Most investors would like a "do over."
They look back on certain investments and wish they'd never heard of, much less put money in them. Sure things like your good friend's invention that would make beer in one day from water and weeds. Or your brother's idea of selling real estate on Saturn. Everyone has their own stories. Mine are usually related to private investments in the medical device field or biotech, though I did have one out of Florida that made a "pig" that ran through oil pipelines to check on their safety. After meeting the founder who looked more like a used car salesman that caught a great sale on polyester suits, I should have known better right then. But I didn't.
With several major developments occurring around the world, many investors may wonder how they could affect their portfolios or their lives. Here are two of the current, newsworthy events and how investors may interpret them.
The oil from Libya totaled about 2 million barrels a day before the revolution, half of which was exported. About 1 million barrels a day are no longer available to the world. That isn't enough to really affect the price of oil for a long period of time. Plenty of other countries can supply that amount without straining their capacity. But they're unlikely to step in to fill the gap when oil prices are above $100 a barrel. That price should recede once the conflict finishes and a more stable government is in place.
The Japanese devastation is almost incomprehensible. First there was the earthquake, followed by the tsunami, followed by radiation. It seems the disaster has no end. The people are suffering beyond imagination. It will be a long time for the country to heal. In the north, it will take decades.
Investors are trying to understand what the economic aftershocks will be. Which industries will be hurt and which ones will benefit? Because the crises change from day to day, it's extremely difficult to ascertain. But there are a few themes that seem to be emerging. Some of these will be short lived, such as the closing of the Japanese auto manufacturers. While they will lose days of production, the long-term effect will be minor, unless supplies are interrupted, causing further delays.
Banks are back in the news -- in a good way. Speculation is that mergers and acquisitions will be picking up, so are profits. Some are looking to raise their dividend and/or buy back more shares. Bank of America (BAC) is one of them.
The CEO, Brian Moynihan, announced that B of A wasn't looking to buy other banks. Instead, the bank would be focused on returning more capital to shareholders in the form of a regular dividend (now 4 cents a year), share buybacks and special cash dividends. The reason: he feels the bank will earn between $35 billion and $40 billion a year (yes, billion ... a year) in pretax earnings when the business normalizes. (But there's the catch: when does business get to normal?)
Warren Buffett, world's best stock investor, writes an annual letter to shareholders of Berkshire Hathaway (BRK.A), the holding company in which he does all of his investing. Fortunately for the world, he publishes it for everyone to read. While it is full of good investment advice, it also shows the Oracle of Omaha has a great sense of humor and a lot of wisdom. Here are some excerpts from his latest 2010 annual letter.
On uncertain times: "Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of 'great uncertainty.' But think back, for example, to December 6,1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain."
Tulip prices increased throughout the decade as more speculators got into the game. In 1633, a farmhouse was traded for three rare bulbs. By 1636 any tulip could be sold for extraordinary sums. Futures markets started. Trades were made in fields or taverns, between farmers and merchants. Some bulbs were bought and sold 10 times in a day. One father left his seven children an inheritance of 70 tulips. One sold for the all-time record price of 5,200 guilders.
Then, one day in 1637 everyone decided to stop playing. No buyers showed up at the local tulip auction in Haarlem. Within days, panic started, then spread. Tulips that sold for 5,000 guilders soon went for less than 50. (Source: Tulipomania by Mike Dash)
The perfect stock suggests that it would fit in any portfolio at any time. That perfect stock doesn't exist. Some investors want capital gains from growth only. Others want income. Still others want some of both. So can there be a perfect stock?
There is for each group of investors. For the ones looking for capital gains, the stock would have these attributes:
You may not have felt it yet, but inflation is running rampant for certain commodities. Prices for some raw materials like cotton, oil, aluminum, tin and many others have skyrocketed in the last year. Manufacturers from electronics to apparel are feeling the pain as they report lower earnings due to higher raw materials costs. That can only mean one thing: prices will be going up on many items in the near future or profit margins will be lower, driving down earnings.
If the first scenario plays out, then inflation will start making a comeback as it will take more dollars to buy the same products. That means a semiconductor chip that cost $2.50 last year may cost $2.75 this year. Same chip, just more expensive. Or an all cotton shirt that cost $50 this year will go to $60. Same shirt, just more expensive.
Coca-Cola (KO) has more than $13 billion in cash.
The top five companies (according to market cap) are:
If you think the economic recovery is just beginning, then these three stocks will benefit. They've just released their earnings so you can see how they've fared even in these tough times. They all share positive attributes: plenty of cash, growing sales and earnings, and a dividend.
General Electric (GE): This stock has been a frustration for years. It cut the dividend. The price went from $38 a share to $8 from 2008 to 2009. Now it's coming back. The latest quarterly and annual reports for 2010 confirm the company's finally seeing better demand for most of its products and services.
GE mirrors the economy because it's in so many different parts of it. Here are only some of its offerings: jet engines, light bulbs, credit, mortgage finance, appliances, power plants, locomotives, electric distribution and control equipment, generators and turbines, real estate, commercial finance, aircraft leasing, NBC Universal, health care and several more. When the economy does well, so does GE.
All investors start at the beginning. They know very little, maybe nothing, but they see the stock market can make them money, big money. It can also take all their money and never even say thank you. If you're just starting out as an investor, follow these guidelines to help you minimize your mistakes and maximize your money.
First, understand that you are stepping into a world many have spent decades deciphering. You are a novice. You know nothing about the landmines that lie beneath. There are many and they can (and will) explode at any moment, usually the moments when you least expect them. Investing is fraught with danger like bankruptcies (even huge companies ... see GM), crooked management (very rare but when caught, very expensive ... to you), and many other disappointments that will cause sleepless nights. Scared? Good. You should be. Now you're in the right frame of mind.
Economies go in cycles. They push to their breaking points, then move in the opposite direction. We saw it clearly in the '90s when there was no end to up (except there was and we abruptly hit it in 2000). In 2008, it felt like there was no end to down. But we now know there is. Things are picking up, and there are numbers to prove it.
Don't be the last to figure out we're in an economic recovery. Sitting on the sidelines, waiting for one more chance to buy a stock at the bargain price you saw in March of 2009 isn't going to happen. Times have changed. The U.S. economy is on the mend.
Investors spend most of their time looking for a great stock, anxious to buy one before others discover what they have. But equally important is knowing when to sell or when not to buy a stock. Here are a few red flags that stocks wave, no matter how good their numbers.
Dividends Are Very High. Stocks paying a dividend are a smart part of any portfolio. But when those dividends are much higher than average payments from companies in their industry, that's a problem waiting to happen. For example, if the average payment from the utility sector is 4% and the one you own is paying 10%, most likely the company's in trouble. Investors are selling the stock for a reason, making the dividend go ever higher (yield is: annual dividend/price ... the lower the price, the higher the yield). Sometimes the reasons for selling aren't known but become apparent after the quarterly earnings report. Or an announcement is made such as losing a contract that explains the downward pressure.
The stage is set for a recovery in certain industries. They've been hit hard the last three years, pounded by a slow economy. But now things are starting to change, and if you believe the worst is over, then these sectors should see good advances in 2011.
Car Companies: They're hiring. Toyota Motors (TM) just announced the re-opening of its Mississippi plant after being dormant for two years. It needs 2,000 workers. GM (GM) is hiring 1,000 engineers and researchers in Michigan over the next two years focused on hybrid and electric cars. Chrysler is looking for 1,000 engineers and others to create small and midsize vehicles in its partnership with Italy's Fiat. Fiat controls Chrysler. Ford is the most healthy of the U.S. producers, having never touched government funds.
Yes, there is a secret ingredient to a successful stock. It's called great management. No company sustains superior growth without management that is focused and honest. That last part is crucial. Ask investors in Tyco, Enron, or the old MCI. As Warren Buffett once said, ""In looking for people to hire, look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. If you hire somebody without the first, you really want them to be dumb and lazy." You're hiring a company's management when you buy a stock. Here are two measures to help determine how well they're doing.