Join our free email newsletter and recieve business and investing tips daily! Our investment newsletter articles can help you build your wealth by learning from the professionals.
On Black Monday, in October 1987, the market plunged over 500 points. It happened because the big trading companies weren’t able to shut down their computerized trading programs. And it could happen again. But thanks to much more powerful computers, it would be far worse. (more…)
At the beginning of the year, The New York Times profiled several investors. Their stories were similar.
As a result of the market plunge in 2008, Cindy and Eric Canup had to put off their dream of “buying land in Northern California or Oregon.” Joe Mancini had to put off his retirement. Robert Paynter, a retired Wachovia executive, said the past year made him feel as if he were witnessing his own death. (more…)
When the swine flu scare first hit the newspapers, people were nervous. Then the government jumped in. They told us that swine flu was not very contagious. And they said it wasn’t even serious. “Don’t worry about it,” we were told.
I was skeptical. And I was right. (more…)
I’m not an expert in stocks, but I have been involved with stock market publications and stock market gurus for more than 25 years. During that time, I’ve met a lot of characters – some brilliant men without a trace of honesty and some honest men without a trace of intelligence.
I’ve seen investors (including myself) swindled, bamboozled, conned, and just plain charmed.
I’ve seen a lot. And though I have never attempted to figure out the stock market or how to get the better of it, I now have an idea of what works and what doesn’t.
Three caveats, in particular, have come to make sense to me:
1. Don’t put too much money in any one recommendation. By limiting each investment, you’ll never get hurt so badly that you won’t be able to keep going.
2. Never invest in something just because you like the story behind it. A story, by its very nature, is meant to dramatize, not to inform.
3. Don’t leave money in an investment after it turns south. I have many good investment-expert friends who will tell me I’m wrong about this one – but in my experience, when a business starts to fail it will almost always continue in that direction. When it comes to investing in your own business, you know enough about it that you might be able to do something extraordinary to turn things around. But when it comes to other people’s businesses… their success or failure is completely out of your control.
[Ed. Note: One last thing to keep in mind when deciding where and how to invest: Most so-called "Wall Street" experts usually don't know a solid investment from a hole in the ground. Now's your chance to declare your financial independence from the stream of Wall Street mis-advice and gloom and doom. Set yourself free by taking 5 minutes to read our free report here.]
No commodity has disappointed more than uranium. But don’t let that put you off. Now is the perfect time to become a uranium buyer. (I’m assuming that you’re not the head of state of either North Korea or Iran!)
Prices hit $136 in 2007 and then began a long pullback to around $40. They bottomed in April and have since rebounded to the $50 per pound level.
Can they go up from here? Based on market fundamentals, yes… and soon.
Nuclear power contributes 16 percent of world energy demand. In the U.S., it contributes 20 percent. And with 30 nuclear plants under construction and another 38 in pre-construction stages, with dozens more planned, nuclear’s contribution is sure to rise.
Meanwhile, there won’t be enough uranium to go around. The International Atomic Energy Agency recently said that Russia and the U.S. may cover only 5 percent of world demand by 2015.
The current shortage in production is being covered by uranium from dismantled weapons the U.S. has been getting from Russia. The government-created company USEC down-blends this uranium for use in nuclear power plants. But that agreement with Russia goes away in 2013.
The global nuclear power plant construction program isn’t going anywhere, though. With China and India leading the way, nuclear’s resurrection shouldn’t be ignored by investors.
The entire nuclear industry is revving up, including uranium exploration and mining. (It takes eight to 12 years to build a mine and get the stuff out of the ground.) One of the bigger companies that has been mining uranium for a long time is Cameco (CCJ). Its stock should grow right along with the sector itself.
[Ed. Note: Andrew Gordon shares his thoughts on the financial markets regularly in ETR's sister publication, Investor's Daily Edge. Get your free subscription here.
You can also check out Andrew's monthly newsletter,INCOME, for regular updates on how to grow your wealth with high yield and market-beating returns.]
Mark my words: Silver is going over $20 per ounce! Here’s why…
Currently, silver is trading around $15 per ounce, already up 40 percent for the year. To take advantage of what is almost sure to be a continuing rise in price, you can buy silver bars or silver coins (e.g., American Silver Eagle bullion coins or Canadian Silver Maple Leaf coins). Physical silver can be stored in a home safe or in a secure hidden location that only you and another trusted person know about.
Another good way to invest in silver is with the silver exchange-traded fund (SLV). This ETF is very liquid and cost-effective.
Whether you choose to invest in bars, coins, or the SLV exchange-traded fund… make sure you own some silver.
[Ed. Note: Silver, gold, oil, agricultural commodities... Ted Peroulakis follows it all and tells you all about it in ETR's sister publication, Investor's Daily Edge. Sign up for free today.]
De-coupling lives again, but I wouldn’t bet the farm on it.
Remember when it made the rounds over a year ago?
The idea was that even if the U.S. economy caught pneumonia, the rest of the world would at worst get a bad cough. It was argued that Europe and China were much less reliant on the U.S. economy than ever before. And China, with its massive import needs, would also keep economies from Brazil to Australia humming.
This gave governments, businesses, and investors hope. It was about as good as any other unproven theory – but it didn’t quite work out, did it?
America’s economic malaise quickly spread to other countries, including China in a very big way, and they caught much worse than just a cough.
Fact is, replacing the U.S.’s massive market is easier said than done. China’s quickest road to recovery is helping the U.S. recover. That’s why, despite a lot of moaning and groaning, China will continue to finance our growing debt and take their chances on a future devalued dollar.
China’s leaders understand better than most people in America that their heady economic growth was entirely dependent on our “borrow-and-spend” behavior.
With no replacement in sight, it’ll be next-to-impossible for China to turn around its economy. De-coupling has once again miscast China. China is no savior. The crisis began in the West and will end in the West. Only then will a recovery spread elsewhere.
Read my lips: A rescue is not around the corner. You should continue to invest defensively (in gold, for example) or bet the market short, because it still has another leg down to go.
[Ed. Note: You can read more of investment analyst Andrew Gordon's commentary on world markets and his advice for how to deal with them in these tough economic times in Investor's Daily Edge, ETR's free sister publication.]
Since the first day I started working in the stock and bond business, the old timers – the guys I have always sought out as a great source of advice – have said almost without exception, “The markets don’t change.”
This mantra was in response to those in the business who, following a big run-up or downturn in the market, would make the claim that “It’s different this time.” The claim was usually made to support buying at the top of a market or buying when things seemed over-priced.
Until now, the old timers’ advice was always correct. Markets have been the markets. They run up, they fall down. They fall a lot faster than they go up – and if you wait until everyone gets in to convince you its okay to do it, you will lose money.
This time, though, I believe some things have changed. The changes may be of a temporary nature, but this definitely is not your grandfather’s or father’s market. And you’re going to have to prepare yourself mentally to deal with these changes… or get out of the market. You can stay in and try to do the jump in and out game, but you’ll get crushed even faster by doing that than you would have in the past.
Essentially, you’re going to have to adopt a different trading discipline for the next three to five years. (The majority of small investors have no trading discipline anyway, so this will be a new concept for them.) There is still a lot of money to be made in stocks and bonds. It will just take a few shifts in expectations and procedures to get to it.
The biggest change is that this is not a trading market. Some will continue to get lucky with their guesses, and the select few who always seem to make money will keep on making it. But going forward, the big money will be made by those who can wait it out and use dollar cost averaging to their benefit.
Trading requires at least some predictability. But now, the small degree of predictability the markets had has been driven underground by the huge collapse in confidence. The market is jumpier today than at any time in our history. The slightest suspicion, wind shift, or rumor makes it plummet. We will see more falls over the next five years than at a rock climbing competition.
The trader’s position has always been just this side of insane, but now it has crossed the line. With virtually no fundamentals, no confidence that the changes put in place by the Obama administration will produce any lasting results, the debt, the monetization of the debt, the politicizing of the banks, and a world community that has grave misgivings about the future of the global economy, you’d have to be crazy to think you could predict anything.
What will work going forward is positions in companies like Clorox (CLX). There are the usual reasons to own a stock like this, as well as the new reasons that work within the new market rules.
First, the usual reasons: The company recently raised its earnings projections. It will earn around $3.70 this year and $4.17 next. The dividend is $1.84, about a 3.4 percent yield, and there’s plenty of cash to pay it. Its profit margin is rising, it has abundant cash, it’s paying down its debt, and it has stable brands (Clorox Bleach, Kingsford Charcoal, Brita, Glad Bags, Burt’s Bees Skin Care, and Greenworks Detergents).
A solid company with reasonable prospects.
In this economy, that is what I call a slap in the face investment. It is about $51 per share, was as high as $65 in the last 52 weeks, was as low as $46, and has been showing a very nice upward trend for the past three months.
The new reasons to own CLX: It isn’t sexy, it will not run off the charts with breaking news, it pays a good dividend that appears to be safe, it won’t be subject to big swings, it won’t fall off the charts because of a rumor, it is expected to show an incredibly boring growth rate of around 15 percent going forward, and – most important – you can own it, wait out the market volatility, and still retire on time.
In fact, this stock has everything you will need to survive the next five years as an investor: stability, fundamentals, solid management, dividend income, and products that consumers need and will keep buying.
Why is dividend income a factor here? Because I expect to see major – and I mean major – swings in this new market. And while you’re waiting it out, if you don’t have some type of money showing up in your account from a bond or a safe dividend, there will be extended periods when you probably won’t see any money at all.
The second strategy to use in this market is dollar cost averaging. Take advantage of the big price swings. Make the volatility work for you. As Warren Buffett said recently, “I love when things are this bad.”
Investors must learn to cheer when the market crashes. It’s a buying opportunity. If you’re in the right stocks, you have virtually nothing to worry about except where you’ll get more money to buy into the dips.
Shift your expectations and investing style for the next five years or be prepared to be very disappointed. Get out of the Stock of the Month Club, get back to boring, solid companies you can live with.
This is the same advice my old timer friends in the markets have been giving me for years. Maybe things haven’t changed that much after all. Maybe we’ve just been dropkicked back to reality.
[Ed. Note: Steve McDonald has dedicated years of study to the bond market. His expertise is in showing investors how to generate stock market gains without taking stock market risk. And for a select group of investors, Steve has agreed to share his secrets of success... and his top bond recommendations. Click here to learn more... ]
Their profits are up. Their write-downs are lower. The government is riding shotgun for them. And the worst is over.
The banks are back, right?
Goldman Sachs, JP Morgan, Bank of America, Wells Fargo, and even Citigroup all reported profits for the first quarter of 2009. But a closer look under the hood reveals some “creative accounting”…
Most of the banks did extremely well in fixed-income, currency, and commodities trading this past quarter. So is this the new bank model? Making boatloads of money from Forex and bonds?
Not likely. It looks more like a one-time bonanza to me.
The Fed and European central banks were broadcasting their quantitative easing efforts. It’s not hard to make money when the government is telling you which way rates are going. But now that the run-up to quantitative easing is over, making those oversized profits will get a lot harder. So where else will the banks be getting their money?
A bank’s loans are only good assets if they get paid back. And the brutal recession we’re having is forcing more and more loans into default. When their loans go into default, banks go from earning money to spending money. Each foreclosure, for example, costs a bank about $50,000.
The banks still have some tough sledding ahead.
[Ed. Note: Andrew Gordon is an investment analyst with decades of experience watching the markets. Get his take on the economy, under-the-radar investment opportunities, and more with Investor's Daily Edge, ETR's sister publication. Get your free subscription here.]
No matter what kind of business you run, I have a secret that can help you make money even while the recession has your clients’ wallets shut tight.
To tell you the truth, this secret is a good way to make money any time.
Andrew Carnegie, Marshall Field, Sam Walton, and Henry Ford are among the mega-wealthy who put this strategy to work.
As Michael Masterson has pointed out, it is “behind many – if not most – of America’s greatest fortunes.” In fact, says Michael, “It may be the most important secret a businessman can know, for it is the most powerful and most reliable way to make a small business grow.”
But many businessmen are afraid of this strategy… and many others simply overlook it.
I’m talking about undercutting the competition.
Andrew Carnegie was able to produce steel cheaply. Marshall Field cut the price of retail shopping. Sam Walton’s Wal-Mart started offering food, clothing, and other goods at rock-bottom prices. Henry Ford made automobiles that the average Joe could afford. All of these men went on to make massive fortunes.
Under-pricing your competition is an exceptionally effective way to rake in profits during lean times.
An interesting article in the Orlando Sentinel recently reported on a number of businesses that have been booming during the recession. Now when you think of “recession-proof” businesses, credit repair services and pawnshops are likely to come to mind. But the Sentinel mentioned several “atypical” businesses that are doing well, including a bank, a restaurant, and an advertising agency.
They are all very different kinds of businesses, but they have something in common: Their focus is on saving their customers money.
Even during a recession, there are some goods and services that people must buy. And if you can save your customers money while giving them what they need, you can make a bundle.
Here’s how to use this undercutting strategy for your business:
Many small businesses do not even consider charging less for their products and services, no matter what their competition is doing. They settle on a certain price, because they figure that is what it “should” be. And if the economy changes and times get tough, they don’t consider lowering their price, because that’s what they’ve always charged. (Mom-and-pop operations are often guilty of this.)
One of the first successful small businesses I began was a swimming pool maintenance company. When I surveyed what my competitors were charging and calculated my costs, I saw ample room for charging less. Back then, monthly pool service was going for around $45-$50. But I figured out that if I used part-time workers and kept my overhead very low I could charge only $35 and still make a decent profit. When I began promoting my service at that price, I immediately signed up quite a few customers.
I’ve used the same strategy to start other businesses. When, for example, I went into ballroom dance instruction, most studios were charging $60 per hour. But I realized that I didn’t need a studio of my own. By renting space by the hour and also giving private lessons in my clients’ homes, I could charge just $30 an hour. That made dance lessons very affordable for many people who really wanted them, but couldn’t (or didn’t want to) pay $60.
Many small businesses have extra “fat” they can trim in order to cut their prices. But before you try to use this strategy to steal market share from your competitors, you have to make sure you can deliver the same quality for the lower price.
The first thing people will worry about when they see your bargain price is that they’ll be getting less in terms of quality and/or service. And if you can’t deliver, your customers will quickly leave you. One way to reassure them is to itemize everything they’ll be getting for the price so they can compare it to what your competitors are offering. (That’s what I did with the swimming pool business.) You should also offer a money-back guarantee. That is a good way to make your customers feel confident that you will offer high-quality products and services.
Undercutting your competitor’s prices is an admittedly aggressive strategy. But the business world is a harsh one… especially in this economy. If you want to prosper, you’ve got to be “Street Smart.”
[Ed. Note: Paul Lawrence is a successful entrepreneur who's started over a dozen profitable small businesses. For more information on Paul's "Street Smart" business program, click right here.
Ready to start your own business, but don't know where to begin? At ETR's 5 Days in July business-building conference, we'll give you everything you need to start an Internet business. In fact, you WILL have your own fully functioning business up and running by the time the conference ends. Learn more here.]
India is one of the world’s fastest-growing (and most stable) economies, with strength in its agriculture, textile, and service sectors. Services are its main source of economic growth, accounting for over half of India’s output with less than a third of its labor force. And India is on track to open up its retail, insurance, and banking sectors to more foreign investment.
The Indian economy has been growing an average of 7 percent over the last 10 years, reducing poverty by about 10 percent over the same period. India had GDP growth of 8.5 percent in 2006, 9 percent in 2007, and 7.3 percent in 2008.
Since the election victory of the free-market-oriented Congress Party, the Bombay Stock Exchange has taken off. I expect billions of dollars’ worth of investment capital to flow into Indian stocks, and India’s economy is going to continue to soar.
You owe it to yourself to invest in India. Keep in mind, though, that developing markets tend to be volatile, so put only a small portion of your portfolio into any emerging market.
My favorite way to play India is with the PowerShares India Fund (PIN). This exchange-traded fund (ETF) has excellent profit potential. It has seen a great short-term gain of 32 percent since I first recommended it on April 9th. You don’t usually see big profits that fast, and it’s on track for more.
The fund is traded in the U.S., holds a nice basket of Indian stocks, and seeks to mirror the Indian stock market as measured by the Indus India index.
[Ed. Note: Ted Peroulakis brings his passion for the markets to his role as investment analyst with Investor's Daily Edge, Early to Rise's sister publication. You can read more of his great advice every day by signing up for free right here.]
In today’s economy, there is more uncertainty among investors than there is among novices shopping around at an antique store.
What does the new leadership in Washington mean for the stock market? What do the seemingly endless billion-dollar bailouts mean for the overall economy? I wish I had a crystal ball so I could answer these questions – but, just like everyone else out there, I’m left guessing.
What I can comment on, though, is what I know about the relative stability of some of the investment vehicles we can choose from.
When most investors think of their options, they think of:
All of the above are foundational parts of the American economy, and all represent passive investments that require little to no effort. Plus, they all offer the potential for growing your financial portfolio.
That’s the good news. The downsides to these traditional investments are several, and are worth mentioning here so I can give you a full picture of how they stack up against real estate… which is an investment that’s more up my alley.
First, market-based investments are historically more risky. Sure, the market has gone up (overall) in the past century. But just ask someone invested in the market who was set to retire this year if they feel comfortable doing that right now, and you’ll see how important timing is when it comes to being successful with these investments.
For many investors, the risk of the stock market is too much to bear. They prefer the security of CDs, money market accounts, and savings accounts. The downside, here, is that these investment vehicles move in the slow lane, growing at a modest pace that requires time and patience.
Another downside to traditional investments is that (with the exception of dividend-paying stocks) they do not produce any cash flow income. And if you choose to put your money in them, you have to sacrifice liquidity.
The way to avoid these downsides is to consider real estate as an alternative investment vehicle.
Properly purchased real estate pays for itself, can be acquired with little (or none) of your own money, and produces monthly cash flow income. Add to that the appreciation in value over time, and you have a winning investment combination.
Real estate is ripe with advantages that you just can’t find with more traditional market-based investments. You might even all it a “miracle” investment medium. However, many investors still shy away from it, for the following reasons:
These are all valid concerns – so let’s look at each one in some detail. (For the purposes of this article, I’m going to limit myself to residential property – single-family homes and multi-family buildings, as opposed to raw land or commercial real estate.)
First, we have the fear of managing and maintaining the properties. Images of busted plumbing, roof leaks, and eviction notices may come to mind – and there are certainly times when those kinds of things can arise. But you rarely wind up with a major problem if you do your homework before you purchase the property.
In general, multi-family properties tend to be easier to manage and maintain than single-family properties. For one thing, you’ve got the benefit of consolidated maintenance costs. Plus, when one tenant moves out, you’re not stuck with zero income coming in until they’re replaced. You have the financial security of multiple tenants.
Now, we’re talking!
What about people who avoid investing in real estate because they’re not familiar with the process? This is an issue that makes me scratch my head. After all, investors with no real knowledge or savvy put millions into the stock market every year – and feel perfectly comfortable with it.
Meanwhile, with real estate, it’s so easy to become educated about what you’re doing – about how to select, purchase, and then manage the properties that make up your portfolio. And that education is readily available, whether you’re interested in investing in single-family or multi-family properties.
Last on our list of the concerns that prevent people from investing in real estate has to do with perceived market volatility. Well… forget the dismal view of real estate you get from the media. What they’re talking about is just a byproduct of the economic downturn – and, quite honestly, that was a necessary shift to keep real estate affordable for the long haul.
From an investor’s perspective, real estate prices are now excellent, demand is consistent (because people always need a place to live), and there are plenty of properties to choose from.
When you consider all of the above factors, real estate might be the best investment vehicle for you in the current economy. So what are you waiting for?
[Ed. Note: David Lindahl, known as the "Apartment King," has been investing in single-family homes and apartment buildings for eight years. He is the author of several popular moneymaking home-study programs, including "Apartment House Riches." He can be reached at dave@real-estate-fortune.com and www.rementor.com.
Real estate isn't the only moneymaker that can get you through the recession. Discover a recession-proof Plan B that can help you secure your financial future right here.]
What is good for individuals and for the economy in general is not necessarily good for retailers. For example, it is a good thing when people stop using their home equity as an ATM machine. And it’s a good thing when they increase savings and pay down debt. But these improvements in consumer balance sheets can be a drain on the balance sheets of retailers.
Like it or not, consumer spending accounts for more than two-thirds of U.S. economic activity. And that makes retail earnings an important barometer for the economy. So what are retail earnings telling us… and how can you profit?
The biggest lesson we can take from retail earnings is that our economy is not only slowing (that is obvious), it is also changing. We are moving from an economy based on “what I want” to an economy based on “what I need.”
That is why retailers that sell necessities (like Wal-Mart) will continue to show strength, whereas retailers that focus on luxuries and rely on discretionary spending (think Coach, Tiffany, and Saks) will show weakness.
Two companies that exemplify the shift in consumer buying trends are deep-discount retailers Family Dollar (FDO) and Dollar Tree (DLTR). Market research firm Nielsen recently reported that high-income shoppers (from households making more than $100,000 a year) increased their spending at dollar stores by 18 percent in the second half of 2008 as compared to 2007. Not surprisingly, both of these companies are near their all-time highs, while the rest of the market founders.
And speaking of relative strength, one of my favorite retailers in this market is AutoZone (AZO). When the economy tumbles and money is tight, people are more inclined to fix their old car, rather than buy a new one. Need evidence? AZO is also within spitting distance of its all-time high. Few companies have shown this level of resilience, and in a down market that is what you should be looking for.
[Ed. Note: Jon Herring is an investment analyst with Investor's Daily Edge, ETR's sister publication. Get a free subscription to this valuable wealth-building resource right here.]
Do you have a mortgage with a variable or high interest rate? If you do, it makes a lot of sense to refinance. Thirty-year fixed-rate mortgages are currently only about 5 percent – and you want to lock in a low rate now, because inflation is on the horizon.
Inflation is coming due to the colossal amount of money that’s being created by the U.S. government to put toward the country’s economic problems. The country’s heavy debt load and deficit spending could also cause higher inflation. The government is on pace to spend $1.8 trillion more than it takes in this year, a record level of deficit spending. And the national debt is over $11 trillion.
Recently, the Fed has been cutting interest rates in an attempt to restart economic growth. But the Fed’s main job is to keep inflation at acceptable levels. So when inflation gets out of control (which it probably will when we finally emerge from this recession), they will have to increase interest rates. (You may remember that interest rates hit 18 percent in the 1970s under similar circumstances.)
Lock in that 30-year fixed-rate mortgage at today’s low 5 percent rate, before rates start to skyrocket. You’ll be glad you did.
[Ed. Note: Ted Peroulakis has dedicated his life to the study of finance, economics, and investments. You can read his take on the markets, natural resources, and more in ETR's sister publication, Investor's Daily Edge.
Meet Ted, as well as a half-dozen of the top minds in investment advising, in Miami in just a few days. Find out more about this exclusive financial conference here. ]
These are risky times for investors. We are still suffering from a financial crisis and global recession. One way to ride out the turmoil is with blue-chip stocks that keep raising their dividends.
Companies that have a history of consistently raising their dividends have outperformed the market over time. They will survive and thrive no matter what happens in the economy. The best part? They put a growing stream of cash in your pocket. Plus, steady dividend growth helps counter inflation, which could rear its ugly head as a result of rampant government spending.
You want to invest in dividend-paying companies that are dominating players in their industry. These market leaders can easily raise prices to keep up with inflation – or lower prices to crush their competitors. Recessions and downturns actually make them stronger, because the weak players in their space are flushed out and they gain market share.
Invest in the 800-pound gorilla! Here are some of my favorites:
Procter & Gamble Co. (PG)
Wal-Mart Stores Inc. (WMT)
Exxon Mobil Corp. (XOM)
The Coca-Cola Company (KO)
Keep in mind that the current rally could run out of steam and we could experience a major market pullback in the near term. Therefore, you may not want to take a full position in these stocks right now. Take a position over time by buying in small lots. Or wait for a market pullback to get a better entry price. These are some of the highest quality stocks around, but they are not immune to a market sell-off.
[Ed. Note: Ted Peroulakis is just one of the expert analysts at Investor's Daily Edge, ETR's sister publication. Learn more about IDE today.
You can meet IDE's financial experts - along with other top names in the industry - in person next week. Find out more here.]
A common saying on Wall Street is “Sell in May and Go Away” – meaning May’s a good time to sell your stocks and take a vacation from trading because the stock market is going to drop in the summer months.
Is this based on fact? Or is it some kind of myth?
Long-term statistics reveal that most market down periods do, indeed, occur over the six months from May to October. I crunched the numbers back to 1950, and it appears that the old adage holds water.
According to my calculations, if, for example, you’d invested $10,000 into the S&P 500 in 2008 with a strict “sell on May 1, buy on October 31″ strategy, you’d have had more than $500,000 on May 1 of 2009. If you’d just bought and held the S&P 500 during that same period, you’d have wound up with less than $80,000.
So “Sell in May and Go Away” has a history of success. It also has some other factors working in its favor: the so-called Santa Claus rallies that typically boost November, December, and January performance due to holiday spending, as well as the market boost in April due to optimism about upcoming first-quarter earnings reports.
But past performance is not indicative of future returns, and this strategy does not work every year. Plus, there are negatives. You pay a higher capital gains tax rate on stocks you hold for less than a year, and you pay more in commissions than you do with simple buy-and-hold investing.
[Ed. Note: Ted Peroulakis keeps a close eye on breaking investment opportunities as an analyst with Investor's Daily Edge, ETR's sister publication. Find out more about IDE here.
You can meet IDE's financial experts - along with other top names in the industry - in person this June. Find out more here.]
The earning season is drawing to an end. But even before it began, we already knew that a lot of companies were in big trouble. Their dividends told us.
Historically, far more companies have raised their dividends as opposed to cutting or suspending them. But in the first quarter of 2009 – for the very first time since 1955 when Standard & Poor’s started tracking this – the ratio reversed. For every three companies that raised dividends, four cut them.
This is yet another red flag indicating how tight credit still is.
But how about those dividend hikers?
Many raised their dividends by 5 to 10 percent or more this past quarter. And you can even find some – including Shell and AstraZeneca – that have upped their dividend payments by over 10 percent.
Raising dividends in this period of tight credit and slumping demand is either a huge bullish statement on the prospects of the company in question or…
The biggest con job this side of the Madoff scandal.
Occasionally I find a dividend hiker I don’t like. For example, General Dynamics raised its dividend last month but also announced that it would be laying off 12 percent of its workforce. This is not a company confident about its future earnings growth.
But I’ve found that 98 percent of dividend hikes are legit – made because the company has deep reserves of cash and solid revenues.
Companies like that are good investments right now. You’d be getting a double bang for your buck: increasingly big dividend checks and share prices poised to go up.
[Ed. Note: You can read the investment advice and musings of Andrew Gordon every day in ETR's sister publication Investor's Daily Edge . ]
Conventional buy-and-hold stock investing is not working in today’s market. Trading E-Minis is a great alternative, because you can take full advantage of the market’s volatility.
You can easily make money in a market that is going up or down. You can, for example, make a bundle if you go “long” or buy an E-Mini contract and the market goes up. And if you go “short” or sell an E-Mini contract, you can just as easily make money when the market goes down. This adds an entirely new dimension of opportunity for investors.
An E-Mini is an electronically traded futures contract on the Chicago Mercantile Exchange (CME) that represents a smaller version of a standard futures contract. E-Mini contracts are available on the S&P 500, Nasdaq 100, S&P MidCap 400, and Russell 2000 indices. One example: The E-Mini S&P 500 futures contract is one-fifth the size of the standard S&P 500 futures contract.
E-Minis have a low margin requirement, which makes trading them easy and affordable. You can get started for as little as $500 per contract. And because standard stock and index options currently have high premiums due to market volatility, your leverage and profit potential is higher with E-Minis.
E-Minis allow investors with small amounts of risk capital to participate in the Dow and S&P 500 at a fraction of the cost of purchasing the actual stocks outright. You would have to pay thousands of dollars in commissions alone to buy all the stocks in the S&P 500, for example. But by buying an E-Mini S&P 500 futures contract, you can participate in all those stocks for a commission of less than $10!
Bottom line: Start trading E-Minis if you’re looking for an exciting, highly versatile, efficient, and economical way to capitalize on the daily swings in the stock market.
[Ed. Note: Ted Peroulakis is a writer and analyst with Investor's Daily Edge (IDE), ETR's sister publication. Find out more today.
The best way to learn the ins and outs of trading (and making huge gains with) E-Minis is with the Velocity Strategy, developed by IDE editor Rick Pendergraft. Using this simple strategy, he was able to make 99.15 percent gains in 2008. Learn more here.]
Inflation is being kept in check right now. But you can guarantee that it will rear its ugly head at some point in the future. Too much money is being printed by the government. And eventually all those dollars floating around in the economy will be chasing a supply of goods that simply isn’t large enough.
So how do you invest for inflation that isn’t here yet?
First, you want to wait until you see the Consumer Price Index and the Producer Price Index creeping up. Don’t wait until everybody is worried about it. You want to take action when the numbers start increasing slightly.
At that point, diversify your portfolio with a balance of investment vehicles: bonds, precious metals, and stocks. How much do you allocate to each one? That is really up to you. But you should consider such factors as your age, your comfort level with risk, and how many years you have until you retire.
I will probably leave approximately 50 percent of my own portfolio in equities (diversified among various markets and sectors), and put approximately 25 percent in bonds and 25 percent in precious metals. And I’m talking, here, about the 80 percent of my portfolio that I view as long-term. The 20 percent that I trade on a short-term basis changes from day to day.
[Ed. Note: Rick Pendergraft's take on the market and approach for investing with confidence despite the Great Recession is available every day in ETR's sister publication, Investor's Daily Edge. Sign up for FREE right here.]
Although the markets of the BRIC countries (Brazil, Russia, India, and China) have crashed along with those of the rest of the world, these countries have tremendous growth potential – which could mean investment opportunities for you.
Their growth potential is due to several factors, including abundant natural resources, low labor and production costs, and increasing foreign trade.
I gave you an overview of Brazil and Russia yesterday. Today, let’s look at India and China.
India has great long-term potential due to its stable economy and position as a low-cost producer of manufactured goods. And consumer demand is exploding as India’s standard of living increases. Because so many people in India speak English, many companies from English-speaking countries have sales and service operations in India. And India’s highly skilled and educated workforce has led to a strong software development industry.
The best way to play India: PowerShares India (PIN). This exchange-traded fund holds a nice basket of Indian stocks and seeks to mirror the Indian stock market as measured by the Indus India index.
Although China still has a communist dictatorship, the country is open to free trade and capitalism. China is the main outsourcing location for manufacturing today. Labor is still very cheap, and logistics between China and the U.S. are very good. It will remain the top low-cost producer of manufactured goods for years to come. Furthermore, with the Chinese enjoying a higher disposable income, domestic consumption is exploding. As a result, retail sales are hitting record highs.
The best way to play China: iShares FTSE/Xinhua China 25 Index (FXI). This exchange-traded fund holds a nice basket of Chinese stocks and seeks to mirror the Chinese stock market as measured by the FTSE/Xinhua China 25 index.
[Ed. Note: Investment expert Ted Peroulakis and 8 of his fellow moneymakers will be gathering in Miami this June to share exactly how you can use their top recommendations to make a fortune in today's market. Get all the details here.]
BRIC is an acronym for the combined economies of Brazil, Russia, India, and China. These developing countries have seen their stock markets plummet along with those of the rest of the world, but now is a great time to invest in them. Their stocks are oversold and they still have high growth potential. Plus, BRICs typically have lower labor and production costs, so companies in other countries are looking into the opportunities they offer for foreign expansion and trade.
Today, let’s look at Brazil and Russia, which are destined to become the world’s leading producers of raw materials.
In the past, Brazil had high inflation, but the economic climate has been quite stable under President Lula da Silva. And the land is rich with natural resources. The ethanol industry, in particular, is very strong and growing. The world is seeking alternative sources for traditional fuels, and Brazil is well positioned to take full advantage of this.
The best way to play Brazil: iShares MSCI Brazil Index (EWZ). This exchange-traded fund holds a nice basket of Brazilian stocks and seeks to mirror the Brazilian stock market as measured by the MSCI Brazil index.
Russia has some big negatives – with political issues and organized crime among the main concerns. And investors don’t like the idea of investing in companies that could be nationalized overnight. But Russia’s energy sector is still a powerful force in the world, and its cheap assets are quite attractive. Russia is one of the largest producers of palladium, platinum, diamonds, nickel, and gold, making it a natural resources powerhouse that should do well as commodity prices recover.
The best way to play Russia: Market Vectors Russia ETF (RSX). This exchange-traded fund holds a nice basket of Russian stocks and seeks to mirror the Russian stock market as measured by the DAX Global Russia+ Index.
[Ed. Note: Investment expert Ted Peroulakis and 8 of his fellow moneymakers will be gathering in Miami this June to share exactly how you can use their top recommendations to make a fortune in today's market. Get all the details here.]
You might think that you and your investments don’t stand a chance against the Wall Street giants. But the fact is, you can gain a big advantage simply by doing one incredibly simple thing:
Stay small.
That means steering clear of the big investment firms. Keeping your money out of massive mutual funds managed by someone more interested in his image than your cash.
In the financial markets, as a small investor managing your own money, you can prevail against the big institutions whose performance is, let’s face it, average at best. The key to success is speed – which is something the Wall Street giants are seriously lacking. It takes them longer to jump on new opportunities or jump ship when things turn south. As a small investor, you can nearly always buy and sell anything you want, literally with the click of your mouse. Your order is filled immediately. And no one is paying attention to what you’re doing, because your trade barely registers on the radar.
And here’s the real kicker: You can monitor the actions of the big institutions because their activity is easy to spy on!
You see, the big institutions need to trade in such large volumes that their activities are immediately obvious to anyone paying attention. And as a small investor, by paying attention you stand to make a small fortune by stalking your prey and pouncing with rapier speed at just the right time.
For example, let’s say ACME is a stock that’s been stuck in a small price range for the last few days. As an educated investor you’re already aware that this stock has the potential to make a big move. The institutions start buying in large numbers, pushing the stock price up – but they’re not done yet. To make money, the big institutions have to buy in such large volumes that it takes days for them to accumulate their positions.
You’re observing this activity and, as the stock price breaks out of its recent tight range, you load up and buy your required quota in just a few seconds with a few clicks of your mouse.
The institutions are still not done, and have to keep buying at higher and higher prices. The stock keeps rising, now at even greater speed as the big funds double up on their investment, pushing the stock to new highs. But remember, you’re already in, happily riding on their coattails.
Abe in Virginia used this strategy for two years, transforming his account from $10,000 to $140,000.
“This is the one pattern in the markets that I pay attention to,” says Abe, “because when the stock flies it can mean triple-digit returns in a matter of days.”
If you want to read more about how Abe and other traders are outgunning Wall Street, click here to read their fascinating story.
[Ed. Note: Trading expert and bestselling author Guy Cohen can show you how to generate your own massive returns trading stocks with his new program. Get all the details here.]
In the past 12 months, a rookie investor named Richie has increased his money by over 300 percent, trading with a certain method that he learned in approximately one week.
Richie has the distinction of comprehensively outperforming Wall Street, thereby embarrassing its so-called pros. He is a typical example of your ordinary guy doing extraordinary things by using simple rules.
So, from someone who has quadrupled his money from $7,500 to $30,000, here is Richie’s NUMBER ONE GOLDEN RULE:
Take your first profit early and protect your position so your winners don’t turn into losers.
In practical terms, this means you have to set a conservative profit target for your trade, at which point you collect your winnings for half of your position. This is a bit like instant gratification for a trade done well – your “chocolate” if you will. The other half of your trade is left open in case the stock price keeps going in a favorable direction. If it does, you stand to make a windfall profit. If it doesn’t, you’re protected by making sure you exit at the price you opened your trade, thereby protecting that first profit you already banked.
It’s crucial that you follow these rules and don’t get greedy. By not taking your first profit, you risk the stock moving sharply against you and allowing your paper profit to turn into an actual loss. By contrast, if you took all your profit at the first target you could miss out on potentially life-changing windfalls when the stock gallops in your favor. So the solution is to (a) satisfy your cravings for instant gratification (take half your profits at the first profit target) and (b) satisfy your need for “fruit and veg” (keep half your stake open for a windfall profit opportunity).
It’s these windfall profits that enable Richie and others to bank phenomenal returns. And Richie is no one-hit wonder. He only risks 3 percent of his money on any one single trade, meaning his performance spans over 100 trades.
Richie is one of the fortunate few who have discovered a method of trading that’s easy to execute and doesn’t take much time.
“I only trade one pattern in the markets,” says Richie, “which means I only have to focus on one thing and get very good at it. Before I discovered this method, I found trading time consuming and complicated. Now it’s a pleasure and something I look forward to for just minutes per day. And the results speak for themselves.”
If you want to read more about how Richie and other traders are outperforming Wall Street, click here to read their fascinating story.
[Ed. Note: Trading expert and bestselling author Guy Cohen can show you how to generate your own massive returns trading stocks with his new program. Get all the details here. ]
You are probably familiar with the Pareto Principle, also known as the 80/20 Rule. It states that 80 percent of your results will come from 20 percent of your efforts. And this applies to investing as well as most other endeavors. For instance, 80 percent of your gains will likely come from 20 percent of your investments.
I also believe it applies to what I do in the investment world: short-term trading. I trade options and futures, but I don’t use all of my money for this. My wife and I have 80 percent of our investment money in long-term assets. She handles those investments while I get to play with the other 20 percent in the short-term.
How you diversify your portfolio also goes hand in hand with the 80/20 Rule. You should not have all your money in one stock, one investment vehicle, one market, or being handled by one firm. Look at how many people put all their money with Bernie Madoff and lost it.
[Ed. Note: Investment expert Rick Pendergraft and 8 of his colleagues will be revealing their top investment strategies this June. Find out how you can learn their secrets to making a fortune in today's market right here.]
Agricultural products, including corn, wheat, and soybeans, are absolute necessities for human existence. And with the world’s population quickly increasing, demand for these commodities will skyrocket… and push prices much higher.
That’s one good reason to invest in agriculture.
In addition, as oil prices head higher bio-fuels will increasingly be used as an alternative energy source – which, in turn, will boost the demand for agricultural products (especially corn).
Furthermore, investing in agriculture is a great hedge against inflation – and it looks like inflation is coming. Elevated inflation drives the prices of agricultural products higher – and, let’s face it, people are always going to need to eat, no matter how bad things get with the economy.
My favorite way to invest in agriculture is with the PowerShares DB Agriculture (DBA). This exchange traded fund (ETF) tracks widely traded agricultural commodities. As the prices of those products rise, the price of the ETF goes up.
[Ed. Note: Investment expert Ted Peroulakis and 8 of his fellow moneymakers will be gathering in Miami this June to share exactly how you can use their top recommendations to make a fortune in today's market. Get all the details here.
Interested in other "against-the-grain" investments? Try ETR's program for profiting from the ongoing foreclosure "boom." No fix-and-flip involved.]
As a result of expenditures for economic relief programs and government bailout programs aimed at getting us out of this recession, the U.S. budget deficit for fiscal 2009 is already close to $1 trillion, the biggest in history. In fiscal 2008, the deficit was a record $455 billion, and this year’s could be four times higher, possibly hitting $1.8 trillion.
And that’s not all. The recession took a bite out of tax revenues and put millions of people out of work. Higher jobless benefit claims are pushing government expenses higher. In addition, defense spending is elevated and Social Security costs are growing.
If an individual consistently spends more money than he takes in, he will eventually go bankrupt. But the U.S. government will never go bankrupt because it can just print up new money whenever needed to meet its debt obligations.
A projected deficit of $1.8 trillion this year and a current national debt of over $11 trillion could lead to a big spike in inflation. So make sure you protect your wealth and purchasing power. Invest in hard assets like gold, silver, copper, land, and oil.
[Ed. Note: Ted Peroulakis keeps a close eye on the markets and government efforts to keep this recession at bay in Investor's Daily Edge, ETR's sister publication.
You can meet IDE's financial experts - along with other top names in the industry - in person this June. Find out more here.]
For months, my colleagues and I at ETR’s sister newsletter, Investor’s Daily Edge, have been pounding the table about how this market is a stock picker’s dream. We have said things like, “Millionaires are made at this point in the market cycle,” “Stocks are really cheap,” and “Build a bulletproof portfolio now.” But most people can only hear the doom and gloom news, and it always ends up costing them money.
The market is almost 7,000 points below its previous high, even after a huge move in the last month. This is a buy signal… not a reason to stay out. But most will stay on the sidelines and wait for stocks to become overpriced before they buy again.
In my last ETR article, I said that you can lower your risk in this market by giving it time. Now, here’s another suggestion…
Average in, rather than dumping in all your money at once. Buy about one-quarter to one-third of what your usual position size is, and buy on the dips – and there will be dips in the next three to five years.
If you want to add a nice kicker to this plan, buy companies with good dividends. That could add 5 to 7 percent to your annual return. That’s how cheap stocks are right now. Companies that usually have dividends of 1 to 3 percent are paying 5 to 7 percent.
This is a 100-year buying opportunity. The only requirement is that you must be willing to stay the course and treat selling dips as buying opportunities. You have your pick of the best companies in the world right now at bargain basement prices.
[Ed. Note: Get the scoop on more emerging investment opportunities from Steve McDonald in Investor's Daily Edge, ETR's sister publication. Sign up for free right here
This June, Steve and 8 other top investment experts will show an elite group of investors how to make a fortune in today's market. They'll be revealing their #1 investment strategies and top recommendations for making 2009 the best year EVER for your portfolio. Get the details here.]
For decades, stock market participants have been led to believe that “investing” is safe… while “trading” is risky. But the way most people “invest” is about the riskiest way you could possibly manage your money. The prevailing advice has been something like this:
“Diversify your investments. Buy quality companies and hold them until you retire. Whether it is stocks or real estate, the values always go up over time.”
That is… until they don’t.
The past two years have shown us how unwise (and unsafe) that advice really is. Diversification helps very little when everything is falling. And while real estate and the markets generally do rise over the long term, that is not much consolation if your retirement is five years away. Millions of people have paid for these misconceptions with huge losses in a short period of time.
Michael Covel, the author of Trend Following: Learn to Make Millions in Up or Down Markets, points out some major pitfalls of the “investing” mindset:
“Investors put their money, or capital, into a market, such as stocks or real estate, under the assumption that the value will always increase over time. Investors typically do not have a plan for when their investment value decreases. They usually hold on to their investment, hoping that the value will reverse itself and go back up. Investors typically succeed in bull markets and lose in bear markets.”
Most investors have no idea how to respond to or, better yet, how to capitalize on a falling market. Clinging to the idea that the markets “always rise over time,” they “hang on” and continue to lose.
If you have any money in the markets – even if it is just your 401(k) – you need to begin thinking of yourself as a trader. That doesn’t mean you have to buy and sell stocks every day, or even every month. But it does mean having a selling strategy for when the market goes against you. It should also mean having a strategy to make money when the markets rise… and when they fall.
There is no doubt that we are in the worst economy in decades. Corporate earnings are falling. Unemployment is rising. And while the stock market recently experienced its sharpest rise since 1933, the overall trend is still down.
But what is bad for the economy and terrible for the market does not have to wreak havoc on your investments. By employing the right strategies, you can multiply your wealth safely in just about any market. In fact, there are a number of strategies that have never been as safe or as profitable as they are today.
Here are two that you should consider right now:
1. Selling Covered Call Options
Selling (or “writing”) covered calls is one of the safest ways to generate extra income from the stocks in your portfolio. And due to the volatility in today’s market, option premiums are currently much higher than their historical averages. As a “seller” of options, that works in your favor. This is a strategy that could easily and safely generate 20 percent annual income for you.
Selling covered calls is probably the lowest-risk form of options trading. It involves selling someone the right to buy a stock that you own at some time in the future. For this privilege, the option buyer pays you cash up front, thus lowering your cost basis for the shares you’ve purchased.
Here’s how it works…
Let’s assume you own 100 shares of stock ABC. The stock is trading for $10 and the July call options on it – with a “strike” price of $11 – are selling for $1. So by selling one call option on your 100 shares of ABC (each call option represents 100 shares), you immediately receive $100 in your account. Therefore, your cost basis on this transaction is $900 ($1,000 – $100).
There are three possible outcomes to this trade:
• If ABC is trading for more than $11 before the option expiration date, the buyer would exercise his right to purchase the 100 shares of stock from you for $1,100. (He would then turn around and sell those shares, making a quick profit.) In this case, you would make 22 percent, based on your cost basis of $900.
• If ABC is trading for less than $11 but more than $9 at the expiration date, you would still own the shares – at a gain – and you would pocket the cash you received up front. You could then repeat the process to generate another round of income.
• If ABC is trading for less than $9 at expiration, you would be holding your shares at a loss. But the income you received up front by selling the call option would offset that loss. And, again, you could repeat the process to recoup more of the loss and generate additional income.
The key to this strategy is to use it with stocks that you would like to hold for the long term. They could be stocks you already own or stocks you buy specifically for the purpose of writing covered call options – stocks you believe to be very safe and cheap. And you should employ this strategy at a time when option premiums are large – as they are now. Ideally, you will be selling options that expire within three to five months.
By writing covered calls on high-quality dividend-paying stocks, you can get an extra bonus. Best-case scenario, you keep the option premiums, you keep the dividends, and you keep the stock too!
2. Selling Put Options
Selling puts is a strategy that can generate an annualized yield in the neighborhood of 30 percent to 50 percent. When executed properly, this strategy can be highly profitable and carry very low risk. That is especially true in the kind of market we have today, where fear is high and option prices are elevated.
This is a great way to buy stocks at a discount. Let’s say you would love to buy IBM at $81 a share, but it’s selling at $89 a share. In this case, you could sell the $81 put option. If the price falls below $81 before the option expiration date, you get your shares at the price you like. If the price stays above $81, you keep the premium and you can repeat the process.
You can also sell puts with the goal of generating income. In this case, you’d want the puts to expire worthless so you can capture the option premium. To accomplish this goal, you sell puts that are “out of the money” on stocks you believe to have very little downside risk… and which you would be willing to purchase at a much lower price.
Here is an example…
Let’s assume that stock XYZ is selling for $13. We’ll also assume the stock has already fallen by a significant amount (not too hard to find in today’s market) and you believe the rock bottom liquidation value of the company is $8.
With the stock trading at $13, the July $10 put option is well out of the money and selling for $1.50. You decide to sell those puts. When the trade closes, $150 will automatically show up in your account for every put contract you sold.
The only way you could lose money on this trade is if XYZ trades below $8.50 ($10 minus $1.50) on or before the option expiration date in July. That would be a 35 percent drop from the depressed level the stock is trading at when you sell the puts.
And in the unlikely event that you are obligated to purchase those shares below $8.50, you should still come out okay. After all, the liquidation value of the company is $8 a share, which makes the downside risk very small.
This strategy should be employed on stocks where you believe the downside risk is minimal. And you should only employ it on stocks that you would be glad to own at a price below where you sell the put.
You should also have a reasonable understanding of the true valuation of the company. For this reason, I would exclude most financial and insurance companies, as few people (including insiders) have any idea how much these companies are worth or what is on the books.
By selling put options, you could buy super-high-quality stocks as much as 50 percent cheaper than today’s historically low prices. Plus, you’ll get cold, hard cash deposited in your account instantly… adding to your annual income!
Where You Can Learn These Strategies… and a Lot More!
By no means are these the only strategies that can be highly profitable in today’s market. We are also seeing a once-in-a-generation opportunity in high-quality corporate bonds. Invest in the right ones and you can enjoy significant capital gains plus income… without taking stock market risk.
This is also an excellent market for shorting stocks. But you should not just go out and short any stock. The inevitable bear market rallies could put you in the poorhouse. The lowest risk opportunity is to short those stocks that are almost certainly going to zero – companies with an impaired business model and a massive debt load. There are dozens, if not hundreds, of them out there.
The good news is that putting these strategies into action can be a lot simpler than you may think. The better news: You don’t have to do it on your own…
Nine top investment experts have been asked by Investor’s Daily Edge and Mt. Vernon Research to share their number one strategies and top recommendations that are making a fortune in today’s market. It will take place in June, at the Turnberry Isle Resort & Club in Miami.
To learn more about this conference and the once-in-a-lifetime opportunities we’ll be discussing (including the two strategies I introduced you to today), click here.
Since the market turned around and started doing its rocket imitation, most people I have spoken to are shaking their heads saying, “It isn’t real,” “It has no legs,” and “It’s 1933 all over again.” Since when are we supposed to be suspicious of a rally?
We moved from an intra-day low below 6,500 to 8,000 in a matter of weeks. It took nine months in a red-hot market, the hottest of all times for the DOW, to make the same move the last time. That was from October 14, 1997 to July 16, 1998.
The average investor missed that move, and is missing the big money again because he has to be convinced by the increase in the price of an investment, or the market indexes, that it’s okay to get in. That’s why most people buy high and sell low. It’s also one of the major reasons why most people lose money in the market.
If the key to real estate is location, location, location, then the key to this market is time, time, time.
If you give this market time, you will have to try to lose money in it. That’s how perfect this environment is for making money over the next three to five years. Yes, years! Not weeks, months, or even one year. Three to five years! If you have any other time horizon in mind, you are setting yourself up for another big loss. If you haven’t learned that making money takes time, save yourself the worry and bury your money in the backyard.
Here’s how easy it will be to make money in this market, if you give it time to work. Just pick the top companies or the appropriate ETFs from the following industries: oil, healthcare, and technology. The easiest way to find these companies is to look at the top 10 holdings of any of the sector funds for those three industries. That should do it.
[Ed. Note: Get the scoop on more emerging investment opportunities from Steve McDonald in Investor's Daily Edge, ETR's sister publication. Sign up for free right here
This June, Steve and 8 other top investment experts will show an elite group of investors how to make a fortune in today's market. They'll be revealing their #1 investment strategy and top recommendations for making 2009 the best year EVER for your portfolio. Get the details here.]
When investigating companies to invest in, I look at several margins – gross, operating, pre-tax, and net profit margin. But I focus on operating margin. Operating margin is the difference between how much you make and how much you spend to operate the business. If the “making” is at least 15 percent higher than the “spending,” I’m interested.
But there’s something else I need to know…
Was the operating margin lower or higher last year? And the year before? And the year before that? I like to see margins on an upward trend. It could mean several things, like…
• Strong and/or rising pricing power
• A shortage of products (Think Harley-Davidson, which deliberately makes fewer bikes than they could sell.)
• Technological leadership
• A transition from lower-end to higher-end products
• Rising productivity
• The ability to effectively manage costs
It takes more homework to figure out what is driving higher margins, but all of the above possibilities are good. So with an operating margin on an upward trend, even without doing the homework, you already know the company is running its business from a position of strength.
Profit margins go to the core of what makes a business successful. If you want a reality check, consider retailers.
Many retailers sold more product than ever during the 2008 holiday season. But because they had to slash prices to get customers to buy, their margins were squeezed to the max. So while sales were up, profits were down. That’s what happens when margins go in the wrong direction.
If you want to do the research yourself, the numbers are provided online by Reuters Finance. Just look up a specific company and click on “Ratios.”
[Ed. Note: This June, investment expert Andrew Gordon is just one of 9 investment experts who will show you exactly how you can make a fortune in today's market. Find out how to get their top recommendations for making 2009 the best year ever for your portfolio right here. ]