In Part I, I discuss a specific strategy to make money from low interest rates. In Part II, I will provide examples with sample return profiles.
Tired of low interest rates? We all are. Don’t get mad at the U.S. Federal Reserve (Fed), get in the wagon and join the party! In this article, I will show you a strategy that will make you money in this low interest rate environment. One of these ideas is actually quite conservative, while the others are more aggressive. Simply put, the more income you make in an investment the lower the risk (conservative) compared to other ideas where you are looking for capital gains.
Over leverage was a large part of how we got into this economic mess in the first place.
But, there is a right time for leverage and a wrong time. When asset prices get overvalued (as they were a few years ago) due to low expected returns going forward, this would necessarily be a bad time to lever up. However, we are in different circumstances now, all the ‘weak hands’ are gone from real estate, stocks, and other investments. This is the time to take advantage of the cheap money, that is, to borrow the money when no one else wants.
Before you start investing in stocks, you very likely put your money in cash or cash-like investments. Making the jump to stock investing requires jumping over a chasm because you are putting your principal at risk because that’s how stocks make you money over cash investments.
Investing in stocks over cash equivalent investments requires a very large mindset change. Stocks can both make and lose money. Because equity investments are priced every trading day, your first impression may be that the market is right and knows something that you don’t know when an investment changes in price. When I first started investing in stocks I made the mistake of trusting the wisdom of the market too much. Sometimes the market is right but many times the market is wrong, especially when you shorten the time horizon.
The following are investing lessons that would have been better learning sooner rather than later. Better late then never as one would say, and it also might be the case that some of these you have to learn yourself even if someone told them to you. In any case these are presented in the hope that you might benefit from them in your own investing situation whatever stage you are at.
Entrepreneurs will tell you that good ideas themselves are not the secret to success, but the execution of them. You may have seen the story about the Winklevoss twins who had a legal claim on Facebook due to the fact that Facebook was their ‘idea’. Facebook didn’t disagree and paid the two quite a lot of money in an earlier settlement, but the pair wanted more because Facebook has turned out to be a much larger business than most people would have thought possible.
The lesson here is that the idea itself was only worth so much – and no more – because implementing and executing the idea is hard and time consuming. They can’t lay claim to any more of their growth because they weren’t around to assist in Facebook’s ultimate success. The court agreed and their larger claim was not granted.
If you watch cable TV finance programs, or perhaps read investing sites, you will see a lot of ink and electrons devoted to the ‘Next Great Thing’. Recently, there was a huge discovery of oil and gas reserves in the Bakken Shale region in North West U.S. So, the next question you might ask is how do you profit?
And, of course, it is possible to find publically traded companies that have rights in this region and that can profit from them (Jim Cramer has done multiple segments on this very topic). Once you find companies that can profit, you inevitably will want to ask the same questions about the company as an investment as you would any other to be certain that it actually is a good investment.
This strategy has risks. Simply owning rights to an oil rich region doesn’t necessarily guarantee access to capital and profit because execution matters. A far less risky approach is to buy a high quality company when it’s on sale that already is known to execute its business well. We had an opportunity to buy ExxonMobil in the summer of 2010 at a price that was lower than the 2008 Financial Crisis price which put its dividend yield at an unprecedented 3%.
This isn’t as sexy or as exciting but in the end profit at lower risk is what matters.