Investing For 2012: All You Need Is A Few Good Ideas
For the new year, we will be bombarded with new investment ideas, portfolio returns from everyone, and the constant drumbeat of analysis/FUD/predictions from the major media financial programs. It’s a good time to take a step back and turn all this stuff off. Keep your focus on what your are trying to accomplish with your portfolio.
The biggest threat to your portfolio is giving in to the temptation that you need to do “X” (whatever it is this week) because its the newest “trend”, will get your awesome returns, and the story is “developing”. There are so many things you could invest in, some of them will be great ideas while many won’t be great ideas. Or if it is a good idea, you need to confirm that you (and not someone else) can actually make money with it.
So, my wisdom today is to keep your focus on a few good investing ideas and stick with them. You don’t need too many because it isn’t possible to master all of them. Don’t feel like you are missing out on anything, remember there is plenty of money to be made in a few ideas, if you pick them carefully. My investment ideas were developed using a very scientific methodology: I tried investing in different things and the ones that I understood the most and made money won! Losers were dropped. It took me years to figure this out but you can learn about it in 5 minutes reading this article.
If you are an ETF or mutual fund investor, I’ve included an ETF alternative for each investment idea.
Here are my investment ideas for 2012. Actually, these are the same as last year, the year before…
Tobacco is the one investment idea I would pick if I only had one to pick. Tobacco has been around forever and will never go away. Lawyers, governments, doctors have tried to kill it to no avail. Paradoxically, the more government tries to regulate and kill tobacco the stronger these companies get because regulation limits competition and taxes create revenue dependency by government. Governments and the FDA, for example, really want to kill Menthol cigarettes (they have banned other types of flavored cigarettes already) but they can’t because its 30% market share would impact government taxes and fees too much.
The best performing S&P500 stock of the last 50 years was…surprise! Altria (NYSE:MO), formerly known as Philip Morris. Today, Altria is near a 52 week high and an all time high. The other major tobacco companies have performed equally well. Why?
It is because of a confluence of traits that make this investment yield outsized performance (I say this not only about Altria, but the whole industry)
- First and foremost, commitment to shareholder return. There probably isn’t a industry more committed to shareholder return than the tobacco industry.
- A business model or product, that famed investor Peter Lynch would say ‘…operates in a boring, or preferably, disagreeable sector‘. This has over time created pockets where tobacco companies have been undervalued, increasing dividend yield.
- A high dividend yield, combined with growth plus eternal undervaluation that supercharges dividend reinvestment. This is the reason why Altria beat every other stock over the last 50 years, not because it grew the fastest.
- Excellent balance sheet and business management. By buying back stock, managing costs and good product management have enabled tobacco companies to increase earnings in almost any economic environment.
ETF Alternative: Consumer Staples Select Sector SPDR (ETF) NYSE:XLP
Energy pipelines, typically structured and referred to as Master Limited Partnerships are a relatively new kind of investment only first appearing in the 1990′s. They are a new kind of investment because you become not a stockholder, but a unit holder in a partnership. This type of ownership does make it more cumbersome to handle from a tax point of view, but there are ways around this if you still want exposure to this industry.
Like tobacco, fossil fuel energy is thought to be a dying industry, though for a different reason. Because the supply is finite and at some point we will reach ‘peak oil’, which refers to the moment when depletion starts to occur. Recent discoveries in North America and elsewhere suggest otherwise. Finding new energy plus innovation in accessing previously inaccessible energy has increased supply over time.
In North America, there is a supply of natural gas that will last 100s of years. The issue for the energy industry isn’t finding the oil or natural gas, but how to get the energy to market efficiently. You may note that there are typically two prices quoted for crude: Brent and Texas. The difference in spot prices for crude can be attributed to the inefficiency of moving crude to market. This is where energy pipelines come in.
- Energy pipelines make money transporting and storing energy. Most of these companies do not have a lot direct exposure to commodity prices, they are simply a ‘toll bridge’.
- MLPs do not pay taxes, they offload that responsibility to the unit holder. Due to large depreciation, the distributions are largely not taxable (‘return of capital’) in the year you earn them, they are taxable when you sell your investment.
- Because of their unique structure (they are formed as partnerships not corporations), they are under owned by funds, even income funds. The individual investor also under owns them. The infamous K-1 filing also scares investors away due to additional complication in tax filing.
- There are multiple ways to invest: MLPs that pay cash divdiends, MLPs that automatically invest dividends into new shares as well as General Partners that pay cash dividends. The General Partner company structure is a way to get exposure to the industry in a typical corporate company stock. (Examples of these three are the Kinder Morgan companies, respectively, KMP (NYSE:KMP), KMR (NYSE:KMR) and KMI (NYSE:KMI)).
ETF Alternative: Alerian MLP (ETF) NYSE:AMLP
Real Estate Investment Trusts (REITs)
Within the financial sector are a class of real estate investments called Real Estate Investment Trusts (REITs). REITs have become popular over the years due to their high and consistent dividends and relatively easy to understand business model. My interest in REITs however isn’t focused on their equity but their debt. REITs need access to capital markets to function because their business requires huge inlays of capital to purchase properties. Companies that need capital can issue equity or debt depending on the costs associated of each at any given time.
The highest quality companies typically either do not need to issue debt (their initial equity was enough to fund the business – Microsoft, e.g.) or when they do issue debt they sell corporate bonds (not accessible to the average investor). This is where REITs come in, all of them, even the best ones need to issue debt. They issue debt using preferred stock, which is a debt/stock hybrid that is accessible to the average investor. I use this debt as a substitute for bonds or money market funds (where you want a stable consistent yield at a higher rate than typical cash investments).
ETF Alternative: iShares S&P US Preferred Stock Index Fnd (ETF) NYSE:PFF
So there you have it! These are my investing ideas. What are yours?