Friday, August 31, 2007

My Investment Background and Initial Thoughts

First off, I want to thank Calculated Risk for insipiring me to do this. Great site! I've hijacked their threads spewing my random banter in a most off topic fashion (well, generally). I therefore decided to focus my random energy on a site of my own. I don't expect much. If people read it, great. If not, that's okay too. It really doesn't matter to me. I'm treating it like a diary or maybe even a time capsule. I figure in a few years (or more) I can either look back on it in abject horror or at least get a good laugh over it, and well, hit the delete button I suppose. ;)

And so it begins.

In the mid-90s I began investing. It started with a small investment in several rather conservative blue chip stocks. From there I made an investment in Wizards of the Coast. It was a small private company. I believed strongly in their product and that's probably one of the best reasons to invest there can be. In fact, to emphasize how much I believed in their product I continued to drive my Hyundai (Hope You Understand Nothing's Dependable And Inexpsensive) rather than buy a new car I could certainly afford. It was the best investment decision of my life.

In 1997, I cashed out my blue chip investments to make a downpayment on my house. I'm still living here.

In 1999, the Wizards of the Coast investment began to payoff. I paid off my house, much to the dismay of my tax preparer. She felt I could earn more than that investing in the stock market. Well, so much for that theory!

As more money started to come in from the Wizards of the Coast investment, I put it to work in the markets. Timing could have been a bit better, as you can imagine. I was 80% in the stock market when the dotcom bubble burst. Fortunately, I did not own any dotcom stocks. Other than the small amount of dabbling I did in Nortel and a few others, I came through that period relatively unscathed. One of my stocks, Hansen, did especially well. It rose six fold by the time I sold it. Hindsight shows it rose another ten fold after that. Oh well! Caterpillar, Citigroup, and FedEx also helped to offset my losses elsewhere, and yes, I did have some real stinkers. Overall though, I did as well as a CD in the bank from 1999 to 2004, so I can hardly complain.

Avoiding fraud seems to be my life's work. It was front page news where I worked. Look up Cendant to see why. Not quite as bad as Worldcom and Enron, but that's not saying much. Speaking of stinkers, the fundamentals pulled me into Conseco and Healthsouth or so I thought, but the fraud and false promises (boy was I naive!) there had me running for cover. Fortunately, I didn't ride either of them down to the bottom. Fraud, fraud, fraud. It was at that point I realized that one's gut is sometimes better than one's brain.

In 2004, my gut was complaining. It was telling me that we were just borrowing this recovery. The dollar kept falling. The stock market kept rising. I'd look over at rocks (gold and silver) and think that I'm not really keeping up. So, in 2004 I exited the stock market and opted to own the rocks instead. Two years later, as both started turning parabolic, I sold for a tidy profit.

I'm now sitting in TIPS (Treasury Inflation Protected Securities), I-Bonds, and three month treasury bills. I'm bearish as ever on the economy. I'm not prepared to short stocks though. It is a bit too much like shorting inflation in my mind.

I look at the housing market and it scares the heck out of me. What are people thinking? In 2004, I was somewhat concerned about hyperinflation (with interest rates at 1% who wouldn't be?). Now I'm starting to warm up to the idea of deflation, at least as it relates to housing prices.

What about the grocery store though? Will we see deflation there? I don't think so. My gut says that we'll be looking at a mildly stagflationary environment. Some things are going to deflate. Some things are going to inflate. Probably best to just sit on the sidelines in relative safety.

Some would say that I shouldn't trust the government CPI. Some say that inflation is running MUCH hotter than that. I don't agree. I track my expenses to the penny. Some things are inflating (gasoline) but not all things. The shoes I buy at Costco are the same $14.99 they were many years ago. No, I think when inflation appears, we'll know it. Inflation in China is picking up and at some point their ability to "ship" us deflation will come to an end. In fact, even our government supplied inflation has been running hotter this year than most seem to realize. If not for last fall's commodity selloff the headline year over year inflation number would look downright ugly. Is anyone talking about that though? Of course not. I guess everyone just assumes we're getting another massive commodity selloff this year. While possible, I wouldn't count on it. Without it, hello ugly inflation numbers come October and November.

I've read how the government computes the CPI. For the most part I'm comfortable with it. It does not exclude food and energy, contrary to what some would say. The only reason core inflation (excluding food and energy) is used is to help predict future inflation. It might be used to justify the current inflation, but food and energy are included when the value of TIPS are calculated (and that's all I really care about). It also does not exclude housing. It just seems that way. It uses rental prices. If the housing boom is sustainable, then those price increases will find their way to rising rents. If the housing boom is not sustainable, then using rental prices was indeed the accurate way to measure it. Either way, rental prices seem a fine way to measure that component of the CPI. The government chose rental prices for this very reason. It shelters the CPI from irrational movements in housing prices.

Disclaimer time: Please don't trust the opinions of a random Internet poster. I'm doing this for entertainment purposes (and most likely just to amuse myself). If I supply charts and they clearly aren't just for attempted humor's sake, then I've more than likely tried to use accurate data. The key word here is "tried". I'm not a computer. I can make mistakes. I'm the last person to say I have all the answers. I have far more questions and even the answers I think I know might very well be dead wrong.

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