PERSONAL INVESTING THOUGHTS

Today I’ve been thinking about investment returns. When investing in an opportunity what kind of return should we expect?

There are two places to invest, your own business or a business you don’t own.

If you invest in a business you don’t own, then you can own part of it. If you buy stock, you own part of it. If you buy bonds or loan them money, you invest without becoming an owner.

How much do you expect to get back from your ownership? I think 10% per year is a good target return. But, the higher the expectation the lower the chance of achieving your expectation. So, generally lower expectation is considered lower risk, i.e. more likely to happen. Higher expectation is higher risk, i.e. less likely to happen.

The DJIA 30 index stocks have averaged a little more than 6% per year growth since 1935. The S&P 500 index has average a little less than that since its inception in 1969. At times these averages were in higher return territories. This is especially true in the period between 1985 and 2007. I don’t believe the real foundational returns ever exceed the trend lines of about 6%. But, one could venture into this financial situations and make returns greater than 6%. Many have done it.

The companies listed in the 30 Industrials do not all sustain real growth of 6%. There is a range above and below this average. Some might be as high or even higher than my target range of 10%. Others have to be below, maybe even losing money in order for the average to be 6%. And, the same company is likely to experience performance at different levels in the range over time. But. it appears that the average sustainable rate is somewhere around 6%. Always remember the companies listed in these indexes are the better companies. If one stumbles, it is likely to be replaced by a higher performance company. In the stock market, there are many companies that are not making money and some that never make money and eventually fail. The higher a company’s current return, the less likely they are to maintain or increase the level of return.

Be careful how you invest. If it sounds to good to be true it probably is.

There are many investors and investor groups who “gamble” in the open stock market. They chart the market and individual stocks trying to predict the ups and downs. Buying low and selling for a profit not based on the real performance of the companies. In this arena there are always gainers and losers. If someone makes money on the daily or periodic fluctuations, another person has to lose an equal amount.

HAVE WE GONE CRAZY?

The country is going crazy. Economic activity is down from last year…down a lot. The people and businesses of the country tell vividly the state of our economy. It is what it is. Since 1985 and maybe before the country has been building a house of cards. We have been building a house with less foundation than is structurally required to hold it up. And, it has fallen to the level our more solid underpinnings.

Now congress is attempting to develop a stimulus plan to rebuild part of the fallen house. Most of what we hear about the developing plans indicates not much foundation building is included. So, the result is likely to be a big tax burden and no solid growth. The result will be a huge anchor for future generations of Americans. Some of those Americans are my children and grandchildren.

Why not admit our past mistakes and let the chips fall? Why not work on foundation and simply use the stimulus dollars to bailout the unfortunate ones who have lost their jobs and homes and need help to survive. Providing them with hollow jobs with no foundation would be a lie. We would be trying to provide hope that is hopeless. Let’s all stop living beyond our means and begin to live sensibly. Many of us can use our excess to help those in need. Will Rogers said it in 1929. “There is still the same amount of money around, its just in the wrong places.” The debt levels we have been promoting have fooled us into believing that there is more money somewhere. And, many banks and investment companies have tried unsuccessfully to turn that debt into assets and sell it for a profit. Those cards have tumbled. We should not try to build them back.

I say work together for the common good of the people and the nation. Let no one go hungry or be cold. Let’s build infrastructure and foundation and slowly but steadily improve our national strength. Let’s don’t pretend to be more than we are. Especially, let’s don’t pretend to be the savior of the world. Let’s not talk and spend beyond our means and capabilities. Let’s stop spending money we don’t have. Let’s act like America before its too late.