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Help me with my investment strategy

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Here's another update (Green = me, Blue = S&P 500). I am investing new capital, so I have an opportunity to reconsider my portfolio. I am weighting more towards VEU (all world ex-US) and less gold and China. My thinking is that gold is good for safety, but not good for long-term speculation for the reasons mentioned above. My friend in China thinks it may be a bubble, though I still think its a great opportunity.

I could be wrong, but my impression is that the USA under Obama is behaving worse in terms of monetary and fiscal policy than the rest of the world. Hence VEU. I think Peter Schiff is right that we're due for a crash sometime, but I can't spend the next decade hiding in GLD and missing out on opportunities.

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I had the good fortune to attend a small Q&A with Warren Buffett a few years ago and one of my fellow students inquired about investing in physical gold. He gave a rather memorable reply which I will attempt to paraphrase from memory. "You pay a guy to dig it out of the ground. You pay another guy to smelt it down. Then you pay another guy to dig another hole in the ground. Finally, you pay a guy to stand guard over it. It has no utility just sitting there. Anyone watching from Mars would be scratching their heads."

But if instead you pay a guy to chop down a tree, pay another guy to turn it into currency, pay another guy to build a bank, and pay another guy to stand guard over it, then it's called savings. The reality is money is a necessary placeholder. Now which are you going to use as your source of savings - something that can be easily produced, and which today can even be created entirely out of thin air on the whims of a stranger to rapidly dilute the market and completely devalue your savings - essentially placing your values and goals in the hands of another person -, or something that is impossible to produce, and must be found in order to dilute the market?

Edited by brian0918

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But if instead you pay a guy to chop down a tree, pay another guy to turn it into currency, pay another guy to build a bank, and pay another guy to stand guard over it, then it's called savings.
I'm guessing Buffett was not proposing cash as an alternative. Knowing him, his choice would be: productive real assets.

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Your portfolio seems well balanced to me (not that I'm an expert or anything) but what about real property investments as well? By which I mean real estate. I'm of the opinion personally that a well balanced strategy should include property investments as well as portfolio investments - split about 50/50.

If you're not interested in direct investment in real estate (ie: being a landlord, flipping houses, etc) then there are other options like REITs.

Land is one commodity that never goes out of style, after all. :D

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Land is one commodity that never goes out of style, after all. :D

I don't know, man. 30% losses in value around the whole country sounds like "outta style" to me. (probably a good time to buy it now, though)

About gold as an investment though, it's been doing well recently but I think that people forget that it was valued at between $300-400 for 20 years(1983-2003). There is no reason that it could not go back down significantly and then stay there for 20 more years or even level out right where it's at. It could go to 2000 an ounce, I suppose, but that seems like a lot to hope for and not necessarily different that hoping some stock you buy is going to double in price.. If it's just to have possessions of physical gold for the 2012 end of times, hey, then go for it.

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There is no reason that it could not go back down significantly and then stay there for 20 more years or even level out right where it's at.

For that to happen, the dollar would have to gain significant purchasing power. Do you see that happening?

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For that to happen, the dollar would have to gain significant purchasing power. Do you see that happening?

I personally don't believe that the valuation of gold is tied solely to the value of the dollar. In other words, I don't think that it has gone up 30% a year for the last 5 years because our currency has devalued 30% a year. I think the increase is more a result of perceived economic risk by investors and perhaps the increased buying of it by exporting countries like China and Saudi Arabia. With 5 years of increasing stability that perceived risk could dwindle and quite a bit could be sold off, lowering the price for quite some time.

Eventually, over the long haul, it will probably go up just as a function of inflation, but as an investment, I could see buying in at 1000 per ounce and and sitting on 870 an ounce for many years before getting a inflation+ gain.

The two things which I see as having the potential to pump it higher are if the economy crashes further for longer, but with the DOW pushing 10k again that's looking unlikely in the medium term to me. The other is if china and others succeed in creating a world wide currency backed by gold and oil. In that case, assuming your gold didn't get nationalized(or world-ized), it would turn out to be a great investment. I don't know how likely it is that the oil/gold currency will happen though, so for me it would be a gamble.

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I don't know, man. 30% losses in value around the whole country sounds like "outta style" to me. (probably a good time to buy it now, though)

It's a great time to buy it.

And like with portfolio investing, 80% of the people who invest use "buy, hold and pray" as their investment strategy and have learned the hard way that yes, real estate values can go down. Meanwhile, 20% make 80% of the money because they learn how to make money in both directions.

With real estate, if you're buying as an investment, then you want to buy something that makes money - that means rental properties.

It won't bother you if the value of your property goes down while its still bringing in at 20% ROI. (Yes, that's a real number - I put 25k down on a property and it cash-flows $500 a month net, so 6000/25000 = > 20%).

And if landlording isn't your interest, you can hire a property management company (lower return but less hassle), or invest in REITs (real estate investment trusts) that handle everything and pay a return.

As with all things, of course, substantive education prior to action is critical.

Edited by Greebo

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It's a great time to buy it.

...

As with all things, of course, substantive education prior to action is critical.

With that I agree. Just to clarify, I don't mean to argue against real estate as an investment in general. Just the idea that it never goes out of style. There are parts of denver(where i live) where 25k would buy you 2 or 3 houses right now with a similar return. So now it's "in style." If, on the other hand you bought something in 2003 or so, it would be out of style by comparison to what else you could do with your money currently. Of course you could still be making a profit(congrats on that, btw), but that doesn't necessarily mean it's the best thing to do.

Unless, as you point out, that's what you know about. Then it's the right thing to do.

I think I'm a little reactive to real estate because of the "rich dad poor dad" crowd always hawking it like it's something everyone can do and get rich at. Not everyone is cut out to evict bad tenants or replace leaky sinks. Some people just don't enjoy it. I agree with you about the REIT's but would add that it is more of an investment in the company or managers than in real estate. Like buying a Gold mine. No point in buying a badly run gold mine that loses money every year. The fact that the product is real estate doesn't make it any more likely to be successful or less risky.

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I'm guessing Buffett was not proposing cash as an alternative. Knowing him, his choice would be: productive real assets.

The problem with real assets is that they are all valued in terms of dollars. So, when you cash out to move onto the next investment or if you want to use that asset you have....tada....dollars.

It's a gamble if the currency is being inflated. However, if you think that the dollar will return to a gold standard or NOT be inflated out of existence, then you would naturally push ahead with dollar based investments. However, no fiat currency has ever survived. You cannot separate money from value.

As to David's investment strategy, David, I think K-mac provided some good broad-based, general advice. As to your specific stock investments, the first thing you need to determine is actually if it is worth your time. I wrote a blog post about this just recently:

http://www.twintierfinancial.com/the_uncom...-your-time.html

If you determine that it is worth your time, you then need to determine whether you want to speculate in the stock market or whether you want to invest in it. There is a big difference.

If you want to speculate, or even if you want to invest, you really should pick up a few books by Benjamin Graham. For starters, "The Intelligent Investor". I have it sitting on my shelf, and I think pretty much anyone doing their own investing should have it on their shelves as well. If you want to speculate, you will need to start hob nobbing with industry insiders (the industries you want to invest in) and get to know them, and their business (and be careful that you don't cross the gray line of "insider trading"). Learning how to pick stocks is a skill. You need to know how to do it, then you need experience doing it.

Real Estate is really a whole 'nuther ball of wax. I almost don't think of it as an investment as much as a business-unless you are buying a REIT. The fundamentals that drive Real Estate are a lot different than what drives securities.

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The problem with real assets is that they are all valued in terms of dollars. So, when you cash out to move onto the next investment or if you want to use that asset you have....tada....dollars.
This is really not a problem at all. What we want -- as human beings -- is real goods and services. If what we own are real goods and services, then we can exchange these for real goods and services. The fact that there has to be a short duration during which they are in cash is not important unless we're talking Zimbabwean/German-Post-WW1 price-increases. If one is going to keep wealth in real assets (i.e. claims to real assets) then it is better -- in the long haul -- to keep it in a specific type of real assets that have a special characteristic: they create more real assets. Of course, this assumes that one is investing as opposed to speculating. Edited by softwareNerd

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Of course, this assumes that one is investing as opposed to speculating.

Could you explain your meaning in this last sentence, please.

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This is really not a problem at all. What we want -- as human beings -- is real goods and services. If what we own are real goods and services, then we can exchange these for real goods and services. The fact that there has to be a short duration during which they are in cash is not important unless we're talking Zimbabwean/German-Post-WW1 price-increases. If one is going to keep wealth in real assets (i.e. claims to real assets) then it is better -- in the long haul -- to keep it in a specific type of real assets that have a special characteristic: they create more real assets. Of course, this assumes that one is investing as opposed to speculating.

I think you misunderstood me. I did not say the problem was with the real assets. I said the problem was with what they were tied to in terms of valuation. I agree that the hyperinflation will make those real assets not very attractive (unless they are tied to some other medium of exchange), but even the slow burn can make them unattractive if the inflation rises faster than the rate at which real assets are able to produce more real assets. I hope that makes sense.

Edited by prosperity

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Could you explain your meaning in this last sentence, please.
I fear it would lead this thread way off topic. (I do realize that many people don't like to differentiate between the two terms.) I use the term speculation to mean that part of the productive process where one is focussed on forecasting (speculating). This is a conceptual "peeling away" of a process that may not actually be a separate activity. For instance, every investment -- for that matter, every action in life -- can be said to contain an element of speculation. A few classical economists used the term in that sense (and, if my memory serves, so does Graham and Dodd's book). Edited by softwareNerd

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If you want to speculate, or even if you want to invest, you really should pick up a few books by Benjamin Graham. For starters, "The Intelligent Investor".

Thanks, I've ordered it, and I've been reading and watching videos on fundamental analysis.

If you want to speculate, you will need to start hob nobbing with industry insiders (the industries you want to invest in) and get to know them

Hmm, I've stayed away from industries that are related to my specialty (software). Do you think it's a good idea to invest in companies with products I personally like?

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Hmm, I've stayed away from industries that are related to my specialty (software). Do you think it's a good idea to invest in companies with products I personally like?
Legendary mutual fund investor Peter Lynch argues in two books, Learn to Earn and One Up on Wallstreet, that the best way to find companies to invest in is through your own life experience. He argues that people should investigate leads especially in their professional industries because they are more likely to spot investment opportunities faster than any analyst on Wallstreet. Of course, he also provides the disclaimer that a company must be sound in other ways before you act on these leads.

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Legendary mutual fund investor Peter Lynch argues in two books, Learn to Earn and One Up on Wallstreet, that the best way to find companies to invest in is through your own life experience. He argues that people should investigate leads especially in their professional industries because they are more likely to spot investment opportunities faster than any analyst on Wallstreet. Of course, he also provides the disclaimer that a company must be sound in other ways before you act on these leads.

Buffet makes the same recommendation. Why would you not make an investment on things which you were more rather then less knowledgeable about?

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Buffet makes the same recommendation. Why would you not make an investment on things which you were more rather then less knowledgeable about?

One reason is that if there is a major recession in my field, I could lose my job and face a decline in my standard of living. Investing in unrelated industries lowers my risk.

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One reason is that if there is a major recession in my field, I could lose my job and face a decline in my standard of living. Investing in unrelated industries lowers my risk.

I see. Buffet's advice was in the context of particular companies. Not investing based on based on industry alone.

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One reason is that if there is a major recession in my field, I could lose my job and face a decline in my standard of living. Investing in unrelated industries lowers my risk.
The whole idea is that you would be aware of the decline before Wallstreet analysts. You have daily interactions with this or that aspect of the business that will tip you off, potentially months or years before it becomes apparent outside of the industry. So, you would pull your investment before you face losses, because the major loss is going to happen only after "outside" investors also become aware.

And on lowering your risk for a lower standard of living, isn't that what investing is all about? It's not investing in unrelated industries that will provide your buffer, but investing soundly according to your knowledge in anything outside (or, as explained, sometimes inside) your regular field of work. To me, for the Joe Shmoe investor, investment number one is one's profession, and everything else comes second as best as he can manage.

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Investing in unrelated industries lowers my risk.
In theory, you could hedge away some of the industry-specific risk. For instance, you could be short something (say an industry-specific index, or a couple of large-but-average companies within the industry), while being long the one or two companies that you believe the market is undervaluing, and you -- being close to the business -- know will do better than expectation. In theory, there is also a "paired" approach: for instance if you decide Company X is going to do well, and take business from Company Y. If you think the market does not have the same insight as you do, then you could go long one while shorting the other.

I think there may be some occasional instance when you know something special about a company you're close to as part of your job, but I think it is more rare than one might expect. In fact, sometimes "insiders" can be overly optimistic or overly pessimistic about their own company's prospects, because of a sort-of myopia and an inability to step back and consider the bigger picture. I'm still more skeptical about the Peter Lynch approach of looking for good businesses in one's day to day affairs. I've seen something like the following happen with me (just after reading Lynch's book), and also to friends. After patronizing some new restaurant chain and seeing that it was good and crowded, we checked out it's finances and found that it was only in a few states, and growing rapidly. Surely a good buy. More often than not, such an analysis will come up short. Chains like that often over-expand, often on leverage, and end up having to do damage control a few years down the line. Also, there might be a similar young chain five states away that is growing toward you, and will actually wipe this one out. At most, one might say that this type of personal experience is a source of ideas. At worst, the concreteness can trick you into being more positive than you ought to be. (Krisy-Kreme was an example where I think a lot of donut-eating Lynch readers went for a bad ride.)

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Hmm, I've stayed away from industries that are related to my specialty (software). Do you think it's a good idea to invest in companies with products I personally like?

Sure. Investing in what you know is the ideal. Now...it's a two edged sword because you want to know a lot but not "too much".... "too much" being a term that is completely arbitrary.

------>

...Why would you not make an investment on things which you were more rather then less knowledgeable about?

In a word, "insider trading".

Let's say you are very knowledgeable about a company or product. You know pretty much everything there is to know. You know the manager of a company or whatever. Or, like David, not only do you know about the industry, you work in it. You buy a bunch of stock from a company that you personally have worked with or for in some capacity in your life. The laws that make up "insider trading" are ambiguous and could potentially do you in if someone in the DA's office is feeling ambitious. The argument goes like this:

Since you have access to information that regular investors don't have (i.e. you know more about software companies because you are a software engineer, work with software companies, know managers, etc.), then you have an unfair advantage over everyone else.

I mean, how many small time investor's get nipped for insider trading? I have no idea, you might never get caught, but the scenario I described above can be made to fall under those laws. To me, it's almost like going 5 or 10 miles over the speed limit. Is it illegal? Yep. Will you get caught and pulled over? *shrugs* Maybe, but probably not. If you were going 20 miles over the speed limit, then yeah probably. I mean, the laws on insider trading are much more open ended than the laws on speeding, but I hope you get my analogy....basically, if it's hard to prove that you had an unfair advantage, or it's not obvious that you traded on inside information, you might be able to do what you want and make money. If you make it obvious that you are trading on inside information or have information that the market doesn't know yet (which, by the way, is how you really make any money in the market; even index funds or passive investing rely on the after-effects of trading on "inside" or "privileged" information) then there's a good chance you could end up like Martha Stewart.

...ironically, the best investments are ones in which you pretty much know with a great deal of accuracy and certainty that you are going to make money. Getting the information and using it to profit under that scenario, however, just happens to be illegal.

Edited by prosperity

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The whole idea is that you would be aware of the decline before Wallstreet analysts.

If this was actually possible, I could have retired by now. It takes a Wall Street analyst to make those kinds of predictions - and even they rarely outperform the market.

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If this was actually possible, I could have retired by now. It takes a Wall Street analyst to make those kinds of predictions - and even they rarely outperform the market.
Well, it is actually possible, and Lynch wrote a whole book demonstrating how he did it, giving example after example of huge investment opportunities he both found and missed, and comparing them to the Wallstreet analysis over the same time periods.

He doesn't claim that Wallstreet knows nothing, he just points out the obvious fact that Wallstreet doesn't know everything, and shows how the average person might capitalize on that.

I doubt you could have retired by now, but you might have discovered a few more excellent investments along the way if you had just been looking in the kinds of areas Lynch suggests: close to your own life, where your knowledge is more specialized than Wallstreet's.

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