A Discovery

Several years ago I planted a Green Dragon cactus from a co-workers cuttings.  I also got to taste the fruit.  It was delicious.  I noticed that it is also sold at some grocery stores at quite a high price that didn’t seem worthwhile to me.  Unfortunately my climate is just slightly too cool for my plants to survive the winter since we usually get some below freezing nights each winter.  I found that I could grow it in secluded spots that are slightly warmer but it doesn’t seem to get enough sunlight there.  It also required more water than I’d like to give it.  I’ve been quite disappointed.
Around the same time, I planted another couple cuttings of another cactus called cereus peruvianus, as best as I can tell.  It’s quite common the yards in our area and certainly tolerates cold and drought.  It appeared to be related to dragon fruit and I had hopes that it would be edible.  Finally, after about 4 years of waiting for the plant to be able to produce fruit, I finally got my first taste.  Wow!  It was very similar in taste to dragon fruit.  It had white flesh with little black seeds.  No thorns on the outside of the fruit (unlike opuntia fruits which taste good too).  I must say this was a very pleasant surprise.

Now I expect to get several fruits each year with very little or no water as an input cost.  The plants get quite large and given the rather low fruit output as well as the limited space I have for planting, I’m not sure that I’m going to plant very many.

Investment Time

After the announcement this week that QE3 is likely coming very soon, I have decided to make another stock purchase.  I’m very sad about this since the stock market is very expensive right now but with high inflation and a depreciating US dollar coming, what choice do I have?

My investment choices are:

Bank of Nova Scotia (BNS)

Cons:

• Banks are risky given the Europe situation
• I already have enough bank exposure in my portfolio
• P/E ratio of 12 is a bit expensive for my taste
• Fiscal cliff and Europe situation make a strong possibility better stock prices in the not too distant future

Pros:

• Dividend of 4% is relatively good
• Dividend history shows good rate of growth
• Dividend is in Canadian dollars which will likely be more valuable in the future
• Investing in the Canadian economy is an indirect investment in natural resources

Market Vectors Emerging Markets Local Currency Bond Fund ETF (EMLC)

Cons

• Countries invested in are risky
• Fund is already quite run up (10% for the year!)

Pros:

• Yield of 4.7% is pretty good
• Yield is not in U.S. dollars so more QE will be a positive impact
• Expense ratio is 0.49% which seems to be about as good as it gets

Calculator

As long as I can remember, there has always been a calculator in Windows.  In Windows XP, there used to be a Microsoft Power Toy Calculator that you could download separately.  I liked that one much better because you could type or paste an expression into it and it would give back an answer that you could paste anywhere.  With Windows Vista, that calculator has disappeared.  I was very disappointed but I subsisted by downloading a variety of third party calculators.  I didn’t like them.  Why?

1. They seemed to take a long time to start up
2. By the time they were good enough to let me type an expression in and get an answer, they seemed too complicated.
3. Some required pushing enter before calculating.  This is a holdover from an earlier time.
4. They didn’t accept dollar signs or commas which since I was usually calculating money, required me to remove them before I executed and add them back when I was done.

So finally I went ahead and made my own.

Download

Investing Strategy Part II

I suspect that here in the United States (and throughout most of the developed world in fact), we are living in perilous times financially.  We seem, for the last several years, to be living in a precarious place after a deflationary economic contraction but before a period of high inflation.  My previously posted investing strategy is good for ordinary times but the times we live in appear to be extraordinary.

Making matters worse, we are currently somewhere around the peak of oil extraction which has profound implications limiting overall economic growth. This may be years away but we’re probably not that lucky.

Let’s examine our options.

Regular bonds, CDs
With yields so low, the only way these are a good idea is if there is deflation. This is not likely in my view especially since the Federal Reserve is terrified of this outcome and has the power to stop it.

TIPS
As long as yields are above 3%, these are a great investment for normal times. Unfortunately if we enter a hyperinflation or high inflation environment, political pressure to lower published inflation numbers or errors in computing inflation may cause these to lose value.  Even so, they will probably lose much less value than regular fixed interest bonds.

Precious metals
I dislike precious metals. They are speculative investments, they do not produce value while you hold them.  They only work out if someone is willing to pay more than you were.

Real Estate
I think buying real estate might be ok right now.  We are probably near the low point of real estate prices.  Real estate survives inflation pretty well.  The problem with this option is that it is not a passive investment.  Taking care of real estate is more like a second job.  So, do it if you enjoy it.  If you don’t enjoy it stay away, you can buy real estate less directly through REITs.  Over a 50 year time horizon I think you have to be more careful.  As the price of energy goes up, I believe that cities will have to become more dense to make transportation more economical.  This means that suburban real estate will probably lose value in the long run.

Stocks
Stocks are not my favorite investment.  I would much prefer bonds.  Sadly, stocks are quite expensive right now.  The S&P 500 has a P/E of 16.  That’s way too high but given the lack of opportunities else where and the immense danger of inflation, I think stocks are the only choice.  Still, I would stay away until the S&P P/E gets down to 14 (even then I find them hard to stomach since I think a P/E of 8 is much more reasonable).  Stocks will be adversely impacted because of peak oil so the trick here is to get stocks with less of an impact or perhaps even a positive one.

Theory of Economic Growth

This is my theory of factors that influence economic productivity:

• Political efficiency (PE): different levels of corruption in government, laws that either allow monopolies to flourish or inhibit businesses.
• The value of money (MV) to a culture.  Different cultures may value material rewards more than others.  A society of workaholics might work 12 hours a day versus a society that only spends 2 hours a day actually working.
• The level of technological (LT) advancement in a society.  A society with access to electricity, computers, bulldozers, cranes, and other modern tools will naturally produce at a higher level than a society that only knows about fishing nets and dugout canoes.  Since the whole world basically has access to the same set of knowledge, this value has increased over time but doesn’t currently differ much by location.
• The level of infrastructure (LI).  Are there electrical lines?  Roads?  Factories?  As technological discoveries are made, infrastructure needs to be torn down and rebuilt with modern tools.  A society that knows of electricity but doesn’t build power plants gets a lower rating that the same society if it does build them.
• Access to natural resources (AR): land area, access to sunlight, oil in the ground, rain water, iron ore, etc.

So the formula to calculate economic production (EP)  in a society is to multiply all the previous factors.

EP = PE • MV • LT • LI • AR

How then can a society advance economically?  Improve any of the factors!

• One of the goals of the political system is to increase economic output but ultimately I see this value having a maximum of one and that changes to the political system seem to yield only relatively small results.  Going from a 0.01 to a 0.1 is a huge increase but I still see the maximum value of this factor as 1 (an impossible society that maximizes this factor at the expense of everything else).
• A value of one in MV means that everyone spends 100% of their time working.  My feeling is that the ideal value of this is 5 hours dedicated to work per day (including lunch and commute), 6 days per week which equals about 20%.  Different people would naturally find different levels for this.  People are working at less than this level, they should find work activities they enjoy and do more.  If they are working more, future economic growth in other areas should be offset by a reduction here.
• The technological level can be increased two ways: learn from a society with more science and technological know-how or if none are available, invest in scientific and engineering research.  Unfortunately, the second option is extremely expensive and slow.  I am guessing based on gut feelings about U.S. history for the last 100 or so years that this value can be increased at only about 1% per year.  This factor is, in fact a very important one because we have no idea how far this can take us.  With all the scientific innovations and discoveries that have been made, it sure looks like this factor can be increased a great deal from here.
• The level of infrastructure is very easy to increase if there is new technology.  Countries like China have probably been able to increase their GDP so greatly in recent years by increasing this value.  Unfortunately by definition, most of the developed world already gets very high scores in this area and has very little room for improvement until technology advances.
• Some natural resources like sunshine, rain, crops, and forests are renewable but limited.  Some like oil, and metal ores are not.  Unfortunately, non-renwable resources follow the Hubbert curve.  When a resource is used up, this factor will actually decrease.  Up to a limit, more land can be exploited but resources that are in the tail end of the Hubbert curve, must be replaced through technology allowing new resources to be exploited.

Ultimately, the great optimism here is technology.  Unfortunately, the biggest problem is limited amounts of renewable resources and depletion of non-renewable ones.  Unless you are interested in military pursuits, per capita economic production is the only thing thing that impacts welfare.  As earth’s population increases, the amount of renewable resources available to each person decreases.  All else being equal if they are already fully utilized this results in negative per capita economic growth.

Investing Strategy

This is a slightly modified reprint of something I published almost 2 years ago.  I have changed my viewpoint somewhat since then to be announced in a future post.

Lately, I have been feeling like my investing has been undisciplined because I haven’t had a definitive formula.

I was lent a book on “Value Averaging” which promotes “buy low sell high” investing. It works by picking stocks and choosing the get a specific return on them. If the stocks don’t return that much, you add money to make up the difference. If the return more, you take money out. I like it because (1) it looks simple (2) it looks like it would really work under normal circumstances (3) and it would keep you from emotional decisions. The down side is that you have to keep money outside of your investments so that you can invest more if they lose value.

I didn’t like dollar-cost averaging because you inevitably end up buying overpriced stocks during good times. It doesn’t seem that there is a choice in the trade off: either keep a significant amount of money on the sidelines or invest in overpriced securities. I think I agree with the “Value Averaging” approach of being forced to keep money on the sidelines.

I fear, however, some problems coming up with blindly purchasing a whole spectrum of stocks but I will discuss those in another post.

My strategy:

Buy a stock only if all of the following:

•  P/E < 10
• Dividend > TIPS yield % with consistent growth
• Positive analyst ratings
• No more than 10% of portfolio in the industry
• TIPS yields less than 3%

Sell stocks when any of the following:

•  P/E greater than (TIPS yield)^-1 (if market reaches new high)
• Dividend reduced below purchase level
• TIPS yields greater than 4% (if market reaches new high)

Buy TIPS when: Yield > 3%

Hello World!

This is my inaugural blog post.  I do have things to say but I don’t say them often.  This will give me a chance to practice my writing skills and communicate my thoughts.  Maybe I won’t keep it up.  Maybe no one will look even if I do.  Let’s find out.

Why is the name of this blog a number?  It’s a reference to one of my favorite books by one of my favorite authors (especially when I was younger). Google it to find out what book it is.