The Intelligent Investor

The Intelligent Investor

In review you now have 5 stocks.  Consolidated Edison Inc. (ED) or another utility, Kraft Foods Inc. (KFT) or another food stock, Eaton Corp (ETN) or another industrial stock, and U.S. Bancorp (USB) or some other financial (Bank) stock of choice.  Last pick was an oil or gas my recommendation was Chevron Corp (CVX) but any oil sector stock would do.  Remember you can own any stock in the sector not the one I recommend.

In Benjamin Graham’s book he teaches value investing.  First of all I read a book written by the author during his lifetime.  (May 8, 1894 – September 21, 1976) I am not sure who is updating his work but I wanted his pholosphy not current theroies.  pg 40 “the rate of return … be dependent, on the amount of (time) intelligent effort the investor is willing and able to bring to bear on his task. … the alert, enteprising investor who exercises maximun intelligence and skill.”  Warren Buffett, who is considered most successful investor of the 20th century is a value investor and uses the principles taught in this book, and what I talked about in my last post. 

“it is absurd to think that the general public can ever make money out of market forcasts.  … There is no basis either in logic or in experience for assuming hat any typical or average investor can anticipate the market movements … successfully”  In this blog I am suggesting that you disreguard the Mutual Funds and junk ETF’s.  Invest for yourself in good high quality companies.  Watch the market for the general direction.  Use market tools, and follow the stocks you invest in.  Use value investing and follow the free advice on CNBC from Cramer and Fast Money.  (sorry closed the book before I got the page number)

“Basically, price fluctuations have only one significant meaning for the investory.  They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.  … he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his company.”  pg 109  I used this durring the 208 market melt down and the flash crash.  No one would have lost money during the flash crash with Procter & Gamble (PG) using a stop loss becaue you would never use a stop loss on your stocks following this investing approach. 

During the 2008 crash on or about 3/09/09 I sold all my stocks and purchased better stocks at a fraction of their value.  The stock were unloved and out of reach in some cases before the crash in March of 2009.  Home Depot (HD) was out of favor and the stock pickers were recommending Lowe's Companies Inc (LOW).  Altria Group Inc. (MO) was unloved due also to a lawsuit.  U.S. Bancorp (USB) being a bank was hated.  All examples of broken stocks not broken companies I picked two were recommended as stocks not to purchase.  Pfizer Inc. (PFE) was the most broken company I picked.  Unloved at the time now it is recommended at least once a week by someone on CNBC.  Pfizer Inc. (PFE) is the most risky of the three in my view and still is.  My point is I watch it closer and am more ready to sell it, even thought it is now loved.  The main point is you can buy stocks the Hedge Funds and Mutual Funds can’t and make a lot of money when the stocks become loved, also stocks flip flop being loved one year and hated the next. 

Go to a used bookstore and buy the book.  Start your own list of value stocks to pick up.  Spoiler this book is written like a college textbook.  You will learn what Warren Buffett has used to become rich.  You can do this too.  In conclusion 50% of the gains to investors on the stock market are from reinvested dividends.  Use value investing to increase your wealth.

Limit Your Risk

Limit the Risk 

If you have been following my blog and advice you now have 5 stocks.  Consolidated Edison Inc. (ED) or another utility, Kraft Foods Inc. (KFT) or another food stock, Eaton Corp (ETN) or another industrial stock, and U.S. Bancorp (USB) or some other financial (Bank) stock of choice.  Last pick was an oil or gas my recommendation was Chevron Corp (CVX) but any oil sector stock would do.  Remember you can own any stock in the sector not the one I recommend.

I know Jim Cramer recommends you own only 5 stocks and research each one a hour a week.  I saw a graph like this in the Charles Schwab investor magazine “onInvesting”.  This graph shows the number of stocks owned on the vertical line is the risk and the horizontal line that runs parallel to the x-axis is the number of stocks you own.  With one stock your risk is at the upper left almost off the chart.  The more stocks you own the lower your risk.  In essence you become a mutual fund.

My recommendation is make sure you own only good stocks watch the company specific news and be willing to explain to someone why you own a stock.  If you can’t expain to a disinterested third party the logic behind why you own a stock, then you must sell that stock and buy a new stock in the same sector.  You can make love to your wife, making love to a stock is very unsatisifating and you can loose a lot of money money. 

I recommend you own a good stock in every sector.  Spend your 5 hours a week researching the market.  Remember half the movement of your stock is the market.  Flaten out your risk curve, follow the market.  In the next post we will explore new purchases.  Your goal is to own one stock the best stock in every sector.  Be your own Mutual Fund.  By being your own Mutual Fund you can outperform Mutual Funds because you can hold out of favor stocks with good fundimentals and hold them long enough to make good returns.  In effect you become your own Hedge Fund.

Oil

Next Stock

You are investing in stocks not the GNP.  If you have been following my blog and advice you now have 4 stocks.  Consolidated Edison Inc. (ED) or another utility, Kraft Foods Inc. (KFT) or another food stock, Eaton Corp (ETN) or another industrial stock, and U.S. Bancorp (USB) or some other financial (Bank) stock of choice.

You now have somewhere from 20 to 40 thousand dollars saved, you are following a plan.  You are getting rich slowly.  Keep it up; it is now time to buy your fifth stock.  Again do it in another sector.  I call the oil and gas stocks a sector, unlike many other investors.  Maybe not correct but I have my reasons as I will explain below.  All oil and gas stocks move with the underlying commodities. 

I think the best oil & gas stock to invest in is Chevron Corp (CVX).  Just because I like CVX there are many oil and gas companies you can invest in pick one.  Pick one and invest in it.  Again 100 shares and again sell upside calls.  You get a 3.4% dividend of 90 dollars a quarter, and with a upside call out 3 months you can get an additional either 200 or 60 dollars depending if you sell the call 3 dollars higher than you purchased CVX at or 7 dollars higher.  I would take the 7 dollars higher call at 60 dollars.  So now you get 150 dollars return for the quarter and a total return with the call at about 5%.  At the current price of the stock (7/3/12) and if the stock is called away from you, you will make an about an additional 6% on your investment.  (Sorry I am not going to do the math to get the exact percentages.)



In 1956 a geoscientist who worked at the Shell research lab in Houston, Texas prodicted the U.S. would become a oil importer after oil production peaks in the 60’s and 70’s See the Graph.  He received harsh criticism at first, this prediction proved correct in 1970.  Hydraulic fracturing changed the bell curve some see the chart in this post, but there is only so much oil underground and this investment will pay you a dividend return for the rest of your and your childrens lives.  That is why I put oil and gas in their own sector.  Let this trend of downward oil inventory pay you dividends for the rest of your life and your childrens lives, and build your wealth.  I am not sure exactly where or when oil will drop off and you see in the graph that new technologies can shift the bell curve upward, but there is a finite supply on earth.  There is an infinite demand for engery on this planet. 

Just look at the war in Iraq for a good example of the importance of oil.  The United States did not intervene in Sudan, Uganda or Tanzina over human rights violations or to bring democary to their people, those countries killed more of their own citizens than Iraq did.  These African countries remind me more of Nazi Germany and Hitler than Iraq did.  Engery is in our strategic national interest.  This war was about oil and gas, you don’t think we would have stayed for 10 years in Tanzina if the terriorists were from Africa do you?  There is always at least one carrier battle group over in the Strait of Hormuz.  We don’t guard the Gulf of Aden and the trade route through the Seuiz Canel and fight the pirates in Somalia like we protect the Strait of Hormuz do we?  It’s oil not human rights George Jr. be honest.  Besides if human rights violations mattered to us at all, George Sr. would have taken out Iraq during the First Gulf War when the Iraqian troops started killing the civilians who had supported the United States and democary.  Just as long as the oil flows and the proper people control it the two George’s were happy.  I always felt bad that we allowed all those people die under George Sr.  And, I will feel bad until the day I die about U.S. troops torturing and tormenting the enemy under orders from the president.  Christians don’t torture George.

The United States will fight for oil now and in the future, like it or not.  At least until we have an alternate engery source.  Do you really think a oil billionare from Texas wouldn’t use any excuse?  There were better ways to take out the terriorists if they alone, were what we were after.  There are other countries that would accept democary better and who have nasty dictatorhips in them, other than those two middle eastern countires we are in garrisoning now.  One for a pipeline project and one for oil. 

 

Do you really think the oil companies need special tax treatment?  Since we are going to put oil companies on government welfare.  Since we will go to war for and use our troops to garrison oil countires.  Since we have now tortured for oil.  Looks like we will do just about anything for oil.  You need to put your money where your government and special intersts put their money!  Ride the coattails of a trend that is here to stay, and build your wealth.  Ride this major wave of a needed commidity and build your own net worth.

Get Rich Slowly

Change your attitude change your life.

You are never going to get rich quick.  You can get rich slowly but most Americans don’t have the patience to get rich slowly.  It takes perseverance and staying power, putting off pleasure for today to save for tomorrow.

The fairy tale told by Horatio Alger to every American is that; by your bootstraps you can pull yourself up, and join the upper social class.  Alger was from the upper class he wrote about something we would all like to believe is true, but is not truth and has little basis in reality.  Horatio Alger wrote fairy tales to children about impoverished boys and their rise from humble backgrounds to lives plenty.  The tragedy is this fairy tale has entered into American culture as a truism.  Your odds of raising your class up one level are more than a million to one; your odds are better buying a lotto ticket.  The truth is the greatest influence on your social class is the family you were born in, not your intelligence, not your job, or your talents.

You can become an entrepreneur?   Really, what bull crap!  The odds are stacked against you.  At least 80% or entrepreneurs fail the first year, and of the 20% that go on to their second year half fail during year two.  I will take the opposite side of that trade any day.  You take your startup money and we can roll the dice, I have a 90% chance of winning.  You will not get into the upper class by making more at work or getting promoted.  The best jobs are all spoken for by those in the know, or who know someone.  The odds are you will get laid off first.  You will not get there by inventing the new great got to have gismo in your garage.  You most likely will not get there by being a contractor, and building homes, roads, fences, etc.  Odds are you will go bankrupt once or twice.

There are only two sure ways I know to raise yourself upward in the social food chain, real estate and stocks.  Please read Dave Ramsey’s “The Total Money Makeover” for instructions on the real estate route.  You need a positive cash flow to be a landlord.  I have known people who are successful landlords and they all have a positive cash flow.  Positive cash flows equal you own your own home and your rental property, so that when you get a bad renter you can repair and keep your real estate.  Everyone I have known lately has lost their rental property and in some cases their homes too.  Many try the easy way flipping houses.  Again like being an entrepreneur and opening your own business flipping houses looks like it is the fast and easy way to wealth.  The system is rigged for the few with money, can you buy the house you are flipping and fund the repairs yourself?  In the past twenty years the top 1% have improved their net worth by a gargantuan 157% while the middle class has improved theirs by a tiny 10%.  Twelve years of oil millionaires from Texas in the White House, and their economic policies for the rich.

Read Jim Cramer’s books on stocks, real estate is more mistake prone than stocks.  There are other good books on stocks that read like college textbooks, Jim’s are easy to understand.  Have a plan and the discipline to follow it.  In ‘The Intelligent Investor” by Benjamin Graham it says “If you want to speculate do so with your eyes open, knowing that you will probably lose money” Chapter 8.  I have made money speculating on stocks and real estate; got out too early, or too late, or rode it up then down to zero.  In comparison I purchased Consolidated Edison Inc. (ED) 4 years ago and it is up 55%, I have 28.6228 shares of stock from dividends and I forget how many times I sold upside calls that have expired as worthless.

The only way I know for you to raise your social class is to slowly work on stocks or real estate.  Pay off your house and buy a new one rent the old one, or buy high quality stocks with dividends with one or two growth stocks.  Pay off all your debt.  I know it takes years and is not quick and easy.  People like the quick easy fix, thanks to Horatio Alger (who was in the upper 10% himself at birth).  This way is slow and steady.  It means going without to save and invest. 

It also should mean voting for people who will build up and not destroy the middle class, for that is where you are now.  Vote for the 99% of Americans not the 1% über-rich, if you looking for a positive change in your financial life.  The GOP is only interested in lowering the percentage they pay in taxes and increasing your tax bill.  Be aware that when you pay more in food and gas that is a tax, when you pay more for healthcare and insurance that is a tax.  The only thing you need worry about is your disposable income, not your net income.  Our taxes when up under Bush Jr., we pay the gas pump and the grocery store.  Food and gas matter little to the über-rich it is a small percentage of their budget, look at your budget, food is probably number 2 in where most your money goes, healthcare number 1 or 3?  Come on W raised your taxes and lowered his own, and his billionaire friends.  The GOP candidate for president pays 15% in taxes, and hides his money in the Grand Duchy of Luxembourg, Switzerland, and the Cayman Islands.  Do you think he cares about you or his über-rich friends?

The GOP wish to move your job overseas and see that you pay the greatest percentage of your income to your healthcare costs in the world.  The Healthcare in the US is between 27 to 37, why are we so low?  The GOP is the reason.  In Education the US is between number 25 to 30.  How can we be competitive if we don’t invest in our children?  I am a Christian and believe if we are really a Christian nation we will treat our poor better, (sell all you own and give it to the poor Matthew 19:21 & Mark 10:21) and how we treat the sick (Luke 10:25-37 the GOP are acting like the priest and Levite) and how we treat children (Matthew 18:6 – 18:10 GOP build the Department of Education don’t tear it down “Take heed that ye despise not one of these little ones; for I say unto you, That in heaven their angels do always behold the face of my Father which is in heaven” )  Time to be the best nation for all not just the 3%.