Finance Your Liberty Rotating Header Image

investing

Hurry Up, Damnit! I Need to Get to Work! Fast Food Investing

Thought: As people are ever-increasingly fearing for their jobs in the US, it strikes me that those still hanging on are now doing much more work (to take up the slack from the downsized positions), and spending more time in the office in general. Fear of getting the axe would do that to you, I’m told. (I don’t actually know. I’ve never really worked a “real job”.)

If they’re spending more time in the office or bringing their work home with them, that means less time for everything else… like cooking. I would expect that in tough times, cheap, fast food becomes more and more popular. Which makes fast food probably a sector to invest in that would outpace the market. I don’t think the sector would be a world-beating sort of play, but it should deliver good steady growth for some time to come. If everyone wants to stay on the Big Mac Express, no reason why I shouldn’t be getting a piece of the fares.

Nuclear Power… back in fashion already?

http://uraniuminvestingnews.com/10542/uranium-deal-china-increase-canada-exports-cameco-athabasca-basin-saskatchewan-australia-kazakhstan-us.html

Apparently the Canadian prime minister has decided his hands dirty. He was off in China negotiating a deal to increase the amount of uranium exports to China. Now obviously nuclear power has been getting a bad reputation as late, with many small European countries claiming that they will be reducing the nuclear component of their energy portfolio and some eliminating it altogether however most of these countries were very small on the nuclear world stage to begin with. China on the other hand is quite the opposite.

Judging by the number  of nuclear power plants now under construction in China, which is more than the amount currently operational there’ll be quite an increase in demand for Canadian uranium in China in the years to come.  Plus, given the beating that nuclear power is taken of late in the public relations department, this sector looks like it could be a sound long-term investment.

 

Quick note: Although the new sources obviously biased (which can easily be spotted by the claim of “unbiased, independent news”) the source can easily be verified by any number of articles in the business press and as soon as the Prime Minister of Canada is mentioned as lead negotiator that’s just a story that’s too big to lie about.

An Idea for Cash: Get Outta Town?

No matter how well you have most of your money working for you, you should always have some money sitting around for day-to-day expenses.  Not only that, but you really should have an emergency fund that holds at least three months (preferably six) of living expenses in case of, well, and emergency,   Job security isn’t what it used to be.  In fact, for many of us, job security isn’t.

 

But the question is, what do we do with that cash?  Should we just leave it sitting in a chequing account in a currency run by a government severely below the curve in budget and trade deficits collecting next to no or no interest?

Well, we could, and since we’re not talking about our entire nest egg, (hopefully) it’s not that big of a deal if we do.  However, I have a low-risk, low-reward idea that will add a few percentage points of return onto the money you have just sitting around.

Remember that the main factor in inflation by the creation of money.  If country A produces money faster than country B, then one unit of currency A will generally go down in value relative to currency B.  There are other factors of course, but this is the biggest.

Why don’t we want to be in USD?  Because while almost every country in the world runs a budget deficit, the US runs the largest deficit in the world on an absolute (number of dollars) basis, and is always right near the top when it comes to deficit per capita.  Which means they’re printing up money (causing inflation to shrink the value of their debt) at a faster rate than pretty much anyone else to make up for the shortfall.  Which also means that there are very few currencies that don’t increase against the dollar.

Let’s take the value of the USD vs another troubled currency, the Euro.  It’s no secret that the Euro has seen it’s share of difficulty lately.  Greece has defaulted, Ireland is on the verge of doing so, Spain and Italy are having to make drastic cuts in their standards of living.  But from 9/11 when America single-handedly financed two wars simultaneously, to 2008, when the “Euro Crisis” first came into the public eye, it was a march straight up for the Euro.  And even since then the Euro, one of the worlds most troubled currencies, is managing to keep it’s ground against the dollar.

Now what happens if we look at a currency that’s very stable?  Like the Swiss Franc? Observe.  Planes hit buildings, America goes to war again.  (and again, and again, it seems), and the CHF (franc) takes off.  In fact, the value of the franc has very nearly doubled since that fateful day.

Canada’s has done almost as well.  Australia has more than doubled.  Starting to see a pattern here?  It’s not everyone else that’s going up.  These countries all run deficits as well.  It’s America’s currency that’s going down.

In fact, the problem covers a lot more than the cash sitting in your bank account.  But that’s a start for now.

 

But if you go to the bank and open a foreign currency account, you may not be able to open an account in the currency you want, and you’ll definitely take a big hit (often more than 2%) on exchanging your money from one currency to another.

One solution you can use is to invest your money into a foreign currency ETF or open a forex trading account.  I’m not suggesting you get into active forex trading, as 90% of the people that get into that game come out losers.  But you can get an account, shift your savings over to it, and put it into a different currency far cheaper than you could at your local bank.   Using an ETF exposes you to a management fee (or MER), but you can  move your money there much more easily than opening a forex account.

Also, you can expose yourself to short-term bonds from other governments.  While the Canadian and Australian economies are on pretty much the same track (straight up, because they rely on natural resources that have to be harvested locally rather than industries whose labor can be outsourced), the US and Canadian gov’t short term bonds pay less than a percent, while Australia’s pays upwards of 4%.  Try getting that in a Citibank savings account.

Want to Invest Smart? Keep it Simple

It doesn’t take an MBA to reach your financial goals. We show you how you can make money the easy way.
Who doesn’t want to be the next Warren Buffett? You could start by clearing  your schedule, buying some highlighters, burying your nose in annual reports and picking up the 800-page volume Security Analysis. Of course, that’s just for starters. Want to be simply a great investor? Then learn to invest simply.

The real secret to successful investing is that it is not actually all that complicated. Most of the jargon and hype doesn’t matter. You don’t really need to know what the difference is between a credit card and a credit-default swap, or between a convertible bond and a convertible sofa, in order to manage your own money. Common sense can take you further than an MBA.

Many investors sabotage their own results when they start trying to get fancy. “When investors start tinkering, they tend to second guess and buy things after they’ve gone up or sell things after they’ve  already gone down, which is a sloppy way to manage a portfolio,” says David Swensen, manager of Yale University’s $19.4 billion endowment and the author of Unconventional Success: A Fundamental Approach to Personal Investment.  Mutual fund investors, for example, have cost themselves an average of two percentage points per year over the last ten years by buying high and selling low, according to Morningstar fund tracker. Maybe we could mend our ways if we were able to see more clearly the evidence of how much our follies cost. But the more complex the investing , the more cluttered the accounts, and it becomes difficult to tell what your actual return is when your portfolio is something of a mess..

One of the few things that an investor can predict up front are costs. “There is only one thing that I am absolutely sure of about investing: The lower the fees that I pay to some purveyor of an investment service, the more there will be for me,” says Burton Malkiel, professor of economics at Princeton University, author of A Random Walk Down Wall Street.

Consider this, for example. Let’s suppose you’re preparing for your retirement by saving $10,000 a year for the next three decades. If we assume that your portfolio averages an annual return of 8% before fees, your retirement nest egg would be a bit more than $1 million – if your costs totaled only 1% a year. But if you had to pay 2% a year, you’d end up with $838,000. So you see, paying just one percentage point less per year translates into 21% more money at retirement time.

Income: The Final Nail in the Coffin For Inflation

Last week we covered how we can use debt to fight inflation, not only by requiring less money to secure possession of an appreciating (at least in the eyes of inflation) asset, but by shrinking the debt that we take out to secure it.  While that shrinkage usually does not make up entirely for the interest payment, it usually will take a rather large chunk out of it, resulting in a real interest rate (interest rate minus inflation rate) of 1-3%.    That combined with the “appreciation” of the asset (the nominal value increasing not because the asset is becoming more valuable, but because the dollar is weakening), leads to a small gain in real terms (after inflation is factored in).

But there is one last thing that you can do that will take your returns from gaining slightly against inflation to shooting it through the roof.

Income.   Income doesn’t just kinda-sorta keep up with inflation like most asset’s value does.  It keeps up with it absolutely.   Have your electricity and water bills stayed constant over say, the last 5 years?  Hell no!  Have restaurant prices?  Get outta town!  Has the price you’ve paid at the gas pump stayed constant?  Girlfriend, please! (OK, I’ll stop now.)

If you find yourself an asset that produces income that keeps pace with inflation, while simultaneously “appreciating” (see above) over time, you’ve got yourself a winner!   You couple that with the power of inflation to shrink debt, and your investment is flying!

For example, say you take a loan at 4% interest.   You put down 25% of the value as a down payment, using the loan for the other 75%.

While your last payment will be the same number as the payment is worth today, but that number of dollars will be worth much, much less by then. If the average rate of inflation over the life of the loan works out to be 3%, you’re going to have paid roughly 1% more than you took out in terms of today’s 2018 dollars.  At 4%, you break even, at 5% you’ll have paid less than the value of the loan and so on.      Ditto for how much your investment has appreciated.  If the value of your asset has gone up 5% in one year, but inflation was 4%, you made real value, if it only went up 3%, you lost it.   Depending on what kind of assets you choose, we’re hovering around breakeven territory.

But now… let’s add income from say, a rental property.  Let’s be conservative and say that it generates 2% of the value of the building after expenses and the mortgage service.   Since you’ve only put 25% down, that’s actually an 8% return cash-on-cash.    And here’s the real beauty…. the value of your rents go up every year with inflation, but the debt payment doesn’t.   That 8%?  That’s year one.  By the end of a 20-30 year loan, your debt payment will be half to one third the size relative to the rents.  Your yearly return on that down payment will be much, much higher.  

You’ve borrowed money from the bank which you’ve paid back at a tiny real interest rate to make a great return on investment.  And if inflation spikes at some point in that 20-30 years because, say, our government has debt payments that are way too large to service any other way, you may even be paying a negative real interest rate.  To make money!

Everybody dance now!