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How To Buy Physical Gold

October 15th, 2011 No comments

There’s a frenzy about precious metals these days, particularly Gold and Silver. There are many people who are financial types that manage or recommend investments pushing their clients and readers to buy Gold and Silver for some portion of your portfolio.

The reason why is simple: currencies around the world are being de-valued through what academic economists call ‘quantitative easing’ (QE), or more simply money printing. Money can be printed at will but traditional stores of money (gold, silver) are in finite quantities. The U.S Federal Reserve says that QE doesn’t cost the taxpayer anything and that they will pull back the expansion at the appropriate time. Markets are saying otherwise: precious metals have been on a 10 year uninterrupted bull market.

In this article I discuss what you need to know to buy physical gold (coins, bullion, jewelry). As investments metals are simpler because there are fewer fundamentals (no P/E ratio, enterprise value, etc), but the market for the metals is less transparent that it is for stocks and other similar investments. Read on for what you need to know to start buying physical gold.

First, Consider Value Added Products

Buying jewelry is one way to buy and own physical gold. The main advantage to this is that you can enjoy your purchase in an intimate and personal way. Also, it is possible that the jewelry or watch can increase in value in excess of the value of the precious metal value.

If you buy signed pieces from well known brands, such as Tiffany’s, Rolex, Cartier, Piaget, or others, the value of the precious metals is a fairly small part of the value in the whole piece. This has a key advantage: quality pieces will generally keep up with inflation or better providing a means of storing value that isn’t tied directly to the price of metals. The value will be maintained because new pieces keep going up in prices, so the used ones will maintain value.

For an example of how to buy signed gold jewelry, see my article about buying a used Rolex watch. In the time since this article was first published, Gold has increased from $900 to over $1600 per troy ounce, and the Rolex watch mentioned in the article has a street value of about $9,500 versus the $8,000 value (an increase of almost 20%).

Next, Consider Gold/Silver Bullion/Coins

The simplest form for precious metals is so called bullion, which is virtually 100% of the metal in coins, bars, and other forms. In some forms, such as coins the precious metal content can be less than 100%. It’s also possible that coins can be valued higher than the precious metal content due to desirability by collectors.

When buying bullion consider the following.

Understand Metal Pricing

Products designed to be vehicles to purchase precious metals have (3) prices you should be aware of. Before buying find out what these prices are so that you can be comfortable that you are making an informed purchase at the best value:

  1. Spot Price – the current market price for raw Gold or Silver as determined by the futures markets. For example, Marketwatch.com has a real time quote for Gold here.
  2. Buy Price – the current market price for the item. In most cases, bullion will sell for a premium above the Spot Price. This premium can vary widely because bullion can also have collector value which can affect value.
  3. Sell Price – the current market price for the item that a dealer will pay you to buy the item back.

Sell Your Coins Before You Buy Them

The first important consideration is to know how much your coins will fetch when or if you decide to sell them. Bullion does not trade as transparently as stocks, which at any given moment you can get full current market value. So, research what it is that your are buying so that you can have a good chance to get back as much of the current market value as possible.

Here are some guidelines on this:

  1. Before you buy, ask your dealer how much he would buy the same item today. Ideally you want to be able to get back at least 90% of value, or even more.
  2. Find out how much in dollar terms (10K, 5K, etc) you would need to sell to get the highest percentage of value. Dealers may only give you the best price for higher transaction amounts.
  3. Size matters. Large sized coins and bars (e.g, 1/2 ounce or 1 ounce) will fetch higher prices enabling you to keep more of the value when you sell. Smaller pieces enable you to buy in, but may not provide the same price level when you sell.

Sell Price is More Important Than Buy Price.

When you price coins or bars, you may notice that some coins go for much higher prices than the metal contained would suggest. Your first thought may be to buy the coins with the ‘lowest’ premium to the precious metal cost. In most cases this is not the best strategy.

The reason why: it’s more important to be able to sell the coin at a higher value percentage regardless of the underlying precious metal value. More expensive coins will usually protect your investment better because they will fetch not only a higher price but a higher percentage of the purchase price. Lower priced items may provide significantly lower sell rates. I will give you examples below to demonstrate what I mean.

Example 1: Different Coin Sizes

In this example, I compare the purchase price of two different sized Gold American Eagles versus what a dealer would buy them back at. In this example, I use the online dealer APMEX which is pretty transparent about its pricing.

2011 1/10 oz Gold American Eagle

Buy Price (to you): $193,  Sell Price (from you): $180

Percentage of Purchase Price Received: 93%

2011 1 oz Gold American Eagle

Buy Price (to you): $1774,  Sell Price (from you): $1724

Percentage of Purchase Price Received: 97%

Given the same transaction amount and everything else being equal, the larger coins retain more of the purchase price.

Example 2: Different 1 ounce Coins

$20 1850-1907 Liberty Gold Double Eagle (Cleaned)

Buy Price (to you): $1729,  Sell Price (from you): $1597

Percentage of Purchase Price Received: 92%

These coins are more than 100 years old and have collector value. When selecting them for collector value, condition matters since other versions of these same coins can sell for 2-3X more than the ones I have listed here. If you are investing simply for the Gold content, be careful here, because these coins and others won’t get you back the highest percentage of purchase price based upon Gold content. The 2011 1 ounce American Eagles in the last example are a far better choice.

Categories: Gold Tags:

Wikinvest Review

October 10th, 2011 No comments

Wikinvest is a non-broker site that provides user generated information about investing. If you have never heard of a Wiki, these are sites that allow people to create web pages without programming. The most famous example is Wikipedia, the most infamous, Wikileaks.

If Wikinvest were just an investing version of Wikipedia that would be OK but not really that innovative of an idea. Where Wikinvest really shows its value is in it portfolio consolidation. It’s simple, elegant and you can get your portfolios consolidated in literally minutes.

If you are like me, you probably have different brokers that you have accumulated over time. This is not uncommon, and I think that it’s a consequence of the fact that different brokers offer benefits for each type of investing that you do. While each one may provide a good idea of how your portfolio is performing, there isn’t a quick way to look at all of them in a consolidated view. This is where Wikinvest comes in.

Portfolio Snapshot

After you provide login credentials to each broker site, Wikinvest will create a complete summary of all of your positions across all of your brokers. The three views that are offered right away are the following:

  1. Summary – short table of each position plus latest news and chart.
  2. Performance – table that shows daily and total gain for each position.
  3. Fundamental – table that shows investment criteria such as P/E, ROE, etc.

There is also an ability to create custom ‘tabs’ that combine whatever criteria you are interested in. See the below image that shows all of the criteria you can select from:

Portfolio Analysis

One the left column of the site, Wikinvest provides a bunch of portfolio summary information that is calculated from all the positions and summarized. Here’s what is offered:

  • Summary Value of Each Account
  • Account Filters, to eliminate positions from the detail view.
  • Analytics.
  • Watchlists, which you can create separate from the portfolios.

The most useful information here is a few things that would be difficult to calculate on your own (it can be done, it would take some effort). In the Analytics section, they offer the ability to view your portfolio overall return up to 1 Year back. This is worth the price of admission alone because it may surprise you that your returns may not be what you expected. Below is what this feature looks like:

The performance number calculation is a ‘time weighted return’. Also, there is other consolidated information that I find useful, particularly the total portfolio ‘Dividend Yield’. This is what is provided in this lower section of the Analytics:

OK, Now For The Numbers Check

I’ve told you about all of the great features this site has, but you should also know about the caveats. The portfolio feature of Wikinvest is relatively new and has a lot of limitations and inaccuracies that are worth noting. First, below are the features that are spot on with each of the portfolios:

  1. Positions
  2. Position Value
  3. Daily Position Price
  4. Cash Transactions (in/out)
  5. Dividend/Interest Transactions
  6. Investment Fees.

Everything else is subject to skepticism because there are limitations to how complete the information that the software is able to get from your brokers as well as quotes and detail specs for some investments. If you are an income investor like me, it is a common frustration that information about many investments isn’t typically available on the public financial feeds/sites (I usually have to go to my broker or specialized data sites). So, this is a common problem.

I noticed the following issues:

  1. No cost basis found for some investments. History doesn’t go past 3 months, so if you bought the investment more than 3 months ago for some brokers, Wikinvest can’t know the initial cost.
  2. Incomplete data feeds – for example, many types of income investments don’t have accurate income noted, so this affects the calculation of dividend yield.
  3. Special Transactions – for example, I had a trust convert to a corporation. The two securities weren’t tied together and this skewed the portfolio performance incorrectly. (My broker didn’t get it right either).
  4. No position consolidation. It would be nice to be able to view an investment ‘as one’, if you own it in two different accounts. Now, it is shown as two different investments.
  5. The Account Filter filters the detail positions but not the summary Performance/Analytics. It would be good to be able to compare how one specific portfolio compares to the total of all of the accounts.

Given the limitations, it’s still worth it to use this site as a quick way to track and monitor your portfolio and all of your positions. Particularly when I am on the go, this offers the ability to quickly track my portfolio without logging in to each broker.

Categories: Investing App Tags:

How To Make Money Off Of Low Interest Rates

September 25th, 2011 No comments

About 5 or 6 years ago, it was possible to make 5% on money market accounts that you can get at your bank or credit union. When you can earn 5% with such little effort, you can make a case to keep cash on hand since that’s not a bad return in the context of long term bond and stock returns (relative to the effort required to get a better return).

But, of course, there is a reason why cash is not a good investment. It isn’t a real asset because how it makes money is in large part determined by short term interest rates which are manipulated by the Federal Reserve. And as we have seen recently, the Federal Reserve has used its authority over interest rate policy to push rates effectively to ZERO.

However, there is a silver lining. Lower interest rates makes borrowing cheaper for things like car loans and mortgages.  Yes, it is and I cover here two indirect and one direct way to make money on low interest rates.

How The Professional May Do It

Banks and professional investors make money on interest rates effectively by borrowing at lower short term interest rates and lending out at long term interest rates or buying assets with higher longer term returns on investment. An example of this strategy is home mortgages. This works most of the time because investors/consumers generally want higher rates to borrow and lend at longer terms. They can also juice their returns by using leverage to increase the total return (leverage is borrowing additional money against the value of the investment). This kind of financial strategy can make lots of money, particularly now that rates are so low.

How would an individual do the same thing? A simple strategy would be to borrow at a low rate and buy assets that have a predictable rate of return. This would give you an effective spread that you can claim as your profit. But, buying Apple (AAPL) wouldn’t be a good candidate because the rate of return is unpredictable (no doubt you could have made a boat load of money nonetheless). Think of investments like bond, preferred stock and dividend stocks.

On to the specific strategies.

Buy A Leveraged Fund/ETF

Professional investors can borrow on your behalf to make you more money. They do this by leveraging part of your funds to buy longer dated, higher yielding assets. A good example of this is municipal bond funds. Typically, municipal bond funds leverage about 30-40% of their assets to buy more bonds. The spread created increases the income available to shareholders.

An attractive type of fund for this strategy is municipal bond funds. Since muni’s are tax exempt, you generally can’t deduct your interest that you pay on your borrowing against the income earned on the muni’s. However, when the fund does it, you get a juiced return which is still all tax exempt.

Example:

NNJ Muni Bond Fund (leveraged): 8.2% yield

NJV Muni Bond Fund (un-leveraged): 5.7% yield.

The difference between these funds demonstrates the extra return available when using leverage.

Buy Mortgage Reits

Another opportunity to make money off of low interest rates manifests itself in Mortgage REITs. These companies borrow at very low rates, leverage their borrowing, and buy mortgage backed securities. These investments are earning dividends of 10% per year, some even more. This type of investment is not as risky as it sounds, because if you stick to the highest quality companies, you can still make money when rates eventually go up. A good example of such a company is Annaly Capital (NLY), which was still making money when short term rates were high 6 years ago (just not as much money).

Just keep in mind that rates will eventually go up, so these high dividends won’t last forever, but it is a good bet that they will still make money compared to other investments.

Interactive Brokers Investor Account

But, as an individual, you don’t have the ability to borrow at same low rates as banks or professionals, right? In most cases this is true. Today, if you borrow money at your brokerage, they will charge you perhaps 7-10% (this does vary according to the broker and account privileges – you might be able to do better). Even if you get a better rate, you normally can’t leverage more than 50% of your portfolio value (this is less than even a home mortgage, where 4-1 leverage is normal).

This is where Interactive Brokers comes in. They will lend you money at little more than the Federal Reserve rates (which are currently about 0.25%) – 1.8% for Portfolio Margin. They offer two type of margin accounts (accounts that allow you to borrow money against your investments), Regular Margin and Portfolio Margin. The first account is what a typical broker provides which is 50% margin against your investments. The Portfolio Margin account allows up to 6X margin at that low interest rate (the actual margin amount is subject to their rating – it depends on each individual  investment you make how much you can actually borrow).

Example:

Buy high quality preferred stocks such as Realty Income Prfd-D (7.375%) (O-D) on margin.

One warning though, Interactive Brokers is a serious broker and isn’t as friendly to work with because it a “Pro” site. You need to learn how to use their site and especially understand how the margin works and particularly how a margin call would work. This is not a good broker for the uninitiated. I expect to write in the future about my experience with this broker.

Final Word About Taxes

One last thing to keep in mind is concerning taxes. In general you can deduct you investment interest against your dividend or interest income, if the investment is fully taxable. So, non-taxable investments or even investments that qualify for the lower tax rates don’t pass this test. This is something to keep in mind when you are trying to calculate your ‘after-tax’ spread.

Categories: Investing, Most Popular Tags:

Weekend Investor: Understanding Investment Yields

September 20th, 2011 No comments

Investment yield is the amount of income expressed as a  percentage that you earn on your portfolio in a year. Like a savings or checking account at your bank, or a money market fund, your portfolio will have an equivalent to an ‘interest rate’ expressed as a percentage.

There shouldn’t be much work to figure this out, your broker should calculate it for you when they send you a monthly statement. However, there are different ways of looking at this and there isn’t just one way to calculate it. As we will see, the yield that your broker provides may understate how well your investment is actually doing.

In this article I will discuss (4) main ways of calculating investment yield and what each one tells you.

Why Portfolio Investment Yield Is Important

Here at JavaInvestor, we are more focused on investment yield than portfolio value. There are a number of reasons for this. First, how much you earn on your portfolio and how much it grows over time is more important than what the market value of those investments are. This is somewhat contrary to popular punditry out there, but this is a strategy that can really work for you over time. When your earnings and income in your portfolio increase, the market value of those investments will go up but it isn’t always that case that these two events will coincide. The market can either over price and under price an investment at any given time.

During the Great Recession of 2008, my investment portfolio remained intact because the companies that I owned kept increasing their dividends. This is a more powerful statement about the health of those businesses than what the market valued them at during any given day.

An Example Portfolio

I will use the following portfolio to demonstrate the calculations. To keep it simple, assume that you bought the stocks at the beginning of the year and then totaled up everything at the end of the year. There was an increase of 8% in the value of each position at the end of the year.

Initial Investment: $10,000

Money Added During Year: $2,000

Investment Yield @ Purchase: 5%

Dividend Increase During Year: 10%

Year End Portfolio Value:  $13,608

1) What Your Broker Will Report

The broker will report on your statement the current investment yield as of the statement date. In this case, the investment increased in value of 8% after the investment initially had a 5% yield when it was purchased. This yield is called investment yield on value (IYV), because it uses the current value of the investment in the calculation.

The 8% increase in the investment value reduces the IYV to 4.62%. This would be the same investment yield that Yahoo! Finance, Google Finance, or Wikinvest would report.

2) Investment Yield On Cost (IYC)

The value of the investment changed but the yield on your initial purchase doesn’t change. From this point of view, no matter what the price change of the investment, you will still earn 5% going forward assuming other things constant. The IYV calculated above only comes into play when you are reinvesting money or adding money to the portfolio.

IYC will always go up when the dividends are increased because it does not take into account any price change, only your initial price that you paid. So, the initial IYC is 5.0%. Since the dividend was increased by 10% during the year, the IYC increases to 5.5% by the end of the year.

3) Compound Investment Yield On Cost (CIYC)

The total amount you invested for the year was $12,000 ($10,000 initial investment plus another $2,000 along the way). However, you have more than $12,000 working for you because you reinvested the $600 in dividends you collected along the way. Also, the investment increased its dividend rate by 10% (to 5.5%).

From this point of view the CIYC is 5.8%, when you add it all up.

4) Forward Investment Yield On Value

Eventually, your broker will catch up and apply the new investment yield that will apply to future income earned. When they do, they will again calculate it based upon the current market value of the investment. In the example above, an increase in the dividend by 10%, coupled with the 8% share price appreciation comes up with a FIYV of 5.08%.

Summary

So there you have it, 4 different ways of calculating the investment yield for the same investment during one year.

IYV: 4.62%

IYC: 5.00% (Initial)

IYC: 5.50% (End of Year)

CIYC: 5.77%

FIYV: 5.08%

As you can see, what you broker reports can understate how your investment is really performing. Over time, you want to make sure that CIYC is increasing because that is the one that determines if you are making more money.

Categories: Investing Tags:

Weekend Investor: Should You Own Just One Investment?

September 15th, 2011 No comments

When it comes to investing, the conventional wisdom says to ‘diversify’ to make money over the long term. Diversification is said to work because it limits your exposure to the ‘big’ loss, as well as offering the ability to make money at any given moment because most investments tend to perform/under perform in cycles.

My thought for this weekend is make the case against diversification to the extreme: owning just one investment. And I don’t mean buying a huge mutual fund such as an S&P500 index fund, or that even bigger total stock market fund that has hundreds of investments in one, the so called total stock market fund. I mean just one individual investment, like a company stock.

What The Fed Chairmen Have Picked

The last two U.S Federal Reserve Chairmen both have inadvertently offered up their wisdom on owning just one investment. The former chair Alan Greenspan only owned investment: U.S Treasury Bonds. He has since changed his investments subsequent to his retirement, but the reason that he offered for owning just Treasuries was to avoid any conflict of interest.

As a practical matter, owning just Treasuries isn’t that easy. Because interest rates are changing over time, it is difficult to generate a consistent income stream off of them. The best option would be to have so many bonds such that you could deal with the variability, in other words, very rich.

The current Fed chairman, Ben Bernacke, listed his only stock investment as Altria (MO), which we own in the Income Portfolio. If you owned this company at the time he made this disclosure (2005), you would now own (3) companies due to a breakup: Kraft (KFT), Altria (MO), and Philip Morris (PM).

This choice as a single investment was previously identified as the best performing S&P500 stock by economist Jeremy Siegel over the past 50 years. So, not that bad of a bet, because even though this is thought to be a mature company, Altria easy beat the stock market over the last 10 years as well.

My Choice For The ‘One Investment’

If I had to pick just one investment, I would want a company that has demonstrated consistently that looking out for the shareholder interest is the first priority. Sure other attributes are important, but given that economic cycles are inevitable, you need to have confidence that the company is looking out for your interests. So, from this point of view, I would pick one of these two companies:

  1. Realty Income (O)
  2. Phillip Morris (PM)

These companies have great management and a proven track record of creating shareholder value.

What would your choice be?

Categories: Investing, Weekend Investor Tags: