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William McNarland. CFA
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William McNarland, CFA has been working in the investment industry for 15 years. He is a co-founder of PMCMG Inc. and My Global Analyst Inc. He has appeared as a guest on Money Line and taught at the University of Toronto. He resides in Alberta Canada. He can be contacted at info@pmcmg.com.
  • Ten lessons from Warren Buffett
    Warren Buffett is one of the greatest investors of all time. Thankfully, he has been very outspoken on how to be successful when investing. Here are ten lessons that investors can learn from Warren Buffett.
     
    1)       Warren Buffet was quoted in the 2008 letter to shareholders saying “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” This is a reminder to buy not just cheap, but buy high quality as well.
    2)       During an interview in the documentary IOUSA, Warren was quoted as saying “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” An investor can learn from this by buying a business that is not overly complicated or dependent on key employees.
    3)       Near the bottom of the 1974 market correction, Forbes magazine asked how Warren felt, he answered, "Like an oversexed guy in a whorehouse.” The point was that when everyone else was depressed about the prices of stocks, he was very excited for the opportunity to obtain quality business at discounted prices.
    4)       In Business Week, Warren was quoted as saying, “success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” This is a reminder that are emotions can have more to do with bad decisions then are research.
    5)       Warren has been outspoken regarding the need to protect your capital, it is better than taking chances on high-risk gains. He was quoted as saying “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
    6)       Warren has had limited interest in precious metals, he has preferred common stocks. His views on gold were expressed when quoted at Harvard saying, “gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head”.
    7)       It is good to be patient, Warren reminds investors of this when he said, “I call investing the greatest business in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
    8)       Warren also reminds us that the market will never be rational; he was quoted as saying “the fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.”
    9)       If investors are still saving for retirement, they should hope for market declines. Warren reminded investor by saying, "if you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall."This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices”.
    10)   Some of his best advice came when he was only 21, at Columbia University he said, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”.
    Warren Buffett is the world’s greatest investor; he buys quality businesses on sale at times when most people are too frighten to invest.
     
    William McNarland, CFA has been working in the investment industry for 15 years. He is a co-founder of PMCMG Inc. and My Global Analyst Inc. He has appeared as a guest on Money Line and taught at the University of Toronto. He resides in Alberta Canada. He can be contacted at info@pmcmg.com.
     
    Nov 24 12:30 PM | Link | Comment!
  • How to profit from the low price of Natural Gas
    The price of natural gas has been trading at levels investors have not seen for 10 years. The price of natural gas is an 80% discount from four years ago. It is extremely difficult for an individual to invest in natural gas profitably. There are four ways to gain exposure to natural gas: Exchange Trade Funds (NYSEMKT:ETF), Stocks, Futures, and Contracts for Difference. I will comment on the pros and cons of each strategy, and provide the PMCMG Inc. strategy ranking for each approach.
     
    Natural Gas ETF
     
    It is extremely convenient to use an ETF to gain exposure to natural gas. Natural gas ETFs trade on both the NYSE and TSX; ETF’s provides liquidity and potential to make use of put and call options. ETF managers have to rely on futures and swaps to provide exposure to natural gas. Currently, natural gas future prices are in contango (this is a term used to describe the fact that the price of the next month contract is higher than the current month). For example, the current price of the natural gas future contracts for November 2009 is $4.50 and the December 2009 contract is $5.41. Natural gas ETF's roll over their position each month. This entails selling their cheaper November contracts to buy more expensive December contracts. This month will create a realized loss of close to 20% of investor’s capital allocated to the ETF. When a commodities future price is in contango, it is not prudent for an investor to purchase commodity based ETF's.
     
    PMCMG Strategy Ranking 2/5 – Reason: easy to purchase; but likely to disappoint because of current contango.
     
    Natural Gas Stocks
     
    It is easy acquire shares of natural gas producers. Many trade on the TSX and NYSE.   Similar to ETF's, investors can make use of put and call options. There is a problem; natural gas stocks currently have a higher correlation to the stock market then the spot price of natural gas. Most pure play natural gas stocks are trading at 52 week highs, even though natural gas is trading at 10 year lows. For example, Chesapeake Energy Corporation (Ticker CHK-NYSE) could be considered a pure play since 92% of their production is natural gas. Yet, Chesapeake is trading for $29, almost 3 times higher than its 52 week low of $9.84. Purchasing natural gas stocks is a poor way to gain exposure to natural gas.
     
    PMCMG Strategy Ranking 1/5 – Reason: very little present correlation to natural gas price.
     
    Ranking
     
    Natural Gas Futures
     
    Natural gas futures allow investors to trade the current, front month contract of natural gas. Futures are extremely liquid; this allows investors to express their views bullish or bearish view by either investing short or long. The futures are the institutional solution of choice, but the minimum size of investment can be a problem for individual investors. Currently, each contract requires a minimal investment of $25 to 50K USD per trade. This makes it challenging even for well heeled investors to leg into a trade. Investors also have to manage the contract rollover risk themselves; this may require a monthly close out of their positions.
     
    PMCMG Strategy Ranking 3/5 – Reason: great institutional solution, but high minimums make it difficult for individual investors.
     
    Contracts for Difference (NYSEMKT:CFD)
     
    CFD are similar to futures; the main difference is that investors can trade smaller amounts of CFD's. Currently, the minimum CFD purchase of natural gas is only $500. Even if an investor has a considerable amount of resources to allocate to natural gas, the low minimum allows them to leg into the trade in small amounts. Similar to futures, an investor can short natural gas and has to manage the monthly rollover prior to expiration.
     
    PMCMG Strategy Ranking 4/5 – Reason: great flexibility with low minimums. The only downside is the investor still has to manage rollover risk.
     
    Conclusion: There is no perfect way to invest in natural gas. Investors expect that one day spot trading similar to gold and silver will be available for natural gas. Until spot trading is available, CFD's are the best solution for individual investors.
     
    William McNarland, CFA has been working in the investment industry for 15 years. He is a co-founder of PMCMG Inc. and My Global Analyst Inc. He has appeared as a guest on Money Line and taught at the University of Toronto. He resides in Alberta Canada. He can be contacted at info@pmcmg.com.
     
    Nov 24 12:27 PM | Link | Comment!
  • How to invest in Gold
    The rising price of gold has encouraged investors to seek ways to benefit from its rise.  Others have invested in gold to protect their wealth during periods of uncertainty.  There is a number of ways that an investor can invest in Gold; let’s look at the pros and cons of each strategy.
    Gold coins or bars.
     An investor can obtain physical gold from bullion dealers and many banks. The custody of physical gold gives the investor added confidence; the downside is the price the investor pays for storage and security of the gold.  It is also extremely difficult to transport.  The cost to own physical gold, is the percentage difference between the bid/ask spread quoted by the bank or dealer.
    Gold Certificates
     An investor can buy gold certificates, this allows the investor to own gold without the problems associated with physical gold coins or bars.  Many investors would prefer having custody of the physical gold instead of only having a paper certificate.  Government guarantees add creditability to gold certificates.  For example, the Perth Mint Certificate is back by the government of Western Australia.  The cost to buy gold certificates is a combination of certificate and brokerage fees.
     Gold Exchange Traded Funds (ETF’s)
     There is a number of gold ETF’s; gold ETF’s represent proportionate ownership in stored gold.  It would be easy to think of gold ETF’s as a Gold Certificate that an investor buys like a stock.  There is physical gold stored to support the total investment in the underlying ETF.   An example would be SPDR Gold Shares (GLD ticker NYSE).  Since the ETF’s are exchange listed, they are available for margin and short sales.  Brokerage commission apply to the purchase and sale of gold ETF’s.  Many investors would prefer having custody of the physical gold instead of only having a paper certificate. 
     Spot Gold
     Investors can buy and short sell spot gold at currency dealers.  For example at Oanda and Forex.com the investor can trade the spot gold price without commission charges, the only cost is the small difference between the bid/ask price.  Margin and short selling are available.  The main concern is that no physical gold held on behalf of the investor; the safety of the account is dependent on the financial security of the currency dealer.
     Conclusion:  The most secure yet inconvenient way to own gold is physical ownership.  My preference is to buy gold at a large financially stable currency dealer. 
    About the author: William McNarland, CFA has been working in the investment industry for 15 years. He is a co-founder of PMCMG Inc. and My Global Analyst Inc. He has appeared as a guest on Money Line and taught at the University of Toronto. He resides in Alberta Canada. You can contact him at info@pmcmg.com.
    Nov 24 12:26 PM | Link | Comment!
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