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I go full into Energy and high dividend stocks! November 20, 2013

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I have now added another stock to my portfolio with funds from selling some of my HCN.
Before I go into this stock, I want to talk about my strategy.

Frederick Holverson is a Norwegion billionaire that has made his money off of oil drilling.
The companies he controls are all stockholder friendly, believing in returning profits, via dividends to its ownership. His companies are well managed and probably the best of the drillers out there. I believe that the worlds thirst for oil is not going to go down anytime soon. So this means that the non-traditional oil discoveries will have to be drilled and used. This nontraditional drilling is sand and deep sea drilling. As this is dangerous work, there is always the risk of spills and explosions that could severely hamper profits. So there is risk I am assuming. However, with the high dividend yield I am being paid well for this risk. Obviously, the larger the companies the least the risk for spills/explosions. So I have entered into this market with 3 different size companies, that engage in basically the same idea, drilling and transportation of oil.

Basically I have dramatically increased my dividends over the last few months.

The new company I took a small position in is AWLCF. It has two drilling rigs in the North Sea.
These rigs are hired out to major companies on contract for 2 and 4 years at current rates. Both rigs were recently refurbished. The company believes these rigs will last for 18 more years. It currently pays a 20%+ dividend. Note this is a risky play, but it is only a small position for me. I just received my first dividend from them of $1.10 per share!

Just so it is clear with all the changes I made here are my current positions:

Berkshire Hathaway 61% of portfolio
SFL 14% of portfolio
HCN 11% of portfolio
SDRL 10% of portfolio
AWLCF 4% of portfolio

My yield on cost of the 4 dividend producing stocks I own are 16%.
Current combined yield of my dividend producing positions is 9%.

And finally, I have a concentrated portfolio dominated by BRK. Owning 5 stocks enables you to diversify away systematic risk of .43. For comparisons sake owning 20 stocks allows you to diversify away .56 and the most you can diversify away at 400 stocks owned is .61. You should not copy my strategies unless you understand the risks you are taking. The tradeoff in diversification versus quality is one that is not given much thought by investors but is discussed by Warren Buffett. Is the extra systemic risk reduction from owning more stocks worth moving down to your 10th, 12th, 20h, or even 400th best picks? For me, it is not. Now I will probably end up with around 10 dividend producing stocks at retirement. At that point I have reduced systemic risk by .5 which is 82% of all that is possible.

Let me know what you think????

The truth about “diversification.” September 26, 2011

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In my mind, diversification is fools gold. It looks good, all shiny and glittery, but in reality is worthless as a financial concept. First of all in its original form, it really means diversifying asset classes. That is if one asset class is doing badly it is less likely that 2 are doing badly and even less likely that three are doing badly, etc. But most people are only invested in equities or equities and bonds. Two asset classes are better than one, but that is hardly real diversification.

Most financial planners apply it to equities. On that you reach the vast majority of risk reduction owning 20 stocks. But most planners suggest owning a variety of mutual funds that might hold hundreds of stocks in each one.

What is wrong with this you might ask?

Well that leads us to the point most financial planners don’t understand or won’t explain to you. The way diversification works is it lowers overall variance. Meaning that owning one stock the total variance in any given year might be -100% [total loss] to let’s say 1000%. So a total variance of 1100%. Owning more than one lowers the risk of total loss. It also lowers the ability of choosing that home run stock. So lets say the possibilities are from -60% to 150% or a total variance of 210%. But here is the part they don’t tell you. It also lowers expected return. Diversification costs! Many people might say it is worth the cost to not have a total loss of funds. OK, but why diversify stocks to the point of owning hundreds or even thousands? Why not diversify asset classes?

But the bottom line is always how does all this theory do in the real world. And here is where it really fails. In the real world there always comes a time that the principal is needed. And this risk is rarely explained to folks. If you need the money within a few years before or after a major negative event you might never make up your losses. That is because you are spending the capital and therefore need a lot of time to make it up. Time you probably won’t have.

Mutual funds, the major financial tool most people have been told to depend upon are possibly the worst investment vehicle for retirement income because they don’t produce income. Bottom line is you have to sell the asset to get anything out of them. Selling into a down market is the worst thing you can possible do. All that diversification did not protect you one iota from the real risk.

So next time some financial expert starts talking about diversification ask them about what happens when a market downturn occurs during your retirement years and you have to draw down your account significantly. Or ask him what happens if you retire into a 10 year period like the last 10 years. And then go find out about dividend producing stocks or an EIUL or investment real estate all of which solve the issue in their own way.

The Failure of Passive Investors! April 13, 2009

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“The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. The minimum return goes to our passive investor, who wants both safety and freedom from concern.  The maximum return will be realized by the alert and enterprising investor who exercises maximum intelligence and skill.”

Benjamin Graham in The Intelligent Investor

He continues, “In many cases there might be less real risk associated with buying a ‘bargain issue’ offering a chance of a large profit than with a conventional bond purchase yielding 4 1/2%.”

And from his student Warren Buffet we get these ideas:

“Wide diversification is only required when investors do not understand what they are doing.”

“Diversification is protection from ignorance. It makes very little sense for those who know what they are doing.”

“Why not invest your assets in companies you really like?  As Mae West said, ‘too much of a good thing can be wonderful.’ ”

So we see from these highly successful investors that passive investing has from the beginning been a failing strategy.  As Ben Graham instructs us, investing passively in mutual funds [which is what most people do], we should only expect meager returns [that is what the data tells us actually happens].  If we should only expect meager returns, then why expose ourselves to the market risk?

So, the data instructs us, as well as successful investors, on rule #2 for investing; If you want to invest in the equity markets you must become an active [intelligent] investor, otherwise take the conservative route and lower your expectations.

For those who missed rule #1; Build reserves or [financially] die!

Fear Is The Enemy! November 7, 2008

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I spend a good part of my working day talking to people about financial things.  Almost everyone I talk to expresses some degree of fear when it comes to finance.  Now fear in small amounts is a good thing.  It focuses the mind, and encourages us to think about all the possibilities.  Warren Buffett thinks that by concentrating one’s investments, fear becomes an ally, forcing folks to really do the necessary fundamental analysis.  I think he is right.

But, extreme fear mixed with strategies sold on reducing risk is not a good thing.  It’s what causes people to make really bad decisions, like selling their mutual funds in a bear market.  And that, unfortunately is what I have been seeing out there.  If people aren’t selling now, then they are ignoring the reality of what has been happening for nine years now!  The only way people can ignore the facts is by not doing their own research.

I hear many of the pundits tell folks that they can’t perform fundamental research like Mr. Buffett, they just have to trust the “professionals” and stick to the buy mutual funds, hold, and asset reallocate strategy.  In my opinion this only produces more fearful people, more inclined to do the wrong financial things.

There are a small percentage of people who, no matter what, are going to be too fearful to invest in the stock market, even equity mutual funds.  Unfortunately, these folks will probably not have a good retirement.  These folks should stick to savings accounts, CDs, and guaranteed insurance products.

The majority have the capability to change their financial behavior.  I have found from personal experience and my wealth coaching, that the key is to take the time to learn how to do the analysis.  From this, flows confidence and self assurance that tampers down one’s fear to a manageable point.  Like I said, a little fear is a good thing as long as it is based on something real.  Once you manage your fear, you can move beyond those strategies that were created to allay the fear of customers and resulted in large reductions of investment rates of returns, like diversification and guarantees.

I have personally met several folks who made themselves millionaires by investing in a single stock (a couple of them worked for the company too).  Microsoft, Coca Cola, Berkshire Hathaway, and General Electric were the stocks.  Now all but the Berkshire Hathaway owner and the Coca Cola owner sold their stock when the fundamentals starting going awry.  I have a friend that works with wealthy retirees.  Guess what they tell him.  Almost to a person they made their wealth with a combination of real estate and a couple of companies stocks.  Many of these folks are living off the dividends from these blue chip stocks.  Here are a couple of articles about folks who became millionaires by either buying a single company stock or by stock options from working at a successful company. 

Coca Cola Millionaries

Microsoft Millionaires

Give me a call so we can conquer fear and get you on the road to a comfortable retirement!

colasign

Mutual Funds, Updated! September 2, 2008

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Morningstar published an interesting statistic recently.  It looked at the universe of mutual funds, all 2100 of the public funds, and found that 17 have a positive rate of return for the last year.  That means that 0ver 99% of all mutual funds lost money.  Now the question for you is why the financial press isn’t screaming this amazing fact out to the public.  They don’t have to, of course, because outflows from mutual funds are at a all time high.  People are reacting as we expected and selling.  They do it every down market.  It is more pronounced now, because of the large demographic group approaching retirement.  Simply, reality is setting in for these folks, and they are panicking. In one week in July, people pulled out over $11 Billion. Two weeks ago over $5 Billion outflow.  This has been going on for about 6 months.  Now mutual fund equity managers are having a problem, because there is so much outflow that they don’t have an ability to shop for bargains in the market.

This is what happens when folks are told that a) mutual funds use diversification to reduce risk  b) mutual fund investors will get a 8%, 10% or even 12% rate of return, and,  c) we are the experts, you won’t/can’t become your own expert so let us invest your money for you!

It bears repeating, no one will take care of your money like you will.  You need to learn what risk is and what it isn’t.  Managing risk is really not that hard once you understand it.  You need to learn what type of investments work best for you.  You need to take responsibility for your own financial health.

Mutual funds are a way most people push off that responsibility to someone else, usually a sales person that knows not much more than you.  Diversification reduces your expected rate of return to a point that you are unlikely to do much more than beat inflation.

And here is another thought.  All those folks closing in on retirement might not trust the market enough to put their money back in.  If this happens, then the mutual fund managers will be hard pressed to do anything but sell, missing out on buying opportunities.  I’m not saying its going to happen, just that it is in the realm of possibilities!

 

******Remember, this post and blog is for amusement only and represents the opinion of a person not licensed to sell mutual funds.  Do your own research before performing any financial advice or purchasing any financial product!**********

Why do you hate mutual funds so much? August 7, 2008

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Yep, you guessed it, I get this question a lot.  In fact, sitting on my porch with some neighbors espousing the philosophy of the Shafer Wealth Academy, I got it asked in a much nicer way.  So I thought I would answer it directly for the readers.

There are three reasons:

1.  Diversification sucks.  There I have said it.  There is an open secret in the investment world that diversification is for suckers or at least for folks that will never capture wealth.  You see, mutual funds were invented as a marketing strategy.  After academic finance disclosed you could reduce risk (variance) by diversification, astute Wall Street companies knew they could market this to average folks.  Previous to mutual funds and the idea of diversification the average person felt that investing in the stock market was akin to gambling and shied away from it.  But those folks in Wall Street knew a good marketing opportunity when they see one and ran with it.  Diversification reduces the variance to a point where the likely outcome is single digit returns.  Single digit returns are fine if all you want to do is beat inflation, but it will never create wealth.  What started as propaganda aimed at getting average folks to own stock has turned into common advice that is demonstrably wrong.  Every wealthy person from Warren Buffett to Donald Trump when being honest tell us that concentration is the way to go.  Diversification before we obtain wealth is a fear based strategy.  People think by diversifying, when things go badly, they can hang on to some of their wealth.  Unfortunately, diversification is a block to building wealth, so they are protecting themselves from a loss that means nothing.  Since fear keeps most folks from building wealth, when they hear diversification can protect them, they jump at it.  Its a perfect fit for a fear based environment. Not that fear is a totally wrong emotion to have for the middle class.  After all this is a group that is experiencing the economic changes most acutely.

2.  Mutual funds are retail products so there is an extra hand (middlemen) between you and your investments.  Even the lowest cost mutual fund company has employees that must be paid, buildings that must be leased or bought and profit that is made.  Where does all this money come from?  Yes, your returns.  See how this all blends together.  In order to get diversification you need to buy mutual funds, which not only creates a profit center between you and your investment but also implicitly requires you to look toward others for financial advice.

3. The sequence of returns issue is real and devastating as millions of recent retirees have found out. You don’t have time to make up for losses when you have a major bear market 5 years before or after retirement and it ends up devastating the amount of income you have at your disposal.

A few words on why mutual funds are so popular.  I’m sure the denizens of Wall Street never imagined the success of mutual funds when they first designed them.  As it turns out they were ideally suited for the psychology of the middle class.  The middle class, especially during the last two decades of the 20th century, were looking for security.  Remember, previous to 1980, layoffs were non-existent, defined benefit pensions were what most people had, and retirement for most was usually less than 10 years before death.  Security for the middle class was the name of the game.  The economic insecurity of the early part of the century eventually got turned on its head, but this was just a temporary reprieve.  Education beget a good job, which brought economic security.  Enter an investment strategy called mutual funds, which offered as its main selling point security (even though this was false, it matters only what people perceptions were).  In other words, mutual funds fit right in to the way people thought about and approached their financial life.

Then the stability of the middle class was turned on its head in short order.  Layoffs became common place not only for industrial workers, but for middle management and technical workers.  Aerospace engineers became perhaps the first middle class victims of this change in the 1980’s.  The government along with Wall Street stepped in and created IRAs and 401Ks ostensibly to encourage retirement savings, but also to pump up their respective cash flows.   We are just now starting to see the results of this unholy trilogy (Wall Street, Government, Security Seeking Workers).  The noise has reached a crescendo about the lack of retirement funds for the current generation of retirees.  Yet, few question the strategy that brought us to this point??? And of course, the latest dependency;  home equity.  If you were depending on your home equity to fund your retirement, the bubble has now burst. 

So there in a nutshell is why I rail against mutual funds.  It is an outdated investment strategy for the world we live in now.  Never was honestly sold.  And absent financial education as to the realities of the current economic climate, causes and will cause much financial pain at the exact time (retirement) that folks can least afford it.