TEN THINGS I'VE LEARNED ON FACEBOOK.

Many Think It Is a Waste of Time. I must admit, I was one who thought it fell into The Get A Life category. Maybe it is a bit of a time waster but I've learned a number of things that, taken together, have made a significant change in my life. Here, in no particular order, are ten of them.

1, Facebook is Not Just For The Younger Generation. Our kids and grandchildren may use them for flirting and gossiping with their friends which doesn't mean as much to most of the older among us but the older generation may have an even greater need to stay in touch with the outside world. Neuroscientists have learned that the aging brain is capable of learning new things that can keep it biologically and psychologically healthy instead of unavoidably deteriorating as we grow older. One of the most important factors in the health of the aging brain is social contact with others. As elders find it more and more inconvenient to leave the home environment, Facebo0k can be a valuable resource in avoiding elderly decline.

2. People You Found Interesting Fifty Years Ago Are Still Interesting Now. I ran across a friend from 50 years ago, John, whom I haven't seen since high school. We had a few common interests together back then and enjoyed spending time together. Even though we went somewhat different directions after high school, we met on Facebook and now have totally different interests but we still connect on many different levels. My relationship with John has added numerous benefits to my life.

3. Blood Bonds Are Extremely Important. I ran across a cousin, Marlene and her husband, Clarence on Facebook last spring. She came from a very religions family and I did not and we had virtually no reason to meet again since we last visited over 60 years ago. It also turned out that her husband Clarence and I had never met but he and I were also cousins through a different branch. Our visits together have been high points and have added immensly to my life in the past year.

4. You Have An Opportunity To Meet People You Might Not Have Met Otherwise. The other day, I met with Josh, a 23-year old veteran of combat in Iraq and Afghaniston. We met on Facebook and decided to have lunch together so I could have a chance to become more knowledgable on what our young men go through over there. He was very willing to share, even some things he found uncomfortable to recall. I came away more knowledgable and even more appreciative of those young men who put their lives on in our behalf.

5. People Are Often Willing To Share Some Intimate Details With Others. Kim started to work in our company when she was 19. She was a brash young lady and knew virtually nothing about our business. She became a huge asset to us in a hurry but I have rarely seen her since she left us over twenty years ago. When we became friends on facebook, I had a chance to follow her through a period of unemployment, a serious injury to her daughter, motorcycle trips across country, and some of her political views. Her frankness and "what you see is what you get" attitude leaves it even more like she's my daughter than she was 20 years ago.

6. You Even Get To Know Family Members Better. My brother married his wife 35 years ago. Even though I saw her on holidays, weddings, and other family events, most of our time at those events I spent with my brother and his two sons. Since we met on facebook, I have learned of her immense admiration for plants and animals around her mountain home and of her relationship with with God which forms a central part of her life.

7. Genuine Love can Exist Between People Who Have Never Met. I have observed this between long-time online friends. I had considerable doubt that this could happen but my observations of some of the interactions have convinced me that this is true. I guess I am now convinced that love can take many different forms and everything we thought to be true may not be.

8. What Can Appear to Be Genuine Love Can Be A Fantasy. I read about a chat room relationship between a male named "Marine Sniper" and a female labeled "Tall Hot Blonde." They both sent very appealing snapshots of themselves and they talked extensively on the telephone, even engaging in phone sex, whatever the hell that is. A third young man also became involved causing lots of jealously. In the final analysis this third man was the only real one of the bunch. Unfortunately, he was killed by "Marine Sniper" who turned out to be 46 years old. His picture was genuine but taken 23 years ago. When police talked to "Tall Hot Blonde" they found out she was 45 years old, married and mother to the young lady in the bikini photo that she claimed was herself. Which brings me to item 9.

9. In Addition To Love, Genuine Hostility Can Form. The previous example illustrates this. In less serious case, I posted a joke (not a dirty one nor hostile one) on an online friend's page. One of her older friends, who obviously did not understand the joke, replied saying that I wouldn't have made that reply if I "knew the lord." Later she replied and she said she didn't understand what I meant but she didn't appreciate it and dropped me as a facebook friend. If she didn't understand the joke, why did she not appreciate it. Again I should emphasize that the joke wasn't dirty, hostile and didn't contain any hostile innuindos. I still don't understand what anyone found offensive but I decided it wasn't worth pursuing.

10. Facebook Can Be A Place to Showcase Your Talent. One of my friends, Sue paints beautiful pictures of horses that show an amazing facility for the use of color. She takes pictures of the paintings and puts these on Facebook. I don't know if her pictures are an economic success but there is no doubt that she is a talented artist.

This Post Represents a Departure from my Original Subjects. Your feedback is appreciated.

AMERICA WAS WRAPPED UP IN A BLANKET OF RAGE.

Been Distracted Lately I won't bore you with the details of why I have been distracted from my practice of a weekly post. Let's just say I have been driven to start again by some of the things I have experienced lately.

A Blanket of Rage? Read the title page about America being wrapped in a blanket of rage. Who said that? Michael Moore? Rush Limbaugh? Actually it was neither (I'll tell you who said it in a later paragraph) but it describes the environment today. Despite my strong efforts to stay away from hate speech, I do find myself getting angry at some of the things I hear, like "Let's take these sons of a bitches out and give America Back to America Where it Belongs. (James Hoffa) There have been comments from the left that Fox News cut out some parts of the speech to make it look like a call to violence. as opposed to what he really meant, that we should vote the Republicans out of office. (I might remind him that they already did.) Violence or voting booth, I know hate speech when I hear it. I probably should look for something equally offensive from the other side but I'm sure there are plenty who will do that for me.

Mr Hoffa Wants More Union Jobs. Actually, I agree with him. I want more jobs for everyone. What Mr. Hoffa and his constituents haven't done is tell me how to make American Labor competitive with the BRIC nations. (Brazil, Russia, India, and China). We are in a global economy and both labor and management have to get more bang for our labor buck if we are going to re-create the job market in America.

Who Said The Title Quote. It was Bob Dylan and he has yet to state his political preference. The time he was referring to was 1968. Racial strife, assassinations, anti-war demonstrations, and sit-ins capped off by the Kent State killings. We are not yet in a situation that serious and I sure hope it doesn't come to that. A common thread to both times is a long-running war which becomes more unpopular by the day.

You and I Both Know What Changed Everything. The September 11 attacks. You know my favorite memory of that day? I remember looking out my 9th floor office window and seeing a man on the freeway overpass waving a huge flag on a six foot pole. Cars driving by were honking and blinking their lights. Many would think that the flag waving was a meaningless gesture. I understood. The poor flag waver just felt he had to do something to express his love for the country. I wanted to do something myself to show my support. Three years later, the flag waver was replaced by folks standing on that, and similar, overpasses with large signs that said, "Bush Lied, Thousands Died." Or at election time, signs said, "Fire The Liar." How did we move from all pulling together on 9-11 to half of us hating the other half a short time later. Frankly, I really don't know but I know its bad for our country. Hate hurts the hater as much or more than it hurts the hatee. We all suffer from what is going on today.

The Terrorists Accomplished More on 9-11 Than Most Of Us Realize. Not only did they kill almost 3000 of us and destroy some major landmarks and symbols of freedom, they started driving a wedge between us. We all differ about how to manage the war on terror or even whether we can call it that but there is one thing I bet most of us can agree on:

DON'T LET THE BASTARDS WIN.

REAL ESTATE AS AN INVESTMENT

Does This Look Like a Drought? Lush and green as my back yard looks, we are in the middle of the worst drought I have seen in this part of the country. The humidity is often so high here that we seldom have to water. Not this way now. I have to water somewhere virtually every day. It's around 100 degrees and the humidity is 50% as opposed to high 90's and 70+% in normal times. We are about 20 inches below normal rainfall for the first six months of the year and we won't be able to have our normal fireworks display because of fire danger. Fires have already destroyed several thousand acres of timber in this area.


What About Our Investments? I haven't talked much about investments in recent months, in fact, I have been so busy with life that I haven't posted much about anything. Hopefully, I can get at least three or four posts per month for the rest of the year. I am still favoring cash flow over depending on capital gains from our investments but the main question is where are we going to get that cash flow in the future. Many of my clients are wary of the stock market and are depending on withdrawal of capital to fund their life style. This increases the odds that you will run out of money before you run out of life. I am in a similar situation myself but I'm determined to improve it in the future. The biggest risk I see in the stock market is that much of the recent gains have been fueled by the federal reserves' loose money policy which is scheduled to tighten in the near future. This means that we are looking at the potential for inflation which is always a problem for the stock market. If you don't have the stomach for another correction, better lighten up in this area. That doesn't mean get out altogether because I don't claim 100% accuracy when it comes to something as in-exact as an economic projection.

Fixed Income Investments? Bonds are unlikely to provide a reasonable return on investment in the current low interest rate environment. If you buy longer-maturity bonds you will get a higher interest rate but you run the risk of losing market value when rates increase.

Which Brings Us To Real Estate. I bet there are many out there, who have seen the value of their homes and investment properties drop 20-40%, and think I am crazy. I won't go into tremendous detail but here are some reasons why I think investment in single-family homes is a wise move at present.

1. Prices Are Down. When the market was hot and heavy I received many calls from investors who wanted to get into the market. Prices were so high that I was unable to find properties that I would project to bring a decent return. If you were using me as a real estate advisor at that time, the best deals were the ones we didn't make.

2. The Rental Market is Strong. During the recent bubble, anyone who could fog a mirror could buy a home; therefore, we had a challenging rental market. You have heard me say many times that it is tenants who drive the investment property market. Vacancy rates in Denver, Colorado are approaching 5%. This means that the supply of qualified tenants exceeds the supply of well cared-for properties and excellent potential for higher rental rates in the future.

3. There Are Still Tax Advantages to Real Estate Investments. Not only can you get decent cash flow in this market, you won't have to pay tax on all of it. You can delay taxation until you sell the property. Even then, you will be taxed at a lower capital gains rate. If you decide to sell and buy another property, there are a number of techniques to allow you to defer, or even avoid, taxation. I few years ago, one of my clients sold a property and carried back a note for part of the proceeds. Not only did this allow him to earn interest on money that would have gone for taxes, he now owns a mortgage that pays him 8%. This is an excellent return in this market. It is my opinion that the note is worth more than the principal due because of this high yield.

4. There is A Strong Potential For a Rebound In Values. The population is increasing and there are few new properties being built. This makes it highly likely that properties will increase in value when the current inventory of unsold homes is absorbed. While there is no way to accurately predict when this will happen, property owners will be paid to wait. Current cash flow is higher now than at any time in the past few years and there is a potential for even higher rents in the future. Qualified borrowers can borrow at favorable rates and tenants will make the payments on your behalf.

A Few Cautionary Notes. Real estate investment is not for the faint of heart. Before buying a property, make sure you have a liquidity reserve to carry you through unanticipated vacancy or maintenance expense. Make sure you have a qualified management company to lower your risk of tenant problems. Don't look for very low down financing. This is a two edged sword and can increase your risk of disaster. Mortgage payments must be made whether or not your tenant pays the rent or you have unanticipated expense.

I'm In Town For Much Of July. If you want to discuss ways to add real estate to your portfolio, give me a call. My cell phone is 303-902-3940 or you can call Susan at Westmont Companies 303-996-2010. She always knows how to find me.

LIKE IT OR NOT, CHANGES ARE COMING

The Picture Above Is What I See The Right After I Get Up. Perhaps it is why I am so nostalgic lately. I am grateful that there are some things in my life that change very little. Although I have to expend some effort to keep it this way, most of it occurs automatically with little help from me.

Other things Are Changing Very Rapidly. A number of these changes are inevitable and can be very frightening because some long time fixtures of our society are virtually disappearing.

1. The Post Office. Regular mail (snail mail) is disappearing. As the older generation disappears, virtually all written communication will be via computers. So much nicer to write something that you can send around the globe in seconds rather than days. Of course, we will still need to move objects and packages but Fed Ex and UPS can handle that much more efficiently than the government.

2. Checks. More and more of us pay our bills by internet. It's way too inefficient to use paper that must be carried around from place to place to conduct commerce.

3. Newspapers. As a means of disseminating news, newspapers are way too slow. Between television and the internet, there is little need for print media to be carried around and thrown in people's yard. Dad with his morning paper and coffee is a thing of the past.

4. Books. In a very short time, electronic books have exceeded printed material. My daughter was here recently with her Kindle bragging to me that she was carrying an entire library of 150 volumes in her purse. Although it pains m to say this, it appears that thi is much more efficient
than my present method of keeping reading material which requires book cases in every room and a dust collecting system that causes my wife to sneeze every time she gets one down.

5. Conventional Telephones. My first cellular telephone was confined to my automobile and cost over $1000 (on sale). It only involved voice communication and you paid by the fraction of a minute each time it was in use whether you contacted the party you wanted to reach or not. The hardware is now cheaper and more versatile. The younger generation takes their cell phones with them when they move away from home and few bother to hook up conventional telephones in their new environment. Telephone companies are doing very little to maintain and improve the infrastructure of their conventional telephone business. Talk to even low level phone employees and they will tell you that land lines are the least profitable segment of any communication company's business

6 Television as it currently exists. TV networks are not serving the public well and it appears obvious to me that commercials are becoming more and more prevelant. Cable subscrptions are becoming more and more expensive, yet their revenues are down. At the same time, video games and and internet entertainment are competing more and more for entertainment time. In the future, virtually all television sets will have a computer terminal and internet connection with programming through the internet.

Most of These Predictions are Common Sense. But common sense predictions have helped my investing success immensely over the years. Think about it. What kinds of companies may be successful over the years in view of these trends? Certain tech companies? Transportation companies? Electronic companies? The current investment environment is pretty risky. Companies that have had dominant positions in some industries might be at risk (Remember General Motors?). It's going to take some thought and attention to avoid losing money on some of the companies that will be impacted by these trends.

THE IMPORTANT THINGS IN LIFE.

Can You Take A Picture of Love? Photography is based on simple scientific principles. It has nothing to do with anything but physical phenomenon. Love is not a physical phenomenon and, although I have tried to formulate a physical definition based on things I learned from my chemistry and biology courses, any definition I could come up with is woefully inadequate. There is no adequate definition to describe love as a physical phenomenon but I know what it is when I see it. Look at the picture above. You might describe the photograph as one of a beautiful young mother and her new born daughter. A very poor description. It is a picture of love. One that tells us what really matters in this life.

I Was Brought Up To Believe You Have To Fight For What You Get. I was born into poverty but I was blessed with parents who encouraged me to roll up my sleeves and work to achieve my goals. I was born into a country that provided me with ample opportunity to do so. Social Security records show I started working at age 13 and have worked every year since although some of you might not define what I do now as work. I am now 73 and I realize that much of what I have worked for is valueless. I can't take it with me when I leave this world and wouldn't want to if I could.

So What Do I Own Worth Taking With Me. With the exception of a few guitars, nothing I can pack up and take from place to place. The answer lies in the picture above. It's relationships and the love that goes with them. I still spend time with people I knew in childhood. During the past two years, I have met people online and formed relationships that I value highly. I have seen posts on facebook that shows the high value certain others place on love. I suppose it is idealistic to wish we could form an entire world society based on love, but you can form a series of core relationships based on love and mutual respect. These will serve you well throughout your life.

I Am A Bit Embarrassed. Some of you may find this to be a bit hokey. I admit I find it a bit that way myself. Still, I find it boring to always be talking about money when there are so many more important things. I will probably be in Colorado soon. Send me an e-mail or call my cell phone (303-902-3940) if you want to get together.

WHO DO WE BLAME FOR OUR PROBLEMS?

It's All George Bush's Fault. No. The Fault Lies With Obama. There was a recent series of posts on Facebook where several posters argued as to whether George Bush or Barack Obama was at fault for the current economic malaise. This reminds me of my own upbringing. We were Democrats from head to toe. There was no room for argument. Herbert Hoover caused the depression we barely survived and FD Roosevelt got us out of it. In every subsequent election we voted against Hoover and in favor of Roosevelt, even though both had been dead for several years. It was that simple. I would be a Democrat when I became old enough to vote. Through out high school and into college, I saw no reason to change my plan as my high school teachers and college professors somehow began to let their preferences creep into their lectures. Not only did I know I was right, I could advance a series of arguments, relatively well constructed, to defend my position. Where Are We Now? As I looked at the series of Facebook arguments, it became obvious to me that things have not changed. Each poster had a very simple answer as to who was responsible for our current situation. One side claimed that Obama has failed to take the necessary steps to remedy our situation because of his lack of leadership skills while the other side claimed he was doing as well as he could be expected because of the mess that Bush left us in due to his lack of intellect and willingness to lie to get what he wants. Which one is to blame. Bush? Obama? Both? We all have our opinions. The real facts are that none of us have access to enough information to know. Both Bush and Obama had access to a host of skilled advisors and more facts than any of us could access in a lifetime. The success or failure of each president will depend on a number of factors beyond their control. For example, Clinton was a highly popular president who produced a budget surplus for which he gets the total credit. This is despite the contribution of Reagan who gets credit for the fall of the Soviet Union which allowed Clinton to cut the military budget as a result of the decline of the cold war. Bush gets total blame for getting us into war in the middle east. This is despite the fact that an overwhelming plurality of congress approved that war. The surplus turned into a deficit for a number of reasons, not the least of which was 9/11 and massive additional expenditures to keep us safe. The Bottom Line I still have my opinion and I'm sure most of you do too. But neither of us can assume that we know enough about all the factors involved to put forth a simple answer or offer a simple solution to a problem that is far too complex to be solved by a simple solution. We also have to look at the voting public who continues to expect the government to provide things for us that we can't provide for ourselves. Want a nice house, a new car, all the gasoline you need, and a low stress job with an income that provides more than 90% of the wage-earners in the world can't afford? Want all of this guaranteed by the government? Ain't gonna happen folks. Beware of any politician who claims to be able to provide it for you. What Does This Mean To Your Finances? No doubt, the government has an influence on your financial future and this is the main thing I'm interested in. There is little or no reward in safe investments. The FED is keeping interest rates low and providing liquidity to the market by increasing the money supply. This is likely a temporary situation that will eventually cease as those funding our deficit will decide they don't want to keep providing us with goods and services that we can purchase with dollars of ever decreasing value. The correction may be prove to be painful to investors. For this reason, I am staying with my same old arguments. Stay with investments that provide income. The most critical factor in evaluating your investments should be how likely is that income to continue. On my next post, I will discuss the real estate market and how you can profit in the current situation. The Picture At The Top. This is a flower bed that we planted when Hurricaine Ike blew down a cluster of Magnolia trees. Rather than try to replace those trees we decided to take advantage of the increased light to add a little color. The bright red flowers are called "Knockout Roses" which I had never heard of but which provide more color than I expected. One of life's pleasant little surprises.

TEARING DOWN FRUITDALE SCHOOL

Recent Picture Of Clear Creek A Major Fruitdale Landmark

All I Needed To Learn I Learned At Fruitdale School In my last post, I talked about a phenomenon known as "Creative Destruction." It's a process by which our society can change for the better. Dr. Jack Makens, a friend of mine from high school sent me two examples from the Denver Post. One of these articles was about the Fruitdale School, the place where I obtained my first 8 years of education. I loved that old school where I learned a lot from several dedicated teachers. There is now a controversy as to whether or not the old building will be torn down. It was offered to the Wheat Ridge Historical Society for the modest sum of ten bucks. The society turned it down because it could not afford the estimated $225 per square foot it would take to remodel it. Several local citizens oppose the destruction of this school because it has been a landmark in Fruitdale Valley for almost 100 years. The building was designed and built by Temple Buell, a prominent Denver area architect. He hired several local farmers to work on the construction. I considered joining in the effort to protect the building but then decided that the significance of that school was the people I encountered there, from classmates to teachers. My memories of those days will always center around those people rather than the old red brick structure.

Another process most likely scheduled for destruction is the teaching of cursive writing (longhand or script to most of us). This is being replaced by "keyboarding skills." I never used cursive after obtaining my college degree since I learned how to print very rapidly as an air force radio operator. My guess is that cursive will gradually disappear from our culture. I, for one, will not miss it.

I'm not sure all this destruction and replacement represents an improvement. At the end of the street where I lived, there was a trolley track where you could ride down town for a dime. We used it a lot during the war when gasoline was in short supply. It was a handy way to get where you wanted to go if you wanted to go to an area near the track. Every few blocks was a green colored station with a roof where you could wait. I won't mention other uses for those buildings but I'm sure your imagination will serve you well if you think about it. The station, tracks, and trolley cars have all disappeared and those who use public transportation can stand out in the cold and catch a bus. If they hadn't constructed I-70 where those tracks ran, they might still be viable for light rail.

An Update On Intel. One common investment mistake I have made is that I am reluctant to sell a stock just because it drops in price. I have invested in companies that I rode all the way from my original price to virtually zero as I held and waited for the price to rebound. Fortunately, I recovered much of my original investment via option premiums and dividends but I would have a much larger portfolio if I had just followed the old adage of "Cut Your Losses and Let Your Profits Run." That is much easier said than done but I surely could have done better than I have. I decided on a somewhat different strategy with Intel. Although I still think it is a good company, the fact that it has dropped almost 10% since I bought it, I decided to take my loss and bail out. Well, almost bail out. I sold my 1000 share of Intel for a $1700 loss. Some of the loss was recovered from profits of $1239 in option premiums and $181 in dividends received for a net loss of $280. Just in case my decision to get out proves erroneous, I purchased an option which gives me the opportunity, but not the obligation, to repurchase my 1000 shares at $22.50 per share any time between now and January of 2013. I paid $1680 for this privilege. This allows me an almost unlimited upside potential should Intel suddenly reverse fortunes and go to unexpected heights with a downside of only $1680.

It is my opinion that option strategies are a valuable tool in the management of any investment portfolio. I would advise virtually any serious investors to learn the basic principles of option investing. Many, if not most, investment managers and stock brokers advise against their use because some don't know enough about them and others are afraid that their clients will become too aggressive and lose money. For this reason, broker dealers require that their investors obtain approval from a designated options principal before they are allowed to trade in this area. While many investors have lost considerable sums speculating in options, others find they can be a valuable tool in managing risk. In the present environment I have limited my own investment choices to those companies that offer attractive option opportunities as well as sound fundamentals.

DIVIDEND PORTFOLIO UPDATE

My Favorite Restaurant I couldn't resist showing you a picture of my favorite restaurant, The Tschoupitoulas Steak House. It's also in one of my favorite towns, Crockett, Texas, The home of the Camp Street Cafe and Store, which is neither on Camp Street nor is it a Cafe and store. It is the home of my favorite music venue and is owned by my favorite cowboy poets/musicians, The Gillete Brothers. One of the pioneers of country blues, Lightnin' Hopkins used to play on the streets there in the early 1900's. The picture next to the cafe is a sample of what's happening to small town America. Alan Greenspan would call it an example of "Creative Destruction" which describes how older/obsolete institutions are destroyed so that newer, more efficient institutions can take their place. I suppose I may also be an example of these old/obsolete intuitions that are being destroyed to make room for the youngsters. In any event, I am grateful for places like this and not sure every example of creative destruction is all that creative.

On The More Practical Side. I told you I would give you periodic updates of the portfolio I put together last December to illustrate alternatives to risk free examples. I am not sure how long I am going to keep publishing these updates. One of the advantages of portfolios like these is that you don't have to watch them every day. I hope you don't find these updates too boring.

1. Ameren Corporation (AEE). Investment amount was $17130 and current value is $16524. Dividends since January 31 are $234.

2. Bristol Meyers Squibb (BMY). Investment amount was $18360 and current value is $19103. No dividends were received this quarter.

3. Duke Energy. (Duk). Investment amount was $19,300 and current value is $19,602. Dividends of $275 were received this quarter.

4. Lockheed Martin (LMT). Investment amount was $20460 and current value is $24,111. Dividends received were $225.

5. Medical Properties Trust (MPW). Investment amount was $20240. Current value is $22140 with dividends of $400.

6. AT&T (T). Original investment was $17,526 and current value is $17310. Dividends received this quarter were $258.

7. Health Care Properties (HCP). Original investment was $19512 with current value of $22038. Dividends this quarter were $282.

8. Kinder Morgan Partners (KMP). Original Investment was $20777 and current value is $22137. Dividends this quarter were $339.

9. Fidelity National Financial (FNF). Original Investment was 19,570 and current value is $19,306. Dividends this quarter were $168.

10. Windstream Corporation (WIN). Original Investment was $26,860 and current value is $24,491. No dividends received this quarter.

The Bottom Line. As of today's date, the total value is $206,762 as opposed a total original investment of $199753, Dividends this quarter were $2181. Since our original investment four months ago, we have earned total dividends of $3,964. This is equivalent to an annualized return of 5.95%. Approximately 3 times as much as you would have earned on a one year CD. In addition, we would have received a preferential tax rate. Of course, you could sell out and get a capital gain of $7,000+ but I would prefer not to count that since it may disappear should the market correct in the future.

Just A Sample. This is the kind of portfolio I would recommend for conservative investors who want current cash flow. If you have a highly paid job, are several years away from retirement, and have a higher risk tolerance, I might recommend something more aggressive; however, I believe now is the time for most investors to be more conservative and, even if you don't need income to live on, you might want to collect cash flow to take advantage of better opportunities that may arise in the future.

IMPORTANT VISITOR ON IMPORTANT MISSION

Azaleas and Dogwoods. The picture at the left shows two of Betty's favorite flowers. The bright azaleas are easily visible in the lower left hand corner while on the right, near the middle is a dogwood tree. You have to strain to see it. Unfortunately, pictures by an amateur photographer seldom do it justice. It is sort of whimsical and graceful and adds a lot to the landscape. Legend has it that dogwood trees used to grow large until they were used to construct the cross on which Christ was crucified and thereafter they were never allowed to to grow large enough to construct an instrument of crucifixion again. It's an interesting story but, as far as I know, it doesn't appear anywhere in the bible.

On A More Serious Note. On March 4, a very important Admiral from Norway visited this country. Rear Admiral Trond Grytting, who had most recently served for several years as the key officer in charge of Norwegian-Russian military contacts, was on an important mission from the king of Norway. While our first guess might have been that this was in Washington DC, we would have been wrong. Instead he showed up at a convalescent center in Silsbee, Texas, a small town a few miles from Wildwood. His mission: To present a royal honor from the King of Norway to Leif Oistad, a longtime neighbor of ours here in Wildwood.

It Was Almost 70 Years Ago. Leif was recruited by the US Army to serve with the 99th Mountain Battalion on a highly secret mission behind enemy lines in German occupied Norway. In his first job, he instructed his fellow soldiers in skiing since he had been a skier practically since his birth in Norway. The second job was much more dangerous in that they parachuted behind enemy lines to conduct sabotage operations. Before traveling overseas, he requested that, since he was likely to give up his life for America, he would prefer to do it as an American citizen. The story has it that his citizenship papers were delivered within an hour.

Their Mission Was Successful. Leif received two bronze stars along with several other medals and awards too numerous to mention. Before retiring to Wildwood, he worked several years as a captain of several seismic research vessels for Shell Oil. While many details of their mission WWII mission are not known, I would venture a guess that the mission involved much more than blowing up a few rail lines since it justified a visit from an important representative on a mission from the King of Norway. I have heard rumors of an atomic energy related operation but can't justify repeating them since they are just that.

I Have Wanted To Pay Leif A Visit For Some Time. We visited a few times when we met outdoors but I never got around to visiting him to discuss some of his adventures. That's very unfortunate since Lief died last Thursday, March 17. This isn't the first time I have neglected to take the time to get to know someone that I could have learned a lot from. Our time here is so important and the most important thing we can do is interact with our fellow human beings. We are losing our heroes at an alarming rate and we must insure that their story lives on.

HURRY UP SPRING

Back In Texas. I'm back in Texas and it looks like spring is coming on fast. Azaleas blooming, yard turning green, and temperatures over the next 7 days are expected to be in the 80's. It can't come too fast for me. The weather is getting brighter but the economic environment seems pretty gloomy. Problems with nuclear reactors in Japan appear to be on the verge of disaster, union/government relations in Wisconsin are at a historic low point, and gasoline is predicted to hit four bucks a gallon. I remember a song in the 1970's called Goodbye Easy Street. That had to do with the Arab oil embargo and the anticipated demise of cheap energy. It appears that the pessimism of that era was 40 years early. Could we be in that situation again?





Ask The Energy Department. It was in the Jimmy Carter Administration that we founded the department of energy. They did a lot of really valuable measures such as lowering the speed limit to 55 mph, instituting full-time daylight saving time, and issuing bulletins advising us to stop using hair dryers and power lawnmowers None of these appeared to work too well so now we have the EPA empowered to help out in order to keep us from adding too much carbon dioxide to the environment and raising the average temperature a fraction of a degree. Of course, we have those curly light bulbs that we have to call out the national guard if we drop and break. Those are due to be mandatory in a couple of years. Just when we were about to ramp up our nuclear power plants to reduce greenhouse gasses, we have this huge earthquake to remind us that, nature has ways of surprising us with new disasters that we have absolutely no way of anticipating.



Bottom Line. Don't depend on the government to solve your problems. They would if they could but they don't know how. I just drove back and forth to Colorado and spent as much for gas as an airplane ticket. In addition, I spent two hundred bucks on motels. At least, I didn't have to sit two hours in a space the size of a linen closet and I could come and go as I please. Add the $165 I spent for a speeding ticket in Decatur, Texas and you can see that it cost me twice as much to drive than it would have to fly. There are ways to hedge against rising energy costs. One of those is to invest in companies in the energy business. If energy prices go up the price of your energy stock increases to help cover the cost of your increased gasoline.





What The Government Could Do. Our government wants us to do things to stop our dependence on foreign oil. So do I. They want us to look at hydrogen as an alternative source of energy. So do I. They want us to look at vegetable oil as a source of replacement for diesel. So do I. They want us to get energy from the sun, wind, and the tides. So do I. So how do we differ? I want us to improve our production of conventional energy via improved technology for exploration and production. They don't. I believe we can become energy independent while we develop these alternative fuels. They don't. I believe their regulations inhibit the production of fossil fuels forcing us to give money to countries who hate us. They don't. Until we make energy independence a priority, whatever the source, we might as well dissolve the Department of Energy and use the money to reduce the federal deficit. That department has squandered huge sums of money and we are just as dependent on OPEC as we were 40 years ago.

COLORADO TRIP ALMOST OVER.

About Time To Head Home. I have been in Colorado in excess of two weeks. I haven't cashed any checks as a result of my trip here but I have opened some new possibilities and I have rejuvenated my spirit as a result of some of the things I have done. I saw a number of friends that I have missed more than I thought. One of the high points was spending an afternoon with a cousin that I have not seen for 60 years. She was a bright teenager last time I saw her and she is just as interesting to be around now as she was 60 years. Her husband, who I never met is also related to me through another branch of the family. He is a fine gentleman. Say what you want about Facebook but I would never have found them otherwise.

Update On Intel. On January 18, I told you about a hedged investment I made in Intel. At the time I told you I would keep you informed as to the performance of that investment. To refresh your memory, I bought 1000 shares of the stock at 21.07 per share last November. At that time, I sold an option to buy those shares from me at 22 in mid-February. I got $630 for that option. The $630 went into my account and I was free to spend it however I wished. Just before exploration, the stock was selling for just over $22. If I had done nothing, I would have lost the stock at $22 a share for a net profit of $1630. That would have been a satisfactory result for a 3 month investment of $21,070. Not a barn-burner but still almost 8% for three months.

Another Alternative. I bought the option back for $195 leaving me a profit of $435 and I didn't have to sell the stock. I also sold another call at $520, this time with a strike of $23 and an expiration of April. This is just another example of what you can do to manage a covered call position once you establish it. Another factor, I received a dividend of $180 today. Granted, these aren't huge dollar amounts but they add up and with only $21,000 at risk it appears to be a prudent investment. I still think Intel is a great buy at the current price of $21.49 and I have generated $1135 in cash flow to buy groceries. I will let you know how things look on or before the Mid April expiration date of the stock.

This Is Not A Lot of Work. You can get by with checking this position once a day once you've established it. In my last post, I talked about information, analysis, and intuition. Establishing a position like this and monitoring it helps develop your intuition to make more money in the future. I am always glad to hear from my readers. Let me know what you think.

INFORMATION VS UNDERSTANDING.

Dumb Money Still Buying? One of my recent blog entries (January 18) discussed hedge funds and their vast research materials including computer programs designed to screen for investment opportunities. One reasons small investors are often considered at a huge disadvantage is that they lack access to these sophisticated tools to manage their investments. Sounds pretty hopeless for the little guy doesn't it? Fortunately, as I said in that post, I am not convinced that is the case.

One Problem With The Information Age. The main problem with the information age is that we think we need vast amounts of information to make any kind of decision. When I completed a commercial real estate certification 25 years ago, I learned to carry out all kinds of calculations to evaluate real estate investments. We did everything from discounted cash flow analysis to sensitivity risk analyses. I was enthusiastic about trying these. I had high hopes that I could add them to determination of cap rate, GRM, expense ratios, and a whole host of other information I had previously learned how to collect. One place I hoped to use this was with a good friend from Germany who had developed a million + net worth in real estate. Using one of the first property acquisition candidates we located, I went back to my office and spent an afternoon applying all my new techniques. The next day I met with my client and showed him all these new analyses. He didn't compliment me on my thorough analyses, he just sort of ignored it.

The Same Thing Happened Again. The information was difficult to understand and few clients paid a lot of attention to it. Since my attempts to use this to communicate with with clients were unsuccessful, I decided to develop the information for myself in order to become a better consultant. After a year of using this information, I decided it had limited use. Why was that the case? 1. Most experienced investor clients made their decision relying heavily on intuition. While, many academics and consultants make fun of intuition, many clients have relied on it for some time and become very successful using it. 2. There are already dozens of quantitative tools to evaluate real estate investment. These can be done in minutes instead of hours and tell you 95% of what you need to know to make a successful investment. The more sophisticated tools involved making assumptions and projections about the future. Even if the more complex calculations can be carried out successfully, the assumptions you make about the long-term future are subject to wide variation and are unlikely to be accurate over longer periods.

Blink. This is the title of a book on this subject by Malcolm Gladwell, a writer for The New Yorker magazine. He studied several situations where it turned out that gathering too much sophisticated information did more harm than good. One of these was an east coast hospital emergency room. Whenever they had a patient come in with chest pains, they had a set of tests designed to determine whether or not it was a cardiac event. The series of tests was quite reliable; however, the time required to conduct all these tests was time that treatment had to be delayed. A statistical analysis of all the tests showed that they could cut the number of tests by 75% and do almost as well as with the full battery. The new, abbreviated test scheme saved money and lives. Gladwell cites several other examples in his book. Fortunately, this example could be statistically validated. Some of the other examples were totally based on intuition. Intuition that could not be taught because the person using it didn't really know how he was doing it. An example of this came from a tennis fan who could predict with amazing accuracy whenever the server was going to double fault. His results were statistically validated over a long period but the predictor couldn't tell you any observation that allowed him to make such a prediction. One of the main observations in Gladwell's book is that often we don't need more information, what we need is understanding. I believe this is an area that we need to think about in the information age when we can be so busy collecting and organizing information that we don't stop and look at what we are collecting in a critical fashion. The term "paralysis by analysis" comes to mind.

Still In Colorado. Learning some things here as I try to tackle a couple of problems using the same principles I have talked about here. Call my cell phone 303-902-3940 if you have any questions or comments.

BOREDOM, DEPRESSION, AND GROWING OLD.

A Blessing Or A Curse. I still don't know whether my exceptional ability to recall things that happened years ago is a blessing or a curse. I may not know where I left my keys last night but I can tell you about my first day of school when they asked us to count as far as we could. I stopped at 13 because I was embarrassed at all the attention. Donald cried, Melvin counted to 100. These flashbacks come to me when I least expect them. I remember one of my first classes when I was a psychology grad student in the 70's. I was assigned a paper about the problems males face in adjusting to changes in the social environment. I wrote a paper entitled Chauvinist Pigs. I thought one of the problems men face would be growing old and losing their physical strength. I was in my 30's at the time but it was one of my fears. I knew I would eventually have to face it but for now I would do what I could to live each day to the fullest without worrying about the future.



The Future Is now. I can no longer avoid it. I am a totally different person now than I was then. I have financial independence and freedom that I never dreamed of. (Not as abundant as a couple of years ago). I live in surrounded by nature with wildlife, vegetation, warm weather, and I can cool off in the summer and keep warm in the winter. Still, there is occasional boredom. How can I be bored in a place like this? I guess its time to call a spade a spade (Not a damned shovel like 40 years ago). It ain't really boredom folks, it's depression. Another memory just flashed through my mind as I heard the voice of Lou Holtz, former Notre Dame football coach at a motivational speech in San Diego. "Nobody wants to hear you whine."
He was right. I am not going to take anti-depressants nor ECT (electro convulsive therapy). That's what Earnest Hemingway did in 1961 just before he committed suicide. It might work for some folks but it didn't work for him and I don't think it would work for me.



This Is my Existence. Flash back to 1976. As a psychology graduate student, I was working as an assistant to a professor doing group therapy. Most of the participants in the group were in their early 30's and in the midst of some life crisis. The group leader asked each one to tell of all the things bothering them. As each one finished, he had them repeat the phrase, "and this is the existence I have created for myself. I remember this phrase to this day and I tend to repeat it to myself when I find myself complaining about something. I am living the path I chose. I created it for myself. I can change it if I wish. One thing I can't totally control is that I have a finite time left to exist and my body is a device that will wear out. We all face that fact and none of us can change it.



What About The Next Life? There is some evidence of an existence after this one. I have studied this issue and I must admit there is more evidence that it is true than not, but it is not the kind of evidence my scientific training has taught me to require before accepting something as fact. Frankly, I don't expect to find a concrete answer but I must continue to look. I don't believe anyone can know the answer beyond a shadow of a doubt. I have decided the best strategy for coping with the aging process is one of living in the here and now. Another principle I learned in my psychology training was the tendency towards "catastrophic expectations." Many times we imagine some future event as much worse than it turns out to be. That tendency keeps us from enjoying the present. Like the picture above. There is a beautiful woodpecker and if you look closely, you can see a cardinal in the lower left hand corner. Those lush green leaves are Magnolia leaves. Betty took this one a few days ago, somewhere around the day I was bored/depressed. On that day, I didn't allow myself to appreciate that scene. I may fall into that trap again some day but I will minimize it by appreciating the existance I have created for myself. On my next post, I will talk about personal financial strategies again. Thanks for reading.

CONFLICT. AN UNAVOIDABLE PART OF LIFE.

It Starts Right Away. Before we learn to walk and talk we are exposed to conflict. It may start with our first experience with solid food. We love applesauce but our caregivers want to feed us pureed spinach. It tastes awful and we reject it by spitting it out, even though we are hungry. We do our best to make our wishes known but they continue to to force that sickening green stuff on us. We can't communicate well enough to tell them we don't want that and we don't even know that it is our best interest to go ahead and eat our vegetables. Neither of us can understand the other but we do the best we can to manipulate the outcome until we either get what we want or capitulate. We have just had our first experience with conflict and there will be many more throughout our lifetime. This first experience and those to follow will serve to help us develop what is known as our "conflict style."

What Is Your Conflict Style. Without going into how it is developed (no one really knows for sure), we all have our own style for dealing with conflict. There are aggressive/assertive styles, passive styles, and avoidance styles. Undoubtedly there are others and some that combine several styles. It is best for each of us to study our own particular style and recognize what we do as we face various types of conflicts. In my own case, I am a conflict avoider. I tend to do whatever I can do to keep from getting into a conflict. This works in some instances but it also will tend to keep me from accomplishing my objectives if I allow it to take total control. Some weeks ago, I told you about receiving a lawsuit summons from a firm representing a home owner association for money they claimed I owed. The suit was for more than $2,000 and it was my belief that it was totally without merit. After several letters were exchanged, neither of us had budged. I was also aware that there was a lien on the property involving a judgement against the prior owner that was of record prior to my owning the property. That lien was for $4,800. It was questionable as to whether that lien was collectible. I believed that I would have probably won in court but, in reality, neither side would win because of the costs of the suit. If I followed my usual avoidance style and allowed them to proceed in court without my resistance, I would definitely lose by default. If I hired an attorney to do battle in my behalf, attorney fees would be more than the amount of the dispute. If I contacted them with an emotional outburst, I might force them to go to court for the principle of the thing. I had no choice but to prepare the best argument I could and confront the issue. The bottom line was that I gave them $1,000 that I didn't think I owed them to drop the suit and release the lien. It was the only practical way to get it over with. This is an abbreviated version of what happens in disputes between individuals, business entities, and countries. Here are some typical steps involved in resolution of conflicts.

1. Assessment. Take an objective look at what's going on. Try to keep your emotions out of it. One thing I learned in graduate school was that the first side to get emotional in an argument is usually the loser. It signals that they have run out of logical arguments and are forced to resort to tactics like name calling, yelling, and threats. If you know this and are able to keep your wits, you have a good chance of winning. Take a really close look and try to assess your odds of a favorable outcome.

2. Look At The Other Side's Position. Steven Covey has written that we are well advised to "Seek first to understand and then to be understood. Try to understand the motivation of the other side, what they stand to gain and what they stand to lose. By knowing this, you will demonstrate that you are willing to consider their arguments. This will make them more likely to listen to your side as well. It will also let you know what issues they are likely to yield on and what they will probably stand firm on.

3. Be Soft on People Issues. Treat the other side with respect. Look them in the eye, smile occasionally and let them know its about the issues and not the people. Give them an opportunity to save face whenever possible.

4. Be Firm On The Issues. In case you were thinking that this is an article on "Negotiations For Wimps." you should know that its OK to be firm on the issues. Before beginning, it is a good idea to make a list of all the issues involved. I am most familiar with real estate negotiations where some of the issues are purchase price, financing, inspections, needed repairs, closing costs and a whole host of others. Some of these may be less important to you and, while you may offer concessions on others, it is a good policy to ask for something in return before making the offer.

5. Be Careful of Strictly Positional Bargaining. It's typical that each side starts with more than they want with each making slight concessions until they meet in the middle. While this can work, its so common that both sides know that the other side is asking for more than they want with the intent of meeting in the middle. This may end up with an agreement that may be somewhat worthwhile with neither side accomplishing their objectives. Look for something more creative than this.

6. Be Patient. In many real estate transactions, there is a formal written offer. Often with a date in which a response is required. Within that time frame, a counter offer is often received with a date in which a response is required. Real estate agents and generally push for a response within the required time frame but it is often a good opportunity to reduce the other side's expectations by failing to respond in time. In reality, the person making the offer may withdraw it at any time before it is accepted and not be bound by it. Sometimes, it is better to wait and let the other side wonder what you are likely to do. This extends to other types of transactions in which it is better to build tension rather than another counter offer right away.

8. Look At Other Avenues. The focus of this is that the principals are negotiating between themselves. Our approach is transactional but many disputes aren't. When a negotiated settlement is not forthcoming, it may be best to utilize the help of a mediator who is trained at advising both sides from a neutral position. Rather than go into detail on this, it is best that either sides investigate how this works and determine of it is applicable. This is often used in divorce and other very contentious situations.

Hopefully, This Helps. Too often we jump into conflicts with little preparation. If this article causes you to think twice and prepare to to seek a resolution in your best interest, it will have accomplished my objective. I welcome your feedback.

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.

EVALUATING INCOME PRODUCING INVESTMENTS.

The Second Step In Income Investing. In one of my previous posts, I listed several stocks that had passed my screen for income producing investments. At that time, I warned that this list was not a recommended list since it takes one more step to determine whether the investment is a suitable candidate. I have selected one of these investments to illustrate the evaluation process I use. The company I selected to demonstrate the process is Fidelity National Financial (FNF). The information given here comes from Yahoo Finance, which provides sufficient statistics to begin the evaluation process.



Step One. Overall View Of The Company Business. FNF is basically an insurance company. (Not to be confused with the company that provides mutual funds and asset management for investors.) By far their dominant insurance product is title insurance, which they market directly to the real estate industry and also through other title agencies who conduct the search, closing, and escrow function and receive the lion's share of the title insurance fees. The company has a good reputation in the real estate industry. In one of my past lives I owned a title insurance agency and did business with this company. The experience was positive. It does help to have some experience with a company your investing in but it is not required.



Step 2. Basic Financial Information. This information will give you an idea of the the relative size of the company and the average volume of shares traded on a daily basis. FNF has an overall market cap of 3.11 billion and an average of 2+ million shares per day are traded. This means that the company falls into the medium category in terms of size and a sufficient number of shares trade per day that it is unlikely that you would have any difficulty in liquidating your shares should you need access to your funds right away. This is an obvious advantage over a long-term CD or annuity which would cost you a substantial early surrender charge. Commissions for the sale of 1000 shares at a discount brokerage house could be as low as $7.00, virtually negligible compared to CD's or annuities.



Step 3. Some Important Statistics. These are things you should know about just about any company you buy. 1. Price/Earnings Ratio. (P/E). This company sells for 10.3 times earnings. A relatively low ratio. I believe this indicates that the company is not over-valued relative to its ability to produce revenue. 2. Price to sales ratio. The annual sales of this company are almost twice the market value with a price to sales ratio of .55. 3. Price to Book Value. The company sells for less than its net worth with a ratio of .9. All these ratios indicate that the company MAY be a bargain. These low ratios also indicate that the market opinion of the growth prospects for the company is low. This is pretty much to be expected since the company growth prospect is pretty much tied to the real estate industry which is disarray right now.



Step 4. Financial strength. In view of the dim prospects for the real estate industry, it is important to have some idea of the ability of the company to continue operating in an unfavorable environment. 1. Cash. The company has cash assets of almost $338 million as opposed to long and short term debt of $802 million. This combined with annual sales of 5.9 billion appears ample to fund dividend payout and operating expenses. 2. Debt to Equity Ratio. The total debt of the company divided by the shareholder equity is 23.2%. This is an indication of good overall financial health. 3. Current Ratio. This ratio is the ratio of short-term debt divided by short-term assets such as cash and other assets that can be liquidated easily to produce cash. This value is .39, Again relatively low for the industry. From these statistics you can determine that the company has the ability to sustain operations in a relatively hostile environment. If you believe that the current environment will stay the same or improve over the next 5 years, this is a relatively favorable situation.

Step 5. Dividend Sustainability. Since your objective is a stable income stream, this is the most important step in determining if the investment is right for you. The most important factor here is the payout ratio which is the dividends paid divided by the reported earnings. FNF has a ratio of 49%, a figure below 50% is relatively healthy and a figure above 100% indicates you might look for a dividend cut sooner rather than later. You might also look at the dividend growth history. Many investors believe this is more important than the current dividend yield; however, if you need income to pay the bills today, this isn't the case. FNF has a negative dividend growth rate. They cut it from $1.20 per share in 2007 to $.60 per share in 2008. This is a negative factor; however, the fact that they have already began to increase it again to the current level of $.72 is an indication that management believes they should have little trouble in maintaining it at that level. My opinion is that these factors are overall positive for the sustainability of the dividend.



Overall Opinion. This is a suitable investment for my portfolio. I believe they can maintain the current dividend. I also believe there is a potential for future price appreciation and dividend increases. All this will depend on a rebound in the real estate industry. I believe that will happen gradually even if the economy doesn't rebound a great deal. The fact that there are few properties being built means that the supply will eventually tighten resulting in an improvement in the supply demand ratio.

Caution. Remember, I said that this is a suitable investment for my portfolio, not yours. Just about any investment is suitable for some portfolios. Whether or not is suitable for yours depends on a number factors such as age, other assets you own, and your current cash flow situation.

Last Post of 2010. I have been writing this blog since 2006. More than 4 years. If you are one of my new readers, I might recommend you look at some of the older ones. You may find some ideas that benefit your financial situation. Would be glad to hear from you if you do. I plan to continue this blog through next year if my health holds out. Here is to a successful year for all of us.