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Get In The Wagon! Use The Fed’s Free Money To Make Money, Part II

September 25th, 2012 1 comment

In Part I, I discussed a specific strategy to make money from low interest rates using margin. In this Part II, I will provide examples with sample return profiles.

In my first part of this article, I discussed what the Federal Reserve (Fed) is doing to prop up the economy and how you can profit from it by borrowing the Fed’s free money using Interactive Brokers (IB). Now, I want to give you specific investing examples that you can use to make money.

Control Investment

First, you need to own the control investment, or the position that you establish with your own cash.

In my strategy, the cash you use to buy the first investment is the control investment. This investment you want to be price stable and provide a sufficiently high level of income that compensates you for the lack of capital gains opportunity and pay for your margin costs. Even if you didn’t want to use margin this investment is a good place to be in this low interest rate environment. For this investment, I’ve selected a below investment grade corporate debt instrument, Realty Income (O-E) preferred. If you have been a reader on this site, you are probably already familiar with this investment, it’s in my portfolio.

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Get In The Wagon! Use The Fed’s Free Money To Make Money, Part I

September 18th, 2012 No comments

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.

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Weekend Investor: This Is The One Key To Wealth

September 16th, 2012 No comments

A librarian from New Jersey wrote this opinion piece about income inequality. The author makes the case of the existence of a caste system, whereby lower income workers can never become wealthy simply because they will never earn enough money as a CEO or professional athlete. Since the lower income worker needs all of his money to live whereas the CEO doesn’t need all of his money to live, he advocates public policy for high tax rates to level the incomes.

This position is hard for me to understand. After all, as a librarian, doesn’t he read books (financial books) to get other ideas of how finances and the economy actually work?

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My First Trade For 2012

September 8th, 2012 7 comments

I don’t trade that often in my portfolio. I look to invest in companies that offer a quantifiable expectation of an attractive return, on a risk adjusted basis. This sounds like something a professional broker would try to say to you to convince you of his expertise, but it is the right words. All this means is that you need to get a better return from an investment in return for taking equity risk.

Bonds are designed to lower capital risk. This means that you get all the money back you invested, plus interest along the way. When you make the jump to equities, you are taking on capital risk which means that you not only might not make any money but you can also lose it.

So, make sure you have the possibility of getting a good enough return if everything works out close to your valuation model. There’s no point in investing in a company that performs exactly as you expected but offers a poor return for your trouble.

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2012 YTD Portfolio Performance

September 1st, 2012 2 comments

We’re just past the middle of the third quarter. This wouldn’t normally be a good time to talk about performance since we are not at a typical time break. After taking some of the summer off from this site, I think its a good time to put this out there. It is a great time to reflect on your portfolio because the markets right now are at an inflection point. We’ve come up from a bottom in June to re-capture the highs achieved in the April. This is what the YTD S&P500 chart looks like now:

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