Investing in Basic Needs: Hedging Your Expenses 6 comments
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In the darkness of current events we all need to retrench, reevaluate, and rethink our strategies (the three “rs” of survival). At the same time we need to start a methodical program for building a watch list of securities to invest in. If the financial signals are any indication, the market has already reached a bottom and now is the time to stick our toes back in the water. Certainly there are hundreds of bargain investments that should pay handsomely in the future. Of course it’s the timing that is critical, and that’s a tough one for any investor. But the possibilities lay right before our eyes and we must be ready when the starting gun fires.
Here is an unusual approach toward establishing a base for our investments. It involves hedging expenses. The shortened definition of “hedge” given by Webster’s Dictionary will do: A hedge is protection against loss. Several of your investments can hedge, or compensate, for your monthly expenses. For example, most people need banking services, but you can choose those few banks that will actually pay you in order to have your accounts. You can also buy stocks in the banks you trust, thus getting a double benefit. Similar hedges will work for the foods you eat, the clothes you wear, and the gasoline you use. Again, it is a matter of knowing what your true needs are and then investing according to these needs.
How do you decide what your critical needs are and if they correspond to the needs of others? You don’t need a financial advisor or a crystal ball to figure out which investments will prosper and which ones will fall through the floor. Work it out yourself by conducing “walkabouts” through the economy and through the financial information around you.
Walk through stores from the 99 Cents Only Store (NDN), Costco (COST), and Wal-Mart (WMT) to special apparel outlets, grocery stores, and fun places like Starbucks (SBUX) and Whole Foods Market (WFMI). Take side trips through industrial areas, automobile sales lots, trucking companies, railroad terminals, hospitals, museums, bars, and boutiques.
Take a notebook along and write down what people generally wear, what they eat and drink, where they work, where they like to hang out, and what they drive. Note what truckers and freight trains are hauling. Watch prices, what people have in their shopping carts, and what items and brands are on the shelves. Listen to what people say about survival and the building of wealth.
Wherever you go and whatever you see, ask yourself these important questions.
- What is here that I just can’t do without and, conversely, what can I do without? Ask the same question for people at large. What do most people need and what can they do without?
- What do people buy and what do they avoid? Where do you find lots of people?
- What things and services do all people require or are addicted to and what do most people disregard. What are the stupid ways in which people spend their money?
- What expenses do I want to hedge, what choices do I have, and how can I improve those choices?
Think about this exercise as a walkabout of moving averages. You can never be exact in your calculations, but on the average you can learn to rate what is valuable and needed by you and the majority of people and what is of low value or overpriced. Always think about what things will be like in the future. You’ll see what others see, but you’ll be able to make discriminations that are beyond most observers. The outcome of what may seem like a mundane exercise is actually crucial to your success. It will help you cut your expenses, manage your activities better, make better choices, get your money’s worth, and be more certain about your investments.
You will avoid wasting money; you will understand the economy from your vantage point, sidestep errors that others make, and in the end make more money and, I think, be more content. Couple these abilities with economic analyses that you encounter in newspapers and elsewhere, and your perspectives and insights will allow you to make intuitive judgments about good and poor investments. You will become your own financial advisor.
If the majority of your investment choices are correct, and if you invest for the long journey ahead, you have essentially hedged your own expenses. Buying into wireless services and using them, you have just covered some of your communication costs and stand to make a healthy profit. You can hedge with almost anything – the food that you eat, the gasoline that you use, the healthcare that you need, the transportation that you use, and on and on. Eventually you will make enough money with your investments to cover all your expenses and then some. At that point you are living free of charge. And you’ve done it simply by responding to your needs and the needs you see in others.
The lessons are clear: invest in basic needs, not in whims and desires, and the market will take care of you. There are tons of inexpensive and high-capitalized companies that may be down 30, 40, or even 50 percent or more, yet will recover their losses and realize a significant return as the market stabilizes and turns upward. Be glad for these companies – they may offer once-in-a-lifetime opportunities.
ALL THE ARROWS POINTS TO THESE STOCKS
When you invest in your needs you also invest in the needs of thousands and millions of others who share those same needs. The most important needs are part of our genetic makeup that in one form or another have existed as long as Homo sapiens have traveled the earth. The aggregate needs of you and others are what stimulate companies to offer products that you buy, thus generating a profit for the companies and a nifty return for you.
In summary, the walkabout helps you define and clarify personal and community motivations. Highlighting these in your mind will shift your attention to companies whose products and services can satisfy your basic necessities. After you find those companies that are dedicated to fulfilling basic urges of survival you are on your way for making selections that will not only hedge your costs of living but will also help you build your wealth, even in an unpredictable market.
When you search for relevant companies keep these criteria in mind.
- High cap companies with proven longevity.
- Companies that not only show increased earning over the years but that also pay dividends, preferably with inexpensive automatic reinvestment programs.
- Companies that are well-managed and strive for customer satisfaction.
- Companies that produce consumer staples or broad general public services.
- Stocks that have the potential for long-term capital gains.
- Low risk investments.
- Securities that are counter-inflationary or address infrastructure requirements.
Below are companies that seem to serve these criteria. Thirty companies are divided into ten sectors that the majority of people deal with... Your ultimate choices of companies depend on your own analyses and preferences. You probably can’t hedge for all of your requirements but you can select those areas and companies that you believe offer the most potential at a reasonable level of risk.
HEDGING YOUR BASIC NEEDS
Disclosure: Author holds positions in PG, SYY, JNJ, MCD, SO, GLD
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Just hold cash a while longer.
This thing is going down a lot more, then the stocks above will be even better buys.
On Dec 30 01:12 PM Mike Kayes, CFA wrote:
> The idea that one can hedge against the expenses related to basic
> needs is idiotic. I am resigned to the fact that I have to buy toothpaste
> every once in a while. To think I can somehow hedge this expense
> by buying shares in Procter and Gamble (as I prefer Crest toothpaste)
> and that somehow if I brush my teeth a lot, then my investment in
> PG will pay for my expenses makes absolutely no sense. Same applies
> to buying shares in XOM to hege the fact I have to fill up my car
> with gasoline once a week. There are many variables which affect
> stock prices, but my personal consumption is not one of them, nor
> should it play a meaningful role in any investment decision process.
> The author's basis for thinking that personal preferences should
> be correlated to investment decisions is based on his mistaken belief
> that everyone can become their own financial advisor. Even if I asked
> my entire home town how much they floss, this does not make me a
> dentist. A prudent, value-added financial advisor understands that
> there is a lot more invovled in the investment decision process than
> intuition and anecdotal evidence. A knowlege of accounting, economics,
> competitive position analysis, and years of valuation experience,
> to name a few. If 2008 has taught us anything, it is that investing
> is a risky business and that relying upon a true professional, one
> that employs a time-tested disciplined process to make investment
> decisions, is the most prudent strategy. One last point - the author
> also seems to believe that if we watch the masses then we can know
> how to invest. Following the heard is only a good thing to do from
> an investment perspective when the heard is moving in the right direction.
> Often it is not. Conversely, being a contrarion doesn't work all
> the time either. Keep this thought from Ralph Waldo Emerson in mind
> when you approach investing and you'll at least have a fighting change
> -"It is easy in the world to live after the world's opinion; it is
> easy in solitude to live after our own; but the great man is he who
> in the midst of the crowd keeps with perfect sweetness the independence
> of solitude."
I sure hope you are joking, Mike Kayes, CFA. If there is one thing this year has taught us, it is that financial planners and the entire financial services industry have one thing in mind when they make recommendations----the... own self interest. With mutual fund companies like T.Rowe Price, their conflict of interest is management fees and the desire to get money to invest based on their socialistic view of the world. In the case of fee on planners and advisors, their self-interest is fees. The bottom line is yes, I lost money this year (about 10%) on the money I managed----the money I let others manage lost about 40%. Hmmm, let's see, should I invest based on fair value and intuition and lose 10%, or let others whose interests do not align with mine and lose 40%. I am guessing your CFA training taught you to do that math; now, if only in your training they taught you to put the interests of your clients ahead of your own, maybe, must maybe, it would make sense to use a so-called "professional".
Mr. CFA, don't take this offensively, you are only human. It really is not possible for a person to put others interests ahead of their own----it is not wired into any of our DNA----we are programmed to put our self-interest ahead of others, so I am not attacking just financial services people. However, when you start making claims that amateurs should not take control of their own finances and should instead enlist so-called professionals, well sir, that is just plain irresponsible. A monkey could have thrown darts and possibly have outperformed the average money manager this year, and most years.
"A knowlege of accounting, economics,
> competitive position analysis, and years of valuation experience"
Hmmm, I used to believe that too, until I witnessed first hand what happens when the herd takes control of the markets like they have for the past 20 years. If there is one thing I have learned, valuation means NOTHING to the herd. Those of us who used valuation during the 1990's got reamed shorting stocks. Yes, I admit it, I lost money using valuation, but have learned that the average professional money manager doesn't use valuation any more than the average idiot and also cannot read a balance sheet. If they could, they would not be able to find more than a handful of stocks to invest in.
The bottom line is the best money managers know that successful investing requires getting in ahead of “trends”, void of the underlying accounting or valuation, and then getting out before the herd wakes up and realized they have been once again taken by empty promises and fraudulent “one-time” accounting. You can use all the quant’s you want; at the end of the day, computer models have proven over and over again that valuation is meaningless. Besides, even if what I am saying is an exaggeration, the fact is if you want to use valuation as a metric, 99% of all companies would be worth $0 because the value they return to shareholders through dividends is not worth the risk investors pay for those dividends. Why would anyone want to "invest" in a company that pays a 3% dividend and take on major risk when they can earn 2% risk free? And please don't tell me about the old “paying for future earnings”----growth. Webster’s dictionary should define growth as the ability of a company to pay it's top executives and their friends increasingly excessive salaries and use "one-time" accounting to ensure shareholders receive as little money today with the promise of growth.
The bottom line is as a person who believes the only way to "invest" in the market is to "short it $0", I will probably never consistently make profits because no matter what you do as a short, you always have the lemmings that invest based on hopes, wishes and dreams, and if you get caught shorting one of these stocks, you can get reamed. Pick a stock, any stock, and you will find that even with multi-year bear runs, they all eventually fall to $0 once the public realizes they have been taken. Even companies like AT&T, have recapitalize multiple times, wiping out existing shareholders. I always laugh when people say “what about AT&T…been around for years”. Yes, the name has, but just during the past decade they wiped out all shareholders and used our criminal investment banks to recapitalize. Your industry prays on this ignorance, and that is why it is self-perpetuating----a fool is born every second, ensuring that there is consistently a new batch of people that buy into “invest for the long term” to keep your industries pockets well stocked with commissions and other wealth destroying mechanisms. This sir, is largely due to people such as yourself that tell people to invest with professionals for the "long-term", while you and your ilk "feed" off of these people's money for your own self-interest.
If people were invest in hard assets like physical gold, real estate, even ones that depreciate in value but provide happiness (e.g. backyard pools, vacation homes, etc), they would have much more fulfilling and enjoyable lives void of the pain of feeding the massive ponzi scheme we call a stock market that is nothing more than a way to distribute money from those that have to those that do not.