David Scranton: Hi and welcome to another episode of The Income Generation. A new kind of show about saving and investing for retirement. Now if you want the usual circus of ringing bells or scrolling tickers and Wall Street cheerleaders, which is how I would describe most financial analysts on T.V, then I hate to disappoint you but you simply won’t find any of that here. Our focus is on the real no-nonsense news and information geared toward helping you, The Income Generation, make informed financial decisions. By that I mean, decisions that will help you avoid pitfalls and potential disaster and build a retirement nest egg that will help you meet your retirement income needs. It will also help you achieve your long-term goals. And in case you’re tuning in for the first time, when I talk about The Income Generation I’m talking pretty much about anyone who’s already retired or within fifteen years or so of retirement. That actually includes me and if it includes you too, I urge you to stick around. You’re not going to want to miss tonight’s guest or hear his thoughts about how you might potentially make money in today’s stock market. Now, this may sound a bit surprising considering what you learned on last week’s show. In fact, if you missed us last week we spoke with renowned economist and market historian, Harry Dent. He gave us some less than optimistic insights about where we might be headed in the next few years economically and regarding the stock markets.
Harry Dent: And I keep telling people to look at Japan their baby boom. They had a real estate bubble, a stock bubble way before the U.S. and Europe because of their baby boom peak just before and after World War two, way ahead. Now the U.S. is following people saying the real estate will come bouncing back, no it hasn’t bounced back in 24 years.
David Scranton: Among other things, we talked last week about long-term secular market cycles and how those cycles have been repeating themselves throw-out 200 years of stock market history right up until today. And even though I happen to share Harry’s view of that long-term bear market cycle, the cycle that we both believe we’re in the middle of right now and hasn’t quite ended yet, we believe that the stock market isn’t the best place to be for at least the next few years. Despite that though, tonight’s guest might have some counterpoints for investors who are still looking to be just a little bit aggressive despite where the market is right now. In fact, you may know Tobin Smith from his many years as contributing market analyst for Fox News or from best-selling books on savings and investing including, ‘Change Wave Investing’ and ‘Billion Dollar Green’. But Tobin, who is our guest tonight, is also the Founder and Chief Research Officer of the Next Big Thing Equities Research. His company focuses on finding what it calls: ’emerging secular growth sectors and hidden microcap stocks in the global economy’. In other words, Tobin focuses on seeking out what he calls: ‘transformational change in disruptive technologies’. Companies and products that literally change society in the way we live. Now obviously there’s enormous potential for growth in those kinds of investments when they come along and a lot of them have come along even in the last 20 years. Now just think for a moment about all of the things that weren’t around in 1995 that we now wonder and question, how we ever live without things like iPods, iPads, E-bay, G.P.Ss, flash drives or even the mouse on your personal computer. The point is simple, as Tobin will talk about, even in zero growth 20 years or longer secular bear market cycles similar to the one we’re in right now those in which the market drops 50 percent or more like has happened twice already since the turn of the century, there can still be pockets of opportunity in the form of these transformative technologies. Even today when you look at the individual companies that have done well since the Federal Reserve ended quantitative easing in October of 2014, and at that time the markets overall went flat, you’ll see that some of these companies have done well including Google and amazon.com. Two more recent examples of technologies that have changed life for most of us. I mean, remember the old days when you actually had to go to the store to do your Christmas shopping or when you had to pick up a book or actually think in order to find the answers to a question? Those days are gone, thanks to disruptive technologies. Brick and mortar stores and libraries haven’t been replaced just yet but they’ve certainly felt the impact caused by Amazon, Google, and others.
Now the question is, is it easy to identify the next Amazon or Google or Apple or e-bay? The next big thing in other words. Of course not, which is why Tobin has an entire company devoted to trying to help investors to do just that. For every device or service that changes our lives, there are thousands of others that never even make it out of the research stage or those that do but the market greets them with a resounding, no thanks. Or some that just get very quickly replaced by an even bigger better thing. For example, remember laserdiscs remember Blackberries I could list dozens of examples and the one thing that all of these companies behind these failed products or technologies had in common, was that they also had investors. Having said that, and despite the fact that I believe generally that The Income Generation should continue to stay clear of the stock market right now with at least the majority of their money still, I want to have Tobin on because at the end of the day I’m a realist. I know there are people who are always going to want to be a little bit more adventurous some with at least part of their money. That goes even for very smart and generally conservative people who understand the lessons of market history and knows a very big chance we’re to going to see another major stock market drop of between 28 and 65 percent in the not too distant future.
I know there are people who are always going to want to be a little bit more adventurous some with the least part of their money. That goes even for very smart and generally conservative people who understand the lessons of market history and know there’s a very good chance we’re going to see another major stock market drop between 28 and 65 percent in the not too distant future. Now, how close is that drop? How risky is the market overall right now? Well, that’s what we’re going to talk about in tonight’s Market Breakdown. Now even though it’s a big part of any financial professional’s job to try to forecast what comes next, I’ve always said that trying to pinpoint an exact date for the next market disaster is a fool’s game. It seems to be pointless, except for one of those talking heads on T.V, hoping that you can get a good ‘I told you so’ sound bite out of it, if he just happens to get lucky and guesses right. But still he’d only be guessing. Besides, the exact date is irrelevant. All every day investors need to know right now is that, as we talked about last week, we have over 200 years of market history which tells us clearly that the next devastating drop is overdue, that’s what’s most important. Now why is it overdue? Simply because, but this is what we talked about a lot in last week’s market breakdown, the influence of quantitative easing. This Q.E. as it’s called, Q.E.1, 2, 3 were supposed to jumpstart the economy you probably remember that. Well they succeeded a little bit but they really didn’t do a fantastic job of this jump starting but they did make Wall Street really happy by creating cheap money and driving everyday investors up what we call ‘the risk curve’. That’s mainly in fact why the markets continued to climb even after the Standard & Poor’s 500 and the Dow Jones Industrial Average both surpassed their previous peaks in 2013 those peaks some referring to were the ones from 2000 and 2007. The markets by then were no longer being driven exclusively by economic fundamentals but instead by what I call ‘economic steroids’ by an artificial drug injected by the Federal Reserve. Ah, but in 2015 we’ve seen some dramatic change. Why? Well because this Q.E. or quantitative easing as we call it finally ended in the United States in October of 2014. Since then we’ve seen record volatility and we’ve seen the steady market climb that’s been going on for the five years previous come to a grinding halt. In fact, right now the S&P500 is about where it was a year ago basically in the same place. Now compare that to early December of 2013 when it was at 1805 or early December of 2012 what was it 1418. Right there was the difference between economic steroids and no economic steroids as far as the markets are concerned. 400 and then 200 point growth in a single year with quantitative easing in place, followed by virtually no growth the first year that it’s taken away. What’s also important to understand is that probably the only reason the markets didn’t nosedive after Q E 3 ended, is that Europe’s economy took a turn for the worse at about the same time. Europe learned a lesson from our playbook and began its own economic steroids in the form of quantitative easing, which has indirectly held down our interest rates and continued to push US investors toward riskier assets as I said before, up the risk curve. This has at least kept the markets propped up in the midst of all of this volatility even if they’ve stopped the upward climbing trend. But how much longer can this continue before history and basic economic fundamentals win out? As you know the stock market took a historic four day plunge in late August as a reaction to worries over China’s economy. It ended with the Dow dropping a 1000 points in a single day on August 24. A lot of people came to me at that time saying: ‘Is this it? is this the start of that third major drop you’ve been talking about? After all we’ve already had two since the turn of the century. The first, when the tech bubble burst and the second with the financial crisis.
My answer, well it could be but the jury’s still out. Even though the markets have rebounded since August the volatility hasn’t really lessened in any way. In addition, the situation in China that triggered the plunge hasn’t really improved at all, it’s very possible we’re just in sort of a holding pattern now until some other skeleton falls out of the world’s economic closet. Now whether that next skeleton is going to be China or Greece or even geopolitical concerns (for example ISIS) whatever it is, it could very well trigger another historic tailspin that doesn’t quite manage to pull up this time. A drop that just keeps going until it hits the benchmark that 200 years the stock market history says it has to hit. A twenty eight to sixty five percent decrease from today’s levels. That’s right twenty eight to sixty five percent. Now again I understand that even among people who are aware of all this there are those who like to gamble just a little bit and are going to want to take some risk in the stock market no matter what. So one of the things I’ll have my guest Tobin talk about is, investing in transformative and disruptive technology as an alternative to diversification. Why? Because if you’re going to be in the stock market at all, which means you either have savings to risk or you have a long, long way to go to retirement, I believe you at least have a better shot of getting somewhere in the stock market with the first strategy instead of the second. Now a lot of advisors talk instead about diversification as a smart strategy and smart way of doing things but I think most of them have ulterior motives. Statistically speaking, if you are in twenty or thirty different stocks then you’re about as diversified as the stock market overall. So the reason that I believe a lot of advisors push diversification is that it’s safer for them. You see it’s easy enough to tell a client who’s portfolio is down X percent that it’s because the market’s down you know after all Mr Client we’re all in this together. But on the other hand if that client’s portfolio is less diverse and ends up being down thirty percent or more than the overall market then that advisor has some ‘splaying to do Lucy’ and the market overall is like I said on a path to deliver zero percent growth between the year 2000 and the time that the secular bear market cycle finally ends, whenever that is. So ultimately that’s what stock market diversification will give you. So as much as I would caution against having much or any stock market exposure right now given market history and given the market’s at a record high, especially if you’re near or at retirement, I still would agree that a speculative strategy in the stock market ironically enough might be preferable to a diversified stock market strategy. In fact, transformative and disruptive technologies are probably the only option for potential growth in what we call a secular bear market cycle, again like the one that we’re in right. I’ll at least be able to agree with my guest, Tobin Smith on that score. And we’ll be right back to talk with Tobin after this message.
Tobin welcome to our show.
Tobin Smith: Thank you. I am the Income Generation.
David Scranton: And so I’m I.
Tobin Smith: I think we’re all the adults, I love the idea of the show.
David Scranton: Great, good to have you here today. Tell us about your company, The Next Big Thing Equities Research.
Tobin Smith: Well we’ve always focused on transformational change and so simply speaking, it’s the world’s greatest wealth creator it’s also the world’s greatest wealth destructor. And I think we’ve seen both sides of that as it applies to Income Generation to actually earning income, we looked and worked in a lot of alternative income generator. So for instance, Master Limited partnerships have been a very popular investment real estate investment trust or maybe a little bit different than the average bear and then bonds and just sort of corporate bonds but not AAA not junk but sort of the mid-level of one percent to fault rate and I think we can stock pick right. So if you combine that (my message is that many times people get in for instant to a Master Limited partnership and a broker will call them and say look if you’re going to in a nine percent yield and you only have to pay taxes on a daily five percent tax free no risk whatsoever. And yet you know there’s many people sitting here today that own a Master Limited partnership. Let’s say they paid forty dollars for that per unit and that unit selling for twenty dollars today I mean there’s some in the…
David Scranton: There are many like that.
Tobin Smith: Many like that. I mean, their average price are down about 35 – 40 percent and that’s not coming back the way that it did because they were in a transformational event this whole fracking world and United States. And people sort of had visions of sugarplums in their head and said: ‘my gosh, we’re going to be going from 9 million barrels a day to 20 million barrels in the United States and we’ve got to build every pipeline we possibly can’. Well guess what? It’s a cyclical business; the faster something transforms the faster something saturates. So whether it would be you know fiber optics in the late 1990’s or fracking oil coming out from 1 million barrels a day to 70 million dollars that at some point in time you could saturate. So my point is, that if you get in Master Limited partnerships for instance or you got into real estate investment trust that you really don’t understand there is principal risk involved there. And I think anybody tells you other than that that they’re lying to you or they don’t know enough to be an advisor.
David Scranton: You said few minutes ago that transformational change is the biggest creator or biggest destroyer of us. Can you give me an example of each one or maybe one where there is a big creator and then subsequently a big destroyer?
Tobin Smith: Let’s look at my from my fair friend Harold Hamm from Quanah Resources. So he had this idea that you could drill sideways into rock, the shell is just rock, and some of the hydrocarbons, the oil, the gas would come out and people said he was crazy. So we leased a bunch of land up at Continental Resource, is the ticker symbol C L R, and low and behold he was right. So oil prices went up, his inventory went up, his reserves went up and so he was worth one point seven and a half billion dollars and shareholders had about a fifty to one return in their stocks it wasn’t a income stock, it was a growth stock. But again, that same stock today is down sixty five percent. People who bought it at a high are not even getting a dividend and my point is almost by definition. Anything that rises quickly by definition is getting to saturation. So it could be something like a blockbuster, you think back to that company and you know you guys actually go to a video store and read it how great is that they have fifty five hundred stores around and then this thing called Netflix happened. So they were the disrupter and Blockbuster went like this and people and then Netflix came and now Netflix the stock is up thirty one thousand percent, if you take it from the bottom, and blockbusters out of business. I mean it happens that cycle happens time and time again. In income, you know bond I’m a big fan again and sort of this corporate mid-level bonds, one percent of fall rates but again you’ve got to look at the company. So the person who bought the bonds in Quanah Resources for instance, those bonds are selling at seventy cents on the dollar people who bought in a quote unquote safe energy companies have bonds those that are down you know twenty percent and they’re never going to get that money back. I mean, unless the world changes. So I guess my big message here is, if you’re not buying sort of straight ahead bonds for income you can’t buy and forget, there is no buy and hold forever in alternative ways of getting higher rates of income. And let’s face it, you know when you’re getting twenty five or a quarter percent. How do your money market account or you’re buying a ten year CD at the bank and getting one percent? People need more income.
David Scranton: So it’s not like the George Foreman grill. It’s not set it and forget it, is that what you’re trying to tell me?
Tobin Smith: You know, if you can get a burger.
David Scranton: You are one here said set it and forget it you were going to do it
Tobin Smith: You can get burned on the George Foreman grill too by the way.
David Scranton: You can get burned on any grill, that’s the problem.
Tobin Smith: The company that started that you know that own the rights to that, did fabulously well until people actually use the George Foreman grill to a certain point and it everyone who is crazy enough to operate that grill, bought it had the same thing that went exactly that way.
David Scranton: I don’t know about you may have that experience. Mine work quite fine I must admit
Tobin Smith: For grill cheese sandwiches, come on, they’re not for grilling anything
David Scranton: Let me ask you though, you talk a lot about investments that give cash flow of ten to twelve percent and of course as we all know and as our viewers know that you know cash flow is not necessarily same as income which is obviously my main focus here. So can you can you tell our viewers a bit about the difference? Tobin Scranton: Well again it’s a great example so if I’m a master limited partnership a real estate investment trust I’m getting cash flow and I get rents or I you know get whatever selling sand whatever it is and by law they have to distribute ninety percent of whatever that cash after expenses is. So that’s cash flow. But many times to maintain their dividend, their distribution, they will also borrow money or they will do other things to enhance (that’s the number one red warning signal) so anything we look at in the alternative space whether it’s… and I we have like medical centers for instance, a major health care OHI, we’ve owned that for years. Income has gone up every year for twelve years. I think we bought the stock as an income stock at eight dollars maybe five dollars, it’s now a thirty five dollars stock. So there are things such as income and growth if you get the right trend but they’ve never distributed more than the income they’ve got in rents. They haven’t done sort of these fake accounting games. Again, if you’re going to stay out of the straight ahead bond business and get a little bit outside of it, you can’t just your advisor who are you’re working with you can’t just say well gosh they distributed nine point one percent that’s their dividend. Where did that dividend come from? So you want to have 120 percent coverage of whatever you’re paying out so you’re not paying out eighty percent you’re paying eighty percent of what you’re earning. Some of these companies will be you know earning a nine dollars dividend and they’re paying a ten dollars dividend. Where did that other ‘but’ came from? It comes from refinance and comes from lending blah blah blah and all that’s great. It’s like Warren Buffett says you know’ it’s only when the tide goes out you find out who’s swimming naked’. And the company that’s paying a dividend that they can’t support from their own operations is swimming naked and when that happens you wake up one day and it’s on the news and that stock of the company is down twenty five thirty percent. It happens every year and people who says, ‘I just want to buy this and you know and just keep clipping coupons’, if you’re getting above way above what normal Treasury bills are paid by definition you’re taking on more risk we try to mitigate that risk by following trends.
David Scranton: But speaking of Treasury bill, it sounds like what you’re saying is that you know the Corporate America cannot do what U.S. government can. It cannot keep incurring interest on debt that it can’t take from tax revenue. With that thought, we’re going to take a break and when we come back we’re going to ask Tobin some important questions, a direct question specifically what industries he’s recommending right now. We’ll be right back.
Welcome back. We’re here with my good friend Tobin Smith who’s’ talking about transformational change. You talk right before the break about watching out, being careful and cautious of that promise actual 10 – 12 percent and sometimes these companies can’t really afford to pay that much out so the difference in cash flow and income, can you tell our viewers for just a moment what percentage or what range of percentages you can reasonably expect in income generating investment vehicles?
Tobin Smith: So there’s this idea called a preferred bond or a preferred stock that basically gets all the income gets paid in them first and if there’s anything left it goes to the next level or so preferred. So Apple stock for instance, I mean we’ve done wonderfully owning Apple and we understand that this is very well. My old research firm, Change Wave Research, we were one of the first people to to buy their stock when they started selling them but the bonds weren’t paying very much. Their bonds were paying a two percent yield but they’re still preferred shares out there that you can buy their you know if you take the dividend from Apple plus the preferred and then there’s appreciation, it’s been a wonderful combination. The reverse of that is you could also have bought Black Berry, In other words a descending company right. I just was on a plane recently and there was like one guy with his Blackberry there and he just looked like a dinosaur like you know
David Scranton: Because iPhone is as jacket pocket is a spare, right. Just in case
Tobin Smith: So Blackberry preferred bonds, preferred shares etc. They haven’t paid any interest payment all those eccentrics’ strategies. The stock obviously has dropped 90 percent. There is business risk and then there is interest rate risk and those are two separate things and so again if you’re going to step outside of the safe and sane treasuries and so on and so forth, then you’re going to have to look at the business risk. Also you know defense companies for instance, now I mean with what’s going on in the world today obviously their revenues are going to be larger and they have some pretty attractive bonds I don’t like that convertible stuff. Convertible stuff it seems to me
David Scranton: It’s more complicated, its hybrid.
Tobin Smith: It’s more complicated and you know blah blah blah. I mean, if you want to buy stock by stock, if you want to buy the bond by the bond but buy Lockheed Martin, it’s got some decent paying yield. And I know you’re a big bond guy but we certainly like to match these durations. A great thing about bonds is as long as you hold to maturity for a great company you’re going to get your money back and so we’re looking at ascending industries. Certainly The Cloud for instance, called computing and everything involved in that well there are some companies that own, Equinox as for instance a company that owns a real estate trust. It is a real estate trust that owns data centers and they have preferred equity that pays you know a 600 percent yield. The stock itself has gone up you know 800 -900 percent. So if you had sort of ninety percent and that bond preferred and you had ten percent on the stock, it is your equity kicker, then all of a sudden you know we have people who’ve doubled or tripled their money in Equinox just on their ten percent piece and the yield has continued. So now you’re growing your portfolio and getting income.
David Scranton: So realistically then, what percentage dividend rate would you tell your clients that they can invest they can expect in investments like preferred, for example?
Tobin Smith: These are 5 to 6 1/2 – 7 percent and for the for the corporate mid-sized companies if you’re looking at Reach, Real Estate Investment Reach, obviously as interest rates go up here Reach start to lose value because they’re competing with the no risk cost of funds. But I think as we get down the road, I think we’re getting no more than a two percent federal funds rate for a variety of reasons including the fact that the Fed said the same thing right. So that means the ten years are going to price off of that and now I’m going to be comfortable in buying rates again, and I love medical rate. All the medical rates, you know Ventus Medical Properties because they have built escalators in their rents. They participate, some of them participate, in the actual businesses they get overages.
David Scranton: Gives less interest rate risk.
Tobin Smith: It’s less interest rate risk and those rates have continually gone up and obviously ten thousand boomers a day are turning 65 and you consume about seventy percent of your health care you know from age 65 and on. And so you know that’s a growth industry that is going to grow no matter what.
David Scranton: So today realistically speaking, somewhere up to seven percent you know what people can expect to interest in dividend bearing investments. If it’s over seven percent then you’d say, be a little cautious.
Tobin Smith: Well if it’s over seven percent, then there’s a reason why it’s over seven percent. In other words, and even if the company you know earns a dollar and pays out eighty cents but let’s say for instance it has interest rate risk they’ll continue to make that you’ll get your seven percent or eight percent or nine percent payment. But the value of the principal of that rate or the sum of those MLPs is going to go down in value and it’s not like there’s you know it could go down in value for a very long time I mean. So you’re taking principal risk and interest rate risk that seems like a bad combination.
David Scranton: Right exactly. It’s a double whammy.
Tobin Smith: It is a double whammy.
David Scranton: So now the tough question. I told you I wanted you here because. I respect you, I love you dearly but now you have to tell our viewers, what sectors today would you recommend that people consider in this realm of investing?
Tobin Smith: I first I love the medical space so any part of the health care space makes sense right now as long as you’re not overpaying. And you know, United Health Care for instance has preferred to have bonds as well as equity to pays a nice dividend to health care. So they’re going to stop offering Obamacare, which to me is a great idea, for a variety of reasons starting with they’re losing money at it. And so this is.
David Scranton: We don’t have enough time left on the show to talk about Obamacare.
Tobin Smith: I understand, so the stock came back a little bit so I think they’re a buy. I like Molina Health Care. So they’re running the Medicaid plans, they’re going to continue to do that more and more because the states won’t run that. There’s a dividend paying but it also got pulled back here. And then you know the big, big picture of where health care is. We like Pfize,r they just recently said they’re going to merge they’re going to go out, can you blame them? They’re going to go to Ireland and they’re going to get a twelve percent tax rate where they get 35 here the United States, wouldn’t you?
David Scranton: They should be patriotic and they should pay their fair share.
Tobin Smith: They absolutely should, but you know what? Every one of their competitors aren’t, and I believe in a free market in free enterprise if your competitors wake up in the morning and have a thirty percent advantage over your profit margin simply because they move their office to Ireland.
David Scranton: And let’s not forget their fiduciary responsibilities, to whom?
Tobin Smith: Exactly right, is to the shareholders.
David Scranton: The shareholders, not to you know, maximize after tax profits.
Tobin Smith: It drives me nuts and it’s amazing that both Democrats and Republicans couldn’t come together on this issue.
David Scranton: Yeah but common sense you think?
Tobin Smith: Those ones you know all that sort of it happened. I think this Pfizer thing will be the final death now. It was like in Canada, Bell Canada which we own for a long time we decided it want to become a royalty trust and the Canadian government said, all right no moss. And I think Pfizer, this is going to be the last you know inversion because it’s a big company. This is a 720 billion when you put it all together and it’s lost to American taxpayers.
David Scranton: By the way I don’t think they say no moss in Canada. Will be the French equivalent of no moss, I’m not sure what it is
Tobin Smith: I don’t know, you know something.
David Scranton: I can’t believe, time flies when you’re having fun and we’re out of time and I wish I could have you here for the whole show but since you and I see so eye to eye. I’ll take a vacation every once in a while will you be my replacement host when I take a week off?
Tobin Smith: I’m the professional guest host by the way. That’s what I do. I don’t want to really do that all the time but it’s fun as guest host because I mess up. I’m only a guest. It was your fault.
David Scranton: That’s right. OK Well you heard it right here this episode. When I’m on vacation you’ll see my good friend Toby Smith here in my place.
Tobin Smith: You don’t have to leave Florida either, let’s vacation right there, I don’t know you know.
David Scranton: Shhh, don’t talk about that. All right well that’s it, don’t go anywhere and we’ll be right back with a lot of important tips on how to protect and maximize your income as an investor. We’ll be right back.
Marti Johnson: Thanks David. Risk and misperception is an interesting topic, whether it’s investment related or related to any other aspect of our lives. What’s an acceptable risk for one may not be appropriate for their situation. For example, a couple I know are avid rock climbers and travel through most of the North American continent challenging themselves by climbing canyons in Utah, ice ledges in Sequoia and small mountains in Colorado. I think of this couple as fearless but eighteen months ago their first child was born and what we found out is that, that has brought their rock climbing to an abrupt halt. You might think that their adventures ended because of parental duties. But no, this couple has taken a couple of long trips to the Caribbean just the two of them. What they tell me is that neither of them had a taste for extreme sports anymore. When they were responsible for only themselves, they enjoyed their risk on the rewarding highs. They felt it irresponsible however, to engage in anything that they deem risky and take any chance that they might not be around to raise their child. I bring up this example because over time a person’s ability to tolerate or even enjoy a risk might change and my report will be mainly about investment risk and how it changes over time as situations change.
It’s important to know that people perceive risk in different ways. Everyone has their own ideas of what’s risky, whether it’s backed up by probabilities or not. For a person who’s grown up swimming only in a pool, the idea of swimming in a lake may feel risky. Taking it a step further, a person who often swims in the ocean with tides and currents won’t view an average stay in the ocean body surfing is risky at all. In fact, many ocean swimmers limit their swimming to and waves are below a certain height and they will consider themselves conservative and risk averse. But you can see why a person who has only swam in a pool or a lake could view any swimming in the ocean at all as high risk, it’s all relative and based on experience and what you know and it’s the same with investments. A financial adviser may deal with clients that primarily delve into the stock market and may be very adept at what he or she does. In fact, the adviser may not be knowledgeable of alternative investments. This advisor is likely to view the stock market in some sectors as conservative while other sectors he’ll deem aggressive or risky. Like the ocean swimmer, he thinks a two foot sea is risk free because he’s seen the ten foot swells. Well many who are in or near retirement shouldn’t have much or anything in the stock market. To the adviser, like the ocean swimmer, that is conservative. That word may mean something that is different, something that is still too risky for many just because they don’t realize it because of their perspective. This happens a lot, a pre-retiree may sit with an advisor who primarily works with the stock market and tell that advisor that they want conservative investments. The adviser may suggest conservative stocks or stock funds which seem appropriately conservative to him or her but could contain far more risk than the investor ever wanted. And what I’m going to do is explain many investment choices in the risk categories so that you are better prepared to understand the likelihood of results or failure among different categories. The information is based on a number of things including potential price wings, guarantees, performances story, volatility, liquidity and several other generally accepted criteria. I’ll also discuss the various inputs that you should use to determine what your risk level should be so that your own risk assessment isn’t just a feeling that you have.
On the conservative side of investing, we have investments savings vehicles and contracts that each have a high level of guaranteed by the issuer and are usually reliable income streams while they’re held. These are certificates of deposit which if under 250 thousand dollars are usually insured by the F.D.A.C, US treasuries which are guaranteed by the same entity that backs the cash in your hands. I mean a civil bonds which have government backing by the issuing agency and often additional insurance by highly rated insurers as well as fixed annuities which are contracts which guarantee that the new attent will receive a certain amount regularly based on the terms of the agreement. These are pictured here on the left hand side of the scale. If you want to know what you’re getting when you’re getting it and want to avoid surprises, these may be the most suitable for you. In the category of moderate risk there are corporate bonds, which are essential loans to corporations and indexed annuities which are contracts with a company which promises to continually pay you based on the performance of a market index like the S&P or NASDAQ. Adding a bit more risk and potentially more return or loss are the investments listed in the moderate category. They include preferred stocks which have a stated dividend that must be paid before any other dividends are paid and real estate investment trusts which represent ownership in real estate held in the trust. A conservative investor may look for an opportunity to earn a bit more by allocating some of their holdings in vehicles in this category and someone invested with a moderate risk tolerance may reduce some risk by sliding some assets into products under the conservative heading. Finally, for the average investor, the aggressive products are the stock market and mutual funds invested in stocks and even some long term bond mutual funds. These are all considered aggressive because they have much more potential to reduce your wealth and the expectations of income from each are not known. Investors who have assets in these categories are invested because over time the average returns, the average returns in these investments have provided better returns than those in the less risky categories.
So how do you begin to understand and know where you stand and what your mix of investments, what your tolerance of risk should look like? Well, like the former rock climbers with the eighteen month old, your ability to endure risk depends largely on your situation and can be expected to change over time. So here are the sum of the primary areas to consider: what is your time horizon? Are you in your twenty’s and planning on working for the next forty years? If you are you should look primarily to aggressive investments that have had the highest return even though they’ve also experienced large downturns. Investors at early ages, young ages can be more aggressive because they can stay in it for the long game with time to make up for large losses that are not dependent on the money earned from investing. Whereas, an investor in or just before retirement should look toward the conservative selections. They don’t want to or can’t go back to work at this stage in their lives. Earning a higher growth over the longer term isn’t appealing, if the value of their investment could drop significantly and take fifteen years to recover. It would be devastating because the people they need to pay; the grocer, the doctor, the insurance company are not going to wait until their investments come back up for their payment. And of course, moderate risk investors are in between. A moderate investor maybe in or near retirement but have a pension which will take care of them or a large the necessary pool of savings that can lose thirty five percent in value yet still provide for their needs. A moderate investor can also be someone who can afford, because of age or other factors, to be aggressive but it doesn’t suit their ability to sleep at night. How can we use this information? You should sit and talk with your investment advisor at least every six months. When you do, even if you’ve been with them for a long time, you want to ask several questions: can you review with me the worst down year of these investments over the past 20 years? This should give you an idea of what you may need to endure. Can you show me how long it has taken in the past to recover, or if it has recovered? This may demonstrate to the dips are short lived or long and would not affect your lifestyle. Did the income, the investments generate, did it change when they dropped? This should give you a very good idea of whether you’re invested in a way that could surprise you in the backside or allow you to plan because you have a good idea of what to expect.
David Scranton: If you watch any sports at all, you’ll know that you cannot sit through 15 minutes of a game without seeing 5 commercials or more about FanDuel. A fantasy sports betting website. Well as you may know, the New York state attorney general, last month issued a cease and desist order to FanDuel on the grounds that it constituted and promoted illegal gambling. Now FanDuel says that’s not true and there are currently fighting it in court. But you tell me you participate in FanDuel by betting money on games and athletes with the chance of making more money but also the chance of losing all your money. Is that gambling? Well I will let you answer that question. So why am I bringing this up? To make the following point. Again, I understand there are always going to be people including many people in The Income Generation who want to gamble with some portion of their money. The popularity of sports betting websites definitely supports the idea that people want to do this and want to do some level of gambling but I know from personal experience that some of these same people try to deny that investing in the stock market is just another form of gambling. Of course, I’ve always said otherwise and when I heard the FanDuel story it got me thinking.
Playing the stock market and betting on sports really have a lot in common. Think about it this way, what’s the difference between a team owner like for example Stephen Ross of the Miami Dolphins and someone who’s just betting on his team? I mean they both want the team to win because they both want to make money when the team wins, but which one of them is gambling and which one isn’t? Well if you’re Stephen Ross and the only team you have a say in choosing who the players are who the coaches are as well as some of the strategies that they utilize, you can have a positive effect on the game’s outcome. But if you’re someone betting on sports, betting on the team, you simply have no way of having any effect at all. By the same token, what’s the difference between Warren Buffett and the average stock investor? Well it’s quite similar, when Warren Buffett invests or someone like him who usually buy controlling interests in these companies or at least large enough interests that he has a seat on the board of directors. In that way, he can control the management and the direction of the company. The average investor, however, simply cannot do this if they’re buying just a few shares of stock. All that average investor can do is bet on the company’s managers, hoping that they do a good job. So that’s where I see betting on the stock market is being very much the same as fantasy football or gambling on sports or any kind of gambling, for that matter. If you’re buying fractional shares in a company in which you have no control at all hoping, hoping that it succeeds and that’s since you were betting on the management team much like in sports when you’re betting on the players. In fantasy football, you’re betting on those players to do well next Sunday or in the game, your way. Similarly, when you buy a stock you’re betting on future profits and even if things go well and the companies profitable, the management could still do something silly that cause it to fall out of favor with Wall Street. And let’s face it the fickle whims of Wall Street can still drive the stock price down no matter what. So to me, that makes it even riskier than betting on sports or gambling on a casino. In fact, the stock market to me is like gambling on steroids. So the point is, if you’re bound and determined to gamble on the stock market, even knowing where we are now in the course of our long term secular bear market cycle, I ask you simply this: don’t kid yourself about what you’re doing. Understand that diversification does not equate to protection in that even the next big thing is never a sure thing.
Hopefully our guest today has given you some helpful food for thought on that topic. And I’d like to thank Tobin again for stopping by. And I hope I’ve also given you some more food for thought about what it means to be part of The Income Generation. It means you we have unique challenges and live in uncertain times, times that I believe call for focusing on the kind of conservative actively managed investment options not for growth but instead that are geared for dependable income conservatism and reasonable growth regardless of stock market conditions. Next week’s guest, Peter Morici has lectured and provides executive programs at more than 100 institutions including Columbia University and the Harvard Business School.
Peter Morici: And one great charm you really can’t solve the economy’s problems with monetary policy alone. We have gotten all we’re going to get out of easy money.
David Scranton: In fact, his views are frequently featured on C.N.N. C N B C and right here on NewsMax as well as other national broadcast networks around the world. So go ahead, mark your calendar same time next week I look forward to visiting with you. Right now log on to theincomegeneration.com and then download your free special report. That’s theincomegeneration.com and then download your free report right now.