Category Archives: Knowledge

Another Reason Why You Should ALWAYS Contribute To Your Retirement Accounts!

One huge piece of advice I would give anyone just starting out investing would be to tell the person to ALWAYS contribute to as many retirement accounts as possible. Max out your contributions every year.

Obviously the tax advantages are a majority of the reason to contribute to retirement accounts, but I also make sure to do so because it makes my tracking/accounting needs virtually non-existant should I do any trading or sell to lock in any gains, as you don’t have to report individual trades from retirement accounts on your yearly taxes.

At my current stage in life, I am much more of a long term investor; hence the subject of this blog.  I used to trade more (but not to the level of day trading) and at the end of the year I might have anywhere from 10-30 trades that, if traded in a regular non-retirement account, would need to be reported on my 1040 when doing my taxes the following April.  Because I was building my retirement accounts, many of those trades took place within my retirement accounts and my gains/losses from individual trades didn’t need to be reported on my yearly taxes.

So not only are retirement accounts a tax shelter, they are an accounting shelter as well! And this either saves you time or money on your taxes, depending on whether you do them yourself or pay someone to do them.  Currently I have an accountant do my taxes, and I was able to negotiate a lower rate because I have done things like this to simplify them.

It has been over 10 years since I started contributing to my retirement accounts (mostly ROTH and SEP accounts), and I now have enough capital in them that virtually all of my stock purchases take place within those accounts. I am well diversified, in that I have free cash for life’s emergencies, physical property and stocks.

If you find my advice helpful, please join my email newsletter or follow me on twitter to keep updated.  At some point I intend to open up a membership section to help my followers more wisely invest their money.

Investing In Gold Isn’t Only About ‘Dooms Day’ Scenario

Most gold investors will tell you that you need to own gold because they believe US dollar is becoming a fiat currency due to all the money “printing” by the Federal Reserve in the Quantitative Easing (QE) programs.  They believe all the money “printing” is going to cause the economy to crash after the world realizes that all the “printing” is not really helping and gold will be the only currency to survive the devastating world economic crash.

I somewhat agree but mostly disagree with this esoteric point of view.

First, the Quantitative Easing programs don’t directly cause inflation.  The programs are intended to help banks square up their balance sheets so that they’ll feel more inclined to loan money. It isn’t until the banks actually loan the money that the subsequent inflation kicks in.

In simple terms, you can think of it like your credit card.  Your credit card company gives you credit to go an buy things, which is your individual money “printing”.  But that credit doesn’t change your life (or effect the economy) if you leave the card in your pocket and do nothing with it.  Once you actually go out and buy stuff with your credit card, that’s when the money “printing” gets put into play and subsequently affects you and the economy.

Since the banks are mostly hoarding the money the Federal Reserve is loaning them (keeping their credit cards in their pockets), Quantitative Easing is not yet causing massive inflation.

So the gold investors are missing a major step in how things would likely play out.

The economy has to really take off to the point where banks are back in the business of heavily loaning money for massive inflation to set in and gold to subsequently follow along with inflated pricing.

So from this point of view, if you are investing in gold, you are investing for the economy to continually pick up to the point where this massive inflation kicks in, and that means that the economy is running in high gear (or more accurately in overdrive since the QE is masking the faults in the engine).

Now gold investors do have it partly correct that if the economy crashes, gold will increase in value.  But it will be a short lived increase if we really head into a depression, as depressions cause deflation and even gold goes down in value in a depression.

I say there will be a “short lived” increase for gold as the fear of a coming depression will cause money to scramble from the highly inflated stock market into gold as overall market investors look for temporary safe-havens. If the government then steps in and prints even more money, the fear of inflation will kick in with even greater ferocity, causing gold to rise with equivalent vigor.

So investing in gold at this point has a double upside potential.  If the economy continues to pick up, inflation will ultimately set in, and gold will follow along by going up in value.  If the fear that Quantitative Easing is not helping the economy instead sets in, gold will rise from the demand, as money moves into gold as a protection.

The way I see the economy right now, we are headed for an overly-stimulated economy with heavy inflation, but we aren’t there yet.  It’s still years away.

In the mean time, QE is supporting the economy making us all feel safe, which is why gold has seen a dip for the last 2 years.

At some point (possibly as long as 5-10 years from now) the economy will pick up (likely due to some new invention on the scale of the internet revolution) and once it gets going, all that extra QE “credit card” money will get put into play and things will take off in a parabolic fashion.  That’s when gold will most likely go through the roof as massive inflation sets in.  The Fed will have to drastically raise interest rates to slow the economy.  If the takeoff in the economy is simply due to excessive exuberance (as opposed to new invention), that would be the time to move your money from gold related holdings into high interest vehicles as a crash will be likely to follow.

With all the above said, I don’t necessarily put much of my investment money into gold.  I don’t like paper gold (gold funds traded on the stock market) and it’s too much of a pain to keep an investment amount of physical gold safe.

I invest in gold mining companies, which see exponential effects, partly directed by gold’s change in value.  Currently, in the long term point of view (there has been a recent run-up), the miners have been beaten up badly and are highly undervalued (see my article on investing in Gold Miners over Gold).

I am currently heavily invested in the mining sector (gold, silver, etc.) with a proprietary technique that I have developed over my many years of investing.  I plan to open a membership section where I share my technique to help you invest your money wisely.  Join my newsletter to be notified when I open up the membership section.

Miner ETFs VS individual stocks

Depending on where you look on the web, you’ll find a different average cost for miners to pull gold out of the ground.  Whichever amount you choose to believe, you can fairly estimate that gold is currently selling at or below the cost to mine it.  Thus, the miners are not likely to be profiting.  Hence, their stock prices are currently trading at a significant discount (see my article on Why stock prices for mining companies can go so low).

I like the miners because when the price of their respective commodity drops significantly, they can scale back operations and go into more of a survival mode, by cutting production and lowering expenses until the commodity price starts to re-elevate. Once the commodity hits a price that becomes more profitable, they can kick things back into high gear while having learned a few lessons in efficiency due to the downturn.  Their biggest objective during the downturn is make their debt payments.

And that’s why I like holding ETFs over individual gold stocks.  Since I don’t have the time to investigate each of the miners and learn how each manages its debt (as well as many other business factors), I know that by buying an ETF, I’m buying the average.  Some companies will do well, and some will not do so great.

In fact, some companies will do so poorly with their debt that they may go out of business.  Since the actual mine is the collateral of the loans, what is likely to happen should a miner go out of business?

Well, the debtor would come in and foreclose on the property.  But the debtors can’t do anything with those mines as they are in the lending business, not the mining business, so they would just turn around and sell the mine to another mining company (or more realistically, one of the better managed miners will first step in and buyout the company/debt for a discount).

Thus, if you are in an ETF that holds many mining companies, you are likely to get that mine back through another company in the ETF.  So it sort of all comes out in the wash, which is another reason why I like holding an ETF over an individual stock at this point in my life (see about me page).  For every company that significantly under performs, another company is likely to significantly outperform.  You do give up the chance for even greater gains but you gain security of knowing you didn’t pick a catastrophic company (see my article about knowing your risk tolerance.)

I have developed a proprietary investment technique for stable investing which I’ve developed over my many years of successful investing while going through major life changes. Having the knowledge above alone is not enough. You need to implement a stable, intelligent investing technique to get substantial, stable gains while protecting yourself from losing money.  I intend to release my technique in a membership section in the future. Please Join my mailing list to be notified when it will be available.

 

Know your risk tolerance and limits when you invest!

NOTE: This article is still in draft form. Due to work and family obligations (ie lack of time), I haven’t had a chance to fully re-read and fact check it.

When I started investing back in college I would invest in individual stocks.  Now that I am older and have more responsibility, my risk tolerance has changed.  With a family to take care of, I can no longer take large positions in individual companies which are inherently more risky than funds like ETFs.

Back when I was single, I was invested mostly in individual companies.  During that period the “Great Recession” of 2008/2009 hit.  I was in companies which I thought were great, but they really got beat up by the market.  Seeing them go down in price, I kept purchasing into them.  I remember buying into one particular small cap company that was falling lightening fast in its stock price, but the company was still reporting earnings of around $2/share, while its stock was trading for as low as $4/share!

Four dollars per share on two dollars per share of earnings is an absolutely insanely low valuation for its “earnings per share” ratio, which is just 2 to 1.  In a more stable and normal market, companies will nominally trade for ratios of 20 or even 40 times their earnings. It was either an unbelievable discount or the company was going out of business!

Towards the end of the crash, my portfolio was down 75% and I was getting crushed.  It was, however, within my real risk tolerance that I could take at the time, because I was single and had no real financial responsibilities, other than to take care of myself.

I believed I was correct in my valuation of the company being worth much more than its then current trading price and I believed the market was wrong in the pricing of the stock, so I continued to purchase it as the price plummeted.

At that time, everything was just going haywire and nobody really knew what was happening.  The market was just crashing.

We all found out later that major funds and hedge funds had to indiscriminately sell everything to cover debts and short positions.  So everything got crushed, especially small capital companies, even if they were solid companies.

After all the financial shock issues finally shook out, that company returned to a more realistic valuation of 20 times its earnings and even shot beyond to somewhere around 40 times its earnings. I sold early at about 10x my cost, making 1,000% profit.

While its great to think back about the successful investment, I learned a lot about my risk tolerance that I would not want to learn at this point in my life, since I have a lot more responsibilities.

During that “great recession” crash period, I was down a HUGE amount in value and was EXTREMELY stressed out.  I wasn’t sleeping and was feeling fairly depressed.  The only thing that kept me together was my belief in my knowledge (which dwindled with every price drop) and my belief in the fundamentals.

I remember that to relieve my stress I would work out extremely hard (running and lifting weights).  One day I even distinctly remember thinking to myself “Is it a positive thing if I try to commit suicide by running myself to death?” because I figured I was taking a negative (committing suicide) and turning it into a positive (forcing myself to get into even better shape).

Because of that experience I really learned a lot about myself.  I thought I had the mental strength to handle the amount of decline I took, but I really didn’t and I know for sure that I could not go through that type of decline at this point in my life.

I’m much more cautious these days, primarily investing in Exchange Traded Funds (ETF) which are funds that hold a bunch of companies, usually all within a similar sector.

The reason I don’t invest heavily in individual companies is that even if I do all my diligence on company (looking at management, balance sheet, cash flow, etc.) there’s still the chance of corporate espionage and scandals.  Issues like Enron had where the company was doing insane things with their accounting, bookkeeping and reporting are happening more often (or so it seems).  A company could look great from all the business and financial views you can think of, but you can’t easily spot the espionage and scandals.  So I know that my current risk tolerance couldn’t handle losing a large position in a single company due to something like that and I stick with funds for a majority of my portfolio.

To sum up, if there’s a first piece of advice I could give a new investor, it would be to learn your risk tolerance and to be honest with yourself when you evaluate your tolerance.  Its one thing to believe you can handle a large decline in value, its another completely different thing when it actually happens.

 

 

Is it better to invest in Gold or Gold Miners?

Even after its significant recent decline, it’s interesting to see that over the last seven years, gold has doubled in price, while the over the same period, the gold miners, as a sector, has declined.

In the charts below, the top chart, Gold is represented by the gold tracking SPDR Gold Shares ETF (GLD), which trades at 1/10th of the actual gold spot price.  The index, representing 1/10 gold spot price was around $60, meaning told was at $600/ounce in 2006.  It nearly tripled to $180 and has come back to be at $120, double its early 2006 price.

The lower chart shows the miners index as represented by the GDX Market Vectors Gold Miners ETF.  Over that same seven years the miner index is currently down from $40 to $24, nearly a 40% decline.

Gold vs GDX Gold miners over the last 7 years

Per my previous article on the exponential profitability of the gold miners as the price of gold raises beyond the miners expense level reasons, you would think that if the gold miners were at one value seven years ago and gold has doubled, the miners would be at a higher level today, possibly even an exponentially higher value than seven years ago.

However, if you look at the chart below which starts from the major dip in mid 2008, you’ll see that the miners can exponentially outperform the the price of gold when coming off of a deep decline.

Ratio of gold to gold miners since mid 2008

The blue line in the chart above represents the miners and the red line represents gold.  You can see that around mid 2011 the gold miners were drastically higher than gold; nearly 120% higher.

The reason that gold has outperformed the miners over the last seven years is because gold had just come off of a major increase seven years ago so the miners were already blown up to a peak. Take a look at the action starting at 2011 in the charts above to get a visual feel for how this same thing happened starting in 2011.

Golds recent decline has really hit the miners extremely hard and they have come exponentially down because both the declining action of gold and the negative market sentiment of the miners have weighed on the miners (see my article on whether gold mining stocks move in relation to gold or market setiment).

This is the cycle.  Gold springs up and the miners jump exponentially higher.  Gold goes down and the miners shoot exponentially lower. We are currently somewhere in a big decline that has brought the miners exponentially downward.  Depending on where you buy, you’ll get very different results.

Thus, based on the above charts, if one wanted to invest in gold or gold related investments and was to ask me which would be a better investment, I would have two answers.  If you were choosing to invest at any random time without previous or current knowledge, I would suggest you invest in Gold as it is more stable over the long haul.

However, today’s current timing presents a major buying opportunity, in that we are currently in a very large decline that is setting up for the miners to exponentially outperform gold as happened from 2008 to 2011.  So if one were to include past and current analysis in to account, I  would suggest that at this current time, one should be purchasing gold miners.

I have developed a proprietary investment technique for stable investing which I’ve developed over my many years of successful investing. Having the knowledge above alone is not enough. You need to implement a stable, intelligent investing technique to get substantial gains and keep from losing money.  I intend to release my technique in a membership section in the future. Please Join my mailing list to be notified when it will be available.

 

Do Gold Stocks move with Gold or the Stock Market?

I recently came across an article that referred to research that, over the long haul, 50% of Gold Miners price moves are based on the price of Gold and the other 50% is based on the stock market.

The article doesn’t go into what it means to move “based on the stock market”, but the author comes to the conclusion that if you are in the Gold miners to get an amplified move on Gold the historical odds are against you.

I though that was a pretty poor conclusion to obtain from that research.

First, of course Gold miners aren’t going to move 100% perfectly in an amplified manner to the movement of Gold.  It seems logical that some portion of the movement in miners is going to be based on the business of mining gold as well as market sentiment of the sector (read my article on how market sentiment affects the gold miners).

I interpret this 50/50 research to help strengthen the argument that now is the time to be getting into the gold miners as both sides are strongly pulling down on the gold miners.  The price of gold is falling, so right now, the miners are less profitable.  Because the price of gold has dropped so much, miners are less profitable and the market sentiment towards mining stocks is incredibly low.

Below is a chart of the ratio of the Junior Miners vs the relative price of Gold (as reflected by the Spider Trust GLD which virtually tracks the price of gold).

Radio of GDXJ to GLD (gold) over the last 3 years

Notice that the ratio of Junior Miners to the price of gold has drastically decreased over the last 3 years.  That means that Gold has drastically outperformed the Miners. Or you could say that Gold’s decline has been amplified in the miners.  If the two move perfect correlation without any amplification the ration would stay the same, and there chart would show a line straight across the graph.

Below is a graph of the ratio of Gold Miners to the Dow Jones Industrial average:

Ration of Gold Miners to the dow jones industrial average over the last 3 years

This graph also shows that the Junior Miners have significantly underperformed the Dow Jones Industrial Average.  Again, if the miners were in perfect correlation with the Industrial Average, the graph would be a straight line across the page.

So there’s a double witching happening.  Both portions of the “50/50” research outcome are working against Gold.  So when the turn around in the price of gold comes, there will be a double amplification in the opposite direction to keep the 50/50 rule in tact.  That will spell monster gains for the Miners as the sentiment will turn around and not only will the lost ground need to be recovered but the euphoria in the opposite direction will be required to compensate for the lost ground over the long term.

 

 

Why I now invest in Exchange Traded Funds (ETFs) over individual stocks

Before I was married, I would invest in individual stocks.  Individual stocks are inherently more riskier than something like an ETF, not only because individual stocks are more vulnerable to larger swings, but there’s always the likelyhood that the individual company could go out of business, causing you to lose your entire investment.

It takes a lot of time to research and individual stock.  Beyond higher level macro picture of evaluating the economy and indivdual sectors, you need to spend time looking at intricate details like the company’s target market, finances, outlook, and management.  Failure to spend time to accurately look at and understand any of the major components that makes a company successful will leave you vulnerable to investing in a company that may go out of business.

Even if you do your diligence, then you are still vulnerable to the illegal espionage that can take a company down.  Management could be mis-reporting or there could be embezzlement.

No matter how well you research a company something could go wrong.  When I was single and didn’t have any dependents, I was more willing to take these risks by investing more of my investment money in individual companies.

Now that I am married and starting a family, both my time and risk tolerance have decreased.  I no longer have the time to obsessively bury myself in balance sheets and research various companies intricate details.  I also can’t risk the possibility of investing a significant portion of my portfolio in an individual company and having the company go out of business.

I now invest primarily in ETFs (Exchange Traded Funds), and I have become more sector focused.  I look for sectors that are getting beaten up for one reason or another.  I look more at the macro picture and have cut out the extra time it takes to investigating the intricate details of a particular company.

ETFs are funds, so there is virtually no chance of losing your entire investment.  Things may get rough and the value may diminish.  A few of the companies within the fund may go out of business, but since each individual company only represent a small portion of the ETF portfolio, the loss of that business won’t erase your investment.    Also, due to the law of averages, in really bad times, a couple companies within the ETF may go out of business, but likely that business will be picked up by other companies within the ETF and those respective stocks will gain in value (especially when the sector picks up), which will mitigate the damage done to your portfolio by the loss of the weaker companies.

I like ETFs over mutual funds because they don’t have “load” fees and usually have lower “expense” costs.  Most ETFs I invest in have an “Expense Ratio” around 0.5%.  Mutual funds tend to have higher management fees of around 1-3%.

When you purchase a mutual fund, the higher expenses go towards paying the fund manger, administrative fees, and advertising fees.  I don’t like paying for a fund manager because there’s so many fund mangers out there that the chance of purchasing a fund that actually does have an exceptional manager that’s worth the fees the person is getting paid is minimal.  To me, mutual funds are for the ignorant.  You are paying someone to sell you something and make you feel good about your investment, though its really no better than lesser managed fund that simply tries to represent a market segment, as mosts ETFs do.

 

 

Why are the values of gold and silver mining stocks going so low?

With the price of gold taking over a 30% drop from its most recent peak in October of 2012 and nearly a 35% drop from its all time high in September of 2011, the precious metal mining sector has been absolutely crushed.

Specifically the large cap Market Vectors Gold Miners Index ETF fund (GDX) has dropped 58% and the small cap Market Vectors Junior Gold Miners ETF (GDXJ) has dropped 65% from their most recent peaks in September of 2012.  They are down substantially more from their all time peaks (65% and 80% respectively).

So why have the miners taken so much more drastic of a plunge than gold itself?  The following is a simplified analysis to help you get started understanding the answer.

Over the last hundred years (or so) we’ve removed all the easier to find gold from the near surface of the earth, and now miners have to do a lot more work, in more remote locations, while using bigger and more powerful equipment to get at harder to access deposits in the earth.  And that work and equipment costs more and more money.

If you add up all the expenses it takes for a company to pull as much gold as they can out of the ground in a year, then divide it by the total weight of that gold they extracted in that year, you get an average cost per weight that it takes for the company mine gold.

If that average price to mine gold is below the current price of gold, the miner obviously loses money when they sell their extracted gold.  If the price they can sell the gold for is greater than their average cost to pull it out of the ground, they obviously make money.

The kicker is that when the price of gold is bigger than than the cost to mine it, every extra amount that the selling price of gold goes up is pure extra profit.

Lets take an example.  Say it costs the mining company $1300/oz to extract the gold and get it ready to sell.  And, say the current price of gold is $1400/oz.  The miner profits $100/oz.

Now say that the cost to mine remains the same at $1300/oz, but the price of gold rises to $1500/oz.   Now the miner profits $200/oz.  So the miner’s profits doubled without them doing anything different.

A company who’s profits double, is (in simple terms) worth twice as much, or will have a 100% increase in value above its price before the profit change.  Whereas in the scenario above, gold only increased in value 7%.  So a 7% increase in gold price, caused a 100% increase in the value of the average company mining it.

From the example above, you should be able to see that relatively small changes in the price of gold can have significant impacts on the profits, and therefore, the trading prices of gold mining companies.

Currently, depending on what source you find and decide to believe, the price of gold is near or below what it costs for for an average mining company to mine it.  So the mining companies are, on average, losing money.

If a company loses money for more than a short period of time, it is likely to go out of business.  A company that is likely going to go out of business is worth very little and nobody wants to buy it.

So with the price of gold going down, and the miners seemingly losing money, it appears as though miner stocks are not worth purchasing, and their trading prices have plummeted to those apparent levels.

Beyond the basic examples above, it is also helpful to know that pricing gets taken to extremes as the sum of people trading in the market make up a virtual mob that is actually quite emotional. When things are going in a certain direction, the mob becomes increasingly focused in that unilateral direction and pays less and less attention to the extremeness of the trend.

It starts with the basic economics of supply and demand. Because just about everyone is doing the same thing, there is usually not enough of whatever the mob is buying (supply) for the amount of people in the mob trying to buy it (demand).  Therefore the price of that thing goes up to balance the limited supply and growing demand.

In the opposite direction, as is happening with the miners, there is too much supply because everyone is selling, creating an oversupply, and the price therefore goes down.

On top of this, add in the effect that people psychologically see that a trend is happening and expect that it will go on forever and you get an extreme overall sentiment in the mob.  People see that everyone is doing something, and expect that because everyone is doing it that same thing it will go on forever.  So it becomes seemingly obvious that one should join the crowd.

We saw this with the housing bubble.  People bought houses because they prices were going up so drastically.  If you didn’t by a house “now”, you’d never be able to own one, because the prices just kept going up and up.  Loans were easy and cheap so people bought as much house as they could afford the payments on, expecting that if anything went wrong, they could just sell the house for a profit as everyone had heard about “those people” that bought a house and sold it a few months later for a 50% profit.  This caused prices to surge.

Of course the reverse also turned out to be true.  When the short term interest rates on those easy loans started adjusting up, people could no longer afford the payments on their homes and suddenly everyone started having to sell their houses.  With virtually everyone selling and nobody buying, the prices plummeted.  Many homeowners, even though they could afford their payments, walked away from their houses, because there was “no way it would ever get its value back”.

Bringing this thought pattern back to gold and the gold miners, we currently have a situation where the price of gold and the miners are going down.  So we have a trend that is snowballing downward.  The mob is becoming unilaterally focused on the downward trend.  People believe that because the price of gold is going down, it is going to continue going down forever, and therefore the miners are never going to be profitable again.  So more and more investors are joining in on selling and “cutting their losses”.  So the miners seem to have virtually no value and their stocks are trading at such a value.

Now… there’s one more effect I need to mention that adds to exponentially increase the already exponential effect of the mob mentality.  And that is the wonderful and exciting ability for market participants in the mob to “short” sell a stock.  This means that a company (stock) can be sold by a person that doesn’t even own it!

What?!!

Yes, that’s right! And you can even short sell gold!  Yes, there are ways to sell gold that you don’t even yet own!

As this article is already getting long, we can get into the details of “short” selling stock and gold in another article, but for now you just need to know that people try to profit on the downtrend of a stock or commodities price.  They “sell” a stock they don’t yet own, and if the price goes down, they can make money.

This (somewhat virtual) selling makes it look like the mob is more focused on selling than it really is. This amplification effect causes the a fore mentioned psychological reasons to sell to be exponentially stronger, as the situation looks like even more of the mob is aligned in one selling direction, causing the trend to look even more negative.  A trend develops and the psychological effect to join in and sell before the value becomes worthless sets in.

So the miners are currently really getting hit hard by all these effects and their prices have plummeted.

So is it time to invest in the mining sector?

I have been buying and I believe it is a great time to start purchasing down in a proprietary pyramid fashion that I’ve developed over my years of successful investing, and I’ll discuss what that means and give deeper reasoning why I believe its time to purchase the mining sector in another article.

Join my mailing list to be notified when it comes out!

UPDATE:  See my article on ETFs creating shares for short positions for yet another reason why miner ETF prices get overly extended on the down (and up) side.