enron’s stock was exposed as a ponzi scheme, it crashed and he lost everything.

Allocation means how much you put in and where you put it. You need to be flexible based on market conditions and your horizon for your life expectancy. I’m over 80, so my personal horizon is short. Any long term investments are really not for me; they’re for my grandchildren and great grandchildren. (just like my reforestation project)

With a Trump win, I’m allocating more in some sectors than others. See my post from last week - 7 Predictions. I’m avoiding stocks tied to EVs, lithium batteries, solar, and wind. In other words, all the so-called “renewables” that turned out not to be renewable at all, after you consider the toxic mining for lithium and cobalt and copper and rare earth minerals. I’m also avoiding the very iffy investments in hydrogen (it’s a great fuel, but too expensive) and the impossible pie-in-the-sky attempts to ever commercialize nuclear fusion. Nuclear fission is the future; not fusion.

Here’s the brief summary list of 7 Predictions:

• Coal, oil, and gas will still be in great demand for many years to come.

• Nuclear power plants will keep on gaining momentum.

• We will need more uranium and more nuclear engineers and skilled workers.

• SMRs (small modular reactors) will soon be a great source of power for special situations.

• Before too long, we’ll need to be building more desalination plants.

• Inflation will continue.

• Commodities will become more valuable.

Position sizing can protect you against a bad drop in any one sector. Most investment advisors recommend limiting any one investment to 1-5% of your total portfolio, depending on risk. 5% for the most conservative investments and 1% or less for the riskiest.

Risk management includes position sizing but should include an exit strategy. If things go south, how much are you willing to lose? Where will you draw the line?

Understand that there’s no such thing as a risk-free investment. On the other hand, in an inflationary environment, if you don’t stick your neck out and invest, you’ll really suffer financially. The things we all need, like food, shelter, electricity, and gas are going up well over 5% a year.

At that rate, your $100 bill today will only be worth $77 five years from now. On the other hand, if you can achieve a 5% return on a $100 bill that’s invested, it will keep you up with inflation and have a ‘value’ of $138.88, compared to today’s dollar, and you would need $138.88 to buy the same basket of products.

Not everyone agrees with me about exit strategy, of course. ‘Buy and Hold’ investors are reluctant to sell even if their stocks go way down, because they know that historically, the long term trend is up, up, up. But I’d rather sell and take a small loss rather than watch a drop of 40, 50, or 60%, which has happened many times in recessions. I can always buy back when it looks like we’ve hit bottom and things start trending up again. One thing you need to remember is that some stocks never recover - they go bankrupt, exposing you to a 100% loss if you try to hang on.

To protect against that risk that a stock might go to zero, one of the best exit strategies, in my opinion, is to use “stop-loss” orders. A stop loss is a standing order to sell if the stock drops to a certain level or by a certain percentage that you determine based on your own risk tolerance. A hard stop sets a price. A trailing stop sets a percentage.

A trailing stop is an especially nice way to lock in a profit, as much as possible. Once you have a stock position that is comfortably ahead of your entry price, a trailing stop will follow it up if it keeps going up, so you won’t lose out on further gains. The stop will only be activated if the stock starts reversing and heading down. For example, say you paid 10 and it goes up to 12. That’s great - you’re 20% ahead. It might keep going up. But it could turn around (nobody knows the future) and head right back down. If you’d like to protect your gain, let’s say you place an 8% trailing stop. So if it goes back down 8%, to 11.04, you’ll ‘exit’ still having a gain of over 10%. But if it keeps going up, you’ll follow it up.

Here’s a tutorial from Schwab: stop loss orders

treasury bills and bonds

A Treasury bill, or T-bill, is a short term (1 year or less) investment. Longer term government securities are called Treasury bonds. The minimum is $1,000, and as an example, a 6 month T- bill is paying around 5%. I personally am not comfortable with terms longer than 1 year, because of that old inflation bug eating away at the value of the dollar.

Anyone can open an online account. Go to treasurydirect.gov to set it up. I have used short term T-bills to park cash whenever I think it’s not a good time to buy stocks.

my two cents on what to do now that Trump is elected

Remember, this is just an amateur approach to the present situation; not investment advice. Here goes…

The market was ecstatic after the election, hitting new highs. I don’t know how long it will last.

There are several reasons to expect a recession. Both public and private debt are so high that they’ll be a big drag on the economy. The cost of electricity is getting high and will go higher, creating a further drag on profits and the whole economy. This has already happened in Germany, and their industries are leaving. Historically, recessions have started after the Fed starts lowering interest rates.

I was reading the Bonner Private Research take on how things will go under President Trump. There are two big problems with his plans. The first is tariffs. Tariffs enacted in 1930 are often considered what got us into the Great Depression or at least made it much worse. Tariffs are a consumption tax, they lead to retaliatory tariffs and they slow down imports and world commerce. Revenue from the tariffs will decrease as imports decrease.

Trump is hoping that our big, global corporations will bring their business investments back to the US rather than produce oversea and get stuck with a tariff when importing to the US. The hope is that those new investments ‘back home’ will produce enough revenue to offset the slowdown in imports and global trade. We’ll see…

The second problem is the lowering of taxes, which will also lower revenue. The deficit will get worse, unless the lower taxes will stimulate business enough to keep the revenue up.

The 3rd problem is the interest on the debt. Public debt, corporate debt, and individual debt are all high, and with interest rates running much higher than the previous decade, this is a drag on the economy.

from Bill Bonner - “Budget deficits are expected to run about $2 trillion per year over the next four years. Interest on the debt is already running at $1 trillion per year. Plus, the federal government will have to refinance about $4 trillion per year in existing debt, every year.”

And the 4th problem is that the stock market in general is sky high. More from bill Bonner: “By almost any measure you choose, US stocks are near epic highs. This month, the Dow crossed the 44,000 barrier. The S&P 500 crossed the 6,000 line. Based on its P/E ratio, the S&P is the priciest it has ever been.”

With all that in mind, it seems prudent to be cautious about which sectors to invest in, and to keep about 30-50% of your cash ready to invest later if there’s a big drop in prices.

The “energy transition” has been a terrible investment, and for good reason. For example, RIVN, the electric truck maker stock has gone down by more than 50% in the last 12 months. The costs of wind, solar, batteries, EVs, and charging systems have not been warranted by the results. None could be done without subsidies.

Nuclear fission is already a tried and proven source of efficient, reliable electric power. Newer designs are safer than ever, SMRs (small modular reactors) are on the drawing boards, and advanced reactor designs will be able to re-use existing stocks of spent nuclear fuel.

However, it will take time for nuclear power plants to be built. In the meantime, fossil fuels will be desperately needed to make up for the failure of wind and solar during weather crises. And natural gas power plants will probably always be needed, even after most of our power is from nuclear - because even nuclear has to be shut down occasionally for maintenance, and gas will be needed for backing that can be bought online quickly, as needed.

conclusion

Looking at a 5 year horizon (I wouldn’t dare try to look much further ahead) I’ll be in uranium stocks, with several little toes dabbling in SMR stocks - not knowing which ones will come out on top. Cameco (CCJ) is a big uranium miner. SMR (Nuscale) headquarters are in Portland Oregon, about 25 miles from my home. They are yet to make a profit. These are long term investments, and there will be a shakeout - there are about 70 companies worldwide trying to get into them small nuclear reactor market.

In the broader market and the near term, I’ll be mostly in businesses that traditionally are good at surviving recessions, like consumer staples (Walmart, for example), and stocks that pay dividends. Us old retired folks need income, especially those like me who were self-employed and didn’t have a pension. Qualcom is an example of a company that benefits from the AI momentum, but not as streetched as hi-flying Nvidia, and they pay a dividend of 2%. The oil and gas pipeline companies will continue to do well and are great dividend payers. MPLX is a good example and pays a 7.8% dividend. The Permian Basin energy stocks are not high priced. Chevron has a P/E of 16 and a dividend of 4.3%. Chevron is “one of the largest operators in the Permian Basin. The Permian basin in Texas has plenty of land and gas available for the energy needed for new data centers. There is also water from drilling that can be used for cooling those data centers.

In the alternative sectors, (which I’ll write about in Investing 401 - wait for it…) gold and Bitcoin are inflation hedges, although Bitcoin is the newcomer and unproven - so I’m keeping my allocation down to about 1%. With President Trump’s election, gold has gone down steeply, because it had been previously bought because of uncertainty in the economy. Now it’s being sold and a lot of that money is going into stocks. I’m waiting for gold to settle before buying. GDX is a well known gold miners’ ETF. It’s dropped about 8% since the election.)

I plan on keeping a good percentage of cash in short term T-bills, until seeing better opportunities.

That’s about it. I welcome your comments.

“A good man leaves an inheritance to his childrens’ children…” Proverbs 13:22

Investing 401 will be kind of a wild ride - talking about high risk and unusual investments.