Sunday, July 28, 2013

The Future of Investment: Reasons for Optimism

There are two reasons that I am optimistic about the future of stock investments. The immediate future looks a little scary. Fueled by the Federal Reserve Bank and the U.S. Treasury, the market is at or near historic highs, even though the underlying economy is threatened by unemployment, underemployment, and debt (both public and private). Almost everything seems overpriced. However, I am trying to visualize how the world might change in the remaining years the Lord may give me.

There are reasons for hope.

First, consider the nature of investing in stocks. I don’t remember where I first came across this idea, but it is true of investing in any climate. If you buy shares in an individual company or for that matter shares in a mutual fund, there is a limit to how much you can lose. That would be all of your money. If you are even reasonably careful in your stock selections this is extremely unlikely. Most well managed companies providing a good service or product tend not to go bankrupt. They are built to outlive their creators. Even when monopolies are taken apart by the law, there successors seem to do OK. Consider, the children of Standard Oil include Exxon (XOM). The Baby Bells include Verizon (VZ) and a merger of the children of Ma Bell is now renamed with the name of its parent, AT&T (T).

Diversification, less than 3% of your net worth in any given company and less than 10% in any sector will protect the investor from catastrophe. Even if you had 5% or your holdings in WorldCom and Enron, their bankruptcies would hurt but it would not be the end of the world. Even in really bad cases, like the BP gulf platform disaster, it is not likely that you will lose more than ½ of your money. BP is a great well managed corporation, critical to the future of the British pension system. Their resources are located all over the world. It is likely that in ten years the patient investor will be rewarded.

Even major meltdowns such as occurred in 2008 will not destroy the patient well diversified investor. Some estimate that as much as ½ of the World’s total wealth disappeared in that debacle (really). The U.S. markets dropped about 40% in a year. Again diversification is key. Consider a portfolio 50% in bonds and 50% in stocks would have lost 20% of its value. However the first quarter of 2009 was a historic buying opportunity. Money shifted from bonds (this process is called rebalancing) back into the stock market at that time rewarded investors with eye popping profits over the next few years.

Now for the really good news, although you are limited to losing all your money in a single investment, there is no upper limit to your returns.

Perhaps after you losses in WorldCom and Enron you came into possession of the All Seeing Eye of Agamotto. You bought Apple (AAPL) at $6.00 a share and sold at $700.00 a share for a hundredfold return on your investment. That would be enough to make you forget about your mistakes.

I am not at all pleased with what is happening in my country. However, the United States is no longer the only game in town. Right now, today, Coca Cola (KO) derives 80% of its sales from outside of the United States. Even though I am a happy shareholder of this beverage giant, I was shocked when found this number on the Internet a few minutes ago. Jeremy Siegel reports in his valuable book “The Future for Investors” that computer programmers in India like to buy bottled water sold by Coca Cola. They trust the brand. He also noted that Carrier air conditioning units seemed to be favored by his Indian hosts.

Many iconic American brands are no longer limited to doing business in this country. They have become creations that exist beyond the boundaries of the traditional nation state. GE is developing entirely new big box medical instruments such as MRI machines for the developing world in the developing world. Their Chinese engineers are designing and building a different kind of product in a Chinese facility for the Chinese market.

In twenty years Carrier may not be an American company. All those dollars we are shipping to China and India are not going to sit still. Their new owners will use them to buy assets both in their own countries and in my country. Eventually, a lot of that money will find its way home. The Chinese are attempting to buy Smithfield, the nation’s largest pork producer. The announcement of this $4.7 billion deal jacked the share price 31% in a single day! Although great American companies may be ultimately be classified as FOCI (Foreign Ownership, Control, or Influence) by our government, there is potential for great profits in owning potential targets of these foreign takeovers.

The key takeaway is that even if the United States continues to diminish as a great creator of surplus wealth, the World market is not shrinking, but it is growing. Great corporations like KO or GE will find ways to profit in new markets, whether those markets are in my country or in some distant corner of the World.

The great wheel is in spin. It is hard to say whether the ball will land on black or red. One thing is certain. No matter what the future may hold, someone will figure out how to make a profit. Keep your eyes and your ears open. That someone may be you.

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