This posting is the last in the mentor series. Today no. 3
Once I began using other people's money and taking chances there became a point where I decided it was time to find safe places to put accumulated capital that would allow it to continue to grow and keep up with inflation. Everyone reaches a point in their financial life where they must make a decision that declining years and lessened skill sets mean your ability to continue earning compensation via work or a career will be lower or even stop one day. One has 40, maybe 45 years to accumulate enough money before you get old enough your working skills become unmarketable. If you do not consider this fact in your investing you are a fool. So as you move up in years in life some of the capital you accumulate needs to be put in safe yielding places.
Safe yielding investments are hard to come by if you consider any capital and yield is subject to the inflation eroded value. All savings such as passbook savings and CD's never keep up with inflation. Banks understand inflation and know that they can not make profit without adjusting for inflation and therefore anything they pay you in savings interest will be less than inflation. Another option for inflation protection are common stocks. Common stocks relate to the business environment and can be raised or lowered accordingly. The lowered part is what worries me when it comes to safe yields. One can also invest in corporate bonds or preferred stocks, but again they are subject to the business environment and you can lose your principal. US government bonds are another choice, but the interest rates here are low and almost always subject to federal taxes and generally a low payout . Lastly one has to consider the erosive part taxation does to yield as a third or so of any yield is gone when you pay tax. So what's a investor to do with money they want to put your money in salt.
Enter my next mentor. Over three decades ago my father introduced me to someone who sold municipal bonds as a specialty. One can find investment grade muni bonds that not only pay good current interest of 5% plus, but if based in the state you live is free from both state and federal income tax. So a 5% coupon rate equates to around 7.5% taxable rate for most people in a 25% federal and 7% state tax rate. 7.5% bond interest not only covers most inflation situation, but makes you some money too. Yes, I know inflation can be high at some times, but you can alleviate that problem with just recycling your muni bond interest into new bonds at the prevailing bond rates. The most important key here is to buy individual bonds that you keep until maturity so as to avoid any loss of capital and to reinvest your interest. Today I have bonds left over from higher inflation periods that pay 7% coupons, almost 10% taxable rates.
Muni bonds are generally issued by US states and rarely, very rarely, default. So your principal is safe and your interest is regular. My mentor not only taught me over the years of using his services much of what I know about muni bonds, he taught me how to buy them at a discount. In late 2007, when most investors were running for the hills and willing to sell good muni bonds for 65 cents on the dollar I was buying up as much of them as I could find. Today they are safe yielding investment that will pay tax free interest for years to come. Bonds bought at 65 cents on the dollar paying 5% is nice, I will let you do the figures there.
So I can only say thanks and more thanks to my now more three decades muni bond mentor and friend Tom Pace. Tom is alive and I visit him about three times a year now to have a nice lunch and to thank him for teaching me how to salt money away for life
Thursday, April 28, 2011
Tuesday, April 26, 2011
Take A Chance
This is my second posting in the mentor series, today no. 2
Anyone who knows me knows from almost the day I started working my goal was to retire early. Frankly I was very vocal about this desire and constantly looked for ways to make and then save money. As I ended my first decade of work in 1984 I considered my current saving situation and came to the realization that no matter how much money I could not spend and save there was no way I could save enough money to ever retire period on the savings, certainly not retire early. Even at what was then 5% plus CD rates capital could not be squirreled away in quantities to make retirement possible.
I thought other people do it so why can't I? I did notice the few that did retire early do it with a pension they can only be viewed as a modest pension. They also had to depend on someone else's benevolence, usually the government, to continue being retired. I was too much of an independent soul to rely on the pension and gold watch scenario. But again other people do retire early and do it with plenty of accumulated capital. The question was how? How turned out to be they "took a chance". I came upon this realization when I attended a class at the local community college where a personal financial class was being taught. The class info was interesting, but the ultimate advantage I got from the class was a quarter century friendship with the stock broker who taught the class. The broker and I became fast friends as both of us had mutual interests and most importantly the broker, being about a decade older, had taken chances in his life to pursue dreams. We had lunch in early 1985 and when I asked him how he had started his success scenario he told me in plain English "take a chance". What he meant was for me to get my money out of bank CD's and take a calculated well reasoned chance with my capital. That was how other people make real money and how they, if they wanted to, retire early and comfortable.
He opined that everyone everyday takes a chance. If you cross the street you take a chance that you might not see the bus that runs you over. You take a chance when you go drive on the road, knowing your chances are rather high you will be one of 50000 or so who are killed annually. If you do take a chance and fail you you are only as well off as you were all along. Fear of failure is what keeps most people from achievement. Nothing ventured, nothing gained.
So over the next few decades that is what I did, take reasoned chances. As time went on I became better at the decision making either by experience at success or more importantly avoiding second mistakes. As the old saying goes idiocy is doing the same thing over and over and expecting different results. Therefore making a mistake once is the way to success. But first taking a chance is the only way to start that pattern.
My friend, who taught me this, was Andy Augustine. Unfortunately today Andy has passed on. But I carry on taking chances. He would be proud.
Anyone who knows me knows from almost the day I started working my goal was to retire early. Frankly I was very vocal about this desire and constantly looked for ways to make and then save money. As I ended my first decade of work in 1984 I considered my current saving situation and came to the realization that no matter how much money I could not spend and save there was no way I could save enough money to ever retire period on the savings, certainly not retire early. Even at what was then 5% plus CD rates capital could not be squirreled away in quantities to make retirement possible.
I thought other people do it so why can't I? I did notice the few that did retire early do it with a pension they can only be viewed as a modest pension. They also had to depend on someone else's benevolence, usually the government, to continue being retired. I was too much of an independent soul to rely on the pension and gold watch scenario. But again other people do retire early and do it with plenty of accumulated capital. The question was how? How turned out to be they "took a chance". I came upon this realization when I attended a class at the local community college where a personal financial class was being taught. The class info was interesting, but the ultimate advantage I got from the class was a quarter century friendship with the stock broker who taught the class. The broker and I became fast friends as both of us had mutual interests and most importantly the broker, being about a decade older, had taken chances in his life to pursue dreams. We had lunch in early 1985 and when I asked him how he had started his success scenario he told me in plain English "take a chance". What he meant was for me to get my money out of bank CD's and take a calculated well reasoned chance with my capital. That was how other people make real money and how they, if they wanted to, retire early and comfortable.
He opined that everyone everyday takes a chance. If you cross the street you take a chance that you might not see the bus that runs you over. You take a chance when you go drive on the road, knowing your chances are rather high you will be one of 50000 or so who are killed annually. If you do take a chance and fail you you are only as well off as you were all along. Fear of failure is what keeps most people from achievement. Nothing ventured, nothing gained.
So over the next few decades that is what I did, take reasoned chances. As time went on I became better at the decision making either by experience at success or more importantly avoiding second mistakes. As the old saying goes idiocy is doing the same thing over and over and expecting different results. Therefore making a mistake once is the way to success. But first taking a chance is the only way to start that pattern.
My friend, who taught me this, was Andy Augustine. Unfortunately today Andy has passed on. But I carry on taking chances. He would be proud.
Monday, April 25, 2011
Using Other People's Money. Mentor Series No. 1
This posting is one of three postings I will do on mentors who helped me become a successful trader, business person, and investor. Today mentor series no. 1. Maybe they can help you too.
Back when I was a young man and wanting to succeed in this world one thing I learned early on was to listen, and listen carefully, to those who had been successful. In 1979, still in my twenties, I picked up some advice from someone who ran a business at the time I never forgot. The business was a auto dealer owned by two friends who I was selling advertising to at the time. Over the years I had done business with many auto dealers who had done well, but only a few who had done well by starting their business from scratch. I wondered at the time how did these young entrepreneurs get started and what was their secret. The vast majority of us are not born with wealth so how you are to gain wealth if you are not born that way? So being inquisitive I walked into my auto friend's office one day and asked him that very question. His advice was not only given in a what is now called a sound bite that I could keep over the years, but he went on to explain in about 10 minutes his reasoning. His wise counsel at that time has helped me many times the last three plus decades.
His advice was "use other people's money". More precisely when you do not have enough capital to do what you want to do in business you use other people's money by borrowing it, making your profit, and paying it back. I know the first thing you ask is just how do you get someone to let you borrow their money? Well you earn that right, by convincing the people you are borrowing from you are good for re-payment of principal and payment of interest on the capital. You can do that either by having an excellent idea that other people believe will make money or having a consistent record of having used other people's money and repaying with interest.
Now I have never been one for original ideas, so no one will likely ever let me borrow from them on that approach. However I have been an excellent risk and proven many times that I can borrow, pay interest, and pay back other people's money. Over time I have expanded that trust to the point I can borrow seven figure amounts now with just my signature. Using other people's money and paying interest for that use means you must not only make enough profit to pay the interest, but also enough to retire the debt and make yourself some money on the borrowed money as well. Today my main lenders allow me to borrow at 3.75% and 4.75% interest rates. So if I borrow money for my hedge fund, and make my lowest profit during the last three years of 15% or so, I am making 10% plus on the borrowed money. That is enough to pay back the principal, pay the interest, and still have a tidy profit.
The decision now is no longer how much can I borrow, but how much risk do I want to take to make more profit. Like an other entrepreneur I make decisions based on market situation, competitive advantage, and unfortunately political considerations. So the lesson here is if you do not have capital to pursue your business and dreams find a way to use other people's money. My mentor, Tommy Baker, many years ago gave me that nugget of wisdom that allowed me the opportunity to pursue my dreams.
Tommy Baker is today a successful luxury auto dealer in the southeast. I expect still using other people's money.
Back when I was a young man and wanting to succeed in this world one thing I learned early on was to listen, and listen carefully, to those who had been successful. In 1979, still in my twenties, I picked up some advice from someone who ran a business at the time I never forgot. The business was a auto dealer owned by two friends who I was selling advertising to at the time. Over the years I had done business with many auto dealers who had done well, but only a few who had done well by starting their business from scratch. I wondered at the time how did these young entrepreneurs get started and what was their secret. The vast majority of us are not born with wealth so how you are to gain wealth if you are not born that way? So being inquisitive I walked into my auto friend's office one day and asked him that very question. His advice was not only given in a what is now called a sound bite that I could keep over the years, but he went on to explain in about 10 minutes his reasoning. His wise counsel at that time has helped me many times the last three plus decades.
His advice was "use other people's money". More precisely when you do not have enough capital to do what you want to do in business you use other people's money by borrowing it, making your profit, and paying it back. I know the first thing you ask is just how do you get someone to let you borrow their money? Well you earn that right, by convincing the people you are borrowing from you are good for re-payment of principal and payment of interest on the capital. You can do that either by having an excellent idea that other people believe will make money or having a consistent record of having used other people's money and repaying with interest.
Now I have never been one for original ideas, so no one will likely ever let me borrow from them on that approach. However I have been an excellent risk and proven many times that I can borrow, pay interest, and pay back other people's money. Over time I have expanded that trust to the point I can borrow seven figure amounts now with just my signature. Using other people's money and paying interest for that use means you must not only make enough profit to pay the interest, but also enough to retire the debt and make yourself some money on the borrowed money as well. Today my main lenders allow me to borrow at 3.75% and 4.75% interest rates. So if I borrow money for my hedge fund, and make my lowest profit during the last three years of 15% or so, I am making 10% plus on the borrowed money. That is enough to pay back the principal, pay the interest, and still have a tidy profit.
The decision now is no longer how much can I borrow, but how much risk do I want to take to make more profit. Like an other entrepreneur I make decisions based on market situation, competitive advantage, and unfortunately political considerations. So the lesson here is if you do not have capital to pursue your business and dreams find a way to use other people's money. My mentor, Tommy Baker, many years ago gave me that nugget of wisdom that allowed me the opportunity to pursue my dreams.
Tommy Baker is today a successful luxury auto dealer in the southeast. I expect still using other people's money.
Wednesday, April 20, 2011
Several Current Trading Mistakes
Despite my success at picking stocks and selling options I do make mistakes. Those errors have become much less frequent over the years, but they still do happen and will continue as long as I trade. However I consider mistakes that cost less than about $3000 as just a cost of doing business as a trader. You take your medicine and move on, these errors are already priced into my trading model. Below are my 2011 stock buys that resulted from options trades and my plans going forward.
WIN...Windstream is a great company in my opinion. They are one of handful of legacy wire line telephone operators left in the country. The areas they serve have very little wireless penetration and that makes the stock a stable performer that will not move much in price, but pay you a handsome currently 8% dividend for years to come. However I sold a put option several months ago that did not take into account the possibility of a drop in price as traders moved from defensive stocks like Windstream to securities with more risk as market dynamics improved. Thus I currently have $14 per share in a stock selling currently at around $12.45, at 4400 shares just under $6600 in the hole on this one. Now I am getting a $1100 per quarter dividend and a monthly call option premium of around $250, so not all is lost. However I have decided with the May option expiration I will begin to be aggressive with my options and move out of this stock in attempt to cut my loss to $4400. Once I am called out of this stock I will once the wash sale rule has expired take another lower price position in this stock.
SCCO.. Southern Copper is another excellent company. It mines copper in several countries and pays a 6.5% dividend. SCCO is a volatile stock and can go up and down $3 to $5 per share in a week. Copper is absolutely necessary to the wired world and will always be needed. The emergence of China and India in the developed world and their need for copper makes this stock a roller coaster, but great for option traders. I currently am $2700 down in value at a purchase price of $40. However I am not concerned about this trade as it will be back at or above the purchase price when the sentiment about the economy improves as it always has done. I continue to make serious option money here. I bought SCCO too high, but that does not make it a bad trading vehicle.
FTR..Another legacy wire line telephone company. Similar trading mistake here as noted in Windstream above. I continue to get a nice dividend and option income from FTR. I am down about $4100 in this security and frankly do not have the available options opportunities to move out of this security. There is the chance I might clear this holding with a sizable loss too. I will sell before year end if nothing happens and take the tax loss. Trading in this stock was a mistake due to the lack of trading range so once I am out of FTR will not take a future position. If one is looking for dividend and a stable price for income this security is still a solid holding.
NYB...I am not currently carrying a loss in this stock. But their results this past week have caused me concern about their ability to hold their present over 6% dividend. I do have a put option on this stock that expires in May. At that time I will be dropping this security from my trading if I am not put on the stock. If put I will work my way out of this holding as soon as possible. It has now become clear that the recently passed Obama financial regulation bill has made investments in small banks not smart. The big banks can spread the additional costs over a larger footprint and eventually pass on those costs to customers.
WIN...Windstream is a great company in my opinion. They are one of handful of legacy wire line telephone operators left in the country. The areas they serve have very little wireless penetration and that makes the stock a stable performer that will not move much in price, but pay you a handsome currently 8% dividend for years to come. However I sold a put option several months ago that did not take into account the possibility of a drop in price as traders moved from defensive stocks like Windstream to securities with more risk as market dynamics improved. Thus I currently have $14 per share in a stock selling currently at around $12.45, at 4400 shares just under $6600 in the hole on this one. Now I am getting a $1100 per quarter dividend and a monthly call option premium of around $250, so not all is lost. However I have decided with the May option expiration I will begin to be aggressive with my options and move out of this stock in attempt to cut my loss to $4400. Once I am called out of this stock I will once the wash sale rule has expired take another lower price position in this stock.
SCCO.. Southern Copper is another excellent company. It mines copper in several countries and pays a 6.5% dividend. SCCO is a volatile stock and can go up and down $3 to $5 per share in a week. Copper is absolutely necessary to the wired world and will always be needed. The emergence of China and India in the developed world and their need for copper makes this stock a roller coaster, but great for option traders. I currently am $2700 down in value at a purchase price of $40. However I am not concerned about this trade as it will be back at or above the purchase price when the sentiment about the economy improves as it always has done. I continue to make serious option money here. I bought SCCO too high, but that does not make it a bad trading vehicle.
FTR..Another legacy wire line telephone company. Similar trading mistake here as noted in Windstream above. I continue to get a nice dividend and option income from FTR. I am down about $4100 in this security and frankly do not have the available options opportunities to move out of this security. There is the chance I might clear this holding with a sizable loss too. I will sell before year end if nothing happens and take the tax loss. Trading in this stock was a mistake due to the lack of trading range so once I am out of FTR will not take a future position. If one is looking for dividend and a stable price for income this security is still a solid holding.
NYB...I am not currently carrying a loss in this stock. But their results this past week have caused me concern about their ability to hold their present over 6% dividend. I do have a put option on this stock that expires in May. At that time I will be dropping this security from my trading if I am not put on the stock. If put I will work my way out of this holding as soon as possible. It has now become clear that the recently passed Obama financial regulation bill has made investments in small banks not smart. The big banks can spread the additional costs over a larger footprint and eventually pass on those costs to customers.
Tuesday, April 19, 2011
Rules for being a Good Salesperson
My files have a wealth of information built up over three decades of sales management and employing people. From time to time I will use the Small Town Investor blog to disseminate that info in case someone has interest. Today is a list of rules for salespeople that for some might seen obvious, but frankly few salespeople apply. Management, is a practice like medicine or law, and therefore a contined learning cycle with errors of judgement and improvement of decision making as one grows more experienced. I made numerous hiring mistakes early on and over time got much better at hiring staff.
Sales, contrary to what others might opine is an honorable profession, and until something is sold no one else has a job. I learned early on most salespeople are born, it is generally not a learned exercise. The two traits most salespeople have are ego drive and empathy. Ego drive to succeed and overcome obstacles and empathy to care, really care, about your customer. One can learn skills, but if you do not arrive at the job with ego and empathy you likely will never be a success at sales.
Most of my former employees will recognize this list as I have passed it out to every salesperson I have hired since 1986. I call it "Building a Opportunity Culture." Because being a salesperson offers you the opportunity to make compensation beyond normal pay. A good manager builds an Opportunity Culture where salespeople not only survive, but thrive. Part of that building is getting rid of staff not suitable for sales and hiring quality staff. Your customers deserve nothing less.
1. Show concern for your customer by giving first rate service. Service means handling your customers payment to you for a product as if it was your money. Actually some of it is. Checking to make sure the customer receives what they paid for and solving problems past the original sale show appreciation and concern for the customer. Appreciation and concern build customer loyalty past any price.
2. Act to make sales. Go see prospective customers, bring them ideas that might help build your customers business. Never, never allow night to come without returning calls, e-mails, or your customers efforts at contacting you. Act when problems arise and alert your customer even when they might not be aware, especially before they contact you.
3. Be organized in your sales approach. List in writing who you want to sell and what you believe the customer needs. Prepare in advance your time with the customer. Their time is valuable and they will appreciate your wanting not to waste their time. Do not be caught using the phone, e-mail, and such to contact your customer regularly. Nothing replaces personal face to face visits as often as can be arranged.
4. Be persistent in reaching your sales goals. Do not take a "no" for an answer the first time. If you have done your research and really believe your product can help your prospect assume they do not understand that your product is an investment and not an expense. Take time to understand THEIR business so as to better address the customer. Address their concerns over a period of time if needed so as to make the sale. If nothing else go see them and ask "how is business" every time you see them.
5. Make yourself more valuable by taking on new responsibilities and becoming cross-trained at your employment. Being more valuable enhances your career prospects and most importantly makes you more confident.
6. Do all your work with integrity, be in your co-workers or customers. Tell the truth, accept blame when it is yours, and have accountability. Nothing improves your self worth like knowing you have integrity.
7. Fully understand your areas of responsibility and the product you are selling. Use that knowledge to create sales opportunities that fills your customer's needs.
8. Be result oriented. Do not just go through the motions of selling and say I have done all I can do to sell. Our goals are made only when we sell the most product the most times to a customer, not when we have made the most commission.
9. Create long term relationships. Do not sell for "sales" sake. Make sure your product is satisfying your customer's needs. In that way they will remain a customer and contribute to your sales base indefinitely.
10. Be enthusiastic. Want to make money doing sales and be excited at the prospect of doing so. Set a goal and go for it.
Sales, contrary to what others might opine is an honorable profession, and until something is sold no one else has a job. I learned early on most salespeople are born, it is generally not a learned exercise. The two traits most salespeople have are ego drive and empathy. Ego drive to succeed and overcome obstacles and empathy to care, really care, about your customer. One can learn skills, but if you do not arrive at the job with ego and empathy you likely will never be a success at sales.
Most of my former employees will recognize this list as I have passed it out to every salesperson I have hired since 1986. I call it "Building a Opportunity Culture." Because being a salesperson offers you the opportunity to make compensation beyond normal pay. A good manager builds an Opportunity Culture where salespeople not only survive, but thrive. Part of that building is getting rid of staff not suitable for sales and hiring quality staff. Your customers deserve nothing less.
1. Show concern for your customer by giving first rate service. Service means handling your customers payment to you for a product as if it was your money. Actually some of it is. Checking to make sure the customer receives what they paid for and solving problems past the original sale show appreciation and concern for the customer. Appreciation and concern build customer loyalty past any price.
2. Act to make sales. Go see prospective customers, bring them ideas that might help build your customers business. Never, never allow night to come without returning calls, e-mails, or your customers efforts at contacting you. Act when problems arise and alert your customer even when they might not be aware, especially before they contact you.
3. Be organized in your sales approach. List in writing who you want to sell and what you believe the customer needs. Prepare in advance your time with the customer. Their time is valuable and they will appreciate your wanting not to waste their time. Do not be caught using the phone, e-mail, and such to contact your customer regularly. Nothing replaces personal face to face visits as often as can be arranged.
4. Be persistent in reaching your sales goals. Do not take a "no" for an answer the first time. If you have done your research and really believe your product can help your prospect assume they do not understand that your product is an investment and not an expense. Take time to understand THEIR business so as to better address the customer. Address their concerns over a period of time if needed so as to make the sale. If nothing else go see them and ask "how is business" every time you see them.
5. Make yourself more valuable by taking on new responsibilities and becoming cross-trained at your employment. Being more valuable enhances your career prospects and most importantly makes you more confident.
6. Do all your work with integrity, be in your co-workers or customers. Tell the truth, accept blame when it is yours, and have accountability. Nothing improves your self worth like knowing you have integrity.
7. Fully understand your areas of responsibility and the product you are selling. Use that knowledge to create sales opportunities that fills your customer's needs.
8. Be result oriented. Do not just go through the motions of selling and say I have done all I can do to sell. Our goals are made only when we sell the most product the most times to a customer, not when we have made the most commission.
9. Create long term relationships. Do not sell for "sales" sake. Make sure your product is satisfying your customer's needs. In that way they will remain a customer and contribute to your sales base indefinitely.
10. Be enthusiastic. Want to make money doing sales and be excited at the prospect of doing so. Set a goal and go for it.
Sunday, April 17, 2011
Profits over Politics.
Anyone who knows me likely knows my opinions on the issues of the day. But rest assured, as I mentioned when I started this blog, I will never place politics over profits. Currently there is one industry where one can make some serious money by playing the political angle. I noted this in a posting earlier this week when I posted some changes in my holdings and that a new holding would become on Monday April 18 my largest position.
The oil industry is on the receiving end of punitive tax and fee treatment, not only in the US, but lately in the United Kingdom. The UK raised the oil industry supplementary charge from 20% to 32% last month. That is on top of the already sizable 26% corporate tax , so that means a combined rate of about 58% on oil companies. Makes me wonder why any oil company would base operations in the UK. Maybe that is why the oil recovery rate in the North Sea is dropping quickly.
In the US we continue to see what is for all intents and purposes the Obama administration led shutdown in Gulf of Mexico oil drilling and not only does that limit current and future supply, but places thousands of workers out of jobs. Add in that many drillers are taking their deep sea drilling platforms to other more friendly areas of the world. Just last month President Obama assured Brazil that oil pumped from their deep sea discoveries would be welcomed in the US. Makes no sense, but that adds to your profit opportunities.
The new discoveries of oil in North Dakota and the huge and growing oil finds in Canada can not get to refineries and into use in the US market since the Obama administration refuses to allow a pipeline to be build from the current terminal in Oklahoma to Texas and Louisiana where refineries are located. Again makes no sense, new pipelines add jobs and help keep down oil prices, but adds to your profit opportunities.
All of these actions and the punitive taxes in the United Kingdom and threatened punitive tax in the US just pushes up prices for current and long term contracts for oil. The unrest in the Middle East also adds a premium on the price of oil.
Monetary policy in the US, lots of deficit spending by the current administration and uncontrolled printing of money by the Federal Reserve also adds a premium to oil prices. Deficit spending puts money in the pockets of many people who go out and buy gas . The continue printing of money inflates the value of oil on the market as more dollars chase limited supply. Oil suppliers across the globe see the dollar declining in value and thus keep oil prices high and pushing higher to earn the same value for more dollars.
One more point here is President Obama has stated that he wants gas at the pump prices to go up. He believes that would encourage less consumption, but that unfortunately that makes prices for goods that must be transported by truck go up as well.
Frankly I do not see any of these policies ending anytime soon and as an investor one would be foolish not to take advantage. Higher oil price per barrel means additional profit for oil drillers and companies who possess oil in the ground.
The only risk to investing in oil currently would be an all out world recession and right now that will not happen as long as the Feds keep printing money. Growth of the economy will be stagnant, but that too works in your favor as stagflation only enhances oil in the ground value. The other risk is for a change in political control and that can not happen until November 2012. So if you invest in oil and want continued and increasing profits in oil one would prefer the current administration to stay on past 2012, one would even prefer Congress to revert to Democratic control which would increase the chances for punitive taxes that would increase at pump prices and add to oil company profits. Out of US oil companies profit even more highly when the US punishes domestic oil, being able the pocket the difference in tax as profits.
Of course somewhere along the current upward trajectory of oil and gas prices the US economy will not be able to handle the higher price and the economy would sink. That risk is there, but current deficit spending keeps that at bay by encouraging out of work people to keep buying high priced gas.
Being no fool here I am willing to profit, and profit handsomely, from the other person doing foolish things. So I would encourage you to highly consider oil company investing. I currently own a significant position in Enerplus (ERF), a Canadian oil driller and supplier. I also will have Monday morning a put option on ERF to build an even larger position should the price decline. They pay a 7% dividend and pay it in monthly installments. They have a large and growing footprint in Canada and the US oil basins. They also are, in my opinion, undervalued. Note that the dividend is taxed 15% Canadian tax before you get it, but that tax can be used against your tax liability with the IRS. What's not to like, low valuation, high dividend, Canadian based company that the current administration can not touch, and a friendly oil driller government in Canada.
Now with all of this said, note as a purchaser of gas at the pump, the current administration is not your friend. But frankly as an oil investor you can more than make up for the increaed gas price with profits from your investments.
Finally if would encourage one, if buying for a long position, to wait for a pullback to initiate a position here. Wait for some market sell-off to buy in. I am doing that with the put option. One note of caution Goldman Sachs, the largest financial brokerage house in the US, suggested that their clients dump their oil based holdings last week. I do not agree with that, but it is info you need to know. Goldman Sachs also talked down municipal bonds all last year, while building positions there. As I said it is smart to take advanatge of foolish moves by the other person.
The oil industry is on the receiving end of punitive tax and fee treatment, not only in the US, but lately in the United Kingdom. The UK raised the oil industry supplementary charge from 20% to 32% last month. That is on top of the already sizable 26% corporate tax , so that means a combined rate of about 58% on oil companies. Makes me wonder why any oil company would base operations in the UK. Maybe that is why the oil recovery rate in the North Sea is dropping quickly.
In the US we continue to see what is for all intents and purposes the Obama administration led shutdown in Gulf of Mexico oil drilling and not only does that limit current and future supply, but places thousands of workers out of jobs. Add in that many drillers are taking their deep sea drilling platforms to other more friendly areas of the world. Just last month President Obama assured Brazil that oil pumped from their deep sea discoveries would be welcomed in the US. Makes no sense, but that adds to your profit opportunities.
The new discoveries of oil in North Dakota and the huge and growing oil finds in Canada can not get to refineries and into use in the US market since the Obama administration refuses to allow a pipeline to be build from the current terminal in Oklahoma to Texas and Louisiana where refineries are located. Again makes no sense, new pipelines add jobs and help keep down oil prices, but adds to your profit opportunities.
All of these actions and the punitive taxes in the United Kingdom and threatened punitive tax in the US just pushes up prices for current and long term contracts for oil. The unrest in the Middle East also adds a premium on the price of oil.
Monetary policy in the US, lots of deficit spending by the current administration and uncontrolled printing of money by the Federal Reserve also adds a premium to oil prices. Deficit spending puts money in the pockets of many people who go out and buy gas . The continue printing of money inflates the value of oil on the market as more dollars chase limited supply. Oil suppliers across the globe see the dollar declining in value and thus keep oil prices high and pushing higher to earn the same value for more dollars.
One more point here is President Obama has stated that he wants gas at the pump prices to go up. He believes that would encourage less consumption, but that unfortunately that makes prices for goods that must be transported by truck go up as well.
Frankly I do not see any of these policies ending anytime soon and as an investor one would be foolish not to take advantage. Higher oil price per barrel means additional profit for oil drillers and companies who possess oil in the ground.
The only risk to investing in oil currently would be an all out world recession and right now that will not happen as long as the Feds keep printing money. Growth of the economy will be stagnant, but that too works in your favor as stagflation only enhances oil in the ground value. The other risk is for a change in political control and that can not happen until November 2012. So if you invest in oil and want continued and increasing profits in oil one would prefer the current administration to stay on past 2012, one would even prefer Congress to revert to Democratic control which would increase the chances for punitive taxes that would increase at pump prices and add to oil company profits. Out of US oil companies profit even more highly when the US punishes domestic oil, being able the pocket the difference in tax as profits.
Of course somewhere along the current upward trajectory of oil and gas prices the US economy will not be able to handle the higher price and the economy would sink. That risk is there, but current deficit spending keeps that at bay by encouraging out of work people to keep buying high priced gas.
Being no fool here I am willing to profit, and profit handsomely, from the other person doing foolish things. So I would encourage you to highly consider oil company investing. I currently own a significant position in Enerplus (ERF), a Canadian oil driller and supplier. I also will have Monday morning a put option on ERF to build an even larger position should the price decline. They pay a 7% dividend and pay it in monthly installments. They have a large and growing footprint in Canada and the US oil basins. They also are, in my opinion, undervalued. Note that the dividend is taxed 15% Canadian tax before you get it, but that tax can be used against your tax liability with the IRS. What's not to like, low valuation, high dividend, Canadian based company that the current administration can not touch, and a friendly oil driller government in Canada.
Now with all of this said, note as a purchaser of gas at the pump, the current administration is not your friend. But frankly as an oil investor you can more than make up for the increaed gas price with profits from your investments.
Finally if would encourage one, if buying for a long position, to wait for a pullback to initiate a position here. Wait for some market sell-off to buy in. I am doing that with the put option. One note of caution Goldman Sachs, the largest financial brokerage house in the US, suggested that their clients dump their oil based holdings last week. I do not agree with that, but it is info you need to know. Goldman Sachs also talked down municipal bonds all last year, while building positions there. As I said it is smart to take advanatge of foolish moves by the other person.
Friday, April 15, 2011
Joe Battipaglia Passes
Sad news yesterday to hear Joe Battipaglia passed on. It was my great pleasure to meet him just last week at a conference in Pinehurst NC. I found him engaging, upbeat, and a joy to chat with during my brief time with him. The posting on April 7 entilted "Small Town Investor does American Idol" is actually about my meeting Mr. Battipaglia. Very surreal to realize that he was the person I was talking to just about one week ago. My condolences to his family and friends. I will miss seeing his regular visits, and great insights, on CNBC.
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