INCOME PORTFOLIO UPDATE.

Monitor Your Portfolio. On December 19, I posted a sample portfolio with a yield that far exceeds that of money market funds and CDs. I didn't necessarily recommend buying that for your account but I was of the opinion that, long term, it would outperform any of the so-called zero risk portfolios. At the time, it would have cost you $199,753 to purchase that portfolio. The following is a summary of the current value of those companies and the income you would have received to date.

1. Ameren Corporation (AEE). Investment amount was $17,130. Current value is $16,800 and we have received dividends of $234.

2. Bristol Meyers Squib (BMY). Investment amount was $18,380 and the current value is $17,500. Dividends received are $231.

3. Duke Energy (DUK) Original investment was $19,700 and the current value is $19,800 with $275 in dividends received.

4. Lookheed Martin (LMT) Investment amount was $20,460 and current value is $23,700 with no dividends received yet.

5. Medical Properties Trust (MPW). Original Investment was $20,240 and current value is $22,000 with $400 in dividends received

7. AT&T (T). Original cost was $17,526 and current value is $16,200 with no dividends received.

8. Health Care Properties (HCP). Original cost was $19,512 and current value is $22,200 with no dividends received yet.

9. Kinder Morgan Energy Partners (KMP) Original cost was $20,775 with current value of $21,540. No Dividends received yet

10. Fidelity National Financial (FNF). Original cost was $19,570 with current value of $19,600 and dividends of $168.

11. Windstream Corporation (WIN). Original cost was $26,860 with current value of $24,700 with dividends of $475 received.

The Bottom Line. Total current value is $204,040 with dividends collected of $1,783. While our potential gain of $4,000 is certainly better than a potential loss, remember that the purpose of the portfolio is to generate income. It is comforting to know that we could sell today, and have over $5700 in capital gains and dividends but that gain could disappear overnight. The dividends are now yours to keep. By way of disclosure, I own T, HCP, and KMP. I have owned BMY amd FNF in the past.

The picture at the top was to remind me of more happy times. Bob Brougham, a lion in the real estate investment industry, passed away last night. I am lucky to have had him as a mentor for 30+ years. Ms. Betty really looks good in that picture, I was more like the Flying Nun in that cowboy hat.

TOUGH TIMES AHEAD?

Changes In My Lifetime. In one of my earlier posts, I quoted one of the problems we must overcome in the future is the unstainability of our consumer lifestyle, purchased with government and personal debt. No matter what our economy does, it is my opinion that we can't continue to live the way we are living. The house in the picture is the one my family moved into in 1947 when I was 9 years old. This picture was taken last year and, with the exception of a bedroom and a bathroom, which we added in 1948, it still looks about the same now as it did then. We really felt we were living in luxury after the addition of that bathroom, not that we had two bathrooms like most folks have now, it was that we had one. That's right, there was an outhouse in the back. Mom and Dad had a bedroom and my brother and I slept in the living room. Know where the lumber came from to build the house? We bought several chicken houses from the poultry farm down the street and salvaged the lumber from those to build this house.



Sound Familiar? Sounds like what the old folks used to tell us about walking miles to school in waist deep snow. Sounds like I was really deprived but actually, I wasn't because that was the way many families lived. Looking closely, you can see why I didn't have to shovel snow off the sidewalks. There were no sidewalks, no TV, no microwave, no garage door opener (no garage), no air conditioners, no cell phones, no computers, no satellite dish, and no gasoline powered yard tools. The reason is that most of these things hadn't been invented yet. We didn't miss having those things because we didn't know what they were. This brings me to a point that I have been hearing for years. "Luxuries, once sampled, become necessities." This is undoubtedly true. Even the less affluent among us have at least one television and nobody pushes a lawn mower any more. Just about anyone with a garage has a garage door opener. You could fit three of the houses like the one my dad built into the one I own today (not large by today's standards).

I Am Not Suggesting that We Live Like The Way I Grew Up. We have earned an improved standard of living from the 1940's but perhaps we've gone too far. The best evidence of that is the proliferation of mini-storage buildings that we rent to keep the stuff we have but can no longer find room for in our houses. Last night I saw a TV show about estate sales. We spend years collecting treasures only to have our children sell for a fraction of what we paid, give to charity, or throw in the trash. Most of us can live on less without a huge sacrifice. Advances in technology have allowed the average among us to live better than the wealthy did when I was growing up.


We Complain About Excessive Government Spending. We all want to eliminate fraud and waste in government and undoubtedly there is plenty of that to cut. Unfortunately, trimming the fat won't be enough to stop our unsustainable federal borrowing practices. We will have to cut lean also. I love my social security and medicare. I think I deserve it because I paid for it. I have never sat down and gone through the exercise of determining what I would have if that money had been invested at a market rate of return in financial assets but, whatever the reason, the government has promised me more than they can deliver. Medicare is the best health insurance I have ever had. I can walk into the doctors office, get treated, and walk out the door without paying a dime. Even when I was a struggling college student, I couldn't do that. This is a great, but unsustainable, benefit. A ten dollar co-payment would allow the government to pay the doctors a little more while still retaining some to keep from passing a huge burden to grand children. People complain that we aren't getting cost of living raises, what would happen if they cut benefits by 3%? A person making $500 a month would lose $15 and someone making $2000 a month would lose $60. That would be a huge help to the system and most retirees could afford that to keep from passing this huge debt to our heirs.

Imagine What Would Happen If They Did That. Those who sponsored the legislation would be thrown out of office no later than the next election. People feel entitled to what they have been promised (thus the word, "entitlements"). It may not be fair, but things like this are what needs to be done. We don't need the government to promise us even more things that they can't afford, we just need them to admit that they can't afford what they have promised us already and tell us what has to be cut. This is a fantasy. Most likely, it will never happen.

A Sign At The Grand Canyon Tells It Like It Is. It says "Don't Feed The Animals. They will become dependent on human food and lose the ability to forage on their own." If we figured that out for wild animals, why can't we figure it out for ourselves. We have trained our citizens to depend on government handouts yet we think we can sustain these handouts while 47% of our population pays zero federal taxes. Not only that, we want to pay even less. It is my belief that we will have to attack our fiscal problems from both ends. More taxes and less spending. The sooner we start making these tough decisions, the less traumatic it will be when we have no choice.

A SUCKER IN EVERY GAME?.

Who Is The Sucker? There is an old adage that if you are in a game for an hour or so and you look around the room and don't see who the sucker is, its you. I've been looking around the room and I don't know who the sucker might be. Is it me? Tha American Association of Individual Investors (AAII) reports that it's last investor survey shows that 56% of its members believe the market will be higher 6 months from now. I am a member of AAII and I would have responded the same way. What does that mean? In a recent article in Energy and Capital, Nick Hodge writes "Unless you run a mutual or hedge fund or otherwise have access to the advantages of institutional buying, You are the dumb money." Both the Wall Street Journal and Barrons report that the dumb money has returned to the market. I guess that means us. Perhaps they are right but I never left. Further, I am not leaving.



Am I The Sucker? Maybe so but I'm not the biggest sucker? The biggest sucker group left the market at the bottom because they could no longer stand the pain. That was pretty close to the exact bottom of the market. The next biggest sucker group believe they can predict where the market is going. That includes those who believe that a complex software program written by a bunch of MIT graduate students can tell you when to unload your over-priced stocks on a bunch of suckers and run like a rabbit out of there. Many have tried at that game and failed.



Does That Mean I Believe We Are Still In a Bull Market. I will admit that it isn't a good idea to pull out all the stops and buy a aggressively. There are a lot of factors that we all need to be aware of. The Energy and Capital article points out some facts that should give us pause.



1. The cost of providing food for 6.9 billion people continues to rise.



2. There are water shortages currently affecting 2 billion people.



3. The American consumer lifestyle is not sustainable nor is the debt it has created.



4. The price of oil is rising and it is inevitable that we will some day have to find other sources.



5. Our military/industrial complex is too large.



6. American labor cannot compete with the BRIC nations.



7. Too many Americans depend on the government for benefits that they have been promised but will not be able to collect because the government lacks the ability to pay. (Added by me).



How Is That For Pessimism. I don't mean to tell you to jump into cash but you really do need to monitor these things and use caution in your investment policy. This is a time to stay vigilant, cut your living expenses, and invest with extreme caution.

HEDGING YOUR BET

Reducing Your Investment Risk. There are a number of things you can do to reduce your risk of loss if you invest in the financial markets. If you are lucky, you can hedge your bet and increase your income at the same time.. I have talked about this one particular technique several times over the 4+ years I have been writing this blog. The best way to illustrate this is to describe an investment I recently made.



I Recently Bought Some Intel. I won't go into the details of the due diligence I conducted before buying this stock. Let's just say it is a company that has lost value in the recent market melt down and has rebounded in subsequent months. A cursory examination shows that the company's earnings have rebounded more than the market price. For those who know virtually nothing about the company, it is the leading company in the production of computer chips which are used in everything from i-pads to elevators to automobiles. A few things I like about the company are as follows: It sells for 11.17 times earnings, much less than the average of the past 10 years. The earnings are growing at a rate of 11+% per year. They have 21+ billion in cash which they can pay out to stockholders or invest in attractive opportunities which may occur. This cash adds a measure of stability in a volatile economy. They pay a dividend of $0.63 per year which is around 3%, considerably more than you could receive on a savings account. Based on this information, this is ample reason to buy the company for a long term hold in my account. My opinion is that 3% yield and potential appreciation to a higher price justifies taking my money out of a money market account that pays virtually nothing and making the investment. Still, market volatility is such that i wanted a bit more insurance against loss due to market fluctuation.



Using Options To Reduce Risk. After buying this company at 21.07 per share, I sold an option which allows some one the right (but not the obligation) to buy the stock for me at $22 per share on or before the expiration date in mid February. For granting this privilege, I received $0.63 per share. While this doesn't sound like much, it is 3% of the 21.07 I paid for the stock. This means that the stock can drop from the $21.07 I paid to $20.44 and I will not suffer a loss. Instead of selling a 22 call, I could have had much more downside protection by selling a 21 call. Since I was relatively bullish on the stock, I wanted to participate in, at least, some of the upside if the stock increased in value. Does all of this sound like a lot of work for a small profit on a $21,000 investment? Look at it this way. I invested in a stock that I wanted to own. If the stock rises to $22.00 before expiration date, I receive an option premium of $.63, a profit on the shares of .93 and a dividend of .16. This is a total of 1720 on a $21000 investment, a return of 8% for 3 months or an annualized return of 32%. There are numerous other options for managing the investment. Looking at today's price of 20.7 for the stock and .21 for the option, I could terminate the investment for a very small gain of $47. If I just bought the stock alone, I could get out with a loss of $386.

Nothing Earth Shattering Here. You might be of the opinion that this is much ado about nothing and I would have a hard time disagreeing with you. On the other hand, now that I have a position in the stock, other opportunities will follow. If I stay in the stock and the price doesn't rise to 22 within the next month, I could keep the $630 option premium I received, get the dividend on March 1, and repeat the process again by selling another option. I will follow my policy of letting you know at major decision points what my management policy is. Hope it proves profitable and interesting.

Tragedy in Tucson. I always take it personally when someone kills a duly elected government official. In 1963, when John Kennedy was killed, I was heartbroken, not because I thought he was such a great president, but because, right or wrong, he was my president and an attack on him was an attack on all of us. I feel the same way about Ms. Giffords. The person who attacked her, and killed all those people, attacked us all. Some people may be able to forgive that but I certainly won't.