Have You Been Doing the Opposite? Warren Buffet says, "Now is the time to buy American." He is referring to the stock market and I suspect that quote has something to do with the market rally we're having today. Am I going to rush out and do just that? Not me. On the other hand, I didn't sell everything and I have raised a few dollars in cash by selling anticipated losers and accumulating, rather than reinvesting, dividends. As I mentioned in my last post, I did buy some more Anthracite Capital at around three bucks a share. It wasn't because I thought the company was going to turn around next week but because I thought the upside was infinitely higher than the downside.
We Should Listen To Mr. Buffet. When an investor as successful as Mr. Buffet speaks, you have to listen. Do you have to do what he says? No, its just another data point that you can use in conjunction with other data points to make sound financial decisions. When we have a crisis as serious as the one we're currently in, the key word is caution. I have been cautious in managing my portfolios and recommending that you do the same. If you have read my posts carefully during the past few weeks, you may have noted that I am becoming a bit more bullish in my approach. While I am not ready to "bet the farm" I find it difficult to resist some of the opportunities in this market.
What's Wrong With Marathon Oil? I've been watching this company for quite a while. Over the past few months, it has dropped from the mid $40's to to $28.5 per share. Why the drop? There are several possible reasons and anticipation of falling energy prices may be one of them. If you look at the share price trends vs the price of oil, it doesn't quite add up. While the price of oil has dropped to the 70's, it has simply returned to the levels of October, 2007. At that time, Marathon was $58.04. Obviously, Marathon share prices have dropped 50% from this level. So what were oil prices, the last time Marathon was in the current price range. In June of 2005, Marathon sold for $25.08 and the price of oil was $49.8 a barrel. Using that data point, you might conclude that investors predict a drop in oil prices to that level. If the current recession deepens, that is not impossible.
There Are Other Factors Influencing Share Prices. We certainly don't know them all but here are some reasons why Marathon appears to be a very good buy. 1. The dividend is 3.6%. This may not seem like a screaming return; however, you do get something close to a CD return while you wait for prices to get back to "normal." 2. It doesn't appear likely that the dividend will be cut in the future since they are only paying out 21% of their earnings. 3. The share price is slightly below book value. Although book value isn't an entirely accurate measure of intrinsic value, it is another data point. Historically, Marathon has sold for almost twice book value. Other oil companies are also priced at a higher multiple to book value. 3. Marathon is actively exploiting new energy sources. They have a stake in the Bakken field, one of the most promising new areas of domestic production and they are also participating in a new discovery of the coast of Angola. Given these factors, I have decided to invest some of my cash in Marathon oil at $28.7 per share. With a sufficient time frame, I think this investment will prove to be a good one, there is one more factor that allows me to hedge my bet.
Option Prices Are At Record Levels. When I made this investment on Tuesday, investors were willing to pay a dollar per share for the option to buy my stock at $30 three days later. This means that I would make $2.30 or 8% over a three day period. If the stock didn't rise to $30 per share, I could keep the dollar. That option expires today and Marathon is selling for around $27 per share and the dollar is mine to keep. What's my next move. Since I still think Marathon is a good company to own, Ill keep the stock and sell another call $30 call option, This option expires in November and can be sold for around two dollars a share. I'll continue to own this stock until I change my mind about the prospect for Marathon, or until I sell an option that is called. There is still plenty of risk involved in this investment but I am committed to keeping most of my funds in the market. If you are afraid to invest when the market is down, you will be stuck in a "buy high, sell low" strategy.
Don't Try This At Home. While this is an actual example of an investment I made, it is not a recommendation for you. In many cases, an investment like this one is totally inappropriate for a given financial situation. Never make an investment unless you have studied the risks involved and determined that you are willing to tolerate them.
Friday, October 17, 2008
Saturday, October 11, 2008
OPTIMIST OR PESSIMIST?
Which Are You? A pessimist might argue that our current economic situation is permanent because we have lost our position as the number one nation in the world. An optimist might argue that American work ethic and ingenuity will keep us at the forefront and an eventual rebound is inevitable. Both optimists and pessimists can be stupid at times but the optimist will be happier and more successful most of the time. I have been reading a book by Martin Seligman called Learned Optimism. Dr. Seligman is a prominent psychologist who discovered that individuals learn to be helpless when they reach the conclusion that, whatever their behavior patterns, they cannot improve their situation. If they persist in this state, they are prone to long bouts of depression, poor health, and a reduced life expectancy. Much of the book goes on to describe how we can reverse our helplessness and restore our optimism. I have argued that, since no one can predict, with any degree of accuracy, the future investment environment, the next best quality you can have is resilience, the ability to keep going after a setback. The more optimistic we are, the more likely we are to persist.
We Have Undoubtedly Had A Setback. We no longer have money we thought we had. Now what we have to decide is what to do with the assets we still have. Here are a few strategies that come to mind. 1. Get out of the financial markets and stay out. This strategy works for a number of my friends and family. The key here is to have an adequate income to meet your needs without having to rely on investment income. 2. Get out of the financial markets and get back in when the environment improves. If this is your strategy, I'm afraid I can't help you. Knowing when to get back in is critical. Past recoveries show that a third of what has been lost is recovered within 40 days of the turnaround. Like I've said before, I've known several market timing specialists over the years. None are still practicing. 3. Change to a less aggressive strategy emphasizing safety. This is what I've attempted to do in most cases; however, it has been only moderately successful. An investment with perceived safety can drop in price right along with those considered more aggressive. The best you can hope for is that it won't drop as much. I will continue to utilize this strategy while looking for opportunities that may arise. One area of interest is some of the beaten down financial stocks. As an example, I recently added shares of a stock that is selling for only $2.75. It currently pays a dividend of $1.24 per year or a yield of 45.09%. The book value of the company is more than $10 per share. What are the odds of that dividend continuing? I don't have a clue but if I can buy $10 in book value and get back 11.27% of my investment in three months, there has to be more upside than downside. The most I can lose is $2.75 per share. Bank of America can drop that much in a flash. If the market decides the company is worth its book value, I stand to make 7.25 a share. Worth taking a flyer? It is to me.
Notice How Few People Are Talking Energy Prices These Days. The price of a barrel of oil has dropped 51.02% since June of this year when I told you prices had to come down for the right reasons or the wrong ones. Remember, the wrong reason was a worldwide recession? Here it is folks. It is likely the price will drop further unless some miracle occurs to erase the pending recession. Hopefully, we won't ignore our long term need to find new energy both from renewable and non-renewable resources. We also need to conserve, which I suppose we will do automatically because we have less money to spend.
It's Getting Chilly Here In Colorado. I suppose that means this old snowbird needs to get ready to fly. Don't hesitate to call if you need to get in touch before I leave. I anticipate spending more time here in 2009. Hope to continue working with you whether I am here or in Texas.
We Have Undoubtedly Had A Setback. We no longer have money we thought we had. Now what we have to decide is what to do with the assets we still have. Here are a few strategies that come to mind. 1. Get out of the financial markets and stay out. This strategy works for a number of my friends and family. The key here is to have an adequate income to meet your needs without having to rely on investment income. 2. Get out of the financial markets and get back in when the environment improves. If this is your strategy, I'm afraid I can't help you. Knowing when to get back in is critical. Past recoveries show that a third of what has been lost is recovered within 40 days of the turnaround. Like I've said before, I've known several market timing specialists over the years. None are still practicing. 3. Change to a less aggressive strategy emphasizing safety. This is what I've attempted to do in most cases; however, it has been only moderately successful. An investment with perceived safety can drop in price right along with those considered more aggressive. The best you can hope for is that it won't drop as much. I will continue to utilize this strategy while looking for opportunities that may arise. One area of interest is some of the beaten down financial stocks. As an example, I recently added shares of a stock that is selling for only $2.75. It currently pays a dividend of $1.24 per year or a yield of 45.09%. The book value of the company is more than $10 per share. What are the odds of that dividend continuing? I don't have a clue but if I can buy $10 in book value and get back 11.27% of my investment in three months, there has to be more upside than downside. The most I can lose is $2.75 per share. Bank of America can drop that much in a flash. If the market decides the company is worth its book value, I stand to make 7.25 a share. Worth taking a flyer? It is to me.
Notice How Few People Are Talking Energy Prices These Days. The price of a barrel of oil has dropped 51.02% since June of this year when I told you prices had to come down for the right reasons or the wrong ones. Remember, the wrong reason was a worldwide recession? Here it is folks. It is likely the price will drop further unless some miracle occurs to erase the pending recession. Hopefully, we won't ignore our long term need to find new energy both from renewable and non-renewable resources. We also need to conserve, which I suppose we will do automatically because we have less money to spend.
It's Getting Chilly Here In Colorado. I suppose that means this old snowbird needs to get ready to fly. Don't hesitate to call if you need to get in touch before I leave. I anticipate spending more time here in 2009. Hope to continue working with you whether I am here or in Texas.
Saturday, October 04, 2008
HOW DO YOU MEASURE FEAR.
When Others are Greedy I am Fearful; When Others are Fearful I am Greedy: That is a quote from Warren Buffet. Mr. Buffet has recently been in the news as a result of placing billions of dollars in Goldman Sachs and General Electric. He obviously saw great opportunity there. Wouldn't it be nice if there were a quantitative measure of the amount of greed and fear in the marketplace? According to market technicians, there is. I looked for a reference to what I am about to tell you but have been unable to find one; however, I have a strong memory of attending a seminar where this was discussed. The quote I remember is that "the VIX is never wrong." What is the VIX? It's a measure of market volatility published daily by the Chicago Board of Options Exchange (CBOE). This is said to be directly proportional to the amount of fear in the marketplace. According to the speaker at the seminar I attended, when the market is dominated by very high levels of fear, a turnaround will occur within six months. The next question is what constitutes a high level of fear? Most technicians believe the VIX is only highly predictive at levels of 40 and above. The current level is 45. According to this we should be racing to put money in the market. I don't know about you but I'm not racing to do anything.
What Does History Tell Us? I attended the seminar I'm telling you about somewhere around 2003 and have watched the VIX ever since. During that five year period, the VIX has often been around 10 and has never been above 40 until now. Since I still don't trust the validity of some here say info I got from a seminar, I decided to do a quick scan of VIX values from now until they began to be published in 1990. To my disappointment, I found only three periods when values were above 40. The first occurred in August of 1998 when the value was 43. At that time the S&P 500 was 1027. Six months later the VIX was 27 and the S&P was up 20.5% at 1238. The next occurrence was in September 2001 when the value was 42 and the S&P was 1085. Six months later, the VIX was 17 and the S&P was up 5.8% at 1148. The last occurrence before now was in Sept of 2002 when the value was 40 and the S&P was 845. Six months later the VIX had dropped to 31 and the S&P was up 5.9% at 895. If we feel comfortable depending on three data points, we can say that the theory holds. Let's see what happens in another 6 months. I must say that I am more optimistic at this point than I was a month ago; however, I wouldn't recommend that anyone make an investment decision on such a small sampling of data. I also don't recommend ignoring the VIX. One more factor to take into consideration when planning your investments can't hurt.
Gasoline Prices Below $3.40. Right down the street there is a service station offering gasoline at $3.31 per gallon. This is good news and bad news. With oil prices at $150 a barrel, the motivation to bring on additional energy sources was extremely high. At $94 a barrel it is less exciting. Although there are a number of patriotic reasons to conserve the energy we have and search for more, I'm afraid these will always take a back seat to economic incentives. As an example, I recently saw an article about conversion of cars to natural gas at the University of Denver. This allows them to run their vehicles at the equivalent of $2.25 per gallon, a savings of approximately $1.25 a gallon. This has to be a bargain right? I'm not so sure. The cost of modifying each vehicle was $12,000. Do the math. If a vehicle gets 14 miles per gallon and drives 15,000 miles per year, it uses 1,071 gallons per year. At a savings of $1.25 a gallon, it saves 1,339 a year. This means you break even at the end of 9 years. How long do we expect these vehicles to last? At 15,000 miles per year, the accumulated mileage after 9 years would be 135,000. While this is not an outlandish figure, I think most would agree that at 135,000 miles the vehicle is pretty well spent. The bottom line is that I wouldn't invest my money with zero return on investment over a 9 year period. Why would DU do this? Because they got a grant of $180,000 from a non-profit organization. Nice for DU but I don't think we can depend on non-profit organizations to solve our energy problem.
Still Here. I am finally catching up on my backlog of problems. Still, I doubt I will leave before late October. I always want to hear from old friends and clients.
What Does History Tell Us? I attended the seminar I'm telling you about somewhere around 2003 and have watched the VIX ever since. During that five year period, the VIX has often been around 10 and has never been above 40 until now. Since I still don't trust the validity of some here say info I got from a seminar, I decided to do a quick scan of VIX values from now until they began to be published in 1990. To my disappointment, I found only three periods when values were above 40. The first occurred in August of 1998 when the value was 43. At that time the S&P 500 was 1027. Six months later the VIX was 27 and the S&P was up 20.5% at 1238. The next occurrence was in September 2001 when the value was 42 and the S&P was 1085. Six months later, the VIX was 17 and the S&P was up 5.8% at 1148. The last occurrence before now was in Sept of 2002 when the value was 40 and the S&P was 845. Six months later the VIX had dropped to 31 and the S&P was up 5.9% at 895. If we feel comfortable depending on three data points, we can say that the theory holds. Let's see what happens in another 6 months. I must say that I am more optimistic at this point than I was a month ago; however, I wouldn't recommend that anyone make an investment decision on such a small sampling of data. I also don't recommend ignoring the VIX. One more factor to take into consideration when planning your investments can't hurt.
Gasoline Prices Below $3.40. Right down the street there is a service station offering gasoline at $3.31 per gallon. This is good news and bad news. With oil prices at $150 a barrel, the motivation to bring on additional energy sources was extremely high. At $94 a barrel it is less exciting. Although there are a number of patriotic reasons to conserve the energy we have and search for more, I'm afraid these will always take a back seat to economic incentives. As an example, I recently saw an article about conversion of cars to natural gas at the University of Denver. This allows them to run their vehicles at the equivalent of $2.25 per gallon, a savings of approximately $1.25 a gallon. This has to be a bargain right? I'm not so sure. The cost of modifying each vehicle was $12,000. Do the math. If a vehicle gets 14 miles per gallon and drives 15,000 miles per year, it uses 1,071 gallons per year. At a savings of $1.25 a gallon, it saves 1,339 a year. This means you break even at the end of 9 years. How long do we expect these vehicles to last? At 15,000 miles per year, the accumulated mileage after 9 years would be 135,000. While this is not an outlandish figure, I think most would agree that at 135,000 miles the vehicle is pretty well spent. The bottom line is that I wouldn't invest my money with zero return on investment over a 9 year period. Why would DU do this? Because they got a grant of $180,000 from a non-profit organization. Nice for DU but I don't think we can depend on non-profit organizations to solve our energy problem.
Still Here. I am finally catching up on my backlog of problems. Still, I doubt I will leave before late October. I always want to hear from old friends and clients.
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