I'm not quite sure if this is a strategy for the use of a Mega Million Jackpot or to make a Mega Million Jackpot, but I suspect it would work for both, given investor patience. In any event, you can help make my mega million dollar dream come true while I guide you to yours. Just keep reading …
We all fantasize about what we might do with our lottery winnings. Well, before my dream was killed by probability, I got to thinking of what I would do with the money if I won the record Mega Million Jackpot of $640 million before taxes. And then I realized, it's exactly what I would do to get there if I were a sensible investor like Warren Buffett.
After taking care of the basics, paying off my entire family's debt (including distant cousins and long lost friends), a huge party to celebrate the big win (maybe on a cruise ship), that trip to Jerusalem I've always wanted to take, my dream car Maserati, some charitable endeavors and the purchase of the Greek island of my ancestral heritage, I would probably want to make a few investments to preserve capital, grow my income and maintain my new lifestyle. This article will focus on five investments I might make with my Mega Millions or to make a mega million.
When you're talking about millions, you take a different perspective on stock investment than most of us usually do; the right perspective. I'm talking about a long-term perspective, the kind of investment strategy employed by Warren Buffet. We do this, of course, because we suddenly become concerned with preservation of capital, whereas small fish, we tend to seek the big jackpot so to speak. So, with my millions in hand, I would want to be an owner of businesses I viewed viable for growth over the long term, and I wouldn't necessarily care about getting the perfect price point either (neither does Warren).
Speculative biotech plays and idea-only names would not make my short list. Sure I might set a little money aside for venture capital investment, but the road to Buffett would more likely be reached via Buffett-like investments and patience. Therefore, I would seek companies making money today, growing successfully already and with a nice comparative advantage or market opportunity to secure them. That said, there are a couple dynamic risks today that I would like to hedge against, and I believe some of these investments cover that right off the bat.
1 - Gold
First and foremost, because of my lack of faith in our government and the governments of the world, I would want to own an interest in gold. Having the natural currency of the world in my pocket might prove a good hedge against mankind's tendency toward self-destruction, and the destruction of fiat currency I see happening today.
Goldcorp (GG) is the name that comes to mind when most investors think of gold miners. However, Goldcorp is no secret, and is fully valued because of it, with a P/E ratio of about 18X the consensus of EPS estimates for 2012. That compares to an industry average of roughly 9.4X, based on Yahoo Finance. Still, I'm not as concerned about finding the best value play of the gold miners. Rather, the reasons I might choose Goldcorp are the same reasons the company itself outlines on its webpage. It's got resources with little political risk, so there's no chance of Hugo Chavez or Vladimir Putin claiming a GG property as their own. Plus, I like its low-cost production, which serves the investor in tough times by allowing the company to take market share. That said, its valuation puts me at risk over the short-term.
Nowadays, better, less risky options exist. Heck, with the kind of money I'm talking about, I can safely hold the physical commodity itself, and I would. I would own some silver as well, given my view that it would rise in demand in extreme scenarios and disproportionately in price, due to the limited amount of gold available.
Thanks to the creative guys on Wall Street (the same sort who devised mortgage backed securities mind you) we can own an interest in these commodities through publicly traded securities. Namely, we can own gold and silver interests via instruments like the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV). Thereby, we can hedge the risks that Goldcorp hedges against, but we can also hedge against Goldcorp specific risk.
2 - Energy
With escalation and upheaval seemingly the long-term theme for the Middle East, and with the Iranian situation going nowhere good soon, I'll want to have a domestic source of energy or other alternative in the portfolio. My favorite domestic energy resource is natural gas, largely because of how far out of favor it is. We've got an abundance of it in the U.S. and it is cleaner burning than coal. Due to the latest surge in production and perhaps also due to environmental questions (to a much lesser extent), the price of the commodity and the shares of the companies that produce it exclusively have been deeply discounted. Nevertheless, I expect that any Iranian issue would lead capital into the domestic resource quickly, and the P/E penalty industry players carry today could then help drive a capital gain boost.
We can have an interest in natural gas, or a stake in the price change, by owning the United States Natural Gas (UNG) security. In this case, I like the stocks of domestic energy producers even more. EOG (EOG) and Pioneer Natural Resources (PXD) have solid or growing reserves of oil and natural gas, and offer a hedge against the pure gas idea. For this reason, their stocks have not fared too poorly lately. Chesapeake Energy (CHK) is an important domestic natural gas producer, and Devon (DVN) and Encana (ECA) are important as well, but have distribution constraints. That might change in November … Anyway, the two have not done as well, as a result.
Depending on how much you believe an Iranian event will happen (I believe), then the stronger you might lean to the weakest performers to date (the natural gas pure plays). In my view, they would outperform in that extreme scenario. Otherwise, an oil and gas producer in North America also serves the purpose and limits the one commodity risk. Choose one of these for yourself, or better yet, hedge your company specific risk by buying the pool.
3 - Everybody's Gotta Eat
Inflation watchmen tend to favor hard assets, but industrial commodities will be sensitive to global economic boom/bust cycles. Agricultural crops, however, do not carry such risk. Financial guru Jim Rogers believes commodity investment is probably a can't miss strategy for today's market, because, he notes, if the global economy solidifies, prices will rise. Likewise, he says, if the central banks of the world continue to ease, prices will also rise. It's a win/win scenario, according to Rogers. I agree, but only to a degree.
The same goes for food, though it should be much less sensitive to economic activity. Also, any disruption to global trade that might follow an Iran event would likely raise prices of agricultural goods. Yet, any drop-off in economic activity shouldn't harm them like the industrial metals and such. If you want to hold agriculture, you can buy the ETFs, PowerShares Global Agriculture (PAGG) or the iShares MSCI Global Agriculture Producers (VEGI), which mimic indices of companies participating in the agriculture industry. If you want to tie yourself closer to the prices of crops, and leave the companies out of it, you can buy the UBS E-TRACS CMCI Agriculture TR ETN (UAG). I would likely mix the two some, but put a majority of my capital in the UBS security.
If we're considering one specific company, it's got to be Monsanto (MON), in my view. As time progresses, the company is increasingly gaining share of the seed market and thereby becoming integral to agriculture. It's got a P/E ratio of 21.6 if you average out this August's fiscal year and that of 2013, to get a true forward calendar year P/E ratio (it's something I like to do when my measuring point is somewhere in between). On this occasion, my measuring point is somewhere closer to the February 2013 quarter. The P/E ratio still compares poorly to the consensus forward growth forecast as indicated by Yahoo Finance (using it because you can use it too). That's 11.26%, but this year's growth is up at 18.6% and next year's is at 16%. I suspect Monsanto will do better than the five-year estimate, so I'll arbitrarily (careful) apply a 15% growth rate. That gives us a PEG ratio of 1.4X, and I'm willing to pay that given my global economic expectation and forecast for agriculture. But I would use the stock to spice up the agriculture ETF.
4 - Commerce Must Continue
Commerce will continue, as sure as death and taxes. In some form or another, in just about any scenario, some sort of commerce will continue for this society. It could be the same as today's or more efficient, or it could degenerate back to a barter trade system, but commerce will continue. What's the best way to play commerce then?
I think there are a few ideas here, and we might mix securities to cover our basis. As paper money is replaced, the uses of plastic and electronic commerce grow. Today's commerce is facilitated by two big names, Visa (V) and Mastercard (MA). Tomorrow's might be better captured by eBay (EBAY), because of Paypal, or because of barter trade. Believers in the Internet might also include Amazon.com (AMZN) in the pool of plays here, but I would focus on the facilitators for the long-term, not the individual retailers.
5 - Own the Market, Sort of
It sounds like a cop-out for an equity enthusiast, and it is. Still, if you are only going to own five securities, I think you would be wise to include an index fund or ETF. You want to beat the market, yes, but you also do not want to severely miss the mark. That's a possibility when you're limiting your investment pool.
This will keep you on target, and over the long-term, the index minders have been able to weed and trim and make it fit your strategy for capital appreciation. You could own the SPDR S&P 500 (SPY), but I would reach for the best performing group over the long-term, where the most value is found. That's found in the small cap value segment of the market.
From 1925 through 2011, the Center for Research in Security Pricing (Ibbotson data) shows that smaller cap shares outperformed larger cap stocks, rising 11.3% on an average annual basis against the 9.5% return of the S&P 500 Index. From the end of 1978 through the close of 2011, the Russell 2000 Value Index offered a total return of 13% on an average annual basis. That compared against the 9% gain of the Russell 2000 Growth Index. Thus, an investment security like the SPDR S&P 600 Small Cap Value ETF (SLYV) should serve you well over the long run. It's true that these things move in cycles, growth versus value and large versus small cap, but over the long-term, small cap value ends up winning, historically speaking.
In conclusion, I expect that these five investments or types of investments should prove positive for a long-term strategy for the Mega Millions we will most likely never win. Now, consider something important. Might a strategy for Mega Millions also be a good strategy for a few thousand? I think the answer is yes. In any event, it was fun dreaming… Keep following my thread here and at the blog, as I will be making more stock recommendations than I have in the past, and I've been good at it. When I make individual picks for shorter terms, I will focus more on valuation than I did today, because current valuation will matter more. In this case, we really had to be futurists, as any slight mispricing will smooth out relatively quickly over time. Now go make your million!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.