Wednesday, June 29, 2005

Overview of investment options and ideas

Primer on my investment outlook

Lets categorize different types of investments and their suitability. Different investments are real estate, stocks, commodities, cash, bonds and gold.
Note that I have kept gold in a separate bracket, as its primary use is in jewellery and investments. Its industrial uses are negligible and it is an alternative currency as an investment. Other monetary metals like silver, and even platinum, palladium, diamonds have substantial industrial uses.

1. Real Estate :- Over the past few years, the US Fed Reserve has kept real interest rates negative, and interest rates in Japan, Switzerland have been 0%. The Euro Central Bank has kept rates at 2%. These are generational low rates. As a result investors/speculators have run to other asset classes to seek higher yield. This has manifested itself more in real estate ALL OVER THE WORLD. I believe there is global real estate bubble worldwide, waiting to burst.

2. Stocks :- Stocks can be in companies related to Financials, Technology, Commodities and Manufacturing. I do not trust the accounting of any financial firms as a creative accountant can show virtually anything on the books. Also, financials are highly sensitive to interest rates and credit risk. I worked as a software engineer in the US and Australia. I hold 2 degrees, a Bachelors in Electronics and a Masters in Computer Science. From my experience in university and industry, the vast majority of Tech firms are valued at a Bullshit Premium, on a dream!! I would never buy a Tech firm unless I see low risk and substantial reward. The problem with Manufacturing is the implementation of Free Trade via the WTO. Any company is in danger of high competition and falling prices due to China and other Third World countries. The world is now flat, and margins/profits are at risk from high competition. Commodities stocks are highly sensitive to the Commodities price cycle. Also, commodities stocks carry more risk/reward than the underlying commodity due to operational risks. If you believe Commodities prices have topped, sell them. If you believe we are in a new era of a secular commodities bull, buy them. At least the assets and accounts of commodities stocks are harder to fake!!

3. Commodities :- There are various indices linked to the prices of commodities, the AIG Commodities Index, Rogers International Commodities Index, Reuters Commodities Index. These are linked to a basket of commodities and go up and down with the underlying prices. Also there is futures/options trading on the prices of nearly every commodity. Commodities are softs - grains/meat or metals - copper/silver/zinc. As an asset class, it is less volatile over a period of time than many people imagine IF you are not highly leveraged and forced to sell. Most commodities also display mean reversion to the trend price.

4. Cash :- This is an asset that no none wants, and perhaps its the best one to have. When everything, commodities, real estate, stocks, gold are booming simultanously, they can also crash simultaneously. And in an environment of rising interest rates, cash is not so bad. The AUD/NZD/ISK are currencies with good short term yields.

5. Bonds :- My favourite "safe" bond is the Icelandic govt bond. But I'd wait until the Icelandic Kroner falls down a bit. The ISK exchange rate seems to be in a bit of a bubble. I wouldnt buy corporate bonds in this environment or even govt. bonds as the interest rate outlook is uncertain. Remember, bond prices go down as interest rates go up.

6. Gold :- This is as asset that evokes strong emotions. A position of 5% of assets in Gold via the Gold ETF's is probably a good idea. Also, in the event of a global crash, gold prices might improve in the event of a movement of investment money. However, gold has minimal industrial use, and if investments dry up, the price can crash.


Blogger johan said...

Great thoughts! Perhaps u could send the blog address to your friends and ask them to spread it among their frinds?

12:49 AM  

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